After WeWork, SoftBank’s Startup Bookkeeping Draws Scrutiny(bloomberg.com)
bloomberg.com
After WeWork, SoftBank’s Startup Bookkeeping Draws Scrutiny
https://www.bloomberg.com/news/features/2019-11-26/after-wework-softbank-s-startup-bookkeeping-draws-scrutiny
156 comments
> Pouring more money into investments to try and boost the valuation. Using previous investments to invest and boost the value of new investments, guaranteeing massive loans in order to get others to invest at huge valuations. It just looks more and more like laundering money through all sorts of different mechanisms to create paper gains that don't reflect reality.
Is this uncommon? E.g. I don't have any inside information as to what went on with the Coinbase acquisition of Earn.com, but from an outsider perspective it certainly looks like:
1) A16Z invests tens of millions of dollars in Earn.com, which fails.
2) A16Z has their other portfolio company Coinbase buy Earn.com to shift some of their profits from Coinbase back into their earlier fund. (Which as far as I can tell is not only completely useless to Coinbase, but is also a huge legal liability.)
3) A16Z uses the "success" of their fund with Earn.com to raise more money.
4) A16Z then compensates Coinbase by investing in them at a higher paper valuation.
I could easily be 100% off base so I don't want to libel anyone, all I'm saying is that that's just what it looks like as someone who wasn't privy to the actual details.
Is this uncommon? E.g. I don't have any inside information as to what went on with the Coinbase acquisition of Earn.com, but from an outsider perspective it certainly looks like:
1) A16Z invests tens of millions of dollars in Earn.com, which fails.
2) A16Z has their other portfolio company Coinbase buy Earn.com to shift some of their profits from Coinbase back into their earlier fund. (Which as far as I can tell is not only completely useless to Coinbase, but is also a huge legal liability.)
3) A16Z uses the "success" of their fund with Earn.com to raise more money.
4) A16Z then compensates Coinbase by investing in them at a higher paper valuation.
I could easily be 100% off base so I don't want to libel anyone, all I'm saying is that that's just what it looks like as someone who wasn't privy to the actual details.
Same thing happened with Sam Altman and Loopt. A Sequoia VC who put money into Loopt pulled strings to get Green Dot to acquire it, allowing Altman and his supporters (chiefly PG) to claim it to be a success:
> https://news.ycombinator.com/item?id=3684357
Altman went on to become YC President, and has publicly toyed with the idea of running for Governor. Graham has even insinuated that Altman should be PotUS
> https://news.ycombinator.com/item?id=3684357
Altman went on to become YC President, and has publicly toyed with the idea of running for Governor. Graham has even insinuated that Altman should be PotUS
Was earn.com acquired at a higher than fair valuation? If so the shareholders of coinbase.com should sue.
It's possible it was "sold at a loss" but the early investors made money.
e.g. by investment round:
e.g. by investment round:
A: $1m for a $10m valuation
B: $5m for a $40m valuation
C: $12m for a $100m valuation
Liquidation preference for later rounds might muck up that calculation.
Or if they were already in financial trouble and C came in with 1.x liquidation preference, they get everything (or near it)
But A and B would have liquidation preference too, so how is the money split?
A and B may not have it at all, and anyway if C pushed a hard bargain, theirs will come first.
At any rate, the devil is very much in the details.
At any rate, the devil is very much in the details.
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You're not completely off base, in fact, you are 100% on the money (no pun intended). This was such an obvious situation to everyone even remotely paying attention that you'd have to be living under a rock to not see what was actually going on.
I think that you’re correct and what is happening is that, in our era of extreme inequality, pyramid schemes are being forced farther up the food chain.
It used to be that you could make a pretty penny soaking the lower classes directly with things like MLMs. But as their wealth was hollowed out by globalization and the Great Recession, you have to shift your predation upward to things like their pension funds, sovereign wealth, etc. While the people managing these resources can sometimes be more savvy than your average sucker signing up to a pyramid scheme, it’s very easy to pull one over on them with stories about “technological innovation” (counter to logic or evidence of profitability) because this is the grand, wishful story of our era.
It used to be that you could make a pretty penny soaking the lower classes directly with things like MLMs. But as their wealth was hollowed out by globalization and the Great Recession, you have to shift your predation upward to things like their pension funds, sovereign wealth, etc. While the people managing these resources can sometimes be more savvy than your average sucker signing up to a pyramid scheme, it’s very easy to pull one over on them with stories about “technological innovation” (counter to logic or evidence of profitability) because this is the grand, wishful story of our era.
Interesting thesis. But I'd guess pyramid schemes (or MLMs) are still all over the food chain and over-represented at the lower tiers.
A variation on this theme, and this has basically been Matt Levine's take on SoftBank if I'm not mistaken: SoftBank, and Adam Neumann in turn, each spotted an opportunity for pyramid schemes at a higher tier of the food chain that hadn't previously been fully exploited. And they exploited it. Perhaps even unwittingly. They were incentivized by the market.
From Levine's 10/23 column:
Look, here I am speculating, and I don’t mean to speak for Neumann’s subjective experience of his WeWork career, but from the outside, in hindsight, objectively, one could describe it like this: He spotted a bubble in venture-subsidized fast-growing money-losing capital-intensive low-margin tech-adjacent companies, noticed in particular that SoftBank seemed to be on the long side of that bubble, and set himself up to profit on the other side—by raising money for his own ultra-unicorn, by setting up the governance of that unicorn in a maximally self-interested way, and by selling and margining a bunch of his personal shares. When investors like SoftBank were frenziedly buying unicorn stock, he was frenziedly selling it. He set himself up to profit from the collapse of the unicorn bubble, and accelerated that collapse. Lessons were learned, and he taught them. Now he’s rich.
A variation on this theme, and this has basically been Matt Levine's take on SoftBank if I'm not mistaken: SoftBank, and Adam Neumann in turn, each spotted an opportunity for pyramid schemes at a higher tier of the food chain that hadn't previously been fully exploited. And they exploited it. Perhaps even unwittingly. They were incentivized by the market.
From Levine's 10/23 column:
Look, here I am speculating, and I don’t mean to speak for Neumann’s subjective experience of his WeWork career, but from the outside, in hindsight, objectively, one could describe it like this: He spotted a bubble in venture-subsidized fast-growing money-losing capital-intensive low-margin tech-adjacent companies, noticed in particular that SoftBank seemed to be on the long side of that bubble, and set himself up to profit on the other side—by raising money for his own ultra-unicorn, by setting up the governance of that unicorn in a maximally self-interested way, and by selling and margining a bunch of his personal shares. When investors like SoftBank were frenziedly buying unicorn stock, he was frenziedly selling it. He set himself up to profit from the collapse of the unicorn bubble, and accelerated that collapse. Lessons were learned, and he taught them. Now he’s rich.
Agreed, and I also found it extremely hilarious that Softbank styled itself as the "300-year company", but their biggest investments are ridesharing companies, a real estate subleasing company, several eCommerce stores and so on.
I mean, if you're going all-in on the future where is the biotech, pharmacology and the robots? It's not just softbank that to me looks fishy, the entire industry looks like it has drunk its own kool-aid.
I mean, if you're going all-in on the future where is the biotech, pharmacology and the robots? It's not just softbank that to me looks fishy, the entire industry looks like it has drunk its own kool-aid.
> I mean, if you're going all-in on the future where is the biotech, pharmacology and the robots?
The Vision Fund has invested billions into robotics companies. Cruise is making self-driving cars. Nuro is making autonomous delivery bots. Zume is supposedly automating pizza (I say supposedly because they do have a robot for making pizza, but their valuation is almost entirely "justified" by a patent to cook food in a moving vehicle - yes really).
