SoftBank plans to lend $20B to its CEO and employees amid volatile markets
mazech.com
mazech.com
- they have tons of illiquid assets (equity in startups and early stage companies - hard to shed - see later)
- SoftBank Vision Fund "borrows" from its huge illiquid assets (Uber + other SV stuff) in order to make the market by throwing around insane amounts of cash ($billions); in other words, they make their own markets in order to pump up their valuations but the underlying thing is fantasy-land VC goop (see any problems here?);
- the only way to shed many of these assets are with buyouts or IPOs and the most recent ones haven't been great (the 'big names' of which [UBER, LYFT] were treated like hot garbage even shorted by IPO underwriters in case of UBER) so it's not like this garbage can be punted to someone else
- SoftBank routinely sells assets to its Vision Fund and uses shady stuff like this in order to provide non-standard accounting; we have no idea what their financial health is due to a maze of non-standard reporting
- SoftBank owns over half (!!) of Japanese corporate bonds
- they have insane amounts of debt - "¥15.7tn ($143bn) of interest-bearing debt and ¥27tn of total liabilities, far greater than its ¥11.6tn market capitalisation"
as best i can tell this is approaching Ponzi territory. once more greater fools wake up to the fact that VC isn't all the rage, get the hell out of the way of anything that SoftBank touches.
https://www.ft.com/content/24c4a8a8-7885-11e9-bbad-7c18c0ea0...
Why else would you invest 300 million in a dog walking app ?
SoftBank was missing some billions for its own new fund and the solution is create debt to fund the fund. Since it's illegal for themselves to invest in their own... they workaround it through it's own employees.
If a workaround/scheme is required to obtain enough capital for the fund... that means that either there isn't enough capital in the world or that the owners of such capital don't believe in the fund.
The important question is why it's better to resort to this scheme than to not have enough capital for the fund?
Plus they apparently did the same thing in their first fund a few years ago.
It seems that SoftBank wants to fund directly 38b$ and indirectly 20b$ through employees.
In the first fund SoftBank contribution seems to have been 28B$ in a total of 93$B.
It seems that SoftBank is having a hard time getting the Saudi Arabia to invest again in the new fund. In the first one they put 45B$.
Yes. There has been zero backlash against SoftBank or Saudi-backed VCs from companies or consumers.
Relative to many companies, SoftBank is not so big. And the bigger companies do have VC-style subsidiaries set up (e.g. Microsoft's M12). But SoftBank seems to make the highest profile investments by a significant margin. Is there any particular reason for this? Are they simply more tolerant of risk and therefore write bigger checks?
Apple+ more invest in the Softbank Vision fund, so the "SoftBank round" is already what you are thinking.
Yeah, but by doing this they essentially outsource the process to Softbank.
I'm assuming OP is curious why they won't make the decisions themselves.
VC funds historically have been in the hundreds of millions, so you can invest up to tens of millions in any one company to keep a balanced portfolio.
SoftBank's Vision is in the hundreds of billions, so it can invest up to hundreds of millions.
This means they can single-handedly shepherd companies across the 'valley of death' or out-spend the competition to reach critical network effects... Essentially instead of just making bets, they're tipping the scales.
The point of this strategy is the scale, which is only possible by raising billions from sovereign wealth funds and mega corporations.
No one company could do it. Apple's net income last year was ~$60 billion.
The Vision Fund launched with $100 billion.
Apple has somewhere around 250 billion cash on hand, so they could definitely launch a 100$ billion fund on their own.
Microsfot has about 150B. Google about 100B . Lots of companies can theoretically build such a fund.
In contrast, Microsoft Ventures / M12 will do proper early-stage venture, doing a check of $2 M or $5 M or $10 M into a growing but still uncertain company.
Source: I have done single-digit $M deals with M12 and am a VC.
Globally we are going through a period of deflation.
Japanese Banks have been dealing with this problem for 30 years now.
BOJ can print money ( yen ) and flood the world and the value of the yen would still go up !
The reason is there is a lot of latent demand for Japanese exports.
When Softbank invests in lets say India, ( through Uber drivers ), and suffers losses.
The yens released ends ups creating demand for Japanese export.
From Softbank's perspective it's a win-win, they get to be owners of really important tech companies and at the same time Japanese companies see a demand surge for their products.
It's hard to understand initially - but don't be surprised to see Softbank clones propping up in Europe in 10 years - once the EU has been completely battered by deflation.
In the US you might yet see the largest types of these funds in the future once the US govt. decides it wants some fiscal spending.
Softbank invests in Uber India pushing up automobile demand[1]. Indian drivers buy cars manufactured by Maruti Suzuki (54% market share [2]). Maruti Suzuki is a JV between an Indian company (Maruti) and Suzuki (Japan) where-in Maruti pays 6% of sales as royalty for design and other facilities. In addition, you have to realize that Japan exports $35b of auto parts and $101b of automobiles [4]. So any lever which pushes up sales of automobiles in any nation is bound to have an impact on exports.
[1] https://economictimes.indiatimes.com/small-biz/startups/dema...
