Two executives are out at 3VR, both after relatively short tenures at the company.
3VR's CEO says this is part of a shift to cover new markets. This shift could be due in part to their stagnant sales growth in recent years, and may also explain their recent debt financing, which we detail in this report, along with our outlook for 3VR.
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If the company value has stagnated, investors are less willing to bring in new equity, as this dilutes their overall investment.
On the other hand if they are expanding, "building a company with maximal short term debt provides greater financial benefits to the smaller amount of equity held." J.H.
So maybe equity is not preferred by either stagnant or growing companies?
#1, your citation is for the context of Dahua who has grown more than 400% in the past 5 years and is one of the fastest growing companies in the industry. Yes, debt can make sense if you are growing fast.
3VR's case is different, growth is basically nil, so debt is primarily to stay alive.
Obviously, I am not endorsing Dahua's overseas strategy, as our ongoing criticism of their operations has shown but they have clearly have strength within China, far more than 3VR does in the US.
3VR's case is different, growth is basically nil, so debt is primarily to stay alive.
Yes, this is what I'm saying, much different cases, yet same solution is preferred by owners: debt over equity.
What makes you say that debt financing was the preferred model in 3VR's case?
My personal experience with smaller/startup type companies (though 3VR is well past "startup" stage by most measures, they are still operating as investor subsidized) is that debt is rarely "preferred".
Debt is more commonly used as a bridge loan while trying to raise equity, or when the company is unable to raise equity, but still needs money to finance operations. Both of these scenarios are a bit "up against the wall" in terms of what the "preferred" approach would be.
Raising equity without growth in valuation often creates contention between the company and existing investors, as the terms will commonly be less than ideal (dilution for existing investors, lead investors being able to dictate highly preferential terms that make it hard to raise future money, etc.). This leaves debt as a last resort, or at the very least a less desirable way to get cash.
What makes you say that debt financing was the preferred model in 3VR's case?
I was only agreeing with you,
If the company value has stagnated, investors are less willing to bring in new equity, as this dilutes their overall investment.
that investors prefer not to be diluted.
They would seem to be a buyout target for a company like Axis? Avigilon? Flir? Genetec? If they have strength in the area of Retail with POS and Analytics, any of those companies with either a presence or interest in the retail vertical could gain from their IP and possibly their customer base?
They would seem to be a buyout target for a company like Axis? Avigilon? Flir? Genetec?
The problem for a 3VR buyout is that they are a tight coupling of VMS and video analytics.
For example, Axis bought Cognimatics because Cognimatics was designed to be an analytics only plug in to Axis, which made the offerings highly complimentary.
Let's say those companies wanted 3VR's retail offering, they would most likely not want the VMS since they all have their own, making a deal and integration a lot more complicated.
The most likely model for 3VR's acquisition is the Aimetis deal by Magal S3, more of an 'outside' company that does not already have VMS / analytics.
Interesting article on Silicon Valley companies raising debt here. One CEO explained terms:
The offers had interest rates ranging from 9 percent to 15 percent over two to five years, and the terms protecting the lenders varied. Financial covenants, especially ones permitting the lender to take control of the startup, were sometimes stringent.
One lender had a clause that would force Metamarkets to pay off the debt early if it failed to hit 80 percent of its revenue projection. Driscoll passed on that, opting instead for cleaner terms for a $14.25 million loan in October at around a 14 percent rate from Wellington Financial and City National Bank.
That's approaching consumer credit card interest rates.
