[foobar_]

This is probably silly but I have often wondered why you don't get straightforward loans in Software. If I were to open a restaurant I would hardly go for a VC.

Do banks have something against software businesses ? Are there software companies that have bootstrapped themselves with loans (not friend/family loans) as opposed to VC ?

[nostrademons]

The market structure is pretty different. Restaurants have geographic barriers to entry - your restaurant is probably only serving customers within a ~20 mile radius. And the economics and business model are well-known: you know exactly how much rent is going to cost, how much labor is going to cost, how much food is going to cost, and how many tables you can turn over a night, and so you can build reasonable financial models for how much you might make.

Software is global, and is fundamentally an innovation business. Once you've written a piece of software that does something useful, you can sell additional copies at zero marginal cost. This tends to make software into a winner-take-all market: there is realistically only one Google, only one Facebook, only one Salesforce, one Amazon, etc. If you try to get into a known market, you are almost certain to fail, because you have to pay all the R&D costs that your competitor has already paid and they can just sell to the customers you would otherwise have gotten at close to zero cost. That means that successful software businesses are almost always doing something fundamentally new - either selling into a new market, or selling a new and different product into an existing market that has changed in some way. Banks are really bad at forecasting the success of new business models that have no financial data to go on - their whole core competency is evaluating financials, so if a company has no revenue but lots of expenses and an uncertain prospect of ever making money, it looks like a universally bad bet for a bank loan. The venture capital industry is all based around answering "How do we finance businesses where success is binary and information about whether the company will be successful is scarce?"

[tonyarkles]

To add to this, a significant portion (I think) of opening a restaurant goes into purchasing physical assets: fridges, grills, safety equipment, tables/chairs, etc, and banks know how to liquidate those assets if your business fails. Taking a failed software company and selling off its assets is a much harder proposition.

[foobar_]

1. Developer Salaries

2. Marketing Costs

3. Compute Power

4. Software Pricing

can all be quantifiable in numbers. Again I don't know how loans operate.

To be a cynic, I think the software free lunch is over. Data will be increasingly localised. More draconian laws to come, let's hope they are stupid. Algorithms have also become "scary" for normal folks.

[nostrademons]

Sure, and once you have those in place you have a startup that eats money and doesn't necessarily make any money. The vast majority of software startups end up building something that nobody wants anyway, because if there's something that lots of people want, somebody has already built it.

Whereas if you open a restaurant, you can make solid projections where "If we fill every table, we make $Y. If we're 1/3 full, we make $X. We're unlikely to be less than 1/3 full", and these are typically completely reasonable because you can see how other similar restaurants have done. For a restaurant, having a similar restaurant be successful is a very positive indicator. For a software company, having a similar software company be successful is an indicator that the market niche is already filled.

[foobar_]

Thats a simplistic view of restaurants. From a purely market perspective, people already do this with personal loans, credit card or otherwise. I do agree that evaluating the final software's value is difficult but for a loan lender, it's only a matter of credibility rather than success.

As long as market actors don't do anti-competitive practices, I still don't see why a successful software can't be replicated and you can't compete in the same market niche. The user interfaces are one area which can obviously be different. Enterprise software is full of replicas.

[samfisher83]

If your startup fails then you software is harder to value. If the bank have ovens at least they can resell them. If you have a piece of software it's much harder to value or sell.

[foobar_]

Interesting, in that sense software is like making an art piece where value is uncertain. That definitely opens a viable case for public funded software. Plenty of movies are produced with the help of Govt for example.

[nickff]

Government often supports investors making movies; likewise, governments could try to get on board with good venture capitalists in funding software, and this does happen in some places. Government panels or individuals selecting which software to fund runs into the principal agent problem, due to lack of skin in the game.

[kelvin0]

You can always use Indie Gogo, Kick Starter, Patreon or any other similar platform to fund your project.

Banks are risk averse. Lending to a restaurant they can always recoup a lot of material and other physical assets as collateral. Not necessarily so for most software dev.

That's my perspective.