Showing posts with label Masayoshi Son. Show all posts
Showing posts with label Masayoshi Son. Show all posts

Thursday, November 07, 2019

Has Softbank Gone Soft?

SoftBank: blind spots threaten Masayoshi Son’s $100bn Vision As the global business elite deserted a Saudi Arabian investment summit a year ago, after the killing of journalist Jamal Khashoggi by Saudi agents, the founder of Japan’s SoftBank slipped into Riyadh for a discreet meeting.......... Masayoshi Son and his chief lieutenant, Rajeev Misra, were there to see Mohammed bin Salman, the crown prince who had helped to make them the world’s most influential technology investors. Almost half of SoftBank’s $97bn technology-focused Vision Fund — the biggest pool of private money ever raised — came from the young royal’s sovereign wealth fund. ........... plans for a long-awaited sequel to the Vision Fund are in serious doubt. ....... Armed with Gulf capital, SoftBank poured into every corner of the digital economy and fuelled some of the world’s most richly valued private companies. Following Mr Son’s advice, many burnt cash in feverish pursuit of scale and market share above all else. ..........

Returning to Riyadh last week for the latest Future Investment Initiative, known as “Davos in the Desert”, Mr Son was met by an almost-empty room for his panel discussion. The weary-looking billionaire, who at one point appeared to fall asleep, insisted he would keep offering capital to start-ups so they could “grow much bigger and quicker”. 

........ “We identify the entrepreneurs who have the greatest vision to solve the unsolvable,” he said. “They need to have the strongest passion. And then we provide the cash to fight.” ....... SoftBank shares have plummeted 26 per cent in the past three months. ......... The struggles have laid bare a sharp-elbowed culture within the Vision Fund, which is led by Mr Misra and seen as rife with mistrust, managerial disorganisation and clashes between executives. ......... Uber is now down 31 per cent from its listing price, with the Vision Fund sitting on more than $800m in paper losses since its investment. Other investments have suffered too: office messaging group Slack has dropped nearly 45 per cent since its first day of trading in June, while Vir Biotechnology has fallen 30 per cent since its mid-October listing. Only two Vision Fund-backed companies, Guardant Health and 10X Genomics, are trading above their IPO price.........

One hedge fund investor says backing from the Vision Fund is “an immediate cue to sell”.

...... The steady procession of IPOs was intended to validate the Vision Fund’s late-stage bets and lay the groundwork for juicy returns that would make big-money investors clamour to pour money into its next Vision Fund. The group would look to list at least two portfolio companies per month by 2020, Mr Misra said earlier this year. ......... The biggest blow, however, came from a company whose founder Mr Son has praised and lavished with billions of dollars since 2017, saying it would be worth a few hundred billion one day. ........ The close bond between Mr Son and WeWork founder Adam Neumann had begun to sour long before its disastrous attempt to list in September. ........ “We created a monster,” Mr Son has told colleagues. “We gave him all the capital.” ....... “WeWork is not the only one weak asset,” says Atul Goyal, an equities analyst at Jefferies. “We suspect there are many such questionable investments or assets within SoftBank Vision Fund’s 80-plus investments.” ........ Other bets, such as a $500m investment into UK virtual simulation start-up Improbable, are not expected to generate any returns. Fair, the car subscription start-up that partners with Uber, recently revealed plans to cut 40 per cent of its workforce as it struggles to become profitable. Wag, the dog-walking company backed by a $300m Vision Fund cheque, has been earmarked for sale. ......... “Money in the right hands, right founders and right potential long-term platforms works,” said