Granted, I think the way they invested in these companies still has all of the financial shenanigans of their investments and they really aren't long-term plays - but they are putting more money into robotics than just about anyone. That said, I don't think it's going to bear fruit.
The Vision Fund has invested billions into robotics companies. Cruise is making self-driving cars. Nuro is making autonomous delivery bots. Zume is supposedly automating pizza (I say supposedly because they do have a robot for making pizza, but their valuation is almost entirely "justified" by a patent to cook food in a moving vehicle - yes really).
Granted, I think the way they invested in these companies still has all of the financial shenanigans of their investments and they really aren't long-term plays - but they are putting more money into robotics than just about anyone. That said, I don't think it's going to bear fruit.
> patent to cook food in a moving vehicle
Also known as a food truck.
Also known as a food truck.
Not really. One of the characteristics of American car culture is that the land that your car occupies as it travels, or makes short deliveries, is not charged “rent.” So unlike a food truck or restaurant, where you need to pay rent for setting up the thing, if you cook and deliver food from a moving vehicle your land costs, which are some of the biggest costs of a restaurant, can be just misappropriated from the public.
That doesn't make sense to me, even trying to absorb your point of view. A moving car has to park somewhere a lot of the time. And parking costs money that ultimately pays for scarce land, so whether or not the money-making is actually happening on the move doesn't have much to do with whether the user is free-riding.
Right but you can park a car in a cheap area and then drive it through very expensive neighborhoods in downtown San Francisco cooking and delivering food while a non-motorized food vendor would need to pay through the nose for that space to prep and sell.
Well, you're considering the alternative for locating that car, but why is that the correct comparison rather than the alternative for using that (moving) spot on the highways? Looking at the latter, maybe that business is providing more to society than other drivers in the same area.
It's a little more nuanced than that. If you didn't happen to be an expert on both robots and restaurants (as you can imagine, this is an extremely niche group) you would actually think it is an innovative solution. In fact, before the Vision Fund even existed, I was surprised how many investors were looking into this exact space (food trucks for pizza that cook the food during delivery). However, once you dig into the details, it quickly unravels into another valuation-inflating scheme for Softbank.
At least you mentioned biotech. Sometimes it seems like the entire (investing) world sees the future in terms of AI, cloud computing, alternative energy, space travel, robots, cryptocurrency, etc. To me, going through all of the growth companies out there with a bottom-up approach, there's practically nothing interesting but biotech.
That "300 year" was double speak like Mark Zuckerberg says "Social Media".
SoftBank bonds account for half of the bonds sold to Japanese retail investors. Ordinary Japanese savers are going to bet burned if SoftBank collapses.
This is an interesting point. Do you have data / references? I’m very curious about this. I’ll search on my own too.
Cursory searching is revealing:
- Softbank "now responsible for more than half of all corporate and financial debt issuance" in Japan [1]
- Softbank's own bond data [2]
- Seeking Alpha's review of SB's bond [3]
[1] https://www.ft.com/content/24c4a8a8-7885-11e9-bbad-7c18c0ea0...
[2] https://group.softbank/en/corp/irinfo/stock/bond/
[3] https://seekingalpha.com/article/4308627-forget-uber-wework-...
- Softbank "now responsible for more than half of all corporate and financial debt issuance" in Japan [1]
- Softbank's own bond data [2]
- Seeking Alpha's review of SB's bond [3]
[1] https://www.ft.com/content/24c4a8a8-7885-11e9-bbad-7c18c0ea0...
[2] https://group.softbank/en/corp/irinfo/stock/bond/
[3] https://seekingalpha.com/article/4308627-forget-uber-wework-...
Issuance, not holdings? What fraction of outstanding debt in Japan?
If Uber and WeWork both go to zero, how big a hit is that?
If Uber and WeWork both go to zero, how big a hit is that?
Issuance should be roughly equal to holdings for retail investors in Japan as the market for those only exist because JGBs pay nothing.
I think if both of those went under it looks extremely bad but SoftBank Group gets a dividend from the SoftBank Corp (telecom) that has enough dependable operating income that should be good for servicing debt. Additionally, SoftBank Group is still trading at a discount to its BABA stake + everything else.
There definitely is an increasing chance of a perfect storm where multiple bad things happen that could quickly evaporate this whole thing:
- China gets worse domestically with or without trade war ratcheting up and BABA is collateral damage
- S/TMUS merger fails from domestic regulatory pressure (just had TX and NV AGs settle but other states are not on board still)
- UBER, WEWORK, and others (Oyo?) get dragged and there are some feedback loops on other portfolio companies
- Funding pressures. There was an article on FT about domestic banks being skeptical on lending more to SOFTBK. Stuff like that becomes a self-fulfilling prophecy after a while and can quickly spiral out of control. That said, SOFTBK has something like 20bn cash on hand so that should only really become a problem if there's prolonged weakness.
- Vision Fund 2 more than likely not going to be able to raise its envisioned amount. Obviously no one wants to touch this right now. I think there's definitely been internal discussions on how some of this $ would be used to bail out VF1 portfolio companies through acquisitions. Additionally, if I had to make a forecast, there's not enough companies out there right now that could absorb $100bn of VC money and be able to profitably exit.
I think the biggest problem going on right now is that all of these companies were built upon endlessly flowing capital and business models were based on that. Now that everyone is focused on "profitability", I'm not sure if you can easily pivot some of these business models without completely imploding businesses. None of these companies have created anything that consumers cannot live without. VC-subsidized luxuries brought to the masses can have a very fleeting existence; people got around before UBER. If any of these companies ever try to raise prices in an attempt to display profitability, they could be in a rude awakening for ECON101 price elasticity/inelasticity lesson.
I think if both of those went under it looks extremely bad but SoftBank Group gets a dividend from the SoftBank Corp (telecom) that has enough dependable operating income that should be good for servicing debt. Additionally, SoftBank Group is still trading at a discount to its BABA stake + everything else.
There definitely is an increasing chance of a perfect storm where multiple bad things happen that could quickly evaporate this whole thing:
- China gets worse domestically with or without trade war ratcheting up and BABA is collateral damage
- S/TMUS merger fails from domestic regulatory pressure (just had TX and NV AGs settle but other states are not on board still)
- UBER, WEWORK, and others (Oyo?) get dragged and there are some feedback loops on other portfolio companies
- Funding pressures. There was an article on FT about domestic banks being skeptical on lending more to SOFTBK. Stuff like that becomes a self-fulfilling prophecy after a while and can quickly spiral out of control. That said, SOFTBK has something like 20bn cash on hand so that should only really become a problem if there's prolonged weakness.
- Vision Fund 2 more than likely not going to be able to raise its envisioned amount. Obviously no one wants to touch this right now. I think there's definitely been internal discussions on how some of this $ would be used to bail out VF1 portfolio companies through acquisitions. Additionally, if I had to make a forecast, there's not enough companies out there right now that could absorb $100bn of VC money and be able to profitably exit.
I think the biggest problem going on right now is that all of these companies were built upon endlessly flowing capital and business models were based on that. Now that everyone is focused on "profitability", I'm not sure if you can easily pivot some of these business models without completely imploding businesses. None of these companies have created anything that consumers cannot live without. VC-subsidized luxuries brought to the masses can have a very fleeting existence; people got around before UBER. If any of these companies ever try to raise prices in an attempt to display profitability, they could be in a rude awakening for ECON101 price elasticity/inelasticity lesson.
