
After WeWork, SoftBank’s Startup Bookkeeping Draws Scrutiny - JumpCrisscross
https://www.bloomberg.com/news/features/2019-11-26/after-wework-softbank-s-startup-bookkeeping-draws-scrutiny
======
Traster
The more I hear about this the more it looks like this entire scheme has
turned into a pyramid scheme. Pouring more money into investments to try and
boost the valuation. Using previous investments to invest and boost the value
of new investments, guaranteeing massive loans in order to get others to
invest at huge valuations. It just looks more and more like laundering money
through all sorts of different mechanisms to create paper gains that don't
reflect reality.

The interesting point though is that this is basically all being done using
money that private investors have given, so really there's no public
accountability or outrage. The question is whether the investors in the vision
fund start asking to open the books and check the valuations themselves. If
they don't then this will just continue until Masayoshi finds a way of getting
his hands on and even bigger pile of money in order to continue to cover up
the dodgy valuations - because that's what you'd have to do right? You'd have
to do another massive fund to have enough cash to continue driving up these
valuations? You would want another massive fund raised quickly before the
existing investments start fallling apart.

I wonder what Masayoshi is doing these days.

~~~
TaylorSwift
I want to point out that a lot of these valuations are signed off by well-
known accounting firms, valuation firms, and consulting firms. If it's really
one big conspiracy to prop up valuations via recent financing, loans, or
market comparables, then wouldn't one of these parties call it out (well,
inherently a lot of these are paid by organizations to do their valuations, so
true independence is a question here).

Additionally, corporate management theoretically exercise due diligence, along
with the valuation committees and the board looking into the reasonableness of
the models and associated inputs and outputs. It would be awkward to say that
these valuations are wrong with so many people having their inputs.

~~~
neffy
The Financial Times has been calling SoftBank out for over a year now.
Detailed accounting analyses, pointing out very basic issues and warning
flags. This is why the WeWork IPO had to be pulled in the first place. Every
major crash is preceded by several years of this.

Financial manipulation is the art of getting everybody confused between stocks
and flows. As long as the flow continues, the employees of SoftBank get paid,
and get bonuses, and everybody keeps dancing around the floor. (Granted the
latest proposal there, which is to make them all take out loans of up to 15x
their salary to provide the capital for Softbank 2.0 may interfere with that.)

and then, one day, the music stops, and there aren't any chairs to sit on, at
all...

~~~
rifta
>and then, one day, the music stops, and there aren't any chairs to sit on, at
all...

What would the signs be, sights seen or sounds heard just before the music
stops?

~~~
dboreham
Loads of people on CNBC saying there's remotely no signs of an impending
crash?

------
zackmorris
I'm deeply concerned about the direction that the tech world is going. I had
hoped that early successes like eBay and PayPal would lead to democratization
and egalitarianism, but sadly that's not the case. Where I had hoped to see
something like a gig economy where anyone could jump in and out of work when
they needed money, and multiple sources of ~$100,000 funding for startups,
today I see a doubling down on race-to-the-bottom competition and austerity.

There is less money available now for independent work than there was in the
80s and 90s because we have to work so hard at consulting just to survive.
There have been few raises in any industry (the starting wage for an engineer
in 2000 was $60,000 per year) but housing and medical costs are many times
higher than they were. Millions (yes millions) of the brightest minds of a
generation are underemployed in sweatshops, call centers and IT. Even working
full time, it can take several years to even save $10,000. Much less reach a
level of spirituality that allows one to rise above the waste of life that is
the working world today, and build inventions that could substantially raise
the quality of life for everyone. Work is now the opposite of progress, not
its source.

Meanwhile banks give millions or even billions of dollars to corporations
making nebulous claims about how to turn the most promising technologies into
profitable returns. When a couple of people in a garage somewhere could do the
same thing for 1/1,000 or 1/1,000,000 of the money. Imagining what tens of
thousands of those teams with $100,000 could do in medicine, alternative
energy, sustainability.. the list goes on and on.

Concerns like this are beginning to dominate my psyche to the point where I'm
not sure I want to be in tech anymore. I have serious doubts about where all
of this is going. Where are the examples of cooperation? Of steadily
increasing personal wealth with simultaneous reduction in work (also known as
real technology)? Where are the examples of tech billionaires making it and
working to make that possible for all the rest who failed?

My greatest concern today is that speaking the truth is now viewed as being
negative.

So just be mindful in these times and don't dwell too much on the truth. I
think it's more useful to imagine a new truth that transcends the boundaries
placed in front of us. That's how technology began.

Have a Happy Thanksgiving everyone!

~~~
kolbe
This sounds mildly interesting, but you make a lot of grand claims and support
none of them. I would love to read about your concerns more deeply in a
longform, where all these ideas can actually be related to one another, and
with support for your claims based in data and real world examples. I would
suggest you do this for your own mental health, because it's not at all clear
to me why the world of (let's call it) 'socialized investing' is a better
world than our current one. And I think you should at least have a well
research model to base your concerns in before they "dominate your psyche."

