rc3.org Rafe Colburn on software development (and other topics)

Rafe, it looks like your post isn’t quite finished and your link is broken.

This story highlights our problems with debt as a nation. . While debt may be a great way of quickly growing a business it comes with SIGNIFICANT risks.

Although I’d financed much of Zappos myself during its early days, we’d eventually raised tens of millions of dollars from outside investors, including $48 million from Sequoia Capital, a Silicon Valley venture capital firm. … Our investors at Sequoia made $248 million.

I have no idea how much profit Zappos’ investors, I certainly doubt they lost money. The bailout you say was needed just rewarded a very risky business strategy. Relying on a $100 million line of credit to OPERATE is risky. Privatized reward, socialized risk.

This article does nothing to change my opinions on the bailouts. While I agree SOMETHING needed to be done, it certainly wasn’t to write a blank check to all the banks.

On the face of it, Zappos should have been a casualty of the recession/meltdown.

Just my $.02 worth.

Posted by Jeff on 7 June 2010 @ 5pm

truncated post? seems like you ended in mid sentence.

Posted by andrew on 7 June 2010 @ 5pm

Jeff, I’m not sure your conclusion makes any sense at least as it applies to Zappos. They didn’t receive bailout money but they were suffering from the credit crunch.

Posted by andrew on 7 June 2010 @ 5pm

Jeff, I think you’re misapprehending how companies like Zappos use short term lines of credit.

Nearly all businesses finance their business on a day to day basis using short term credit, simply because it allows them to decouple paying their expenses from their cash flow. I have a friend who works in accounting for a utility company, just about the most stable kind of business there is, and they were in the same boat during the crisis. Even though their future revenue is very predictable, they use a line of credit to pay payroll and whatnot, and those lines of credit were drying up.

Sorry about the truncated blog post. My internet connection cut out while I was composing it and when I went back and re-saved it, some of it was lost. It’s fixed now.

Posted by Rafe on 7 June 2010 @ 5pm

“Nearly all businesses finance their business on a day to day basis using short term credit, simply because it allows them to decouple paying their expenses from their cash flow.”

Yeah, but one might ask whether this is actually a desirable state of affairs. Not only does it let the bank skim a significant part of the profit of the business in interest and fees (they wouldn’t do it otherwise), it leaves the business vulnerable to the credit markets in a way that they wouldn’t be if they had a cash cushion.

For a rapidly expanding business like Zappos I can see why it makes sense. For stable businesses I think there is a good argument that sitting on a couple of month’s payroll is better than paying to borrow it every month and taking the risk that a credit crunch will crash their business through no fault of their own.

Posted by Jacob Davies on 8 June 2010 @ 8pm

Perhaps. I’ll ask my friend the accounting genius why businesses do it that way.

Posted by Rafe on 8 June 2010 @ 10pm

Jacob hit on my point. I understand the what, but the why doesn’t make sense. You’ll note my first sentence, “This story highlights our problems with debt as a nation”.

We as a nation live on debt. This is not a good thing. When a business needs credit to make payroll, this is not a good thing.

While Zappos was not directly bailed out, if part of the side affect of the bailout was to save businesses that operate at extreme risks, then yes we did indeed bailout Zappos and their investors who made a much higher profit than if they had to slash business or put on a fire sale.

This is one reason I think the pain for our economy isn’t over. Too much debt. Too much private sector, too much public sector and too much personal deb.t

Posted by Jeff on 8 June 2010 @ 10pm

I disagree that debt is, by definition, a problem, especially short term debt. I put most of my expenses on my American Express card over the course of the month and pay it at the end of the month. It’s paid off every month (it has to be, it’s Amex), but it’s still debt. It just makes it easier to make the budget work with my pay schedule. I don’t think that’s a bad use of debt, or even a very risky type of debt to carry.

I am also not against long term debt if you can use it to make money. If you can borrow money at 5% and earn a return of 10%, borrowing that money makes good financial sense.

Obviously we’ve seen a lot of misuse of debt — people using credit to live beyond their means, people buying houses that they couldn’t realistically afford, and so on. And we’ve seen entire industries built around taking advantage of people who want to live that way, lending money to people knowing that a fair number of them won’t be able to pay it back.

But being against “debt” as a rule doesn’t make a lot of sense to me.

Posted by Rafe on 9 June 2010 @ 12am

Even accepting that some amount of credit is necessary even for a responsible business, it doesn’t justify the bailouts given that the banks haven’t responded to the bailouts by opening reasonable lines of credit to responsibly run businesses. They’ve still shut down lines of credit, and companies like Zappos still went under.

And now we (the tax payers) have run up an enormous debt to save the banks from the consequences of their own irresponsible practices, i.e. going out of business the way they’ve forced companies like Zappos to do.

Posted by Kief on 9 June 2010 @ 3am

Rafe, let’s say your AmEx isn’t available next month, can you still pay your bills? Let’s say your income drops by 25% next month, can your AmEx bill still get paid? There is a difference between using credit for convenience and using credit as a necessity. My guess is if you lost your credit cards tomorrow, you’d be ok. Judging by the article, if Zappos lost them, they’d be up **** creek without a paddle.

I am not against debt, but a company that is reliant on debt to survive is not healthy.

That’s great if you can borrow money to earn a greater return, but that also exposes you to more risk. Assuming that greater risk for greater reward should not make it my problem or the public’s problem.

Posted by Jeff on 9 June 2010 @ 7am

I agree with that. If you can’t service your debt, you file for bankruptcy. The policy question is whether it’s cheaper in the long run to spend money to stem a crisis or to let companies suffer the consequences of their risk taking. There is no doubt in my mind that AIG, Citibank, and everyone else we bailed out deserved to default and file for bankruptcy. But the consequences to the economy of doing so would have been severe. When it comes to economic policy, I care less about justice (such as it exists) and more about what’s good for the economy in the long term.

What’s been frustrating to me is that we still haven’t reformed financial regulations enough to greatly lower the probability that we’ll go through this again.

Posted by Rafe on 9 June 2010 @ 8am