SoftBank Gives Startups Billions of Reasons to Hold Off IPOs
wsj.com
wsj.com
It sounds good - they come in and offer a huge investment at a high valuation, higher than anyone else. About time someone recognizes how valuable your company actually is!
So you take it. You make an announcement, everyone oos and aahs over your new valuation. Talent flocks to you, fuck yea. Things are going great!
Fast forward some time. You need some more investment to go chase opp X. Or maybe you burned thru cash, who knows. So you start fundraising. investors look at your numbers and say...umm...you've shown some good growth but we dont agree with Softbank's valuation. We will invest in a downround, or come back when you've posted even more growth.
Crap. You need money NOW not later. You did NOT realize that high valuation was a double edged sword. And a downround is totally out of question.
Also working with them is...challenging. Gotta love those 8am calls (latest they can do Tokyo time). They ask for metrics that kind of make sense but are different than how you run things so it is a complete waste of time. On the phone they are oh so polite, but you're never sure what they're actually thinking.
You're asking yourself why you took their money again? They have had zero strategic impact (they're a Japanese telco) and now it's making fundraising more difficult.
Fun times. If I see a company take SB money I assume they are declining (or soon will) or greedy / short sighted. Or there is the rare actual strategic benefit sure. But most times there is none.
So why did we work take the money? Sounds like they wanted to avoid going public. But I wonder if they did their homework on this one.
You remind me of an anecdote about an American working in Asia. They were constantly frustrated with communication difficulties. One day, they felt they finally were on the same page with a coworker and they said "We are thinking along parallel lines." to express this. Coworker agrees.
Later, the problems came back. They referred back to that conversation. Their Asian coworker says "Yes. Parallel lines never meet."
Is it? The description on that page is just about having multiple conversations at once, not having them all start in the same place.
Also, starting in one place and going different directions is basically the opposite of parallel lines, so this makes zero sense as a justification of the punchline.
Gotta love the straight German way.
It is usually not the best explanation and it actively causes all kinds of problems. I like to give push back against this common assumption wherever possible.
The Pan Am smile: https://www.urbandictionary.com/define.php?term=Pan%20Am%20s...
Why? Especially because this is the foundation of your entire argument.
Read more: Down Round https://www.investopedia.com/terms/d/downround.asp#ixzz5U48D... Follow us: Investopedia on Facebook
If you would have been happy selling shares at X valuation, if only that high-valuation deal had never happened, then the level of dilution is acceptable to you.
"This down round is bad because it's undervaluing and over-diluting" is an easy to understand argument.
"This down round is bad because a previous round overvalued the company, even though the down round is the correct valuation and the correct dilution" is an argument that needs more justification.
If the valuation is flat-out too low, then the fact that it would be a down round has nothing to do with the problem. A too-low valuation is a problem even if it's higher than your last valuation.
Which is fine. Plenty of tech companies have already demonstrated IPO downrounds are fine.
https://www.ft.com/content/c2fe7814-536a-11e8-b3ee-41e020920...
Mistake is here.
Taking money doesn't necessarily mean you have to go on an expansion spree.
Or, if it does, you need to make this decision before you take the money.
Whenever you raise you should always consider the valuation you'll be aiming for at the following round and the metrics needed to achieve it and whether they're achievable.
Guess who the guys who gets hosed are? Founders and employees of the company who have options. Suddenly you and your co-workers have almost worthless shares in a company that isn't doing well. If you're at the start up for the potential upside it's at that point you really need to look at moving on. So suddenly a down-round isn't just a down-round it's also a "lose all the good employees" round.
WeWork founders banned meat from their office meals can they really accept to be owned by this fund?
Once the SoftBank money stops flowing does the chamath described Ponzi scheme stop causing the whole thing Venture backed growth story to unravel?
https://www.businessinsider.com/softbank-talks-invest-15-bil...
https://www.cbinsights.com/research/wework-real-estate-earni...
But then what about buying German cars, some of which were started by Hitler (such as VW)?
One of your examples is ongoing, the other is not.
