Hello there. How have you been? Have you stopped wearing masks yet?
I went for a run a couple of days ago without a mask. I flew1. No more wheezing in your own warm moist exhalations. Fresh air hit the lungs like an amphetamine.
In other news, HDFC is merging with HDFC bank. Axis bank took over Citi’s business. Paytm had its business model questioned by Aditya Puri himself. Banking is reverting to the mean.
Elsewhere, companies are trying to come up with save now pay later schemes. Do you feel confident about this when your savings are likely going to be used up for acquiring new customers? We seem to oscillate between yet another form of subprime lending (BNPL) and what seems to be yet another form of ponzi schemes (SNPL) .
ah well, time will tell…
1. Softbank decks are a lot of fun to read
Have you seen WeCrashed yet? if you haven’t, I would strongly recommend you do. Jared Leto is exactly as jarring as Adam Neumann is in real life.
There is a scene where Masa is telling Adam that he is not thinking big enough and that he has to grow at all costs.
Here is the thing. Private companies can hide a lot of pushing the envelope on what the concept of “at all costs entails”.
Take a look at SoftBank itself. It has humdrum, run of the mill, unsexy businesses like telecom. It also has a dizzying array of aggressive, complicated private investments often funded by crazy, crazy amounts of leverage. Masa’s own concepts of value are a bit - let’s say offbeat. He strongly believes that the markets don’t value his own company fairly.
In Nov 2014, Masa railed against the market thus:
OK.
4 years later though, Masa decided that Aesop’s fable was a bit much for not-so-elevated minds of the unwashed masses and resorted to the raw power of basic arithmetic.
Then, Softbank reported its first quarterly loss in 14 years as it took a breathtaking $5bn charge for WeWork. Masa, undeterred, resorted to Hypothetical EBITDA. I don’t know if we are supposed to calculate hypothetical enterprise value on this using hypothetical multiples.
and then there was this gem which followed in Feb 2020
I don’t have words to describe my feelings here. Maybe that’s why my net worth is less than pocket change to Masa.
The most recent presentation contains a very interesting take on what drives shareholder value in Softbank:
Which begs the question - is the value of Softbank Vision Fund really that much? Especially considering that its companies are private and they often tend to do the equivalent of tipping the scale through some interesting related party transactions?
2. Painting the Tape
From Investopedia:
“Painting the tape is a form of market manipulation whereby market players attempt to influence the price of a security by buying and selling it among themselves to create the appearance of substantial trading activity. The goal of painting the tape is to create the illusion of an increased interest in a stock to trick investors into buying shares, which would drive the price higher.”
Imagine that you are an employee of Goldman / JPM / Merrill / Nomura and you have a large position in a stock. You are at December 30th and your position is underwater. You are really hoping that in the one day left, things are going to look up lest you have to book a loss (which will likely affect your bonuses).
So, let’s say that you come up with a brilliant idea - make small buys and trade among friends to push the stock price up on Dec 31. If done correctly and close enough to close of trading, you would have managed to push up the stock price at the end of December 31 - and your position now gets marked there for the year (and for bonus computation)
Predictably, this is very illegal.
What happens if this is done in a private company?
3. How to Boost valuations, insider style
Suppose we are a founder. We have a company and we have raised $1mn for a 5% stake in our company. The value of our company now is $20mn. Simple math, right? An external investor vetted our business, put us through the root-canal of a due-diligence exercise and came up with a “fair” value for our business. So far, it’s all kosher.
Now what happens if this money came from our family and friends? Maybe they would agree to a 1% stake for the $1mn. After all, they all trust me to take care of them. Suddenly, our fledgling business has become worth $100mn from $20mn.
And this is just a small example (albeit a highly exaggerated one) to outline exactly how non-transparent private valuations are.
And you will see examples of it pretty much everywhere. While I will not name them, at least 4 unicorns became so thanks to current investors putting in very small amounts at very high valuations.
And sometimes, just sometimes, we may even get a vendor to put in money in our company. They will pay us money to buy our stock and we will pay the money right back to them for their services.
Sounds insane? Here is a headline from 2021:
“Microsoft has invested $5 million in Indian budget hotel chain Oyo, according to a regulatory filing this week. The investment confirms a TechCrunch scoop from last month.
The new investment values Oyo at $9.6 billion, only slightly below the $10 billion implied valuation from the Indian startup’s previous financing round in 2019. The startup, which lost significant business to the pandemic, was valued at just $3 billion in recent quarters by SoftBank, one of its largest investors.”
So, Softbank wrote it down to $3bn after the pandemic, Microsoft wrote it back up to $10bn. Just a $7bn gap in perspectives - or just the GDP of Malawi (pop: 19mn) . Ever hear that one about mutual back scratching?
But this, my dear reader, isn’t even the craziest shit that has happened at Oyo. That it is a MeWork business is a given (Softbank is an investor after all).
In July 2019, this happened:
“The fast-growing Indian hospitality business Oyo has garnered a valuation of $10 billion after its founder, Ritesh Agarwal, purchased $2 billion in shares from venture capital firms Sequoia Capital and Lightspeed Venture Partners, the company announced Friday.
…Agarwal opted to increase his 10% stake to 30% via a Cayman Islands company called RA Hospitality Holdings, according to The Wall Street Journal. SoftBank has also increased its percent ownership as part of this round, now owning nearly half of the company.”
