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Why You Should Take On Debt To Stop Dilution

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Why You Should Take On Debt To Stop Dilution 1

By Blair Silverberg, CEO of Capital

Imagine an exciting space dominated by two major companies, each growing and developing at about the same pace. To get ahead, they keep raising more money, but interest rates are low and the global stock of wealth is at an all-time high, so there is unlimited money to raise. Soon enough, their employees are dealing with substantial dilution because each round of equity wipes out the growth in valuation between rounds. Both companies become unicorns and announce their IPOs, but employees are hardly seeing the payoff.

This is happening right now in SaaS, meal delivery, ridesharing, and dozens of other spaces that you and their employees might not even realize.

What if it didn’t have to be like this? What if one company could get ahead without diluting their employees’ shares?

This is why most companies raise debt — and it’s only a matter of time until venture-backed companies do, too.

Why Dilution is Bad for Your Company

When the venture industry was small and companies like Google and Amazon went public after raising less than $50M, dilution was miniscule and thus not often a top concern for executives. The world has changed, with some companies raising billions before ever going public, but mindsets haven’t caught up.

The impact dilution can have on employee morale and retention can be substantial. When employees are first hired, they’re often excited to receive shares as part of their employment. But after repeated dilution, they’ll be asking HR, “Why aren’t my shares worth as much as they used to be? When will I get more?” Some companies start giving out bonuses and extra shares to placate everyone, but this can only go on for so long. Giving out more shares to combat dilution leads to more issues; those shares have to come from somewhere. Usually, these shares come from the founders, who eventually give up so many that they might only own 1% of their own company. That’s a major blow to those who worked so hard to get the company off the ground.

For employees, dilution means they may leave the company if they decide their shares are worth too little, especially if the competition can offer them a better deal. And if employees determine that this problem is industry-wide, they might leave the space entirely. The downside to tech becoming mainstream is that dilution has become unsustainable to employees and founders alike.

The Solution: Raise Debt

Companies are generally funded in one of two ways: equity financing or debt financing. Equity requires giving up a share of the company in exchange for capital. The biggest benefit is that this money doesn’t have to be repaid. Debt, on the other hand, does have to be repaid with interest. But while debt comes with a repayment obligation, it doesn’t come with dilution. Once the debt is repaid, the lender has no further involvement in your business. You aren’t selling a part of your business to get funding.

Understanding your capitalization options can be essential to getting ahead of the competition. When your competitors are raising equity to finance their business, they’re giving employees one fewer reason to stick around. If you raised debt instead, you could still offer employees valuable shares while receiving much-needed financing. You could also stand out from the pack by creating a candidate-friendly brand around prudent wealth creation. Once you start using debt intelligently, your access to credit capital expands, giving you a permanent head start over the competition.

Why don’t more companies raise debt?

Outside of tech, most companies do. It’s normal to raise debt once a company has a working concept. But the tech space hasn’t always looked the way it does today. Early on, it was so inexpensive to start technology companies that raising debt wasn’t necessary; equity financing was miniscule compared to the ultimate market value of these companies at liquidity events. Over the years, it’s become ingrained in tech culture to pursue equity funding, with such a heavy focus on raising the next round that many founders forget you even can raise debt.

But times have changed, and financing will, too. We saw this shift before with Mike Milken, who was a major player in the development of the high-yield bond market. In the early 1970’s, Milken noticed that risky turnaround businesses could be financed with “junk bonds” — bonds with higher interest rates than those offered to more creditworthy borrowers. He famously calculated that despite their higher default rates, the higher interest rates on these bonds produced sufficient compensation for the higher risk. This opened up financial capital to a group of companies previously financed only by equity and created a market that today is worth more than $2T. From the emergence of the high-yield bond market, we know how powerful access to debt financing can be. It gave rise to legendary investors and operators from Carl Icahn to T. Boone Pickens as well as iconic companies from Time Warner to Hilton Hotels and Safeway. For companies who have a kernel of a working business model, the benefits of debt financing are massive. Eventually, tech will go the way of all other industries, leaning on debt as a major source of financing.

Final Thoughts

Debt financing is one of the best alternatives to taking on equity, especially when trying to mitigate dilution. If you want to attract and retain top talent, then ensuring you don’t dilute their shares will go a long way.  The transition to debt financing is coming. Soon, it’ll be common practice across the entire tech space. If you start using debt intelligently now, you’ll have a competitive advantage. You’ll be able to get one step ahead of the competition with access to capital that others refuse to utilize. This not only benefits your employees today, but also your entire organization in the long run.

Finance

Three ways payment orchestration improves financial reconciliation

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Knowing the best alternative payment methods

By Brian Coburn, CEO or Bridge,

When Luca Pacioli, the 15th century Venetian monk, invented double-entry account keeping, managing financial reconciliations had its own unique challenges. The father of modern accounting didn’t have to deal with glitches in his book-keeping app but he did have to write with feather-based quills by candlelight. Five hundred years later the challenges are different but no less onerous.

As in the 15th century, solid financial reporting is at the heart of every successful high-transaction business. As Pacioli no doubt knew, up-to-date, well-documented accounting ensures good operational health and makes it easier to grow. And that’s never been more important.

