
Ask HN: Why are foreign funds investing in startups at ridiculous valuations? - MetalGuru
Why are foreign funds like the Saudia Arabia’s sovereign wealth fund and SoftBank’s vision fund dumping so much money into US tech startups, giving them insanely high valuations. HN’s very familiar with SOftBank and WeWork. I just read that Cloud Kitchens (Travis Kalanick’s new startup) was valued at ~$500M in September of this year. 2 months later, the SA sovereign wealth fund invests $400MM at a $5BN valuation. Can someone who understands the dynamics of global economic forces explain what’s happening?
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kp98
Well this certainly isn’t the only reason, but a major one is that money is
cheap. For example Europe has almost 18 trillion dollars of negative yielding
debt. Interest rates in the entire western world except for America and last
time I checked? Canada are returning negative yields after inflation. So as
wealthy inequality climbs, and wealthy institutions have no where to put their
money, it flows into riskier and risked assets chasing yield. I heard a funny
quote something like: a decade of 0% real rates made the bond market your
savings account, the stock market into the bond market, VCs into the stock
market, and crypto ICOs into VC. It’s essentially describing how low interest
rates pushed the world into riskier investments because the traditional
investment class returns 0-negative in real terms.

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adventured
Along with what kp98 mentioned, they're looking for the next Facebook, Google,
Amazon, Alibaba, Tencent, et al. It's mostly that simple.

The returns that those companies have generated have been something beyond
extraordinary. For example SoftBank turning tens of millions of dollars into
~$125 billion in Alibaba. Naspers bought 1/3 of Tencent for $32 million and
that turned into ~$180 billion at one point.

SoftBank is willing to take N% of that $100b BABA windfall and vaporize it
trying to generate the next $100b in returns (they won't be able to most
likely, as China's 15-20 year boom is a one-off event that can't and won't be
repeated).

They loaded into eg Uber because it was thought to be the next Silicon Valley
homerun (which it was for some of the very early investors).

Travis Kalanick has a successful track record as a founder, selling Red Swoosh
for $19m to Akamai and then Uber. The backers are betting Cloud Kitchens is
perhaps at least a $20-$25 billion business at some point down the road. I
doubt any sane person thinks it's the next Facebook, however it could
certainly, potentially, be a relatively large business.

So Saudi Arabia buys 8%-9% or whatever at $5 billion. They're betting that
they can generate a serious return from that valuation level (4%-5% at $25
billion for example; and if they're lucky, more). They aren't trying to play
early VC, where you put in $1m trying to get a 200 fold return. They're
looking to considerably beat the returns they can get on their money
elsewhere, such as in equity markets, bonds, or even domestic industry.

Also keep in mind SA money is mostly dumb money. They're not at all competent
to ascertain whether Cloud Kitchens even has the theoretical potential to be a
publicly traded $100 billion valuation company one day. They're rolling the
dice hoping to catch the next homerun. For the Saudis there's always more oil
money, until there isn't.

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smarri
Trying to find returns in a low interest environment. Maybe also control and
influence in the large companies of the future.

