
SoftBank plans to lend $20B to its CEO and employees amid volatile markets - lettergram
https://mazech.com/2019/08/softbank-plans-to-lend-20-billion-to-its-employees-amid-volatile-markets/
======
maximente
there's reason to believe SoftBank is gonna go "boom", and in a big way:

\- 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.

~~~
thewarrior
I have a conspiracy theory kicking around in my head that Softbank might be a
money laundering or tax saving scam of some sort.

Why else would you invest 300 million in a dog walking app ?

~~~
gomox
It's a pretty standard interpretation that the Softbank funds are a vehicle to
deploy capital that is otherwise hard to invest (because of political
controversy, dubious origins, etc). That's why they can afford to throw cash
around so liberally.

~~~
thewarrior
So startups are like the art market now ...

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tumetab1
This smells like walking into bankruptcy.

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?

~~~
bsaul
OP says SoftBank contributes for 38b to their own 100b fund directly, so i
don’t think your explanation is correct...

Plus they apparently did the same thing in their first fund a few years ago.

~~~
tumetab1
Correct, thanks for that note.

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$.

~~~
jacquesc
Do you think they're still trying to get more Saudi money after the Jamal
Khashoggi government sponsored murder? VCs need to be smart about their LPs.
Idealistic startup founders / employees (the one's VCs tend to invest in)
don't want to take blood money for their company.

~~~
JumpCrisscross
> _Do you think they 're still trying to get more Saudi money after the Jamal
> Khashoggi government sponsored murder?_

Yes. There has been zero backlash against SoftBank or Saudi-backed VCs from
companies or consumers.

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rococode
Tangentially related: Could someone explain to me why SoftBank often seems to
be the only major company playing in the "traditional" VC space? We hear of
the "SoftBank round", but not, for example, the "Microsoft round" or the "AT&T
round".

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?

~~~
mushufasa
Softbank isn't really a traditional company. And it's not really a bank. It
started as a kindof publisher for software ("software bank"), so it has a lot
of expertise in identifying and distributing new technologies, and it's
essentially acted as a holding company for tech investments (including
alibaba) since 2000. Really it's the manifestation of Masayoshi Son, who is an
incredible entrepreneur, technologist, and investor.

Apple+ more invest in the Softbank Vision fund, so the "SoftBank round" is
already what you are thinking.

~~~
KptMarchewa
>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.

~~~
mushufasa
The Vision Fund is, among other things, the manifestation of the idea that an
order of magnitude more scale will qualitatively change VC investing.

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.

~~~
Illniyar
>No one company could do it. Apple's net income last year was ~$60 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.

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5822130027
It's important to understand what SoftBank is, and why betting against them is
a bad idea.

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.

~~~
Traster
I'm really not understanding this. What you seem to be saying is that when
Softbank succeeds they get to own a load of tech companies. That's great,
that's the upside of any VC.

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?

~~~
5822130027
If you want a full comprehensive understanding of what is going on I highly
recommend :

\- [https://www.amazon.com/Princes-Yen-Central-Bankers-
Transform...](https://www.amazon.com/Princes-Yen-Central-Bankers-
Transformation/dp/0765610493)

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.

~~~
navigatesol
> _Japan specifically could print unimaginable amount of money and use it to
> create whatever technology they want._

And they're not doing this because...?

We are living in truly dangerous times if people actually buy into this
nonsense.

~~~
lowdose
You are completely right. This sounds like a fringe academic theory from
someone without skin in the game.

~~~
corodra
Fringe academic theory is being generous. This is more someone watched that
ten minute cartoon YouTube video on "how centralized banks really work" and
now think they're economic experts.

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pascalxus
Based on where equities are and where the bond market are, you're going to
have one hell of a hard time trying to get 5% return on the loans they're
handing out. Take a look at some of the projections on 10 year returns for
equities and bond market. The 2018 Vanguard report shows equities will return
3% real return over the next 10 years, and there are many estimates lower than
that. Bond prices are also at all time highs. I wouldn't even take this loan
if it were 2%.

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mcthrowaway123z
Sure we'll pay you, but the only place you can shop is the company store.

~~~
cthalupa
No. There's no requirement they invest the loans in the Vision Fund. Nor is
there a requirement to take out the loan.

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.

~~~
C1sc0cat
I haven't heard of "partners" anteing up (paying) to become partners before -
if you think about it this would favour "Tim nice but dim" with a rich mummy
and daddy.

~~~
vikramkr
You sort of have to pay to become a partner to buy your equity share, that's
just how it works, and as the other poster said, you can get a loan from the
partnership to pay for your partnership buy in

~~~
C1sc0cat
I checked that and I don't see that requirement for Goldman Sachs or any other
partnership set up - the potential for corruption and nepotism is huge if its
pay to play.

Some form of coops Mondragon for example do but that is a very different type
of employment.

~~~
phyalow
Goldman's partnership today is that in name only. Prior to the firms IPO new
partners did indeed have to buy their way in (via loans!).

~~~
C1sc0cat
The full value? GS was huge even before the IPO no individual could ever
expect to buy the value of their share surly?

~~~
phyalow
I think anecdotally it was around 6-800k USD, which could be covered no
problem with a few years of contributions from salaries and bonuses. Basically
its just company equity that you are buying. The amount can be token but you
are still a "partner".

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herostratus101
Can someone explain to me how this is not like that episode of Arrested
Development where they steal a dollar from the banana stand and then throw out
a banana to "cancel it out"?

~~~
vikramkr
Of course it's nothing like that. That was one dollar, while this is 20
billion.

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nobrains
Can someone explain the economical incentives behind this and how it helps
SoftBank and the employees?

I understand what they are doing but I don't understand how it will work to
succeed.

~~~
mushufasa
5% for a loan is pretty good these days if it's low risk. With yields way down
and now negative, it's hard for companies to make use of cash reserves. If
SoftBank has cash, and they know that employees are making way above 5%
returns on average ( _cough_ Vision Fund), then it seems like a good
investment.

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.

~~~
joosters
Why bother with the middle man? If Softbank is so confident that its vision
fund is going to make much bigger than 5% returns, it should be putting the
money directly into there.

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?

~~~
mushufasa
Because you can't just take corporate cash and invest it in a private equity
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!

~~~
hollerith
>Because you can't just take corporate cash and invest it in a private equity
fund. Fiduciary duty requires low risk products, and liquidity.

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)](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).

~~~
mushufasa
can't as in "that asset class does not meet the risk and liquidity
requirements for cash management in general"

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.

~~~
hollerith
>Different companies have different allocations but healthy companies
(including google) have allocations into a diverse bucket of asset classes

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](https://news.ycombinator.com/item?id=20736072)

------
matt2000
Bad idea: Being dependent on a single company for your salary while also
holding mostly that company's stock in your investment portfolio.

Worse idea: Also investing in that same company's highly risky VC fund.

Worst idea: Borrowing money to do so.

~~~
mv4
Softbank's deals - Sprint, WeWork, and now this - make me question their
financial intelligence.

~~~
mrnobody_67
Their last Uber investment is under water... wouldn't be surprised if the $2b
in WeWork stock they purchased is crushed as well at IPO time -- but at least
they didn't follow through with the $8b they initially promised to Adam.

~~~
onlyrealcuzzo
I read that SoftBank structured their investment in some way that they made
money on the IPO even though the price was below what they bought in at.

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?

~~~
charlesdm
I think they also bought common stock?

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.

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xxxpupugo
What does this mean?

~~~
downrightmike
19.999999999 billion for the CEO, 1 for employees.

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rkimmel
Makes complete sense.