While it might not be feather quills by moonlight, today’s environment of multiple customer channels can be time-consuming and labour intensive, with various payment methods and financial reconciliations from multiple data sources.

Understanding cash inflow through online transactions is a critical element of financial reporting. However, when these involve multiple payment processors and payment methods and a complex system of disjointed silos of payment data, this can become a cumbersome and arduous manual task.

Common issues in this fragmented payments landscape include working across different formats, managing different data owners and access as well as inconsistent process timings. The result is often increased inaccuracy and inefficiency. Procuring multiple tools and software can end up being uncost-effective and unwieldy. Though the current digital transformation is an exciting time for retailers, staying on top of the ever-changing payment options can be an overwhelming burden for many business owners.

Introducing payment orchestration presents a single, accessible, creative and accurate source of transactional data, crucial for today’s complex challenges around financial reconciliations.

Simplicity

Today, commerce is 24/7, so being able to access and analyse real-time information is vital to managing business controls. Many organisations have looked to automate these processes with account reconciliation software.

However, one key challenge is the sheer volume of transactions and the need to capture data from a variety of different sources. Payment orchestration enables transactions to be carried out by multiple payment processors and payment methods with simple and flexible plugins, centrally monitored and routed in the most optimum way.

It allows users to add or remove providers easily, knowing the complexity (detecting outages and automatically rerouting payments) is being handled by a trusted specialist partner via an intelligent platform.

Bringing disparate sources of online transaction data into one place simplifies how enterprises access and operate with multiple payment processors and payment methods. This makes it easier for businesses to remain agile.

Speed

For organisations that still depend on manual, spreadsheet driven processes, the mechanics of reconciliation can be extremely time consuming.

A payment orchestration layer creates the opportunity to automate processes and reduce manual intervention. By bringing multiple payment processors and payment methods into an integrated service layer with intelligent routing capabilities, the impact of individual outages or failed payments can be mitigated to ensure optimum payment success rates, saving crucial revenue.

Accuracy

Naturally, significant manual work brings with it the added risk of human error. The speed with which business moves today demands accurate accounting processes. Checking for error takes up valuable time that could be spent focusing on business growth.

Payment orchestration can improve accuracy and reduce the opportunity for error. Providing a holistic and central source of real-time transactional data, payment orchestration can offer improved transparency and greater visibility of financial data.

With all transactional data captured in one source, payment orchestration can present a data source to feed other applications – such as automated reconciliation tools and fraud management – automating business processes in a seamless way across the enterprise. Good practice like this will, of course, enable a consistent approach to fraud management across all channels and payment services.

Multiple payment choices can be onerous but, today, not adopting them at all is unwise. The key to success, and good financial reconciliation, is being able to streamline and manage them.

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Finance

Circular Economy must be top of the business agenda in 2021

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Circular Economy must be top of the business agenda in 2021 2

By Andrew Sharp, CEO of CDSL, the UK’s leading appliance spare parts distributor

The last year has been one in which we were all forced to change our behaviour. We have become far more familiar with the four walls of our home than we would have liked, we have had to give up the social activities that mean the most to us and we have spent much longer apart from relatives than we could have imagined.

But alongside the many reluctant changes that we have made, there have been some silver linings. Both consumers and businesses have reassessed their priorities, and we have seen a noticeable increase in the importance of sustainability and social value in everything we do.

Within this has been a rise in awareness of the power of the circular economy. Research from the Recycle Now campaign shows nearly nine out of 10 UK households now say they “regularly recycle” (September, 2020), while environmental organization Hubbub found that 43% of people are more concerned about plastic pollution than before Covid-19 (September, 2020).

The role of the circular economy in underpinning wider sustainability targets is now being widely realised by Government, consumers and businesses alike. The Ellen MacArthur Foundation recently found that circular economy policies contribute towards tackling the remaining 45% if greenhouse emissions that cannot be resolved by transitioning to renewable energy alone (January, 2021), and the circular economy can offer solutions to the 90% of biodiversity loss and water stress that traditional resource extraction and processing require.

However, reducing the impact of our current linear economy will require widespread change and every product that we use will need to be accommodated within this. One area that is yet to be fully incorporated into a circular economy model is e-waste – an area where the UK is unfortunately a world leader. Other than Norway, the UN has said that the average person in Britain discards more electrical items each year than anywhere else in the world, and the UK is also the worst offender in Europe for illegally exporting toxic electronic waste to developing countries.

1,000,000 tonnes of e-waste are produced annually in the UK, enough to fill six Wembley Stadiums. The WEEE Forum estimates that only 17.4% of e-waste was recycled in 2019 (October, 2020), meaning the vast majority of this is burnt or thrown into landfill, creating environmental hazards for years to come.

However, the good news is that 100,000 tonnes of e-waste would be avoided if we fixed just 10% more perfectly repairable appliances. As an electrical spare parts retailer, we have seen incredibly encouraging trends throughout 2020. Our leading consumer brand eSpares has seen record-breaking surges in demand over the past year as consumers look to fix appliances themselves rather than kicking them to the kerb.