Nikesh Arora, Mr Son’s former heir apparent, who abruptly resigned in 2016

, at a CNBC event last week. “But it doesn’t work willy-nilly on every pet-walking and hotel room-renting website.” ....... It is hard to formulate a cohesive picture of SoftBank and the Vision Fund, in part due to Mr Son’s incessant dealmaking, and also because of the extreme levels of financial engineering employed by Mr Misra......... One of the most powerful credit traders from a pre-crisis generation of Wall Street bankers, the Indian former Deutsche Bank executive is considered by some as a pioneer of modern finance............ He was feted in April by Michael Milken, the junk bond king of the 1980s who was convicted of securities fraud and later imprisoned for two years. Talking to Mr Misra at a conference, Mr Milken, now a self-styled philanthropist, said: “There is no one that has the understanding of financial markets and capital markets and the hundreds of different types of instruments that you do.” .......... To others, however,

Mr Misra is a source of chronic instability who has stuffed the senior ranks of the Vision Fund with former Deutsche Bank colleagues and financial complexity.

...... “SoftBank and the Vision Fund are layers of leverage upon leverage,” says one banker who has worked closely with both. This person and others see parallels to what took place at Deutsche Bank, the now struggling lender whose lack of oversight and controls saw its balance sheet laden with risky products of the sort Mr Misra specialised in. ...... SoftBank is saddled with $160bn of interest-bearing debt and its bonds are rated non-investment grade. The Vision Fund has a unique structure — created by Mr Misra — where roughly $40bn of outside investor funds are in the form of preferred shares that work like debt and pay an annual coupon......... When Mr Misra looked to return capital to the Vision Fund’s backers earlier this year, he added yet more leverage, taking out a $3.5bn loan mortgaged against stakes in companes including Uber. ....... Under Mr Misra’s watch, the fund’s ranks have grown to more than 400 employees ...... “I’ll tell you the biggest change in two years. We are learning so much. It’s becoming sixth sense. We transfer that learning to our portfolio companies,” Mr Misra told Mr Milken, highlighting best practices shared across its holdings. ....... The growth inside the Vision Fund belies an environment where Mr Misra and his allies have jostled with those outside their inner circle. Critics say

the toxic culture

, which Mr Son has overlooked, could imperil the future of the fund. ........... Two senior SoftBank executives have had fierce run-ins with Mr Misra that have had an impact on the balance of power in the Vision Fund and the company. One, Alok Sama, SoftBank International’s former chief financial officer who was a critic of the WeWork investment, left in April........ Former Goldman colleagues and others described Mr Schwartz as a “moral compass”, who became fed up with the changing culture within SoftBank and concerns over governance at the Vision Fund, as well as its reliance on money from Riyadh. ........ A second Vision Fund would help Mr Son silence his critics. A rollout this summer of those plans were designed to showcase SoftBank’s ability to attract blue-chip investors such as Microsoft. But no outside investors have formally signed up yet. ........ Nearly half of the $108bn SoftBank hopes to raise is set to come from the Japanese company itself and senior employees. However, some of these employees have balked at what that entails: a “loyalty test” that involves taking SoftBank loans equivalent to as much as 15 times their annual salary. ........... Executives within and close to SoftBank concede that renewed commitments from Saudi Arabia and its neighbour Abu Dhabi are crucial if there is to be a second fund. Both have been slow to commit, even as SoftBank executives are counting on Prince Mohammed to reinvest up to $30bn with them. 





Everybody has a bad year. Every person, every company, every country. Some have two, some have three. Is this just a bad year for Masa Son? I'd argue otherwise. If the idea for the 100B Vision Fund is to give a 2X return or a 3X return in a five-year timeframe, that would still be excellent. A 10X return over a 10-year run is considered excellent in VC circles. It is so good the vast majority of VCs fail trying. They go out of business.

But the expectations on Masa are high. People look at his track record. He is the magician who harvested big from his bets on Yahoo and Alibaba. If he were to pull the same rabbit out of the hat, the 100B fund should become 10T. Will it? I doubt it.

Masa bet big on WeWork and Uber. Those two moves expose his thinking with the 100B Vision Fund. He thought both those companies were out of high-risk territories. They had already found product-market fit, the holy grail of tech entrepreneurship. Now all they had to do was scale. To him, it was like that Russian billionaire pumping 100M into Facebook when Facebook was already hotcakes. It was on its way to up and up and up.