~~~
fogetti
Well then maybe you should do the same thing first to set an example? Because
what the OP describes is actually pretty much real. I would suggest you to
check out Guy Standing and his research first.

~~~
kolbe
OP is very specific behavior by one bank. What about Softbank marking up its
own assets has anything to do with the idea that an investment philosophy
spread out among thousands of times more people but with less money is even
remotely covered in the article?

------
carrozo
_When SoftBank buys shares in a startup and then invests again at a higher
valuation, Son says he has made a profit. That is legal under accounting
standards, but SoftBank receives no money. The only change is that SoftBank
has boosted the value of its original stake from, say, $1 billion to $2
billion by raising the value of the startup. In SoftBank’s income statements
and return calculations, at least some of the additional $1 billion can be
counted as profit._

Hmmm.

~~~
FBISurveillance
Never gets old: [https://signalvnoise.com/posts/1941-press-
release-37signals-...](https://signalvnoise.com/posts/1941-press-
release-37signals-valuation-tops-100-billion-after-bold-vc-investment)

~~~
rchaud
> We’re excited to roll out a list of unconfirmed revenue possibilities that
> involve crowdsourcing, a robust set of widget creation tools, 3G, augmented
> reality, social stuff, and an app store.

They joke, but WW were literally doing exactly this, updated for 2019 of
course. A bunch of ill defined tech projects with no real link to their core
business.

------
Akababa
> In early 2018, the founders of Chinese artificial intelligence startup
> SenseTime Group Ltd. flew to Tokyo to see billionaire investor Masayoshi
> Son. As they entered the offices, Chief Executive Officer Xu Li was hoping
> to persuade the head of SoftBank Group to invest $200 million in his three-
> year-old startup.

> A third of the way into the presentation, Son interrupted to say he wanted
> to put in $1 billion. A few minutes later, Son suggested $2 billion. Turning
> to the roomful of SoftBank managers, Son said this was the kind of AI
> company he’d been looking for. “Why are you only telling me about them now?”
> he asked, according to one person in the room.

This sounds more like an episode of Dragon's Den than a firm responsible for
billions of dollars of investors' money. Doesn't quite inspire confidence...

~~~
chance_state
There's a similar anecdote about WeWork, where as Masayoshi Son and Adam
Neumann are leaving the WeWork offices in a car to see Masayoshi Son off to
the airport, Masayoshi Son says "forget the $1B we talked about in there, find
a way to spend $5B."

------
JumpCrisscross
The press’s thoughtless repetition of headline valuations didn’t help.

Even in this article, WeWork’s $7.8bn expected valuation is quoted unadorned.
It’s a number that was derived by the same people and processes as the $47bn,
yet one is ridiculed and the other presented as fact.

~~~
onlyrealcuzzo
Well the biggest problem is it's less of a $7.8bn valuation and more of a $3Bn
minimum valuation (which is still probably far too high).

Startups don't really have valuations like a public company. You don't have
anywhere near the same liquidation preferences in public companies as you do
with startups. I'm pretty sure the bankruptcy protections aren't as good
either.

And people keep making these valuation comparisons anyway. Probably because
even in finance you can get loans and whatnot as if the valuations are the
same.

~~~
JumpCrisscross
> _Startups don 't really have valuations like a public company_

Valuing complicated capital structures is well studied. (Many public companies
have complicated cap structures.)

The wrong way to do it is take the top-of-the-stack share price, multiply it
by everything outstanding, ignore debt, and equate it to enterprise value.
That number means _something_ , but the obsession with it in the Valley
incentivised Vision Fund-style antics.

------
code4tee
There are a lot of VC backed companies that are likely very upside down. You
know the types with tons of money raised with very little revenue and little
to no profit and an unclear vision on how the entity becomes a real business
with a solid profit steam that justifies its valuation. The old model of “it
doesn’t matter because we’ll always be able to offload this thing to others
and cash out” is dead now.

What we’re seeing unfolding now in the market isn’t a bubble per say but it is
the market asserting that revenue matters. Profit matters. Real business plans
based on reality matter. Ultimately that’s a very good thing for the
innovation industry but things are going to get real ugly for these upside
down companies.

~~~
cinquemb
Its not just VC backed companies with this problem, but with publicly traded
"investment grade" ones as well[0]…

[0] [https://blogs.cfainstitute.org/investor/2019/10/23/anne-
wals...](https://blogs.cfainstitute.org/investor/2019/10/23/anne-walsh-cfa-
warns-of-cumulative-credit-losses/)

------
hughpeters
It's good for tech that the public market's response to WeWork has brought
some well deserved scrutiny to SoftBank. Their investing behavior over the
last several years has pushed up VC valuations to unhealthy levels and
contributed to this "Unicorn or die" startup culture.

A high private valuation alone is not an accomplishment. While revenue growth,
happy customers and a clear path to profitability are accomplishments worth
celebrating. Hopefully after this SoftBank fiasco more startups and VCs will
focus on fundamentals more than jaw dropping valuations.

------
t_mann
"Yet it turned out that Agarwal [founder and CEO of a SoftBank-backed startup]
had borrowed $2 billion to finance his share of the purchase"

According to a recent article in the Economist, SoftBank encourages its own
employees to do the same with SoftBank shares. There is a chance that things
go well and they will look like geniusses (like Michael Dell who took his
company private in 2013 and returned to markets last year). If things don’t go
well, however, they’ll become a case study for Business Schools on business
practices to avoid.