How much of that is savers and how much the japanese central bank? From what I know they are the ones doing the buying.
Isn't SoftBank able to get negative yielding loans (essentially paid to borrow money) from the BoJ also? And doesn't the BoJ own a signficant portion of SoftBank stock?
The Japanese economy sounds like a dystopian Capitalist hellhole to me. I'm hoping I'm just wrong about everything, and it's actually fine.
The Japanese economy sounds like a dystopian Capitalist hellhole to me. I'm hoping I'm just wrong about everything, and it's actually fine.
The BoJ owns 9.78% of Softbank. https://group.softbank/en/corp/irinfo/stock/ownership/
Softbank cannot borrow directly from the BoJ because it is not an actual bank. However, they recently issued bonds at a 1.38% rate: https://economictimes.indiatimes.com/markets/bonds/gone-in-1...
Welcome to NIRP.
Thankfully, Softbank's internal exposure to the Vision Fund is quite limited. Also, they have a sizeable liquid stake in Alibaba worth $100 billion they can unwind if they start needing cash. I don't think retail SoftBank investors are in imminent danger, but I do think the BoJ eating up so much liquidity in sovs is pretty crazy.
Softbank cannot borrow directly from the BoJ because it is not an actual bank. However, they recently issued bonds at a 1.38% rate: https://economictimes.indiatimes.com/markets/bonds/gone-in-1...
Welcome to NIRP.
Thankfully, Softbank's internal exposure to the Vision Fund is quite limited. Also, they have a sizeable liquid stake in Alibaba worth $100 billion they can unwind if they start needing cash. I don't think retail SoftBank investors are in imminent danger, but I do think the BoJ eating up so much liquidity in sovs is pretty crazy.
> The BoJ owns 9.78% of Softbank. https://group.softbank/en/corp/irinfo/stock/ownership/
Are you sure? I just Googled 'The Master Trust Bank of Japan Ltd.' (the only listed shareholder with 9.78% ownership) and it seems to be owned by Mitsubishi Trust Bank and a bunch of other banks, and nothing to do with the BoJ...
Are you sure? I just Googled 'The Master Trust Bank of Japan Ltd.' (the only listed shareholder with 9.78% ownership) and it seems to be owned by Mitsubishi Trust Bank and a bunch of other banks, and nothing to do with the BoJ...
http://www.opac1.com/bank/detail.php?bcd=5960 yeah according to this it's owned by Mitsubishi Trust, Nippon Life Insurance, Meiji Life Insurance, Touyou Trust (which became a chunk of UFJ Trust), and ... I think Deutsche Bank?
So like a bunch of fingers in this pie. A good or a bad thing depending on your perspective.
So like a bunch of fingers in this pie. A good or a bad thing depending on your perspective.
The BoJ does not own 9.78% of SOFTBK; the Master Trust Bank of Japan does. Here is their website:
https://www.mastertrust.co.jp/
I don't know much about them but from a brief look they look comparable to BNY Mellon.
https://www.mastertrust.co.jp/
I don't know much about them but from a brief look they look comparable to BNY Mellon.
That 100 billion Alibaba valuation looks fishy.
It’s complicated, and has a long history. The Japanese industrial complex has generally been more tightly linked than the West. (Perhaps cultural reasons?). Suppliers and customers frequently had large cross-holdings. The system works when the goals are well known, but can prove tough to change.
After WW2 the US occupational forces were going to dismantle the giant corporate groups (Kerietsu) but decided to keep them in place to strengthen Japan as a counterbalance to North Korea.
Despite this, the links weakened over time. While there are cases like the ones with SoftBank, this isn’t a new phenomenon.
And before we judge the system too harshly, in 30 years Japan went from a post-nuclear dystopia to a first world economy. It’s managed to keep the economy moving despite an aging population and very low birth rates. There are lots of “But X...” though it’s still a fascinating economy.
After WW2 the US occupational forces were going to dismantle the giant corporate groups (Kerietsu) but decided to keep them in place to strengthen Japan as a counterbalance to North Korea.
Despite this, the links weakened over time. While there are cases like the ones with SoftBank, this isn’t a new phenomenon.
And before we judge the system too harshly, in 30 years Japan went from a post-nuclear dystopia to a first world economy. It’s managed to keep the economy moving despite an aging population and very low birth rates. There are lots of “But X...” though it’s still a fascinating economy.
Thankfully the regulations saved the public before WeWork could enter the stock exchanges. As long as it stays this way, I really don't care if Saudi Arabia sinks billions of dollars into a turkey like I will sink my teeth into one tonight.
The risk is that suddenly all tech investors will want to know what's going on with all of the companies they invested in, and demand actual returns and not pixie dust and double talk.
Can you imagine if the SV bubble was held to the same expectations as real world companies? Half of the Bay Area would curl up and blow away overnight.
Can you imagine if the SV bubble was held to the same expectations as real world companies? Half of the Bay Area would curl up and blow away overnight.
You say that like it's a bad thing. Sometimes things need to fail and fail hard so everything can get better in the long run.
[deleted]
How big is the frothy part of the SV tech (and tech adjacent) landscape relative to the tech landscape as a whole though--much less relative to the total Bay Area economy?
It looks to me as if companies that seem to have no credible business plan are already starting to be punished. I don't doubt that scrutiny will probably increase further and people should probably think harder about joining startups that don't seem to have a path to profitability.
But I expect something like a major downturn in ad tech would have a much greater impact than some will-never-be-profitable startups circling the drain.
It looks to me as if companies that seem to have no credible business plan are already starting to be punished. I don't doubt that scrutiny will probably increase further and people should probably think harder about joining startups that don't seem to have a path to profitability.
But I expect something like a major downturn in ad tech would have a much greater impact than some will-never-be-profitable startups circling the drain.
Check YzerGroup for a real "money laundering".
They started with YzerProperty(2014 or so). Then YzerMotors (2016). Now YzerChat. These startups all involves billionaires from Dubai. Btw YzerProperty and Motors do not exist anymore.
They started with YzerProperty(2014 or so). Then YzerMotors (2016). Now YzerChat. These startups all involves billionaires from Dubai. Btw YzerProperty and Motors do not exist anymore.
Do you have any material on their money laundering?
No. I don't. It is just a rumor in the market.
>I wonder what Masayoshi is doing these days.
Smart Slumlord™ junk rated deals in preparation for its Softbank Fire Sale: "SoftBank will utilize its technology deployment insights to introduce advanced technologies to shopping malls and other commercial facilities, hospitals, and the entire Lippo Village area," Hidebumi Kitahara, SoftBank's vice president and head of global business strategy, said at a signing ceremony. "Through this, we aim to develop Lippo Village as a smart city model case in Southeast Asia."[0]
[0] https://asia.nikkei.com/Business/Business-deals/SoftBank-and...
Smart Slumlord™ junk rated deals in preparation for its Softbank Fire Sale: "SoftBank will utilize its technology deployment insights to introduce advanced technologies to shopping malls and other commercial facilities, hospitals, and the entire Lippo Village area," Hidebumi Kitahara, SoftBank's vice president and head of global business strategy, said at a signing ceremony. "Through this, we aim to develop Lippo Village as a smart city model case in Southeast Asia."[0]
[0] https://asia.nikkei.com/Business/Business-deals/SoftBank-and...
It is not a pyramid scheme, it is called a "pump and dump" scheme:
https://en.wikipedia.org/wiki/Pump_and_dump
https://en.wikipedia.org/wiki/Pump_and_dump
Could it be that Vision Fund is a grand scheme to vacuum global liquidity, especially from the Middle East? In the absence of war these days, Weapons of Financial Mass Destruction might exactly be what is needed.
