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SoftBank Gives Startups Billions of Reasons to Hold Off IPOs (wsj.com)
100 points by dsr12 60 days ago | hide | past | web | favorite | 62 comments



Anyone who takes Softbank money probably didn't do their due dilligence on what they are like as an investor. I worked at one such company.

It sounds good - they come in and offer a huge investment at a high valuation, higher than anyone else. About time someone recognizes how valuable your company actually is!

So you take it. You make an announcement, everyone oos and aahs over your new valuation. Talent flocks to you, fuck yea. Things are going great!

Fast forward some time. You need some more investment to go chase opp X. Or maybe you burned thru cash, who knows. So you start fundraising. investors look at your numbers and say...umm...you've shown some good growth but we dont agree with Softbank's valuation. We will invest in a downround, or come back when you've posted even more growth.

Crap. You need money NOW not later. You did NOT realize that high valuation was a double edged sword. And a downround is totally out of question.

Also working with them is...challenging. Gotta love those 8am calls (latest they can do Tokyo time). They ask for metrics that kind of make sense but are different than how you run things so it is a complete waste of time. On the phone they are oh so polite, but you're never sure what they're actually thinking.

You're asking yourself why you took their money again? They have had zero strategic impact (they're a Japanese telco) and now it's making fundraising more difficult.

Fun times. If I see a company take SB money I assume they are declining (or soon will) or greedy / short sighted. Or there is the rare actual strategic benefit sure. But most times there is none.

So why did we work take the money? Sounds like they wanted to avoid going public. But I wonder if they did their homework on this one.


but you're never sure what they're actually thinking.

You remind me of an anecdote about an American working in Asia. They were constantly frustrated with communication difficulties. One day, they felt they finally were on the same page with a coworker and they said "We are thinking along parallel lines." to express this. Coworker agrees.

Later, the problems came back. They referred back to that conversation. Their Asian coworker says "Yes. Parallel lines never meet."


As someone who lives in Germany for quite some time, believe me, Americans are a problem here too. Smile in your face and drown you in over-politeness while stabbing you in the back.

Gotta love the straight German way.


For the record, it was an anecdote about people from different cultures not understanding each other. It was not intended to be a criticism of Asians. It absolutely wasn't intended to blame Asians for the misunderstanding.


You don’t have to do this here. Nobody assumed you were saying something with malicious intent.


It is the routine norm with social issues to look to pin the blame on one party. That seems to be the default mental model for any social problem.

It is usually not the best explanation and it actively causes all kinds of problems. I like to give push back against this common assumption wherever possible.


> Smile in your face and drown you in over-politeness while stabbing you in the back.

The Pan Am smile: https://www.urbandictionary.com/define.php?term=Pan%20Am%20s...


As someone who works with Germans, you sign a non-aggression agreement, and then pow - double cross!


I’m sorry but I’m born and bred in the US and would have read this the same way.


Most people use it to mean "We are headed in the same direction."


Yes but “parellel thinking” is actually a term of art. It generally means that we want to get to the same place but have different ideas on how to get there.

https://en.m.wikipedia.org/wiki/Parallel_thinking


> It generally means that we want to get to the same place but have different ideas on how to get there.

Is it? The description on that page is just about having multiple conversations at once, not having them all start in the same place.

Also, starting in one place and going different directions is basically the opposite of parallel lines, so this makes zero sense as a justification of the punchline.


If you don’t foresee a downround risk and huge pressure to grow as part of a high valuation raise, you’re way out of your depth. My impression is that SoftBank is very effective at hedging entire markets and using (gullible? desperate?) founders as a stalking horse to push stronger competitors that they’ve also invested in. I think it’s a solid investment strategy when you’re placing a lot of capital.


Horrible track record they have. See the latest dot com crash, Alibaba, a $20 million investment saved them. Otherwise they lost all


I honestly don’t know what their returns will be on the latest fund, but it doesn’t seem to reflect anything like your (extremely vague) take so far.

https://www.ft.com/content/c2fe7814-536a-11e8-b3ee-41e020920...


If you're delaying an IPO, the downround in the future can be the IPO.

Which is fine. Plenty of tech companies have already demonstrated IPO downrounds are fine.


> So you take it. You make an announcement, everyone oos and aahs over your new valuation. Talent flocks to you, fuck yea. Things are going great!

Mistake is here.

Taking money doesn't necessarily mean you have to go on an expansion spree.

Or, if it does, you need to make this decision before you take the money.


