Randy Stewart Thompson – chairman of Valhalla Private Capital, managing director of Old Kent Road Financial and co-owner of Peterborough United Football Club – opened up about “the dawn of debt” and its impacts for entrepreneurs.
Critiquing founders’ use of simple agreements for equity (SAFEs) at Decentralised Energy Canada (DEC)’s 2022 Annual General Meeting and Investor Forum alongside Anouk Kendall, president of DEC; Natasha Kostenuk, CEO of Ayrton Energy; Dan Erhardt, CEO of Arcus Power Corp and John MacInnes, chair and CEO of Earthware; Randy said there is currently a “fight for deal flow”, which is a “big change” in the startup ecosystem compared to during the heights of the coronavirus pandemic.
However, when debt joins the “fight”, Randy said that banks can't do debt against what entrepreneurs don't have yet, which is “security” (or “any financial asset that can be traded”, according to
Corporate Finance Institute).
As a result of this, Randy maintains that entrepreneurs should “try to avoid the personal guarantee”, condemning the practice as a “kiss of death”.
“You've got mezzanine debt moving in to get so you can actually get higher rates of interest like your credit card,” Randy continued.
Referring to debt as a “startup credit card” which is “fighting with equity to get into your deal”, Randy added, “tell me it doesn't sound like ‘we should all just start a company tomorrow.'"
However, Randy claimed that inflation and high interest rates “don’t matter” for investors as they are able to move into “alternative markets”.
In these so-called “havens”, Randy remarked that investors are “looking for places where they can get 10-12% returns, or plunk it in equity so it hides for 10 years away from the markets”.
On the topic, he lamented: “Something's wrong with the world because everybody is fleeing into these alternative marketplaces, and historically as inflation goes one way, you always start startups in a downturn.
“It's good time to start [a business], but because the markets in a downturn investors are freaking out, and they do stupid things like invest in startups,” Randy concluded.
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