Now we know that is not how it panned out.

Either Masa will go back to his roots of doing early stage (which can't be easy .... that is akin to saying Mark Zuckerberg should go launch another Facebook ... Mark can't .... he is incapable of) or he might have to make do with more modest returns. Right now the 100B Vision Fund delivering a 10X return over a 10-year timeframe looks ambitious. As in, not happening. But even 2X would be nice. 3X would be great. 5X would be congratulatory stuff.

Prince Salman gets to tag along. :)







Wednesday, October 23, 2019

Can WeWork Be Rescued?

I have not read too much on this topic, so I will refrain from taking major stands. I will keep my comments to the minimum. But some outlines are obvious even if you just skim the headlines. And WeWork has been making the headlines for all the wrong reasons recently.

Is this like throwing good money after bad? Maybe not. Without this cash infusion, all of Softbank's earlier investment would have gone to zero. I think they had $30 billion into it. Which was a stupid sum to begin with. 30B is a lot to give a company.

The basic business model of WeWork was not and is not unsound. You grab larger properties in big cities, slice them up, and rent out individual desks. I can see a margin there. That can be profitable. But is this scalable? Can it see exponential growth like tech startups are expected to have? Maybe, maybe not. But it looks like WeWork ended up having some major governance issues. Bad governance on its own can kill. But sometimes if there is too much dissonance in what you say you will do, and what you perform, that can lead to governance constipation.

This cash infusion has prevented the immediate death of WeWork. But now Softbank has 40B in this venture. Can this be recouped? Fast enough? I am not sure. I don't know.

WeWork has created some great coworking spaces. I have visited many of them. In fact, I have seen the company from its infancy. I have been impressed. It has grown right before my eyes. Too bad the insides have been less remarkable. I hope WeWork sticks around. But I feel sorry for Masa Son. This 40B is going to be too much of a drag on his 100B Vision Fund. Now there is tremendous pressure on the other 60B to perform. This 40B will not give him 10X, which is considered excellent by VCs. And this might still go to zero. So that is a lot of pressure.

There is plenty of early-stage action. There is more early-stage tech startup action now on the planet (and I mean the planet, not Silicon Valley, or New York) than ever before. So I am not going to argue 100B is too big a size for a VC fund. But Masa did not go into WeWork's early stage. He went in when WeWork was grabbing all the headlines.

There are plenty of Yahoos and Alibabas on the cutting edges of technology today. Too bad Masa was caught sleeping on the wheels. We just saw a very expensive firing of a CEO.


WeWork: Blitzscaling or Blitzflailing? Prominent news organizations, ranging from The Economist to Wired (multiple times), have been describing WeWork as an example of blitzscaling. ....... We argued extensively in our book, Blitzscaling, that these strategies and tactics describe why Silicon Valley Bay Area – which has a population of less than 4 million – generates such a massively disproportionate number of global technology companies. ......... If you add together Apple, Alphabet, eBay, Facebook*, Lyft, Palo Alto Networks*, PayPal, Salesforce, ServiceNow*, Twitter, Uber, and Workday*, these twelve companies alone have a market capitalization of $3 Trillion, a little bit more than the annual GDP of the United Kingdom in 2018. ..........

