 Yes, what the thumbnail says is exactly what this video is going to try and prove that the startup ecosystem is the biggest scam of contemporary capitalism. Now, all of us have heard of tech startups and a majority of us have got carried away by the hype around them. In fact, at some point, you must have heard the saying that software will eat the world. Now, what does that mean? It means that tech will replace human beings and human-dependent systems in almost everything we do. Tech startups are based on this fundamental premise. Think of the startups that you know. A large number of them operate in the retail, trade and distribution space. Let me give you a few popular examples. Amazon, for instance, replaces your need to go to many shops and allows you to buy things from across the world with just a couple of clicks on your phone. Zomato lets you access food from thousands of restaurants across India, actually, without leaving your home or going to each individual website to order. Paytm allows you to leave your wallet at home and it dramatically reduces the number of trips that you have to make to the ATM every time you run out of cash and Blinkit delivers your groceries faster than it takes for you to walk to your closest grocery store. Then there are social media apps which allow you to stay connected to your friends and acquaintances 24-7 and also lets you indulge in all your vices. Instagram, for instance, helps you bring out the exhibitionists in you. Facebook makes you a warrior. You can browse through a friend's photos and judge them without them ever really knowing whether you did that. You can sometimes even see photos of friends of friends. And yes, Facebook also lends you social capital. You can let the world know who your friends are and rise up the social ladder. And Twitter gives you your personal soapbox for you to give a usually uninformed opinion on everything under the sun. And then there is the biggest tech marvel, Google, which has revolutionized our access to information, whether through its search engine or through that great video repository YouTube which Google owns. I'm leaving out Apple and Microsoft from this list, even though they're called tech companies for two reasons. First, they're not new. They've been around for a very long time. Microsoft, for instance, gives us old-fashioned computing, word processing, presentations and a very sophisticated calculator called Excel. While these are revolutionary, they're more like paper saving and time saving devices, productivity aids and don't really replace humans on a very large scale. The second reason is that they're similar to old-school manufacturing companies. Apple almost entirely so. Its business is selling phones, tablets and earphones, each of which have to be physically manufactured in factories. Yes, of course, Apple also has a streaming music service and a video on demand service like Netflix does. But, you know, those are not core to its business and they're not very profitable. If you notice, among the tech companies that I've named, many are virtually monopolies. They have no serious competitor. Google has no real rival when it comes to search. Yes, Microsoft has hit back by integrating chat GPT in its search engine, but it is still far away from really challenging Google's complete dominance. Facebook, now called Meta, is a virtual monopoly in social media. Wanting not just Facebook, but also WhatsApp and Instagram. Twitter is the go-to micro-blogging site for everyone, even though it is struggling to make money. And Amazon is without doubt the biggest global e-commerce site. If you look at food delivery in India, then two companies, Zomato and Swiggy, control almost the entire market. And we all use these apps every day, but ask yourself, would you use them if you had to pay a lot of money for them? Would you pay, for instance, 500 rupees a month to use Google search? Would you pay for Facebook or Instagram or Twitter or even WhatsApp? Would you pay a hefty delivery fee on Zomato or Blinket if they didn't balance that out by giving you massive discounts? Would you pay more on Amazon because things are home delivered? Or will you then make the trip to the shop more often than you do right now? Would you use UPI or Paytm if you had to pay a large transaction fee? The answer in most cases would be a resounding no, or you'll pay much less than the company can hope to earn. All tech companies know this. Software does not eat the world. Freebies do. In every case, without exception, every time a tech company, especially a startup, tries to earn their money directly from customers, they fail. Even the profitable tech companies, whether it is Facebook or Google, earn their money from advertisers and not from users. In that sense, their revenue model is even more advertisement dependent than media companies. I mean, after all, old school newspapers and news channels earn some of their money from subscribers. Google and Facebook don't get a penny from subscribers. Amazon is a mega marketplace where it earns a commission from vendors, but it also passes on some of that fee to consumers as discounts to hold them onto their platform. That is why Amazon loses money on its online retail business. Almost all of its profits come from the services it provides to other corporates called Amazon Web Service, or AWS. And by the way, right now, Amazon is a loss-making company. Despite this precarious revenue model and relatively modest profits, Amazon, Facebook and Google are amongst the most valuable companies in the world. And it is the success of these tech giants in the global stock markets, which enables every new tech startup to command fabulous valuations, even though they make absolutely no profit. Even take the big tech names in India, Paytm or Zomato or Baiju, they make huge losses. But they're extremely valuable companies. That is what makes the tech startup ecosystem such a big scam. Some of you might know what valuation means. Some of you might not. In the simplest terms, it is the amount of