The myth of profitability
Seeing a lot of posts on profitability of startups and I'd like to burst some bubbles.
Debt is good for companies because debt's value decreases as inflation increases. Most successful companies of today leverage debt and managing risk, not by using cash in the bank all the time. Plus inflation and money printing has been pretty steadily growing in the last 30 years or so.
Elon is a good example, he takes loans against his assets and equity and doesn't take a salary. Saves tax and still has money to use. Most people take EMIs even if they can afford something in cash to have more flexibility with their payments plus save taxes.
Yes, it's riskier. If things go south you can lose ownership of assets. But in a global economy that mostly runs on debt with even countries being in deficit, debt is a useful tool for those who have access to it and can afford to pay it off against other assets or cash.
My startup has no debt right now but we did have debt and were unprofitable over periods when we invested more into product and growth.
It's all about balancing priorities and managing risk well.
Talking product sense with Ridhi
9 min AI interview5 questions
Half truths. Yes debt value decreases as inflation increases on paper but high inflation is swiftly followed by interest rate hikes making your debt gains useless if on floating rates.
And comparing debt to financing lifestyle for individuals is completely separate not to mention wrong with profitability of companies.
Rich people take debt on equity or shares at around 4-7% which is a no brainer when compared to paying themselves a salary and paying >30% income tax. But again as mentioned it's wrong to compare a company's financials and profitability with that of an individual.
When it comes to countries debt is good but again in limit. Look at Pakistan they are fked with debt. Or Venezuela where you print more to pay off debts making it worse. Only US is an exception because they have the magical money printer and an insane market size.
I'm simply stating how debt is used on micro and macro levels
Senior exec payments are a big part of expenses at large companies, that's why ESOPs are mixed in. Have also mentioned it is risky and has pitfalls.
Neither 100% profit nor 100% debt is ideal.
Startups that are still trying to figure out whether people have a use for their product are going to shoot themselves in the head by taking debt.
There's plenty that do have use cases and PMF too. There is almost no successful company out there that never takes on debt and never will.
Of course there's use cases for debt. Most capital intensive startups do raise debt alongside equity, very often from the same person providing the equity. In shark tank usa the sharks write a lot of debt for that reason. Could you give some examples of companies that are saying no to debt but you believe they should be taking it?
Very interesting POV. Didn’t honestly see debt in that light.
itni ramayan likh di.. but ye nahi bataya which great bank/org gave you debt when you had no cash flows.. Debt comes to those who can repay>>Cashflows. cashflows come post operating profit. Plot twist : pappa gave me "debt" when I was unprofitable :)
Debt doesn't just come from banks, debt is also when you owe someone money for goods or services.
We took loans against confirmed purchase orders to help bring cashflow. Ironically, once the order was serviced the same bank denied us a loan for expansion. Started the company with our own cash deposits because banks and govt schemes were simply not an option available to us.
Banks are not the sole karta dharta of debt (thankfully). That's why peer to peer lending and borrowing is still so popular in India today. Otherwise our lower and middle income populations would never be able to grow. These folks rarely have parents that can dole out money whenever needed.