Tag: bank loan

Start-Ups: Endgame

After the two weeks-long enforced COVID pause I had to endure, now I am back with the last part of the StartUp Lifecycle series. In this part, we shall speak about what happens after the Start-Up has multiple rounds of bank loans and the usual working strategy after the Start-Up has reached the IPO. Previous parts of the series you can find here and here.

Now, once the Start-Up reaches the IPO status, the modus operandi has to change a bit. The company has to prove itself as a leader in the field and acquire as many clients as possible. Usually, the founders try to balance between too many bank loans and enough income to pay for the developed infrastructure and employees. At that phase, the Start-Up is no longer “categorized” as a Start-Up but usually as a mature and more giant company. Better and more mature processes are established, and usually, the management has to find a way to delegate and distribute the management power and duties.

On the diagram, you can see the standard lifecycle of the given company after IPO. A merger is the most common exit these days.

On the economic side of things, we could not expect new investments and fundings. Usually, the board of directors is trying to survive on IPO and profits. As a rule of thumb, we could expect the company to operate at a loss and cover this loss using IPO profits or bank loans. This way of operation usually gives a good long run of business execution. With this strategy, the company can survive for around 10-15 years, and during this lifespan, the company owners have three options:

  • To find another company for merger or acquisition: At this stage, the company usually has enough assets and IP, which could interest another company. Mergers and acquisitions are typically categorized as successful exits and will leave founders’ reputations intact.
  • To make the company run on profit: Some owners could decide to stop the company’s growth and focus on getting enough clients to keep the company on profit. That was not a rare choice in the past. However, many company owners will pursue option one because it gives them less risk in the long term.
  • To fill bankrupt: As everything in our world, companies could come to an end. Balancing between shares, bank loans, and profit could be tricky sometimes and lead to erroneous results. Significantly, the share price is sometimes quite volatile and could be affected by the CEO’s matters and life choices.

In conclusion, at that stage, companies rarely fall bankrupt. Most owners and major shareholders would prefer to sell the company and its assets instead of bankrupting. At least this way, the employees usually retain their jobs and can be moved to more successful projects in the new company/structure.

Game of loans

In my article on start-up unicorns, I already presented how most start-ups finance their operations and how efficient this way of work is. This article will show how companies and wealthy individuals finance their operations once they reach unicorn status and have already managed to execute a successful IPO or ICO.

But before explaining the financial workflow, let’s analyze what an IPO is and how it integrates with the standard capitalism-based system. At its core, IPO operates the same way as every ordinary bank. People trust the company doing IPO and are willing to buy common stocks of this company. Additionally, let’s analyze a little bit how banks evaluate a given company to calculate its value. Usually, it is a combination of all of its assets, including the common stocks from the stock exchange. So far, so good; however, the stock exchange evaluation rules are pretty exciting. More specifically, the rule of how the end-of-day price calculation is done. It is based on the amount of money an individual is willing to pay for a given stock. And here is the part that must bother us – one big chunk of a given company evaluation is entirely based on people’s trust in the company. It is not based on any real-life assets such as gold, art, or real estate. It is entirely based on faith. We can even safely assume that we ll are living in a trust-based economy.

On the diagram, you can see a standard way of how wealthy individuals finance their operations. They use the IPO/ICO to increase their liquidity and apply for a loan after that

But let’s go back to loans – how do we calculate the personal wealth of people. The answer is a simple one. The same way banks calculate the evaluation of a company – aka based on all personal assets, including stocks. When wealthy individuals decide to buy something or invest in something, they have two ways of doing that – to sell assets or to get a loan.

Usually, most of them are willing to get a loan based on the current evaluation of their stocks and payback later. However, to give the loan, the bank does the review based on the willingness of someone to buy the stocks at a given price. In traditional banking, this usually triggers the central banks to issue a new amount of the local currency to provide the bank with the amount of money necessary to give the loan. So, in short, every time the bank provides a loan based on stocks, we pump new money into the system and lower down the buying power of everyone attached to the local currency.

In conclusion, most wealthy individuals prefer to finance their operations using loans instead of selling stocks at the current value. However, getting a loan increases inflation because the central banks have to issue new money to fund these loans. Another question is how much is the buying power of our modern billionaires compared to the ones in the past. For sure, most of them can not afford to finance the operations of over 1000 public libraries with their own money.