Sadly for such a scheme the Vision Fund is structured with the Saudi money backed by the SoftBank stake. Thus loses and mis-spending will fall on the shoulders of SoftBank Group shareholders before they eat into Saudi's portion.
I want to point out that a lot of these valuations are signed off by well-known accounting firms, valuation firms, and consulting firms. If it's really one big conspiracy to prop up valuations via recent financing, loans, or market comparables, then wouldn't one of these parties call it out (well, inherently a lot of these are paid by organizations to do their valuations, so true independence is a question here).
Additionally, corporate management theoretically exercise due diligence, along with the valuation committees and the board looking into the reasonableness of the models and associated inputs and outputs. It would be awkward to say that these valuations are wrong with so many people having their inputs.
Additionally, corporate management theoretically exercise due diligence, along with the valuation committees and the board looking into the reasonableness of the models and associated inputs and outputs. It would be awkward to say that these valuations are wrong with so many people having their inputs.
The accounting firms' motivation is profit, which they derive from the customers they are auditing, so they have an incentive to be favourable to their clients. If you want to be kind to them you can call it an unconscious bias. There have been a few scandals uncovered where an accounting firm audited and approved a company which soon after went bankrupt due to bad or corrupt accounting. For example Carillion, VBS Bank & Enron.
They are also drinking the same Kool-Aid as most other people in the industry, that all this is above board and fine. There's a lot of group-thinking, and not as much objective analysis as is needed.
The blindness extends to management and the board, who all want the company to be successful. Good financial numbers are questioned a lot less than bad ones.
They are also drinking the same Kool-Aid as most other people in the industry, that all this is above board and fine. There's a lot of group-thinking, and not as much objective analysis as is needed.
The blindness extends to management and the board, who all want the company to be successful. Good financial numbers are questioned a lot less than bad ones.
> so true independence is a question here
You managed to figure it out before even hitting the end of the sentence in which you posed the question.
Money works kind of like particle physics. Once you start to operate on a fundamentally different scale, basic laws of nature start to change.
You managed to figure it out before even hitting the end of the sentence in which you posed the question.
Money works kind of like particle physics. Once you start to operate on a fundamentally different scale, basic laws of nature start to change.
> It would be awkward to say that these valuations are wrong with so many people having their inputs.
The purpose of external consultant is to guess what client is expecting from you and deliver exactly that. Usually the management requires a stack of papers to cover their asses in case of risky deal, sometimes to get an argument in some internal struggle. They never expect objective truth or independent thinking.
There is no conspiracy here just the market forces at work. Imagine what happens to consultancies who do not deliver..
The purpose of external consultant is to guess what client is expecting from you and deliver exactly that. Usually the management requires a stack of papers to cover their asses in case of risky deal, sometimes to get an argument in some internal struggle. They never expect objective truth or independent thinking.
There is no conspiracy here just the market forces at work. Imagine what happens to consultancies who do not deliver..
> If it's really one big conspiracy to prop up valuations via recent financing, loans, or market comparables, then wouldn't one of these parties call it out.
Not if they accept the same culture of growth that enables this in the first place—it’s certainly still speculation, not a science. I would love to see the justification behind the $47B valuation.
Not if they accept the same culture of growth that enables this in the first place—it’s certainly still speculation, not a science. I would love to see the justification behind the $47B valuation.
> a lot of these valuations are signed off by well-known accounting firms, valuation firms, and consulting firms
There isn’t a theoretical foundation for valuing lossmaking companies.
The best we can do is project forward to a cash-flow producing state, where there is good theory, and then discount that value to the present. The projection is essentially guesswork, making homework-checking by valuation consultants somewhat useless.
The only real check is other investors participating. That happened with some of Softbank’s investments, but not with others. (Adding fuel to the fire is Softbank’s habit of shutting down the secondary markets around companies it invests in.)
There isn’t a theoretical foundation for valuing lossmaking companies.
The best we can do is project forward to a cash-flow producing state, where there is good theory, and then discount that value to the present. The projection is essentially guesswork, making homework-checking by valuation consultants somewhat useless.
The only real check is other investors participating. That happened with some of Softbank’s investments, but not with others. (Adding fuel to the fire is Softbank’s habit of shutting down the secondary markets around companies it invests in.)
I used to work on Wall Street and this is spot on how we guessed at valuations for cash flow negative companies when we were trying to show bottom-up valuation analyses. Otherwise, we might compare the company to a list of peers and value it on some Enterprise Value / Sales multiple (especially in high growth software).
The valuation is just an estimate of how much an average investor would like to pay for a share. It's a guessing game trying to predict irrational decisions made by huge and diverse groups of people. Factor in corporate politics and internal competition and you will see that there is no room for reason left.
The Financial Times has been calling SoftBank out for over a year now. Detailed accounting analyses, pointing out very basic issues and warning flags. This is why the WeWork IPO had to be pulled in the first place. Every major crash is preceded by several years of this.
Financial manipulation is the art of getting everybody confused between stocks and flows. As long as the flow continues, the employees of SoftBank get paid, and get bonuses, and everybody keeps dancing around the floor. (Granted the latest proposal there, which is to make them all take out loans of up to 15x their salary to provide the capital for Softbank 2.0 may interfere with that.)
and then, one day, the music stops, and there aren't any chairs to sit on, at all...
Financial manipulation is the art of getting everybody confused between stocks and flows. As long as the flow continues, the employees of SoftBank get paid, and get bonuses, and everybody keeps dancing around the floor. (Granted the latest proposal there, which is to make them all take out loans of up to 15x their salary to provide the capital for Softbank 2.0 may interfere with that.)
and then, one day, the music stops, and there aren't any chairs to sit on, at all...
I'd say that from the article SoftBank are operating in grey area of accounting regulation.
Combine that with the fact that those auditing/consulting firms are being paid by SoftBank and you can see a strong incentive for them to side with SoftBank's valuation strategy.
I'm sure the risk management people in the Big-4 are looking at this but I'd also guess there's quite a lot of pressure to let it ride, as I'm sure work from SoftBank + it's group companies is worth a lot of money.
It's been the case in many previous collapses, that the auditors signed off on the companies, sometimes quite close to the date they collapsed, and that wasn't even where there is a lot of ambiguity as there is here.
All this isn't to say that the valuations are necessarily otf, but that I can see the incentives that might lead to companies accepting them.
Combine that with the fact that those auditing/consulting firms are being paid by SoftBank and you can see a strong incentive for them to side with SoftBank's valuation strategy.
I'm sure the risk management people in the Big-4 are looking at this but I'd also guess there's quite a lot of pressure to let it ride, as I'm sure work from SoftBank + it's group companies is worth a lot of money.
It's been the case in many previous collapses, that the auditors signed off on the companies, sometimes quite close to the date they collapsed, and that wasn't even where there is a lot of ambiguity as there is here.
All this isn't to say that the valuations are necessarily otf, but that I can see the incentives that might lead to companies accepting them.
I want to point out that a lot of these valuations are signed off by well-known accounting firms
You mean the way Big Five accounting firm Arthur Andersen signed off on Enron's shenanigans?
https://en.m.wikipedia.org/wiki/Arthur_Andersen
You mean the way Big Five accounting firm Arthur Andersen signed off on Enron's shenanigans?
https://en.m.wikipedia.org/wiki/Arthur_Andersen
Financial auditors cannot sign off on a valuation, they can only say that the financial results as shown present an accurate picture of the company at the time of review. There will be a section for management to comment on specific line items, usually to give context for things like large one-off expenses, or other things that jump out from the numbers.