blitzscaling is prioritizing speed over efficiency in the face of uncertainty

........ Blitzscaling does call for prioritizing speed over profits ....... The purpose of blitzscaling is to achieve enduring market leadership in what we call Glengarry Glen Ross markets. A Glengarry Glen Ross market is a winner-take-most market that occurs when being the first player to reach critical scale brings lasting competitive advantage. The term comes from the classic movie about a sales contest where “First prize is a Cadillac, second prize is a set of steak knives, and third prize is, ‘You’re fired.’” ......... Once achieved, leadership in a Glengarry Glen Ross market can provide decades of substantially profitable operations, repaying and justifying the costs incurred in blitzscaling. ......... In Blitzscaling, we lay out the four key growth factors that enable a company to successfully blitzscale, as well as the two key growth limiters that can make the strategy a poor choice. ........ It doesn’t make sense to expend massive resources to win a small market. ..... A good product with great distribution is more likely to win a Glengarry Glen Ross market than a great product with poor distribution. ........ The purpose of blitzscaling is to win the market so that the company can generate massive profits for years or even decades. (Consider Amazon’s evolution from a low-margin retailer to a high-margin marketplace and cloud computing leader.)....... Network Effects (or other competitive moats) ... This is the key growth factor that defines a Glengarry Glen Ross market. Without this growth factor, it’s hard to financially justify the high cost of blitzscaling. ........ two key growth limiters: ... Product/Market fit doesn’t guarantee long-term success, but a lack of Product/Market fit does guarantee long-term failure. ..... Designing a scalable economic model isn’t enough if the company can’t scale up operations to meet demand. This applies to both the infrastructure and the organization. ........ WeWork business model .. in the first half of 2019, the company had revenues of $1.5 billion and expenses of $2.9 billion. ....... Apple’s gross margin is 38%, and Alphabet’s 56%. ..... WeWork with gross margins of just 3% ...... Unlike software, where you can sell as many copies as the customers want, you can’t rent the same square foot of space to more than one tenant. ........ in the end, WeWork’s business model doesn’t provide any lock-in. WeWork tenants can easily move, and many of its co-working members don’t even need a cardboard box to clean out their dedicated desks. ...... it’s not clear that there is a “Cadillac/steak knives/you’re fired” market dynamic at work. ......... WeWork’s occupancy rate of 80% compares favorably to IWG’s 72%. This suggests that customers like the WeWork product. ....... WeWork offers American Express Platinum customers an entire year of WeWork access for free—a $2,700 value that comes bundled with a credit card with a $450 annual fee. Offers like this can boost occupancy but hurt gross margins. Subsidies only make sense in blitzscaling if they are a temporary measure that allows you to achieve market leadership and establish a profitable and sustainable business on the other side of those subsidies. ............. Alphabet invented AdWords several years after launching; Amazon invented AWS more than a decade after going public. ........

While WeWork’s business model checks the boxes on big market, effective distribution, and Product/Market fit, the poor gross margins (with no clear path to significant improvement), operational scalability challenges, and most importantly, lack of network effects and lock-in, indicate that this is not a Glengarry Glen Ross market where you can build enduring and profitable market leadership. Thus, the choice of blitzscaling is likely a dangerous rather than intelligent risk.

............ Hotel companies like Marriott and Hilton have pursued an “asset-light” strategy where they manage the hotels that carry their brand, rather than owning the actual bricks and mortar. Airbnb is completely asset-less, acting as a two-sided marketplace to bring together hosts and guests. ........ we explain why blitzscalers should never take risks that endanger their customers or pose a significant risk to the fabric of society ....... ethical or integrity risks like the self-dealing behavior that reportedly took place under the watch of WeWork’s founder and former CEO, Adam Neumann. ........ the value WeWork created doesn’t appear to exceed the amount of capital expended to build it. ........

Without major changes to its business model, WeWork’s efforts at blitzscaling seem likely to turn into blitzflailing.



SoftBank to Take Majority Stake in WeWork as Adam Neumann Gets Big Payout The deal reportedly calls for WeWork co-founder Adam Neumann to receive nearly $1.7 billion and surrender his posts as chairman and a director. ...... WeWork chose a rescue proposal from SoftBank over a competitive offer from JPMorgan Chase (JPM), although one source familiar with the situation told Barron’s that JPMorgan never made a serious alternative.