[2] https://auto.economictimes.indiatimes.com/news/passenger-veh...
[3] https://economictimes.indiatimes.com/markets/stocks/news/low...
In Indiranagar (a popular, hip neighbourhood in Bangalore), you might have to wait for an hour to get an Uber or Ola, on weekday mornings too! Hence a lot of people are using Yulu (India's Bird).
I can see that, at the margins, a company can spend money where it thinks it it can receive complimentary benefits. But this idea that you can spend your way into riches is a fallacy.
So, I think we agree on some things, mainly that Japan is printing money and Softbank is a beneficiary and is using that cash to spread around the tech industry. Cheap money. Except I think it will backfire, eventually.
Where I'm not understanding is you're saying when they fail, the money they've lost has gone into stimulating demand for japanese goods and kept the currency low. But firstly, that's still them failing - the company will fail, ROI will be low. It might help the domestic japanese manufacturing industry, but it's not going to help softbank.
But also to take your example, Softbank blows a load of money in India on Uber, those Indian Uber drivers go out and buy japanese cars. But it's not like 100% of the cash you're putting into Uber goes to Japanese car companies. It's probably not even 5% - the vast majority of the money will be going to stimulate the Indian economy.
I just don't understand, because what you seem to be saying is that for a primarily export based economy, you should just print money always, that doesn't seem correct to me - but I really don't know enough about it. Surely there must be downside? Normally I'd say this maps to inflation and squeezed living standards- but are we just no longer seeing those effects?
- https://www.amazon.com/Princes-Yen-Central-Bankers-Transform...
There is a huge overlap here with MMT ( Modern Monetary Theory ), but the book was published way before MMT become more widely read. Richard studies what happened in Japan from an economic history prespective. ( I will do a dis-service to the whole topic trying to explain everything in a few sentences, but I will try to answer specific point raised ).
> I just don't understand, because what you seem to be saying is that for a primarily export based economy, you should just print money always.
As an exporter you cant help but accumulate FOREX. so the value of the yen would always head north, if you want to stay a top exporter you have to constantly print money to balance out your FOREX accumulation.
> Surely there must be downside?
Nope, no downside when you build capital goods that everybody else wants.
> Normally I'd say this maps to inflation and squeezed living standards- but are we just no longer seeing those effects?
inflation happens when aggregate demand > aggregate supply. If you are not supply constrained then inflation wont happen regardless of how much money you print.
Japan specifically could print unimaginable amount of money and use it to create whatever technology they want.
Technology acts as an accelerator to this deflation doom loops, since these technology products further increase supply or reduce cost.
You might have hard limits due to physical commodities like oil. But technology has been able to squeeze even more value out each unit.
> Where I'm not understanding is you're saying when they fail, the money they've lost has gone into stimulating demand for Japanese goods and kept the currency low. But firstly, that's still them failing - the company will fail, ROI will be low. It might help the domestic Japanese manufacturing industry, but it's not going to help softbank.
Japanese banks are very much interwoven with their state, softbank might get certain lending quota from BOJ that they must lend out. Remember if Japan doen't print yen and spread it around then their deflation problem gets worse. My personal opinion is Japan should pay attention to their domestic proverty problem, they could just implement UBI, but having too much Yen domestically wont solve their deflation problem. The last time they tried helicopter money, everybody just bought government bonds, making the problem worse ! So they might prefer to figure out to create demand in foreign markets.
> It's probably not even 5% - the vast majority of the money will be going to stimulate the Indian economy.
I do not think Japan really cares if the Indian economy is stimulated or not, they just want there to be healthy demand for Japanese products, printing money and lending it out and then suffering some loss might even be preferable to having a large marketing and advertisement industry like we do in the West.
And they're not doing this because...?
We are living in truly dangerous times if people actually buy into this nonsense.
What? Pretty much every country has inflation [0].
> BOJ can print money ( yen ) and flood the world and the value of the yen would still go up !
That is definitely not true. If they were to print 518,755,944,000,000 Yen (2017 estimate for their gdp) and flood the market with it (say by giving every citizen an equal share as a lump sum a la helicopter money [1]) the value would certainly drop.
> From Softbank's perspective it's a win-win, they get to be owners of really important tech companies and at the same time Japanese companies see a demand surge for their products.
So you're saying Softbank doesn't actually care about their return on investments and is really in it to boost Japanese exports? Softbank is big but there's no way any secondary effects from their vision funds investments will return more money to them than the initial investments. Not only that, but your also effectively saying that they were able to swindle 40 billion dollars from the Saudis and I say swindle because the Saudis don't care 1 bit about Japanese exports and are 100% in it for the initial return on investment.
[0]: https://en.wikipedia.org/wiki/List_of_countries_by_inflation...
We already see something similar at law firms - partnership in a firm means literally buying into it, and one of the perks you receive at many law firms is the ability to take out a loan at favorable rates, particularly to help with said buying in.
Some form of coops Mondragon for example do but that is a very different type of employment.
In general, a partnership is a collection of equity owners ("the partners"). To become a partner you have to buy equity, usually sold by a retiring partner.