Valuation depends on estimates of the firm's future revenue growth, predictions about the business climate, etc. That's what investment analysts do, using the audited financial statements as a basis for developing scenarios for the future.
Valuation depends on estimates of the firm's future revenue growth, predictions about the business climate, etc. That's what investment analysts do, using the audited financial statements as a basis for developing scenarios for the future.
The Saudi government was the major investor. He pays them back with positive PR.
It becomes tricky when he mixes Vision Fund business with SoftBank business.
It becomes tricky when he mixes Vision Fund business with SoftBank business.
And if you're the Saudi government, your biggest concern is probably not Softbank, the Vision Fund, or WeWork - it's the Aramco IPO.
The valuation range for that was comical with it being anywhere from slightly under $1 Trillion USD to $2 Trillion USD depending on who you ask. I mean you can use WeWorks as a scale for that sort of spread.
The valuation range for that was comical with it being anywhere from slightly under $1 Trillion USD to $2 Trillion USD depending on who you ask. I mean you can use WeWorks as a scale for that sort of spread.
Yes. And that’s an entirely new shell game. (Similar though - small float of shares yields a huge valuation which can be borrowed against...)
Potentially similar story at an earlier stage: Oyo, a budget hotel chain from India.
They raised 1.7 B, mostly from Softbank, and are now getting in the vacation rentals space in Europe.
Their approach is unclear. I spoke to their representatives and it seems unclear for them too.
Nothing seems to make sense in what they are doing in this vertical.
The only logical explanation seems that they are trying raise the valuation of the brand.
It could be the next WeWork.
They raised 1.7 B, mostly from Softbank, and are now getting in the vacation rentals space in Europe.
Their approach is unclear. I spoke to their representatives and it seems unclear for them too.
Nothing seems to make sense in what they are doing in this vertical.
The only logical explanation seems that they are trying raise the valuation of the brand.
It could be the next WeWork.
> I wonder what Masayoshi is doing these days.
Trying to invest the rest of the Vision Fund v1, so that he can raise Vision Fund v2.
Trying to invest the rest of the Vision Fund v1, so that he can raise Vision Fund v2.
He’s already invested all of the 100bn for the first Vision Fund.
I find it a bit funny that both comments say ‘invest’. Can we use that word to describe what actually looked like spending?
I really liked this video featuring Chamath Palihapitiya[1]. It's essentially a rant about most of VC being a ponzi scheme:
https://www.youtube.com/watch?v=RwRZtZQoLtQ
[1] (from Wikipedia) Chamath Palihapitiya an is a venture capitalist and the founder and CEO of Social Capital. Palihapitiya was an early senior executive at Facebook, joining the company in 2007 and leaving in 2011. He is a minority stakeholder and board member of the Golden State Warriors.
[1] (from Wikipedia) Chamath Palihapitiya an is a venture capitalist and the founder and CEO of Social Capital. Palihapitiya was an early senior executive at Facebook, joining the company in 2007 and leaving in 2011. He is a minority stakeholder and board member of the Golden State Warriors.
Sounds like venture capital.
I'm deeply concerned about the direction that the tech world is going. I had hoped that early successes like eBay and PayPal would lead to democratization and egalitarianism, but sadly that's not the case. Where I had hoped to see something like a gig economy where anyone could jump in and out of work when they needed money, and multiple sources of ~$100,000 funding for startups, today I see a doubling down on race-to-the-bottom competition and austerity.
There is less money available now for independent work than there was in the 80s and 90s because we have to work so hard at consulting just to survive. There have been few raises in any industry (the starting wage for an engineer in 2000 was $60,000 per year) but housing and medical costs are many times higher than they were. Millions (yes millions) of the brightest minds of a generation are underemployed in sweatshops, call centers and IT. Even working full time, it can take several years to even save $10,000. Much less reach a level of spirituality that allows one to rise above the waste of life that is the working world today, and build inventions that could substantially raise the quality of life for everyone. Work is now the opposite of progress, not its source.
Meanwhile banks give millions or even billions of dollars to corporations making nebulous claims about how to turn the most promising technologies into profitable returns. When a couple of people in a garage somewhere could do the same thing for 1/1,000 or 1/1,000,000 of the money. Imagining what tens of thousands of those teams with $100,000 could do in medicine, alternative energy, sustainability.. the list goes on and on.
Concerns like this are beginning to dominate my psyche to the point where I'm not sure I want to be in tech anymore. I have serious doubts about where all of this is going. Where are the examples of cooperation? Of steadily increasing personal wealth with simultaneous reduction in work (also known as real technology)? Where are the examples of tech billionaires making it and working to make that possible for all the rest who failed?
My greatest concern today is that speaking the truth is now viewed as being negative.
So just be mindful in these times and don't dwell too much on the truth. I think it's more useful to imagine a new truth that transcends the boundaries placed in front of us. That's how technology began.
Have a Happy Thanksgiving everyone!
There is less money available now for independent work than there was in the 80s and 90s because we have to work so hard at consulting just to survive. There have been few raises in any industry (the starting wage for an engineer in 2000 was $60,000 per year) but housing and medical costs are many times higher than they were. Millions (yes millions) of the brightest minds of a generation are underemployed in sweatshops, call centers and IT. Even working full time, it can take several years to even save $10,000. Much less reach a level of spirituality that allows one to rise above the waste of life that is the working world today, and build inventions that could substantially raise the quality of life for everyone. Work is now the opposite of progress, not its source.
Meanwhile banks give millions or even billions of dollars to corporations making nebulous claims about how to turn the most promising technologies into profitable returns. When a couple of people in a garage somewhere could do the same thing for 1/1,000 or 1/1,000,000 of the money. Imagining what tens of thousands of those teams with $100,000 could do in medicine, alternative energy, sustainability.. the list goes on and on.
Concerns like this are beginning to dominate my psyche to the point where I'm not sure I want to be in tech anymore. I have serious doubts about where all of this is going. Where are the examples of cooperation? Of steadily increasing personal wealth with simultaneous reduction in work (also known as real technology)? Where are the examples of tech billionaires making it and working to make that possible for all the rest who failed?
My greatest concern today is that speaking the truth is now viewed as being negative.
So just be mindful in these times and don't dwell too much on the truth. I think it's more useful to imagine a new truth that transcends the boundaries placed in front of us. That's how technology began.
Have a Happy Thanksgiving everyone!
This is my favorite comment in this thread. We keep pouring billions into ride sharing, scooters, co-working to prop up crap business models that have no path to profitability to benefit a few.
[deleted]
This sounds mildly interesting, but you make a lot of grand claims and support none of them. I would love to read about your concerns more deeply in a longform, where all these ideas can actually be related to one another, and with support for your claims based in data and real world examples. I would suggest you do this for your own mental health, because it's not at all clear to me why the world of (let's call it) 'socialized investing' is a better world than our current one. And I think you should at least have a well research model to base your concerns in before they "dominate your psyche."
Maybe I'm missing something, but this article that was well-received yesterday seems surprisingly apt:
https://americanaffairsjournal.org/2019/11/the-real-class-wa...
https://americanaffairsjournal.org/2019/11/the-real-class-wa...
Well then maybe you should do the same thing first to set an example? Because what the OP describes is actually pretty much real. I would suggest you to check out Guy Standing and his research first.
OP is very specific behavior by one bank. What about Softbank marking up its own assets has anything to do with the idea that an investment philosophy spread out among thousands of times more people but with less money is even remotely covered in the article?
Yeah dude I’ll get right on that research paper you’d obviously like to see and skip spending time with my family on thanksgiving.