So, unless you are paying attention, Oyo is the shizz right? It’s worth $10bn. The CEO was so confident that he personally bought back $2bn of stock. (It also helped that Softbank REALLY needed Oyo’s valuation to be at a certain level). Clearly, folks at Lightspeed and Sequoia are smoking something that induced them into bailing on a decacorn.
Hold on grasshopper. There is a big mystery here. Where the Eff did Ritesh come up with $2bn? Here is Mint with the answer:
“Oyo risks turning into another problem startup for SoftBank and Son, still reeling from the meltdown at the shared-office company WeWork. SoftBank had booked profits on Oyo’s rising valuation and may now be forced to take losses on the investment. The startup was valued last year at $10 billion, one of the highest in SoftBank’s portfolio.
The Oyo situation could prove particularly messy. In a highly unusual move, Agarwal, now 26, borrowed $2 billion to buy shares in his own company as the valuation rose, and Son personally guaranteed the loans from financial institutions, including Mizuho Financial Group Inc. Banks may ask for more collateral if Oyo’s valuation drops, and the two men could face personal losses.
“Agarwal could be in trouble soon if he faces a margin call," said Justin Tang, head of Asian Research at United First Partners. “He might need to sell shares at a massive discount."
Oyo, SoftBank and Mizuho declined to comment.”
Of course. I get it. Commenting on this particular smelly diaper may be a bit difficult.
4. Painting the Tape Oyo style
So, here is a short history of Softbank’s investments in Oyo:
July 2015 - SB leads Oyo’s $100mn Series B
Aug 2016 - SB leads Oyo’s $90mn Series C
Sep 2017 - SVF leads Oyo’s $250mn Series D
Sep 2018 - SVF leads Oyo’s $650mn Series E
As of 2019, right when Softbank’s goose appeared to be well and truly cooked (and all the golden eggs poached), the CEO of Softbank gave (in effect) a personal loan to the founder of a startup in which Softbank’s corporate entities had already gone all-in.
SoftBank promptly marked its various investments in OYO at the new $10 billion anchor. Does this make more sense now?
In Other news, Oyo still continues to burn cash like crazy. They planned an IPO, filed the RHP. All kinds of eloquent waxing of half baked jingoistic brainless gibberish erupted on Twitter, Reddit and Linkedin heralding the coming of age of the Indian “startup ecosystem2”.
Bloomberg meanwhile reported less than a month ago:
“Faced with headwinds including slumping stock markets, Oyo-operator Oravel Stays Ltd. could clip its Indian IPO from the nearly $1 billion initially sought to half that, the people said, declining to be identified discussing internal matters. It’s considering also halving its expected valuation from the $12 billion originally targeted, they said. Oyo could even decide to suspend its IPO plans, the people said.”
So, Softbank is quite stuck. Half of $12bn is $6bn. That’s still writing off the GDP of Tajikistan (pop: 8mn). In the meanwhile, the folks in China are looking askance at anyone taking away their Renminbis and US growth stocks are fucked thanks to rising interest rates.
Meanwhile, Reuters reported that the cost of Softbank CDS (basically, insurance against Softbank folding like a deck of cheap cards) is at a two year high. Here are some highlights from that article:
“The cost of insuring against a default in SoftBank Group Corp's (9984.T) debt hit a two-year high on Wednesday and its bond yield also climbed as sharp drops in the value of its tech investments have unnerved investors.
The value of marquee companies in the tech investor's portfolio have tumbled, hit by China's crackdown on tech companies, the prospect of higher interest rates and war in Ukraine. Among them, Alibaba Group Holding Ltd (9988.HK) and Didi Global Inc (DIDI.N) have slid 35% and 64% respectively for the year to date”
.…
“Some analysts have questioned SoftBank's ability to sell down its portfolio in choppy markets, given that many investors have turned sceptical on money-losing companies that lack a clear path to profitability.”
….
“Clearing by investors exposed to Russian and Chinese bonds could have contributed to SoftBank's rising yields with the conglomerate seen as a riskier investment than other tech firms, said Justin Tang, head of Asian research at United First Partners.
Analysts point to potential deterioration of SoftBank's loan-to-value ratio which rose to 22% at December-end from 19% three months earlier. SoftBank has pledged to keep the ratio below 25% in normal times with a 35% threshold in abnormal periods.”
Softbank’s reaction - “SoftBank did not immediately respond to a request for comment”.
5. Is there a point to all this “writing”?
Yes, The entertainment value of Masa Son discussing geese aside, I flag this because this is an indicator of a much bigger systemic issue. It is incredibly hard to be at peace with the consequences of Masa being forced to play this game in reverse.
As anyone with any exposure to venture capital can attest from experience, Softbank threw around so much money at so many startups at such blistering valuations that he tilted the entire market. Almost every other VC firm was forced to follow suit, creating a vicious cycle of ever-higher valuations as the basis for the pricing of the next hot deal - a basis which is BTW completely divorced from reality.
You think the public markets are in a bubble? The Private Market bubble is at least 10x larger.
In the meanwhile, I think I have earned the right to express my reaction to all this bakchodi thus:
Interesting listen
A great podcast on Julius Caesar becoming Julius Caesar:
Housekeeping
As always, I look forward to hearing from you. If you liked this post, pls feel free to share this or subscribe to this newsletter using the links below. I try to write a 1000-2000 word essay once every two weeks or so.
Stop laughing. It’s all relative.
Which BTW also happened when Zomato and PayTM listed. Just saying. Clearly the Indian startup Ecosystem is like Benjamin Button going to the Tenet Universe. It likes to keep coming of age repeatedly.