WeWork’s IPO Nightmare a morass of ethical, legal and financial lapses was revealed, to which the investor public's appetite for WeWork sharply waned. ....... WeWork, founded in 2010 by Adam Neumann and Miguel McKelvey ....... The company has over 12,000 employees and manages over 600 properties and operations in over 120 cities worldwide. WeWork is said to manage 46.43 million square feet of property. ...... WeWork scouts buildings and transforms them which it has done for Facebook, Microsoft, HSBC, and Deloitte. ........ “[WeWork] happens to need buildings just like Uber happens to need cars, just like Airbnb happens to need apartments.” (Neumann, A., 2014). ....... The Company also has $47.2billion of location lease liabilities, making it one of the top-3 renting companies in the world ...... “what makes WeWork worth more, the company seems to be saying, is that it’s a tech company — meaning its innovation and flexibility make it better than a regular real estate company” ....... About 40% of WeWork memberships came from companies with 500 or more employees in the second quarter of 2019 ........ Through its $100 billion Softbank Vision Fund (“Vision Fund”), Softbank has invested c.$10.65 billion in WeWork, making it the second-largest shareholder (c.29% ownership), after the combined holdings of the founders. ........ Behind the scenes, it was rumored that Softbank was aggressively pushing for the now ill-fated valuation amount of $47 billion; a significant multiplier in the value of its existing shares if they decided to take the option of reducing their shareholding and ‘cut & run’ from a ‘financially risky’ company ......... Adam Neumann bought real-estate property and leased it back to the Company, the founders owned the trademark on the name “We” ..... these actions essentially constitute ‘double-dipping’ ....... While Neumann received benefits of his role as the Company CEO, he could also receive millions of dollars in secondary income through rent and licensing fees. Even though this might not have raised any legal red-flags, it was certainly ethically questionable, because these actions caused a conflict of interest on the part of the CEO. ........ Ahead of its planned IPO, Neumann liquidated $700 million of his holdings in the Company; a legally acceptable transaction, but ethically questionable; such moves, particularly by senior management members, as showing a lack of confidence in the company. These actions (which could have completely been avoidable), which were never explained, also dampened investor appetite in the Company .......

Nepotism within the Company was rife, where family and friends were granted senior roles, many of which they were not qualified for.

‘The company disclosed two connections in the IPO prospectus: One was Adam’s brother-in-law, who ran the company gym. It also said an immediate family member was paid to host eight live events for the company. ......... The chief product officer was Rebekah’s brother-in-law; the longtime head of real estate was Rebekah’s cousin; and for years, the company’s mega summer retreats were hosted at a venue in upstate New York owned by the cousin’s parents, further evidence of self-dealing. .......

Running high personal expenses, masked as business costs; the Company purchased a $60 million G650 Gulfstream private jet

, and spent even more on upgrades, purchases of chauffeured driven luxury cars, and hosting of lavish parties. .......... Its complex ‘choose-your-adventure’ corporate structure; it makes for such a legal-headache ....... All this was a little too late, as research analysts and social commentators had published their ‘hold’ recommendations and scathing reviews of the Company, respectively. ...... “there appears to be no scale effects, as losses have kept pace with revenue growth. There is little pricing power, as they are still a mole on the elephant of commercial real estate.”


