tag:blogger.com,1999:blog-6997105406412017838.post3606820835149462656..comments2010-04-07T07:00:57.756-04:00Sarah Tavelhttps://profiles.google.com/108254512958707569058noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-6997105406412017838.post-26857165509872144092010-04-07T05:20:10.659-04:002010-04-07T05:20:10.659-04:00Interesting post, although from the perspective of a venture debt provider I would argue the scenario described is quite unusual and pretty irresponsible as a lending case (It certainly would not make it through our credit commmittee). Standby facilities are a niche in the overall VD sector and should not be used as a standard case for judging VD. <br />From some of the other comments (amoritizers, sponsored deals etc.) I get the impression the author has a pretty US centric view of VD. However, there are different approaches to VD, and for venture companies and entrepreneurs it is just a question of doing their homework and finding them instead of going with the first best VD provider and lamenting about the terms afterwards.JSchottnoreply@blogger.comtag:blogger.com,1999:blog-6997105406412017838.post-23521085456568142352009-09-03T10:07:53.742-04:002009-09-03T10:07:53.742-04:00@Edward - thanks for the comment. In the first post, I think I may have used different parameters than what I have in the model. Did you change the inputs to correspond to what I have in the post?<br /><br />And you are right re: XIRR / IRR -- my mistake. There was another reason I had to use XIRR but now I can&#39;t remember; I&#39;ll see what happens when I update the model.Sarah Tavelhttp://www.blogger.com/profile/11417142500978926397noreply@blogger.comtag:blogger.com,1999:blog-6997105406412017838.post-3662435311516584472009-09-03T08:44:30.721-04:002009-09-03T08:44:30.721-04:00Hi Sarah<br /><br />I have been reading your post on venture debt, and can&#39;t work out how you got the cost of capital of 57% when using the XIRR function. In your model which I have downloaded I see a cost of capital 16%.<br /><br />Also with regards to your use of the XIRR function this is used when cash flows are not at regular dates and not when cash flows are not the same. IRR can be used when cash flows change each month provided the timing is equal for each payment, eg daily, monthly or annually.Edwardnoreply@blogger.comtag:blogger.com,1999:blog-6997105406412017838.post-44987983598692658492009-05-26T15:18:00.624-04:002009-05-26T15:18:00.624-04:00@hanchee thanks for the comment. Obviously a CEO needs to do their own analysis of the dilutive effect of VC vs. cost of venture debt. that often involves some kind of scenario analysis, which unfortunately, despite my best efforts, I haven't figured out how to automate in Excel. :)Sarah Tavelhttp://www.blogger.com/profile/11417142500978926397noreply@blogger.comtag:blogger.com,1999:blog-6997105406412017838.post-35402885665931325692009-02-13T14:49:00.000-05:002009-02-13T14:49:00.000-05:00Sarah, I was wonder if you've done similar analysis comparing the dilutive effect of equity vs. cost/dilution of venture debt? Also curious whether you've had this discussion with Bessemer's GP Felda Hardyman who sits on the board of a bank that provides venture debt.hancheehttp://www.blogger.com/profile/11183520789684321689noreply@blogger.comtag:blogger.com,1999:blog-6997105406412017838.post-77862629707722712172009-01-13T10:26:00.000-05:002009-01-13T10:26:00.000-05:00Interesting post.<BR/>ThanksWallen'shttp://wallen.typepad.comnoreply@blogger.comtag:blogger.com,1999:blog-6997105406412017838.post-13998760316007166132009-01-13T09:35:00.000-05:002009-01-13T09:35:00.000-05:00@OutsideShot: Great questions.<BR/><BR/>Re: XIRR function: Unlike a mortgage payment, which is characterized by equal monthly payments of principal + interest, venture debt is typically structured as equal principal payments + interest on the debt balance (which consequently decreases each month), so the cash flows are irregular and I needed to use the XIRR function to calculate the cost of capital. <BR/><BR/>On the the CD front, you're absolutely right. I didn't mention it in my blog post because it was already long enough and the difference is marginal (CD interest rates are fairly low right now, and many companies are choosing to put their $ in t-bills instead), but in the model I put together for our portfolio companies, they can plug this # in and get the benefit.Sarah Tavelhttp://www.blogger.com/profile/11417142500978926397noreply@blogger.comtag:blogger.com,1999:blog-6997105406412017838.post-74614839612474469082009-01-13T02:41:00.000-05:002009-01-13T02:41:00.000-05:00I'm curious about a couple of things... Why did you choose to use the XIRR function (which I thought was for irregular cash flows) as opposed to the IRR function? And, what "guess" did you use for the XIRR function (doesn't the guess affect the outcome)?<BR/><BR/>Lastly, though the impact may be trivial, isn't there an opportunity to earn a return on the funds that aren't deployed that would reduce the effective rate (i.e. if you take the $2.35M that will "remain" when cash is low and put it in a CD, won't you get a few points back)?<BR/><BR/>I'm not taking issue with the thesis that venture debt is often more costly than it appears, but mostly looking for a better understanding of this analysis.<BR/><BR/>Regardless, thanks for a very interesting and thought provoking post.Outsideshothttp://www.blogger.com/profile/12032208514862096600noreply@blogger.comtag:blogger.com,1999:blog-6997105406412017838.post-77679107064349345582009-01-12T10:26:00.000-05:002009-01-12T10:26:00.000-05:00Darren -- Thanks! Much appreciated as always.<BR/><BR/>Jason -- You raise a good point, but I think this is why venture debt providers often care so much about who the equity investor in the company is (and rarely provide venture debt to a non-venture backed company). Debt is always senior to the other shareholders, so they know they are going to get their $ off first. This protects the debt providers because 1) by the time the company would have run out of cash, the co has already paid back a majority of the debt and even in a fire sale, would prob be able to return more of the principal to the debt provider and 2) incents the VC investor / shareholders to raise $ with equity.Sarah Tavelhttp://www.blogger.com/profile/11417142500978926397noreply@blogger.comtag:blogger.com,1999:blog-6997105406412017838.post-43939359733198057012009-01-12T09:02:00.000-05:002009-01-12T09:02:00.000-05:00This was great. In some ways, isn't this a bad deal even for the lender? If your borrower runs out of cash before becoming CFP, that doesn't create a very strong long-term customer. I would think there would be some incentive for the lender to structure the deal to allow the company to get close to CFP so the lender avoids loss from default.Jason Adlerhttp://jasonadler.vox.comnoreply@blogger.comtag:blogger.com,1999:blog-6997105406412017838.post-74252687755691257482009-01-11T16:04:00.000-05:002009-01-11T16:04:00.000-05:00Excellent post. There are many other reasons to go with venture equity such as reputation, connections, advice, etc. Debt is great for many reasons outlined, and this is a terrific read for all entrepreneurs.dherman76http://www.blogger.com/profile/10467311812111797269noreply@blogger.com