Sometimes "new partners" are created by diluting the stock; this is generally avoided unless the person is expected to grow the business by at least that much.
I understand what they are doing but I don't understand how it will work to succeed.
For example,
0) SoftBank loans extra cash to Masayoshi Son.
1) Masayoshi Son invests a portion in the next Vision fund which makes 40% returns, and the rest in safer strategies (public equities, long-term debt)
2) Masayoshi Son makes a killing, has no trouble repaying the loan.
3) SoftBank just grew their cash reserves well above the market rate.
The key assumption here is 2). But since this is a loan, and Masayoshi Son invested most of the money in safe investments (and has a lot of wealth anyways), even if the Vision fund underperforms, SoftBank can be confident they can still make money back (step 3). They're using their advantages to build their own unique loan product.
The fact that it doesn't do this is a little ominous. Why does it believe that it will get a better return by loaning out cash at 5% rather than investing in its own fund?
Fiduciary duty requires low risk products, and liquidity. Generally that means long-term debt (e.g. t-bonds) or 'corporate paper' which are nearly risk-free. Those yields are 3% or lower, certainly less than 5%. The risk profiles are about as far away from a VC fund as can be.
Generally a personal loan would be way too risky for corporate cash -- so this is actually an incredible show of confidence in the Vision Fund!
I call bullshit. Specifically, what you wrote is not remotely true under US law or under Japanese law.
A company's managers have very broad leeway to spend the company's cash however they like. In fact, if the cash, treasuries, corporate paper, etc, of a company starts to pile up over the years, the markets tend to take that as a sign of managerial incompetence or at least managerial lack of vision.
Anyone that can buy and hold shares in SoftBank can also hold cash, treasuries or corporate paper directly. In other words, SoftBank's investors don't need SoftBank to hold cash, treasuries or corporate paper on their behalf; they invest in Softbank because they expect that SoftBank has a more ambitious plan than that. Creating and selling the iPhone is an example of an ambitious plan that turned out extremely well for investors in the company with that plan.
If that argument is not persuasive enough, consider this concrete counterexample to your claim: for 6 years, Google had a venture-capital arm:
https://en.wikipedia.org/wiki/GV_(company)
Specifically, although GV is currently owned by Alphabet, for a period of 6 years before that it was owned directly by Google (under the name Google Ventures I believe).
not can't as in "de-facto illegal."
dereliction of fiduciary duty is illegal, of course the circumstances matter.
I think you are conflating capex + investments with overall cash management.
They already invest a lot in the vision fund. This is a way for them to route more money into the vision fund on top of what they already invest, by tapping into an additional asset class within their portfolio allocation.
If a company's portfolio is a high percentage of cash management products, that's a bad sign of low innovation. If the portfolio is too low a percentage, that's a bad sign also because they would be unable to access liquidity to cover operations given a downturn or sudden need for capex etc... Different companies have different allocations but healthy companies (including google) have allocations into a diverse bucket of asset classes...
> consider this concrete counterexample to your claim
The fact that Google also has a VC arm is not a counter argument. Google allocates some amount of its cash into cash management products as well.
> SoftBank's investors don't need SoftBank to hold cash, treasuries or corporate paper on their behalf
Their customers do. They're still a major telecom company in Japan -- they certainly have operations they need to protect.
When you say "fiduciary duty", you imply that the company can be sued.
OK, but that's different from your "you can't just take corporate cash and invest it in a private equity fund". If you'd written instead, "having their employees carry some of the equity risk is a way for SoftBank to increase the size of the private equity fund while continuing to make sure that they have enough cash to continue operations", I wouldn't've felt the need to call you out.
I don't know enough about Japan to say, but if it were a US company making this move, I would be more inclined to believe that the loans are mostly intended as a perk for employees like this comment claims: https://news.ycombinator.com/item?id=20736072
I think maybe you misunderstand what "fiduciary duty" means here.
This is a perk for employees. Stock options/RSUs on steroids. It’s nothing more complicated than that.
It’s unusual to do it this way in tech but in big accounting and law firms giving favourable loans for people to “buy into” the partnership is business as usual.
Perhaps the borrowers can take the cash, invest it, then borrow elsewhere at lower rates to pay back the more expensive loan? In all, it still seems a vastly complicated scheme for the attested goals. I guess that there are tax reasons behind it all.
Worse idea: Also investing in that same company's highly risky VC fund.
Worst idea: Borrowing money to do so.
It didn't really make any sense to me, but I wanted to ask here:
Is there any truth to that? And if so how did it work?
During private fundraising, investor (vs founder) stock generally has preferred rights when the company is sold and/or liquidated. There might also be restrictions on who and how someone can sell their common shares. This depends on the investors and the terms that were negotiated during fundraising.
So common stock generally is sold at a discount because it doesn't have any of these protections, and it's basically last in line to receive any payout.
However during IPO, often preferred stock converts into normal common stock so that it can be sold to Joe Smuck (or their pension fund institutional) investor.
Hence it's an arbitrage play; you purchase common at say a 30% discount in a late round and then sell it on the market for full price.