One could change the future, the other can't change anything except other car markers margins.
One could be justified, the other can not.
I could make a much longer list, but I hope you get the gist.
But I guess the kingdom is still permeated with Sunni Islam and they are willing to bomb the crap out of Yemen so it won’t fall into Shiite Houthis’ hands.
They executed an American permanent resident journalist, Jamal Khashoggi, in one of their consulates on foreign soil within the last two weeks, and failed at the cover up [1].
[1] https://www.cnn.com/2018/10/15/middleeast/saudi-khashoggi-de...
What if Jamal Khashoggi was a Ruhollah Khomeini of Saudi Arabia [0]?
That is, what if it was not about wahhabism but about self preservation?
Goldberg: What do you mean you don’t know about it?
MbS: What is Wahhabism?
Goldberg: You’re the crown prince of Saudi Arabia. You know what Wahhabism is.
MbS: No one can define this Wahhabism.
Goldberg: It’s a movement founded by Ibn abd al-Wahhab in the 1700s, very fundamentalist in nature, an austere Salafist-style interpretation—
MbS: No one can define Wahhabism. There is no Wahhabism.
https://www.theatlantic.com/international/archive/2018/04/mo...
Hmm, so should we call this sort of thing a "Ponzi Scheme" or a "money laundering scheme"? That is given that Softbank is a way to recycle the Saudi Billions while other schemes involve Russia oligarchs or Chinese money itching to leave it's homeland?
Saudi Arabia's only serious pressing concern economically, is building a non-oil-based, sustainable economy before the oil growth era stagnates or reverses course. They have rapid population growth (50% in 15 years), the clock is ticking against their ability to sustain a future with 50 or 60 million people.
It's not enough to just replace oil in the equation as it is today for their economy, they have to figure out how to do it for twice as many people. They need to figure out how to build out a $1.5 trillion non-oil economy within 30 or 40 years.
But Softbank is a poor example given how the invest almost entirely in late stage companies, mostly with real profitable business models, who would otherwise easily find plenty of funding in traditional less risky capital markets (who don't share the same critique but push the same never-ending growth pressure and often far worse backroom financial trickery).
This is very distinct from the dotcom boom... or you know acutal Ponzi schemes... which were entities which raised countless millions on zero-value organizations. He's probably right in some ways but lost me in his exaggerated/radical positioning which he seems fond of.
Also true that later stage companies have working business models (though they are typically not profitable a tradeoff they willingly make for growth). See the comment above on plenty of funding post SoftBank round. I've also observed that their valuation forces founders to do subsequent down rounds.
The Ponzi scheme argument (not perfect) is the gains are all paper valuations that are based on growth continuing or more investment being piled in. Once that stops the whole thing crumbles. After Softbank with a $100B fund, where else does the funding come from? IPO?
Arm Holdings is held fully by SoftBank and the Vision Fund, should they fail, i am not sure what would happen but my guess is Arm would get out of the tumble relatively unscathed, it's too valuable.
During the dotcom boom, he became the richest man in the world for a few days by betting big and then during the crash, he lost almost all of his net worth.
https://www.quora.com/How-did-Masayoshi-Son-lose-70-billion-...
He was able to maintain power and keep softbank afloat while losing billions during the dotcom crash. So he has powerful backers and contacts who believe in him and are willing to carry him during rough times. That's very rare. In many ways, he reminds me of bezos and musk. For some reason, they are able to get the support of big money while losing a lot of money.
It may fail but it can't be a worst investment than just giving it away as dividends.
As mentioned in the article, SoftBank often buys employee shares, giving them liquidity without needing an IPO.
The finance and tech world doesn't need to compromise for some vague fragile security arrangement in the middle east. But regardless money is money and it will find an immoral taker at some point. The best we can do is keep the pressure on companies to hold their investors accountable.
That said, I'm not a fan of bringing the fanatical political tribalism, which is very popular in the US at the moment, into the tech/business world.
Once they have investors from there aren't they pretty much beholden to them?