In a newsletter from Tech Crunch, I read a snippet about how founders of companies could switch to receiving funding through debt underwriting and securitized debt. I don’t understand what they’re talking about at all. (Quote below)
What is securitized debt? How does it work? How do people make money from it?
Thanks in advance!
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>“In one decade, we went from buying licenses for software to paying monthly for services and in the process, revolutionized the hundreds of billions spent on enterprise IT,” Danny Crichton observes. “There is no reason why in another decade, SaaS founders with the metrics to prove it shouldn’t have access to less dilutive capital through significantly more sophisticated debt underwriting. That’s going to be a boon for their own returns, but a huge challenge for VC firms that have been doubling down on SaaS.”
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>Part two is to take all those individual loans and package them together into a security… Imagine being an investor who believes that the world is going to digitize payroll. Maybe you don’t know which of the 30 SaaS providers on the market are going to win. Rather than trying your luck at the VC lottery, you could instead buy “2018 SaaS payroll debt” securities, which would give you exposure to this market that’s safer, if without the sort of exponential upside typical of VC investments. You could imagine grouping debt by market sector, or by customer type, or by geography, or by some other characteristic.
In: Economics
Securitized means they have turned a debt, or a pool of debts, into a “security”. Basically a piece of paper that says you, as an investor, own a piece of that debt.
Lenders like that because they can basically sell off piecemeal the debts they hold to investers and not wait around for the borrowers to make payments.
Investors like it because a pool of debts is a safer bet than giving out individual loans and they don’t have to do any of the work of assessing borrowers, servicing the loan, or ponying up the full amount of the loan.
Borrowers, according to your quote, would enjoy it because instead of giving up a percentage of ownership in their company for funding, there would be a large market of investors ready to buy small pieces of generic loan pools. They could just get a normal loan that would end up as part of a pool – effectively making it less important for them to distinguish themselves from other players in the market looking for funding.
The idea is that tech companies could start doing what companies in some other sectors do and “securitize receivables”.
You have a receivable when you have sold someone something but haven’t collected the payment yet. In this case, you sold someone an annual subscription for software for the next few years and they pay you every year – you collect your first year and then have a receivable for the following years.
Typically, companies that have very large receivables tend to securitize them: they hire a bank that packages them up into a bundle, gives them money today and then collects the revenue later. So in our example, the bank buys the future revenue from the software company, gives them some money today for it, and collects the revenue later.
This is not a common arrangement for software companies, but for an example of a well known company that does it, AT&T securitizes the payments on routers, so if you rent your router from AT&T chances are the money from your payment is going to some bank and AT&T has already been paid by them.
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