WeWTF In frothy markets, it's easy to enter into a consensual hallucination, with investors and markets, that you’re creating value. And it’s easy to wallpaper over the shortcomings of the business with a bull market's halcyon: cheap capital. WeWork has brought new meaning to the word wallpaper. . ....... WeWork's prospectus has a dedication (no joke): "We dedicate this to the power of We — greater than any one of us, but inside each of us." Pretty sure Jim Jones had t-shirts printed up with this inspiring missive. Speaking of idolatry, "Adam" (as in Neumann) is mentioned 169 times, vs. an average of 25 mentions for founder/CEOs in other unicorn prospectuses. ......... We's mission is "to elevate the world's consciousness." ......... We isn't a real estate firm renting desks, it's a Space as a Service (SAAS) firm. I know, use the word "technology" over and over, despite having little R&D and computers and stuff, and voilĂ  … we're Salesforce. ........ Today I froze water and used this technology to reconfigure the environment encapsulating my Zacapa and Coke. So, I'm Bill Gates. ........ We has begun reporting "Community-based EBITDA," profitability before the BITDA, but is also taking out expenses, including real-estate, that comprise the bulk of cost required to deliver the service. A more honest description of the metric would be "EBEE, Earnings Before Everything Else." ........ As someone who follows stocks and goes on TV to pretend I have any idea which direction a given stock is going, I'd like to suggest a few metrics to provide insight into We: .......... Adam Neumann has sold $700 million in stock. .. This is 700 million red flags that spell words on the field of a football field at halftime: "Get me the hell out of this stock, but YOU should buy some." ............. Adam has several family members working in the business who make “less than $200,000." ...... The corporate governance structure of WeWTF makes Chinese firms look American, pre–big tech. ...... The related party section of this prospectus reads like the Trump administration. Adam owns 10 buildings, several that he leased to WeWTF at a handsome profit. Adam also owned the rights to the "We" trademark, which the firm decided they must own and paid the founder/CEO $5.9 million for the rights. The rights to a name nearly identical to the name of the firm where he’s the founder/CEO and largest shareholder. ........ WeWTF has $47 billion in long-term obligations (leases) and will do $3 billion in revenue this year. What could go wrong? ........ There are other businesses like this (real estate, Hertz), and they are good businesses. Businesses that trade at, I don't know, 0.5 to 2x revenues. ....... But is this firm, trading at 26x revenues, superior to Amazon, which trades at 4x revenues? There appears to be no scale effects, as losses have kept pace with revenue growth. There is little pricing power, as they are still a mole on the elephant of commercial real estate. There is no defensible IP, no technology, no regulatory moats, no network effects, and no flywheel effect (the ancillary businesses are stupid, just stupid). ............ The last round $47 billion "valuation" is an illusion. SoftBank invested at this valuation with a "pref," meaning their money is the first money out, limiting the downside. The suckers, idiots, CNBC viewers, great Americans, and people trying to feel young again who buy on the first trade — or after — don’t have this downside protection. Similar to the DJIA, last-round private valuations are harmful metrics that create the illusion of prosperity. The bankers (JPM and Goldman) stand to register $122 million in fees flinging feces at retail investors visiting the unicorn zoo. Any equity analyst who endorses this stock above a $10 billion valuation is lying, stupid, or both. ............. Adam's wife is Gwyneth Paltrow's cousin






Musings on Corporate Governance for Venture-Backed Companies From my perspective of reading the news, we’ve seen a breakdown in governance for several fast-growing technology companies. Take Ofo as an example, once the leading bike-sharing company in China. The company went from a $3 billion valuation to the brink of bankruptcy in less than a year in 2018. Part of the fault falls on poor corporate governance structure. According to a Tech In Asia titled, “Ofo and the dangers of investment capital,” several common and preferred board members all held veto rights, which was a barrier in strategic decisions. There was an opportunity to merge Ofo with its key competitor Mobike that most board members supported but was voted down by a single board member.




Friday, September 13, 2019

Softbank's Problem: Vision, Not Money




100 billion dollars is a lot of money, but it is not too much money for all the innovation that needs to happen, that will happen, with or without the Softbank Vision Fund. So where did the Vision Fund go wrong?

Masa by now has the wrong vantage point.

A tech startup can fail every step of the way. It can fail post-IPO.

But veterans (and give him credit, he has a Steve Jobs-like aura ... he has a stellar record) like Masa learn to become cautious and careless at the same time. Cases in point: Uber and WeWork.

It is hard to spot Uber and WeWork in their early rounds. But by the time they become unicorns, you think, okay, I missed out when it grew from one million to one billion in market value, but now I got it. If I can hop on now, I will still likely see a 100X growth to my investment, when 10X is considered excellent.

But then things go topsyturvy. Elon Musk wants to eat Uber alive. WeWork starts crumbling down right before your eyes post-IPO.

Both are sound companies. Both shifted the paradigm.

Masa picked Alibaba when Alibaba was really young. He has to go to those roots. Maybe it is hard to do. But there are enough early stage companies in the world today that will easily absorb 100B, or whatever is left of it after Uber and WeWork, two dud investments of Masa.