(That’s what you’re essentially suggesting isn’t it?)
(That’s what you’re essentially suggesting isn’t it?)
It's more that the ideas seem pretty far fetched. And if you're about to quit your job over these ideas, my bet is that your family would prefer you to do the research instead of eating thanksgiving dinner.
> Where are the examples of tech billionaires making it and working to make that possible for all the rest who failed?
> Concerns like this are beginning to dominate my psyche to the point where I'm not sure I want to be in tech anymore.
That’s a part of the problem. People, like you, that consider these questions and would like to make positive a difference, give up.
Because the proposition is an ambiguous long-term play where you could spend a lifetime trying to solve it with little to no results at the end. If these issues are important to you, then wouldn’t it be worth it though?
You’ll have no better opportunity to fix this than by being in the position you’re in now. Which is, an “insider”, that can easily command $100-300K salary+stock that can readily be invested in many of your own ideas and businesses in a bid to ratchet your liquid capital up to >$10M. This capital can then be used to propel you on to >$100M or >$1B or wherever you think is the best point to make a difference in the problems you’re seeing.
You’re only two hops away from making a difference. As opposed to people that are scraping by on $20-60K a year with little to no savings and thus no resources or time to dedicate to more self-actualized pursuits. They’re four to five hops away.
Each hop probably carries 5-7 years worth of effort plus potential risk of ruin.
Point being: don’t give up. Go make a difference in the problems you’re seeing.
> Concerns like this are beginning to dominate my psyche to the point where I'm not sure I want to be in tech anymore.
That’s a part of the problem. People, like you, that consider these questions and would like to make positive a difference, give up.
Because the proposition is an ambiguous long-term play where you could spend a lifetime trying to solve it with little to no results at the end. If these issues are important to you, then wouldn’t it be worth it though?
You’ll have no better opportunity to fix this than by being in the position you’re in now. Which is, an “insider”, that can easily command $100-300K salary+stock that can readily be invested in many of your own ideas and businesses in a bid to ratchet your liquid capital up to >$10M. This capital can then be used to propel you on to >$100M or >$1B or wherever you think is the best point to make a difference in the problems you’re seeing.
You’re only two hops away from making a difference. As opposed to people that are scraping by on $20-60K a year with little to no savings and thus no resources or time to dedicate to more self-actualized pursuits. They’re four to five hops away.
Each hop probably carries 5-7 years worth of effort plus potential risk of ruin.
Point being: don’t give up. Go make a difference in the problems you’re seeing.
This is absolutely, unquestionably, spot on. It's a societal level change that's required to unpick what we have right now. It's incredibly complicated and there's issues everywhere.. but I think we can (mostly) agree that our current system doesn't benefit the many. And that can't be the way we want to be forever.
I feel you, but bankers do not owe lone developers anything. If you want to see something exist in this world, you need to figure a way to make it happen. There have been many new technologies that have been brought into this world by people with close to nothing. In fact, not having the funding (initially) may be a good first test. If you really think it should exist, then it is on you to find the time to make it happen.
Sounds like a (nice) summary of this zinger: https://news.ycombinator.com/item?id=21635896
When SoftBank buys shares in a startup and then invests again at a higher valuation, Son says he has made a profit. That is legal under accounting standards, but SoftBank receives no money. The only change is that SoftBank has boosted the value of its original stake from, say, $1 billion to $2 billion by raising the value of the startup. In SoftBank’s income statements and return calculations, at least some of the additional $1 billion can be counted as profit.
Hmmm.
Hmmm.
That's known as unrealized capital gains, which is a totally normal thing to measure. But what's important is how the value is determined. With a company on the public market you theoretically have millions of actors constantly evaluating the price of something using the same information (10K, etc.). If it's a house you have an appraiser from the government to tell you what it's worth. These two examples are considered securities in the US and so everything is federally regulated. But when it comes to valuation of a private company you can pretty much do what you want (see: "community adjusted EBIDTA"). So it's totally possible for a company to be irresponsible and overvalue itself, to the extent where it might be considered fraud if the company ever went public.
Matt Levine wrote that it's not as bad as it could be, because Softbank generally only counted valuations where at least some other investors were participating. So they weren't completely setting arbitrary numbers by themselves.
Everyone is really doing this. GAAP allows for this. Making value out of hot air. Generating paper profits through re-valuation of assets, especially intangible assets or where there is no mark-to-market.
Softbank had been a little bit more creative then usual (arranging large loans to founders to lead another round of financing) I must admit.
At some point the music stops and then you have a quarter or two of really funny quarterly reports where everyone is taking all skeletons in the closet and repricing them down "due to unpredictable external factors like recession in Botswana or extreme solar activity". And then the game continues.
Softbank had been a little bit more creative then usual (arranging large loans to founders to lead another round of financing) I must admit.
At some point the music stops and then you have a quarter or two of really funny quarterly reports where everyone is taking all skeletons in the closet and repricing them down "due to unpredictable external factors like recession in Botswana or extreme solar activity". And then the game continues.
Interesting. Where can I read more?
Reading company reports.
Personally I had been lucky gossiping for years with a friend of mine who is reading and analyzing company reports in professional capacity. And never tired of discussing latest findings over a drink.
He also has a column in a newspaper and lectures on accounting tricks and frauds at economic university. He always jokes that he only shows old tricks to his students and keeps the best bits to himself.
Accounting tricks is also an arms race of sorts apparently.
Personally I had been lucky gossiping for years with a friend of mine who is reading and analyzing company reports in professional capacity. And never tired of discussing latest findings over a drink.
He also has a column in a newspaper and lectures on accounting tricks and frauds at economic university. He always jokes that he only shows old tricks to his students and keeps the best bits to himself.
Accounting tricks is also an arms race of sorts apparently.
"We have talked about this strategy before, and actually reading the article mostly assuaged my concerns about SoftBank’s bookkeeping. In fact, SoftBank says that it doesn’t aggressively mark up its unicorn portfolio (and take accounting profits) every time it pumps in more money on its own. When it invests in later rounds alongside other investors, providing some external validation for the new valuation, it will mark up its stakes (but “only after taking into account future cash flows and public market proxies, as well as private market funding prices”). But, for instance, SoftBank and its associated Vision Fund “never took profits from WeWork by marking it all the way up to $47 billion,” since it was the only investor in at those levels; instead it marked WeWork at levels that other investors also paid." from Matt Levine newsletter
Journalists exaggerate as always - it is hard to get real info from mainstream press.
Journalists exaggerate as always - it is hard to get real info from mainstream press.
So one guy thinks it’s fine. Everybody, it’s okay.
There is more than just Matt Levine's opinion - there is his explanation. The SoftBank accounting is not exactly what the journalists suggest, I still don't think it is fine (I don't quite agree with Levine) - but the article is not correct either.
This is normal accounting practice.
Not only is it legal, it's essentially legally required for companies to track the changes in the value of their assets.
It matters more in the downward direction, a company has to know when they are insolvent (owe more money than assets they hold) because they are required to file for bankruptcy. Value of an asset goes down, they need to update the books and make sure they don't have too much debt.
The only real issue, are the valuations accurate? If they're not, then it might be accounting fraud.
Not only is it legal, it's essentially legally required for companies to track the changes in the value of their assets.
It matters more in the downward direction, a company has to know when they are insolvent (owe more money than assets they hold) because they are required to file for bankruptcy. Value of an asset goes down, they need to update the books and make sure they don't have too much debt.
The only real issue, are the valuations accurate? If they're not, then it might be accounting fraud.
