A fundamental insight about finance: Suppose the bank has $250k and you want to buy a house costing that. The bank, by convincing you to take out a mortgage, ends the day *materially* better off than it started, because your promise to repay is worth *a lot* more than $250k.
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“Why inefficient?” Well there are people whose future needs for cash flows are shaped in such a way that they’re happier to tie up more money now in return for predictably receiving a modest rate of interest than the bank is. (Pension funds, insurance companies, etc)
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They want the mortgage more than the bank does, in same way that you want the car more than Toyota does, and so the market “should” arrange for the mortgage to move over to their books and the car to move to your garage.
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This logic is almost certain to hit SaaS companies eventually, by the way. It’s not obvious that Dropbox is the best owner of the stream of cash flows from me to Dropbox.
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(I once asked a very savvy person “Why hasn’t this happened already?” and his answer was that the boom market in SaaS equity makes securitizing SaaS payments unnecessary and potentially a bit negative.)
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“What do you mean, negative?” Well a bank is a pot of money and an operating business, right? A SaaS company is a smaller pot of money, an operating business, and a large number of probable future cash flows. You might be able to efficiently value those cash flows directly.
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But effectively the equity markets let you sell someone very attractive cash flows bundled with an operating business that maaaaaaaaybe they’re paying quite a lot of money for relative to similar software factories.
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End of conversation
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i.e. they can sell the IOU to someone else for more than $250k, so of course there is risk but the creditor is not really "gambling"
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