It has been kind of fun watching this subprime mortgage meltdown and finding out who the guys were that were actually behind the funny money. Me and my cohorts are all for free money when our companies are taking advantage of it. Should we have some concern for endowments, pension plans and for ourselves to the degree that we have some financial exposure to banks who are giddy about lending to startups? Rather than post a diatribe, let me just put a few questions down here:
1. Does anyone remember Comdisco? They were the first ones and the last ones to price venture debt at 1 or 2 over prime with 2% or 3% warrant coverage. For the rest of the market, even going to 5% warrant coverage was too thin and a bad path to go down.
2. Are any financial sponsors questioning the pricing and underwriting that is going on at venture debt firms?
3. Is any one thinking about the pricing and the mortality rate of startups? If 3% warrant coverage is sufficient, why not 2%? How about 1%.
Who are the players and how can you profit from a downturn in venture debt portfolios? Study Comerica, Silicon Valley Bank, Western Technology, Hercules Growth, Lighthouse Capital and Eastward Capital to name a few. First get a term sheet from a venture capitalist, then call a few of these firms and look at their terms sheets. This money is easy and we know the fate of easy money.
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