1 - Why start ups want to raise funds rather than bootstrap
"Thousands of years of history shows us that from the time there was money, human beings have always found ways to acquire it using the path of least resistance and most efficiency. Of course, the world has been flush with liquidity in the last decade and this money has found its way to India due to the growth prospects of our country. This capital has made it easier for entrepreneurs to raise money."
"Let me explain with an example. Assume company “A” has 5 promoters, each holding a 20% stake in the business. This company earns a profit before tax (PBT) of Rs 100 Cr in FY 2019/20. The promoters decide to dividend out the profits as the business doesn’t really require additional capital."
"Here are the taxes that will have to be paid:
Corporate tax of 25%: 25 Cr
Dividends taxed in hands of the promoter at 34.5% (highest slab with cess): 26 Cr. Total tax = Rs 51 Cr
So. the money promoters actually receive from the PBT of Rs 100 crores = Rs 49Cr. Or a whopping tax of 51% on PBT. Promoters can also take a salary. In the above example, it would be at the highest individual tax slab of ~43% (taxes of 43 Cr)"
"An alternate means for the promoters to take the money out is described below: Assume that the company is growing 50% YoY (Year on year). They value it at say 50 times its pretax profits or 5000 Cr and sell a 2% stake to a professional investor. This gain on selling the shares is considered Long Term Capital Gain, which is 20% for unlisted companies before indexation benefit. Assuming the company is 5 years old, the net tax after indexation would be around 17% or Rs 17 Cr.
That is 17 Cr vs 51 Cr (Dividend earning) & 43 Cr (Salary earning) — a whopping 66% and 60% lesser tax payout!"
"Thanks to the excess liquidity in the world economy over the last 10 years, and with professional investors competing with each other chasing companies showing growth, the definition of growth itself have changed in a short time. It isn’t just revenue growth anymore — it can also be user growth. Users who potentially can be monetised at a later time but used for calculation of valuations today."
"The method to pick a company to invest in today’s world isn’t really Price-to-Earning (PE) ratio, dividend yield, etc. — it’s growth!"
2 - Is India Really a failing state? Hard look at economic statistics of India
This blog by Marcellus Investment managers focuses on all relevant critical data points to analyse long term structural socio-economic progress of a country.
"We analysed different metrics under broader categories like health, development, and social sectors. As shown in the charts below, in terms of the above indicators, India has improved steadily over the past 30 years. Most notably, India’s progress on these fronts has been, in general, superior to other large Emerging Markets (EMs) and to India’s immediate neighbours"
" To compare India with other large EMs and its neighbouring countries, we chose 3 countries each under the large EMs (China, Russia, and Brazil) and neighbours (Sri Lanka, Bangladesh, and Pakistan) categories. Then we averaged the data under each of the metrics for both the groups (i.e., we averaged China, Russia, and Brazil for the “Large EMs” data series, and we averaged India’s 3 largest neighbours for the “Neighbours” data series). We then rebased everything to 1990 (wherever applicable) "
" Life Expectancy: Life expectancy at birth is the number of years a person is expected to survive"
" Infant mortality: Infant mortality per 1000 live births is the measure of the number of deaths at birth for every 1000 live births. It has long been seen as a reliable measure of the ability of a state to provide basic health services to its people"
"Average maternal deaths: This metric measures the number of deaths related to pregnancy. India has done better in providing basic health services to its citizens but relative to the large EMs, India has fallen behind."
" Average literacy rate: This metric measures the number of people who are literate (over 15 years of age) as a percentage of the total population"
" Average poverty headcount ratio: This metric measures on average how many people live on less than $1.90 as a percentage of the population."
"Average Human Development Index (HDI): This metric is a mixture of three metrics – life expectancy, the standard of living at Gross National Income, and education in terms of expected and mean years of schooling."
"Average GDP per capita (constant $ 2017 PPP): This metric measures GDP per capita that is converted to international dollars using purchasing power parity rates. It measures the overall income for countries on an equal footing."
"Average number of individuals as a percentage of the population with access to the internet: This metric measures individuals as a percentage of the population that use the internet."
" Crime rate per 100 thousand: This metric measures the number of crimes committed per 100 thousand population."
"One of the most powerful biases all investors have to live with is “recency bias”. Given the events of the past year, it is but natural that most of us will be impacted by “recency bias”
"According to Daniel Khaneman - the decision-making process is basically inferring from recent trends as if they were to continue. That seems to be the information that people go on and so when things have been getting worse for a while, you become pessimistic, and when things have been getting better for a while, you become optimistic, and it’s those feelings that really control the investment”