Never gets old: https://signalvnoise.com/posts/1941-press-release-37signals-...
Thanks. It's fun.
Honestly, for the first third or so I wasn't sure if it was satire or not...
> We’re excited to roll out a list of unconfirmed revenue possibilities that involve crowdsourcing, a robust set of widget creation tools, 3G, augmented reality, social stuff, and an app store.
They joke, but WW were literally doing exactly this, updated for 2019 of course. A bunch of ill defined tech projects with no real link to their core business.
They joke, but WW were literally doing exactly this, updated for 2019 of course. A bunch of ill defined tech projects with no real link to their core business.
this is why venture funds leading consecutive up-priced rounds is rare. their LPs do not like them to price their own shares and would prefer if there was external validation.
(when you see the previous lead do another round it can be at the same valuation which isn’t quite the same thing)
(when you see the previous lead do another round it can be at the same valuation which isn’t quite the same thing)
> In early 2018, the founders of Chinese artificial intelligence startup SenseTime Group Ltd. flew to Tokyo to see billionaire investor Masayoshi Son. As they entered the offices, Chief Executive Officer Xu Li was hoping to persuade the head of SoftBank Group to invest $200 million in his three-year-old startup.
> A third of the way into the presentation, Son interrupted to say he wanted to put in $1 billion. A few minutes later, Son suggested $2 billion. Turning to the roomful of SoftBank managers, Son said this was the kind of AI company he’d been looking for. “Why are you only telling me about them now?” he asked, according to one person in the room.
This sounds more like an episode of Dragon's Den than a firm responsible for billions of dollars of investors' money. Doesn't quite inspire confidence...
> A third of the way into the presentation, Son interrupted to say he wanted to put in $1 billion. A few minutes later, Son suggested $2 billion. Turning to the roomful of SoftBank managers, Son said this was the kind of AI company he’d been looking for. “Why are you only telling me about them now?” he asked, according to one person in the room.
This sounds more like an episode of Dragon's Den than a firm responsible for billions of dollars of investors' money. Doesn't quite inspire confidence...
There's a similar anecdote about WeWork, where as Masayoshi Son and Adam Neumann are leaving the WeWork offices in a car to see Masayoshi Son off to the airport, Masayoshi Son says "forget the $1B we talked about in there, find a way to spend $5B."
Sounds like Son is trying to get rid of money? Reminds me of Brewster's Millions ( excellent film - can't go wrong with Pryor and Candy ). Maybe Son has to get rid of $100 billion to get $1 trillion?
The press’s thoughtless repetition of headline valuations didn’t help.
Even in this article, WeWork’s $7.8bn expected valuation is quoted unadorned. It’s a number that was derived by the same people and processes as the $47bn, yet one is ridiculed and the other presented as fact.
Even in this article, WeWork’s $7.8bn expected valuation is quoted unadorned. It’s a number that was derived by the same people and processes as the $47bn, yet one is ridiculed and the other presented as fact.
Well the biggest problem is it's less of a $7.8bn valuation and more of a $3Bn minimum valuation (which is still probably far too high).
Startups don't really have valuations like a public company. You don't have anywhere near the same liquidation preferences in public companies as you do with startups. I'm pretty sure the bankruptcy protections aren't as good either.
And people keep making these valuation comparisons anyway. Probably because even in finance you can get loans and whatnot as if the valuations are the same.
Startups don't really have valuations like a public company. You don't have anywhere near the same liquidation preferences in public companies as you do with startups. I'm pretty sure the bankruptcy protections aren't as good either.
And people keep making these valuation comparisons anyway. Probably because even in finance you can get loans and whatnot as if the valuations are the same.
> Startups don't really have valuations like a public company
Valuing complicated capital structures is well studied. (Many public companies have complicated cap structures.)
The wrong way to do it is take the top-of-the-stack share price, multiply it by everything outstanding, ignore debt, and equate it to enterprise value. That number means something, but the obsession with it in the Valley incentivised Vision Fund-style antics.
Valuing complicated capital structures is well studied. (Many public companies have complicated cap structures.)
The wrong way to do it is take the top-of-the-stack share price, multiply it by everything outstanding, ignore debt, and equate it to enterprise value. That number means something, but the obsession with it in the Valley incentivised Vision Fund-style antics.
I agree, seeing those numbers repeated over and over was bad, but as it wasn't a public company, the only information available was from the horse's mouth.
Usually stories did mention their mounting losses and relatively small revenue, once that info became available.
Usually stories did mention their mounting losses and relatively small revenue, once that info became available.
But isn't that how valuation works works by definition? Why is this model of financing under scrutiny only now???? Blows my mind...
There are a lot of VC backed companies that are likely very upside down. You know the types with tons of money raised with very little revenue and little to no profit and an unclear vision on how the entity becomes a real business with a solid profit steam that justifies its valuation. The old model of “it doesn’t matter because we’ll always be able to offload this thing to others and cash out” is dead now.
What we’re seeing unfolding now in the market isn’t a bubble per say but it is the market asserting that revenue matters. Profit matters. Real business plans based on reality matter. Ultimately that’s a very good thing for the innovation industry but things are going to get real ugly for these upside down companies.
What we’re seeing unfolding now in the market isn’t a bubble per say but it is the market asserting that revenue matters. Profit matters. Real business plans based on reality matter. Ultimately that’s a very good thing for the innovation industry but things are going to get real ugly for these upside down companies.
Its not just VC backed companies with this problem, but with publicly traded "investment grade" ones as well[0]…
[0] https://blogs.cfainstitute.org/investor/2019/10/23/anne-wals...
[0] https://blogs.cfainstitute.org/investor/2019/10/23/anne-wals...
Let's hope this correction is a bit smoother than the last.
It's good for tech that the public market's response to WeWork has brought some well deserved scrutiny to SoftBank. Their investing behavior over the last several years has pushed up VC valuations to unhealthy levels and contributed to this "Unicorn or die" startup culture.
A high private valuation alone is not an accomplishment. While revenue growth, happy customers and a clear path to profitability are accomplishments worth celebrating. Hopefully after this SoftBank fiasco more startups and VCs will focus on fundamentals more than jaw dropping valuations.
A high private valuation alone is not an accomplishment. While revenue growth, happy customers and a clear path to profitability are accomplishments worth celebrating. Hopefully after this SoftBank fiasco more startups and VCs will focus on fundamentals more than jaw dropping valuations.
"Yet it turned out that Agarwal [founder and CEO of a SoftBank-backed startup] had borrowed $2 billion to finance his share of the purchase"
According to a recent article in the Economist, SoftBank encourages its own employees to do the same with SoftBank shares. There is a chance that things go well and they will look like geniusses (like Michael Dell who took his company private in 2013 and returned to markets last year). If things don’t go well, however, they’ll become a case study for Business Schools on business practices to avoid.
According to a recent article in the Economist, SoftBank encourages its own employees to do the same with SoftBank shares. There is a chance that things go well and they will look like geniusses (like Michael Dell who took his company private in 2013 and returned to markets last year). If things don’t go well, however, they’ll become a case study for Business Schools on business practices to avoid.
Dell looks like a great story because the market is up almost 100% since 2013. It's hard to say it was a good decision on Michael Dell's part. He could've bought anything else with leverage in 2013 and it probably would've turned out equally well or better. Dell isn't exactly doing amazingly.
So Dell took the company private in 2013 for 24.4bn. Right now the market cap is 34.26bn, most of the value from Dell’s 80% stake in VMWare (worth 65bn). So one it’s face, Dell looks pretty shitty. Since the buyout was announced (Feb 5, 2013), the S&P has returned around 105%. Dell as only returned 40%, mostly due to the massive amount of debt Dell has been loaded with.
