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The Allure of Bonds
Financing of young companies has a taken on a surprisingly retro twist. Privately owned startups, such as Loudcloud Inc. and Tunes.com, have turned to debt financing before initial public stock offerings--despite concerns that such small companies can't make big interest payments. Web CEOs are learning that bonds aren't just for Grampa anymore.
The trend has taken off in the past year. In February, 18 information-technology companies raised $6.4 billion selling convertible bonds--up from less than $1 billion in February, 1999. Dot-coms like convertibles because the right to swap the bond for stock can be deferred until the stock price rises--effectively, it's selling stock at tomorrow's prices today. Selling debt lets founders hold on to more stock until the company gains critical mass, says Marc Andreessen, chairman of Loudcloud, which raised $23 million in debt late last year. Letting founders get richer can do an awful lot to make old-fashioned ways of raising cash seem sexy. As entrepreneurs get used to the idea, it's likely to win lots of, ahem, converts.