 If you had to talk about the single brightest beacon of hope for the global economy, then it would most probably be tech startups. By now all of us have accepted that the future is going to be digital and probably driven by AI or artificial intelligence. And all the people taking us into that future, yes, tech startups. Tech startups have one more thing that they do, especially if you look at e-commerce and aggregated services. They sell things to us at huge discounts. And sometimes they give away stuff for absolutely free. Just open your phone right now and look at all the apps you use to buy stuff. Whether it's a product or a service, there's either some sort of rebate or some cashback or maybe a discount coupon for you to buy something later if you wanted to. The question that you must have asked at some point is who is footing the bill for all this? Who is paying for these discounts? The financials of these startups and even some big tech companies will give you the answer. They're burning cash to keep us hooked and to get more customers. And in the process, they're making huge losses. Yet, these companies are worth massive amounts of money, hundreds of millions and often billions of dollars worth without showing any profits. How does this happen? It starts with founders going to angel investors who give them some funds to launch their business in exchange for a share in the company. The company gets 1 crore from angel investors for 10% and the entire 100% of the company would become worth 10 crore rupees. Once the business starts and the startup gains customers by spending the 1 crore it got, it has to raise money again because it's not making profits which it could have pumped back into the business. This time they go to bigger investors, usually venture capital funds or VCs. The founders and investors show how the startup has managed to get a large number of customers and together they come up with a model which projects what the startup will earn over the next 5 to 10 years. This model is used to come up with a valuation for the company. Obviously, this is more than the 10 crore rupees it started with. Let's say it is now worth 20 crore. The angel investors have effectively doubled their money. They might want to exit now by selling their shares to the new venture capitalists and the VCs take the angel investors 10% shares and also ask for 20% more from the founders because they want more control. This totals to 30% of the company. Now remember we said that the company's valuation is now 20 crore. So the VCs put in 30% of that or 6 crore rupees for their 30% stake in the company. The angel investors get out with that 2 crore and the startup is left with 4 crore rupees to burn and expand. In 2 years they've run out of cash again and need more money but the startup's narrative is still looking promising at least to outsiders so the VCs decide it is time to get out. They bring in even bigger investors, usually private equity firms popularly known as PE firms. Once again this loss making company goes through a miraculous increase in its valuation. Now it is worth 30 crore. The VCs sell their 30% to the private equity firms and get out with 9 crores. Remember they brought in originally just 6 crores. The PE funds ask the founders to give up another 20% and inject 6 crore into the company. Again the startup gets more money to burn and get more customers by giving them free fees and discounts. Who wouldn't want that right? 2 years down the line the startup is still not showing signs of making any profits and it hasn't hit the revenue targets it had promised. But if the private equity investors admit publicly that they've lost faith in the startup its valuation will tank right? So they bring in more money at an even higher valuation. This time they take 10% more but at a valuation of 50 crore. The PE firm now owns 60% of the company and the startup gets another 5 crore to spend which it will inevitably end up burning. But it's a new lease of life after all. Now the founders and investors begin to plan an IPO. Yes you can be loss making but still raise money from the public through an IPO. It happened in the past couple of years in India when loss making tech companies raised money by selling their shares to the Amjanta. That is when the PEs take out a chunk of their money as do the founders. The IPO is sold to institutions and the public at fabulous valuations. Perhaps 150 crores now the original investors in the startup triple their investments while mutual funds and ordinary shareholders are left holding the baby and the bath water. Think of any of the tech startup stocks that listed recently each one of them has crashed. So if you invested in these companies you have more or less lost every penny that you gained from all the rebates they gave you when you used their apps. Okay you will say I don't care I didn't buy into any of these IPOs. You lose even if you think you have no connection with startup financing. Because the entire startup financing system is a sophisticated Ponzi scheme. When investors put in a money into a startup they not only bring their own savings but also borrow from other lenders. The money that comes into the startups account is kept in a bank as a deposit out of which the startup spends money every month. The bank in turn takes these deposits and lends them out to an interest on it. Some of this money goes back to venture capitalists and private equity firms who in turn invest in startups again which once again put their money into their bank accounts. This is a self-reinforcing cycle. On the face of it there's no problem here the startups are very valuable after all the shares can fetch a lot of money in the market. So even if the startups are unable to make profits and therefore find it difficult to pay the loans back the shares can be sold to make good the loans right. But remember the example we just took the startup never made any profits but managed to get a massive valuation which its business model simply didn't deserve. So if a bank really wants to get back the money it lent it would only get a fraction of the market value of the shares because it was so heavily inflated in the first place. In effect this is very like a sophisticated Ponzi scheme where future investors are going to lose. They will pay for all the losses that have been made while consumers were being given freebies. This is exactly what happened to the real estate bubble that led to the global financial crisis in 2008 which caused a massive economic slowdown across the world where everyone lost. This time the crisis might start in the over inflated over bloated valuations of the tech sector where huge amounts of money huge amounts of public savings have been invested. Tech startups have already been facing a funding winter for the past one year something similar happened to the real estate sector in 2007 just a year before the final collapse and just like 2007 the first banks are beginning to fail back then home loan companies started failing first this time banks in the startup and tech space have begun to fail. Again the contagion spread very quickly to bigger banks in 2007 this time we are seeing a mega bank credit switch fail it is seemingly without any connection to tech financing but it is within the same interconnected world of finance capital. Again back then we were told everything is under control the same thing is being repeated once again keep your fingers crossed maybe nothing will happen but prepare for the worst a global crisis could be around the corner. If you have liked this video do press the like button and leave your comments and share it with your friends and family do subscribe to our channel and don't forget to press the bell icon so that you get to know as soon as a new video drops. We do real news our videos are worth watching until next time goodbye.