Anyways I was hoping to make some argument about HP or Lenovo doing worse in that time period.. but after checking, Dell is indeed doing pretty shitty. Maybe I could make some weak argument about once they pay off their debt, but I dunno, he and his leveraged buyout guys could have done better with an index fund.
Anyways I was hoping to make some argument about HP or Lenovo doing worse in that time period.. but after checking, Dell is indeed doing pretty shitty. Maybe I could make some weak argument about once they pay off their debt, but I dunno, he and his leveraged buyout guys could have done better with an index fund.
He could have liquidated everything and bought stock in Apple...
Easy dumb money like SoftBank is the greatest enemy of innovation and progress. Just take a look at the first deck. Companies like Uber, Softbank, WeWork all having trouble with funding is an important step in our economy
Dumb money makes you complacent and lazy. Every problem looks like a nail. Just add more money and stir, with a splash of arrogance.
Some hardship and tight money leads to innovation and creative thinking.
Some hardship and tight money leads to innovation and creative thinking.
Dear commenters on HN. Don't bite or spite the hand that is feeding you. The recession will come soon enough.
I'd claim that most folks here aren't directly in this area and couldn't care much. The mostly quiet majority I would call us. And recession? It won't be started by this but bigger forces. A correction might be even healthy for most in long term.
I respectfully disagree, I think there is a massive trickle down economics affect going on even if it’s just local. The auxiliary companies selling into startups is HUGE from recruiting agencies, design firms, the gig economy, local tax revenues, commercial real estate, law and accounting services, one medical offices, and much much more. When VC funding slows down a lot of these places will shutter (because few people in management ever prepare for a downturn).
I don't think a smaller number of dumb startups will have much negative impact, considering the huge numbers of highly paid employees the giant "fang companies" have.
Except when the FAANG company revenue turns out to be driven by the same fake money faucet.
What fake money faucet? The big tech companies have tons of paying customers, and tons of net income increasing at tremendous rates with tremendous moats.
Huge portions of advertisements are being shown to bots without detection. I'd guess google's ad sales are 25% overblown given my analysis of it's bot detection products.
I don't spite or hurt SoftBank. I'm just pointing out the emperor has no clothes and is investing poorly. Bad investments by those with wealth hurt those without the most.
Why? If it is easy to take it, let clever people take it to have the resources for real innovations.
On the other hand, you can think of dumb money like SoftBank as desparate money and the jobs it creates as workfare in everything but name. Lots of people who would otherwise not get the chance, are getting paid and stuffing their resumes working for these places. These doomed companies are essentially allowing investors to pay for the training of employees who will be adding value to the not-doomed companies that will come after.
Workfare. I agree it provides employment but it also bids up salaries. Moreover, anti-unicorns like WeWork make it more difficult for real startups motivated by survival and profit.
Considering past conspiracies to restrain information workers salaries, this may just be restoring some of the missed natural growth. The FAANG companies aren't having any problems keeping up with the Softbank funded companies.
>allowing investors to pay for the training of employees who will be adding value
Putting on my most cynical hat, what value is there in flashy web frameworks and marketing hacks?
Putting on my most cynical hat, what value is there in flashy web frameworks and marketing hacks?
Then it would be better to put the dumb money to work fixing/improving infrastructure or doing something else useful. As it stands, some of this looks like one great, big broken window parable[1].
[1] https://en.wikipedia.org/wiki/Parable_of_the_broken_window
[1] https://en.wikipedia.org/wiki/Parable_of_the_broken_window
Wow...finally. This is happening in public companies too btw. Draper Esprit, Scottish Mortgage Trust, Woodford (he was marking up his "genius" cold fusion play all the way...this is real life, 2019, amazing)...the way positions are marked is very suspect, and the general public just doesn't understand (they see NAV as cash in the bank).
Would you mind going into a little more detail? I'm intrigued, but I don't even know where to start learning more about this.
Just read about accounting so you understand how different assets are valued (i.e. the difference between an asset that is marked-to-market and marked-to-make believe). And then start looking through public companies that hold private assets (i.e. they will report financials to the SEC or wherever).
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SoftBank: Would you like some money at a $10 billion valuation?
Startup: Sure.
SoftBank: Here you go. Would you like some more at a $20 billion valuation?
Startup: Sure.
SoftBank: Here you go. How about a $40 billion valuation?
Startup: This is dumb but it’s not like we’re going to say no.
SoftBank: Here you go.
Startup: Thanks brb buying a yacht.
SoftBank: Our mark-to-market investment returns are tremendous, we must be good at this.
If SoftBank keeps throwing cash at startups like WeWork, the numbers will start to lose their meaning. [June 14, 2018] - Matt Levine
[1] https://www.bloomberg.com/opinion/articles/2018-06-14/softba...
Startup: Sure.
SoftBank: Here you go. Would you like some more at a $20 billion valuation?
Startup: Sure.
SoftBank: Here you go. How about a $40 billion valuation?
Startup: This is dumb but it’s not like we’re going to say no.
SoftBank: Here you go.
Startup: Thanks brb buying a yacht.
SoftBank: Our mark-to-market investment returns are tremendous, we must be good at this.
If SoftBank keeps throwing cash at startups like WeWork, the numbers will start to lose their meaning. [June 14, 2018] - Matt Levine
[1] https://www.bloomberg.com/opinion/articles/2018-06-14/softba...
> "They pump up valuations to get higher returns to look good to investors" says Eric Schiffer
Seriously??? Who, even with half a brain could not understand that that's how venture capital works by definition???
Seriously??? Who, even with half a brain could not understand that that's how venture capital works by definition???
In theory it works by actually building valuable companies, not by running pump and dump schemes.
Huh, who could have seen this coming.
Is there a non-paywalled version?
Funny but this is word for word following Bloomberg.
https://economictimes.indiatimes.com/small-biz/startups/news...
https://economictimes.indiatimes.com/small-biz/startups/news...
For bloomberg.com it works to turn off JS (bottom right corner of uBlock Origin).
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I am wondering, if Saudis really wanted to flush $100bn down the drain, wouldn’t it have been better spent to uplift poverty and reduce hunger ? At least that will give them positive news coverage to offset all the bad news.
> At least that will give them positive news coverage to offset all the bad news.
You know what really offsets bad news? Having your hooks deep into the economies of powerful countries to buy their tacit approval of whatever you do.
You know what really offsets bad news? Having your hooks deep into the economies of powerful countries to buy their tacit approval of whatever you do.
Judging by what they’re doing in Yemen, this doesn’t seem like the kind of thing they’re interested in pursuing.
Presumably, they thought it would give them the money they weren't going to get by doing an Aramco IPO, since they didn't want the scrutiny that required.
I am wondering if there is any anger stirring in Saudi Arabia about how the west took their money and basically played with it, with no realistic opportunity of making a profit?
I am wondering if there is any anger stirring in Saudi Arabia about how the west took their money and basically played with it, with no realistic opportunity of making a profit?
The interesting point though is that this is basically all being done using money that private investors have given, so really there's no public accountability or outrage. The question is whether the investors in the vision fund start asking to open the books and check the valuations themselves. If they don't then this will just continue until Masayoshi finds a way of getting his hands on and even bigger pile of money in order to continue to cover up the dodgy valuations - because that's what you'd have to do right? You'd have to do another massive fund to have enough cash to continue driving up these valuations? You would want another massive fund raised quickly before the existing investments start fallling apart.
I wonder what Masayoshi is doing these days.