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Episode Info: When should a company take on debt to enable growth? Silicon Valley’s longest serving CEO has some answers. Guy Smith: Hello everyone out in podcast land, welcome again to another episode of the Tough Things First podcast. I’m your guest host today, Guy Smith. And as always, we’re having a little sit down chat with Silicon Valley’s longest serving CEO, Mr. Ray Zinn. How are you today, Ray? Ray Zinn: Trying to stay dry, Guy. How are you doing? Guy Smith: Well, it’s warming up nicely out here, and boy I am aching for spring, that’s for sure. What I want to talk about today, a subject dear to my heart, managing debt and managing growth. Founders in startups face an interesting inflection point during their growth cycle. It’s real tempting to go out and score some debt in order to try to rise up to the next level of growth, certain investments that need to be made around the company. When should a startup consider debt, when should they just flat out avoid it? Ray Zinn: Debt never sleeps, it’s going to be there 24/7. When you go after debt is a mater of what your growth needs are, if your trajectory exceeds what your cashflow is. Because often, you can grow through cashflow, if you’re profitable, and that’s the way I prefer to do it is to be profitable, and grow through profitability. But, if you’re growing faster than you can grow through cashflow, then debt is fine, presuming that you can fund the debt. In other words, debt is something that has to be paid every period, whatever that period that your lender sets or you agree to, so that’s the key. The key is make sure that whatever debt you take on, that you can make those regular payments on that debt. Guy Smith: Are they any inflection points where you think, in a startup’s life, where debt is truly critical? For some of the startups that I’ve worked with in the past, there often comes a time where they’ve been able to have a growth spurt by taking on a little bit of debt, and using it to either bolster their manufacturing, take care of certain infrastructure needs, hire some really new and unique brainpower. Are there any inflection points that you think are appropriate for using debt? Ray Zinn: Well, anytime you’re introducing a new product, there’s going to be additional costs upfront to do that. So, whatever you’re developing a product that’s not been mature enough to start generating reasonable cashflow, that would be a decent time, or considered a reasonable time, to take on debt to cover the development of that product. You’ve just got to make sure that product actually flies, because when it comes time to start paying down that loan, you’d better have the cashflow to do it. The key is to make sure you can always make your payments on that loan, because that’s the surest way of ruining your credit. The word gets around. I guarantee you, you miss a payment, they’re right there and you’re going to hamper your ability to again get additional fun...
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