~~~
onlyrealcuzzo
Dell looks like a great story because the market is up almost 100% since 2013.
It's hard to say it was a good decision on Michael Dell's part. He could've
bought anything else with leverage in 2013 and it probably would've turned out
equally well or better. Dell isn't exactly doing amazingly.

~~~
smabie
So Dell took the company private in 2013 for 24.4bn. Right now the market cap
is 34.26bn, most of the value from Dell’s 80% stake in VMWare (worth 65bn). So
one it’s face, Dell looks pretty shitty. Since the buyout was announced (Feb
5, 2013), the S&P has returned around 105%. Dell as only returned 40%, mostly
due to the massive amount of debt Dell has been loaded with.

Anyways I was hoping to make some argument about HP or Lenovo doing worse in
that time period.. but after checking, Dell is indeed doing pretty shitty.
Maybe I could make some weak argument about once they pay off their debt, but
I dunno, he and his leveraged buyout guys could have done better with an index
fund.

------
alexnewman
Easy dumb money like SoftBank is the greatest enemy of innovation and
progress. Just take a look at the first deck. Companies like Uber, Softbank,
WeWork all having trouble with funding is an important step in our economy

~~~
chvid
Dear commenters on HN. Don't bite or spite the hand that is feeding you. The
recession will come soon enough.

~~~
saiya-jin
I'd claim that most folks here aren't directly in this area and couldn't care
much. The mostly quiet majority I would call us. And recession? It won't be
started by this but bigger forces. A correction might be even healthy for most
in long term.

~~~
ben_jones
I respectfully disagree, I think there is a massive trickle down economics
affect going on even if it’s just local. The auxiliary companies selling into
startups is HUGE from recruiting agencies, design firms, the gig economy,
local tax revenues, commercial real estate, law and accounting services, one
medical offices, and much much more. When VC funding slows down a lot of these
places will shutter (because few people in management ever prepare for a
downturn).

------
hogFeast
Wow...finally. This is happening in public companies too btw. Draper Esprit,
Scottish Mortgage Trust, Woodford (he was marking up his "genius" cold fusion
play all the way...this is real life, 2019, amazing)...the way positions are
marked is very suspect, and the general public just doesn't understand (they
see NAV as cash in the bank).

~~~
onlyrealcuzzo
Would you mind going into a little more detail? I'm intrigued, but I don't
even know where to start learning more about this.

~~~
hogFeast
Just read about accounting so you understand how different assets are valued
(i.e. the difference between an asset that is marked-to-market and marked-to-
make believe). And then start looking through public companies that hold
private assets (i.e. they will report financials to the SEC or wherever).

------
chewz
SoftBank: Would you like some money at a $10 billion valuation?

Startup: Sure.

SoftBank: Here you go. Would you like some more at a $20 billion valuation?

Startup: Sure.

SoftBank: Here you go. How about a $40 billion valuation?

Startup: This is dumb but it’s not like we’re going to say no.

SoftBank: Here you go.

Startup: Thanks brb buying a yacht.

SoftBank: Our mark-to-market investment returns are tremendous, we must be
good at this.

If SoftBank keeps throwing cash at startups like WeWork, the numbers will
start to lose their meaning. [June 14, 2018] - Matt Levine

[1]
[https://www.bloomberg.com/opinion/articles/2018-06-14/softba...](https://www.bloomberg.com/opinion/articles/2018-06-14/softbank-
s-wework-investment-would-rapidly-double-valuation)

------
helltone
I wonder about Improbable?

~~~
turkey99
They had all of £700 revenue when SoftBank invested £500M. Not a clue as to
what Improbable needed that for? to get those military gravy train contracts?

------
fogetti
> "They pump up valuations to get higher returns to look good to investors"
> says Eric Schiffer

Seriously??? Who, even with half a brain could not understand that that's how
venture capital works by definition???

~~~
empath75
In theory it works by actually building valuable companies, not by running
pump and dump schemes.

------
etblg
Huh, who could have seen this coming.

------
bvda
Is there a non-paywalled version?

~~~
chewz
Funny but this is word for word following Bloomberg.

[https://economictimes.indiatimes.com/small-
biz/startups/news...](https://economictimes.indiatimes.com/small-
biz/startups/newsbuzz/after-wework-softbanks-startup-accounting-model-under-
fire-oyo-raises-eyebrows/articleshow/72234413.cms)

------
dmode
I am wondering, if Saudis really wanted to flush $100bn down the drain,
wouldn’t it have been better spent to uplift poverty and reduce hunger ? At
least that will give them positive news coverage to offset all the bad news.

~~~
rchaud
> At least that will give them positive news coverage to offset all the bad
> news.

You know what really offsets bad news? Having your hooks deep into the
economies of powerful countries to buy their tacit approval of whatever you
do.