We recently conducted a survey of 5,000 people and the results clearly show this growing interest among young people for repairing and recycling their electrical goods. The answers suggest that three times more young people than over-65s would try to fix a broken appliance at home and that the environmentally conscious under-35s are increasingly keen to fix gadgets rather than throw them away.

That is why we have taken steps to encourage our customers to drive a circular economy throughout the year with the campaign #FixFirst. As a business and a retailer, it is our responsibility to help educate our customers on the benefits of a circular economy. Free services like our Advice Centre, which has over 700 step-by-step articles and attracted 1.2million visits in 2020, contribute to this by offering assistance on making repairs around the home whenever and wherever it is needed.

It is up to businesses to ensure that we champion the benefits of the circular economy and ensure these behaviours are maintained permanently.

Certain sectors are already leading the charge in doing this. In fashion retail for example, Levi’s is paying consumers to bring back old pairs of jeans for sale on a second-hand marketplace. Patagonia similarly will take back old pieces of clothing to repair and refurbish them.

Plastic packaging is also receiving some tough attention from across the retail and food and drink manufacturing sectors. Tesco has announced that it has removed one billion pieces of plastic from its UK business in just one year through a policy of Remove, Reduce, Reuse and Recycle, while consumer brands like Nestle for example are testing reusable packaging to reduce the amount of single use plastics.

Consumer attitudes are moving in one direction on the topic of the circular economy and it is therefore essential that businesses also get ahead of this as a commercial priority. In 2020, Deloitte found that 43% of consumers were already actively choosing brands due to their environmental values, while 2/3 of consumers have reduced their usage of single use plastics. In direct to consumer in sectors like the one in which we operate, sustainability credentials are fast becoming a purchasing priority alongside price.

Legislation in the UK is also increasingly clamping down on businesses that do not champion circular economy in the products they create and use. The Environment Bill that is expected to be passed in Autumn will give Government powers to introduce new targets on waste reduction and packaging. Extended Producer Responsibility expected to be introduced in 2023 will also lead to major fees for manufacturers of products that cannot easily be recycled.

As the circular economy rises in priority over the next year, businesses must act fast. Robust policies on the circular economy will both drive environmental benefit and allow businesses to stay ahead of a trend that is fast becoming a priority for consumers.

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Finance

Bitcoin steams to new record and nears $1 trillion market cap

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Bitcoin steams to new record and nears $1 trillion market cap 3

By Tom Wilson and Stanley White

LONDON/TOKYO (Reuters) – Bitcoin hit yet another record high on Friday, and moved within sight of a market capitalisation of $1 trillion, blithely shrugging off analyst warnings that it is an “economic side show” and a poor hedge against a fall in stock prices.

The world’s most popular cryptocurrency jumped 2.6% to an all-time high of $52,932, setting it on course for a weekly jump of over 8%. It has surged around 60% so far this month.

Bitcoin’s gains have been fuelled by signs it is winning acceptance among mainstream investors and companies, from Tesla and Mastercard to BNY Mellon.

Its latest gains took its market capitalisation – all the bitcoin in circulation – to about $982 billion, according to cryptocurrency data website CoinMarketCap, with all digital coins combined worth around $1.6 trillion.

Still, many analysts and investors remain sceptical of the patchily-regulated and highly volatile digital asset, which is still little used for commerce.

Analysts at JP Morgan said bitcoin’s current prices were well above estimates of fair value. Mainstream adoption increases bitcoin’s correlation with cyclical assets, which rise and fall with economic changes, in turn reducing benefits of diversifying into crypto, the investment bank said in a memo.

“Crypto assets continue to rank as the poorest hedge for major drawdowns in equities, with questionable diversification benefits at prices so far above production costs, while correlations with cyclical assets are rising as crypto ownership is mainstreamed,” JP Morgan said.

Bitcoin is an “economic side show,” it added, calling innovation in financial technology and the growth of digital platforms into credit and payments “the real financial transformational story of the COVID-19 era”.

Other investors this week said bitcoin’s volatility presents a hurdle for its ambitions to become a widespread means of payment.

On Thursday, Tesla boss Elon Musk – whose tweets have fuelled bitcoin’s rally – said owning the digital coin was only a little better than holding cash. He also defended Tesla’s recent purchase of $1.5 billion of bitcoin, which ignited mainstream interest in the digital currency.

Graphic: Cryptocurrencies surge multi-fold from March lows –

Bitcoin steams to new record and nears $1 trillion market cap 4

Bitcoin proponents argue the cryptocurrency is “digital gold” that can hedge against the risk of inflation sparked by massive central bank and government stimulus packages designed to counter COVID-19.

Yet bitcoin would need to rise to $146,000 in the long-term for its market capitalisation to equal total private-sector investment in gold via exchange-traded funds or bars and coins, according to JP Morgan.

Rival cryptocurrency ether traded down 0.5%, still near a record of $1,951 reached earlier on Friday. It has been lifted by growing institutional interest, and after its futures were launched on the Chicago Mercantile Exchange.

(Reporting by Tom Wilson in London and Stanley White in Tokyo; Editing by Sam Holmes and Pravin Char)

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