money that you would need to buy out a company in its entirety. The market value of a company whose shares can be bought and sold on the stock market is pretty easy to calculate. If it has 10 lakh shares and each share is selling at 1,000 rupees, then the company is worth 10 lakh into 1,000, which is 100 crore rupees. Usually, the value of a share is dependent on two things. A profitable a company and what its growth prospects are. So sometimes a company that is less profitable might be more valuable because it is likely to grow faster and deliver higher profits later than a company that makes more money right now. Now this promise of future earnings is what is used to justify the valuations of tech companies and tech startups. This is why Facebook's parent company Meta's market value is 25% higher than that of the oil giant ExxonMobil. Even the Facebook's profits are barely 40% of what ExxonMobil earns. Amazon, which made a $3 billion loss in 2022, has a market value that is more than double that of ExxonMobil. But at least Facebook and Amazon are listed companies. They have to declare their financial data. This is revenues, costs, profits, taxes every three months. The world of tech startups on the other hand is completely non-transparent. So how are they valued? Let us take the hypothetical case of an imaginary company which we will call Ponzi AI. The founders of Ponzi AI have made an app and they've gone to an early stage investor to raise money. Let us call this investor Angel Funds. Angel Funds gives $1 million and in exchange it gets 5% ownership of Ponzi AI. Now right at the beginning without showing any revenues or profits, just a promise Ponzi AI's valuation goes to $20 million. Ponzi AI uses the $1 million that it has raised to give freebies and get customers on board. In the world of tech startups, this is called customer acquisition which is actually just a fancy name for giving things out for free. After six months, Ponzi AI has run out of the money. Angel Funds doesn't want to give any more or doesn't have any more so together they look for second round investors. This is a bigger venture capital fund and let us call it big bet funds. Ponzi AI's founders and Angel Funds negotiate hard and they tell big bet funds that say, look, we have already had 100,000 customers. Don't worry that they don't pay anything but look at the growth potential. They managed to convince big bet funds to put up some money this time at a higher valuation. So big bet agrees to buy 15% of the company for $6 million. Ponzi AI's valuation has jumped to $40 million in just six months. Angel Funds sells it 5% to big bet for $2 million, doubling their investments and Ponzi AI gets the remaining $4 million to reinvest in its game of giving freebies to acquire even more customers. After another six months, Ponzi AI has spent all its money but its customer base has risen to 300,000 people in just one year it has gone from zero to 300,000-watt brilliant growth. Oh yes, no point harping on that small fact that no money was actually made in the process. Now Ponzi AI's founders and big bet funds want to sell shares to a more mature fund and raise even more money at even higher valuations. This time they managed to raise money from a private equity fund called Clever Investments. Clever Investments agrees to buy one third of Ponzi AI and agrees to pay $30 million for it. The startup's valuation has now risen to $90 million in just one year. Big Bet sells 10% to Clever Investments and takes out $20 million while holding on to the remaining 5% for future gains. Ponzi AI gets the remaining $10 million to plow back into the business. This is burnt in another year. Thanks to that magic word called Customer Acquisition, Ponzi AI is still making huge losses and it has not met any of its revenue targets. Clever Investments gets nervous now. Now in any old school business, Clever Investments would write off the money put in, shut the company down, sell all its assets and try to recover whatever it can. But this is the start of world. Here, the exact opposite happens. Clever Investments invests even more money at an even higher valuation. It now takes its ownership to 50% and puts in another $50 million for the remaining one-sixth of the company. This takes Ponzi AI's valuation to a whopping $300 million with no real business to show against it. What Clever Investments has done is that it has sent a message to the market that it has full faith in Ponzi AI's growth story. Now it is time to offload all the shares to a greater fool and who better to do that than the average retail investor in the stock markets. So Ponzi AI's founders and Clever Investments plan an IPO. They bet big-name global auditors to value the company and these firms magically come back with a fair value of a billion dollars. Ponzi AI's IPO plans to sell 50% of the company to the public and to institutional investors and raise $500 million. The founders, Clever Investments and Big Bet intend to sell a large part of their shares in the IPO. Remember the total money that was put into the company various rounds was just $87 million out of which Angel Funds and Big Bet Funds had already taken out $24 million in previous rounds. Now the investors and founders will make huge amounts of money even if they plan to reinvest half of that in the company. As soon as the company lists its stock price collapses because it has no earnings. This is exactly what happened to Paytm and Zomato and the retail investor is left holding dud shares on which they've lost half their money. But this is not the only thing that makes tech such a scam. It is also the only space left where financial speculators can make money without showing any underlying earnings exactly like they did at the mortgage and real estate bubbles of the mid-2000s. This is the last space for finance capital to operate freely without regulation. It is the last space for them to privatize all gains and socialize all losses. That's the show today. 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