"Talent flocks to you" doesn't have to mean you accept them all; it might just mean you have better picks.


> And a downround is totally out of question.

Why? Especially because this is the foundation of your entire argument.


While each funding round typically results in the dilution of ownership percentages for existing investors, the need to sell a higher number of shares to meet financing requirements in a down round increases the dilutive effect. Due to the potential for drastically lower ownership percentages, raising capital in a down round is often a company’s last resort, but the new funding may represent the company’s only chance of staying in business.

Read more: Down Round https://www.investopedia.com/terms/d/downround.asp#ixzz5U48D... Follow us: Investopedia on Facebook


Not good enough.

If you would have been happy selling shares at X valuation, if only that high-valuation deal had never happened, then the level of dilution is acceptable to you.

"This down round is bad because it's undervaluing and over-diluting" is an easy to understand argument.

"This down round is bad because a previous round overvalued the company, even though the down round is the correct valuation and the correct dilution" is an argument that needs more justification.

If the valuation is flat-out too low, then the fact that it would be a down round has nothing to do with the problem. A too-low valuation is a problem even if it's higher than your last valuation.


The implication of your post is that Softbank do this on purpose for some reason but it might be that companies often fail to meet Softbank's growth projections.


When you take a high-valuation (compared to market) from any VC you set the expectation for the next round.

Whenever you raise you should always consider the valuation you'll be aiming for at the following round and the metrics needed to achieve it and whether they're achievable.


Newbie question: what's preventing the downround? SB's (and other investors') terms ("others shouldn't pay less to get more!") or founder ego ("I'm not a successful unicorn shepherd if we take a downround"), or something else?


The big problem with a down round is existing investors generally have protection against their shares being diluted, so the non-prefered holders get completely hosed since their shares have to get diluted even more to make up for the fact that some shares won't get diluted at all.

Guess who the guys who gets hosed are? Founders and employees of the company who have options. Suddenly you and your co-workers have almost worthless shares in a company that isn't doing well. If you're at the start up for the potential upside it's at that point you really need to look at moving on. So suddenly a down-round isn't just a down-round it's also a "lose all the good employees" round.


A downround wrecks the cap table. Earlier investors and employees get diluted like crazy. So now your investors hate you and your employees are pissed. The options of recently hired employees go underwater - so they start getting poached. It wreaks havoc on a company and should really be avoided at all costs.


Sounds like a case where the startup just overvalued itself and couldn't deliver?


It would seem that softbanks backing by the Saudi brutal regime should give Silicon Valley idealistic founders moment of pause before accepting their investment.

WeWork founders banned meat from their office meals can they really accept to be owned by this fund?

Once the SoftBank money stops flowing does the chamath described Ponzi scheme stop causing the whole thing Venture backed growth story to unravel?

https://www.businessinsider.com/softbank-talks-invest-15-bil...

https://m.youtube.com/watch?v=RwRZtZQoLtQ


It’s worth noting that the commercial real estate companies are exposed should WeWork falter.

https://www.cbinsights.com/research/wework-real-estate-earni...


I watched the whole Chamath talk you linked and I'm not sure I'm entirely convinced. Every couple of years there is a guy like him yelling that this is all a big ponzi scheme about to collapse.

But Softbank is a poor example given how the invest almost entirely in late stage companies, mostly with real profitable business models, who would otherwise easily find plenty of funding in traditional less risky capital markets (who don't share the same critique but push the same never-ending growth pressure and often far worse backroom financial trickery).

This is very distinct from the dotcom boom... or you know acutal Ponzi schemes... which were entities which raised countless millions on zero-value organizations. He's probably right in some ways but lost me in his exaggerated/radical positioning which he seems fond of.


Chalmath only started talking this way once investors and employees fled his fund.


Acknowledged and true that there is always someone with a contrarian pessimistic view. Chamath seems bent on "burning it down" after his own firm went through what objectively looks like a meltdown.

Also true that later stage companies have working business models (though they are typically not profitable a tradeoff they willingly make for growth). See the comment above on plenty of funding post SoftBank round. I've also observed that their valuation forces founders to do subsequent down rounds.

The Ponzi scheme argument (not perfect) is the gains are all paper valuations that are based on growth continuing or more investment being piled in. Once that stops the whole thing crumbles. After Softbank with a $100B fund, where else does the funding come from? IPO?


Once the SoftBank money stops flowing does the chamath described Ponzi scheme stop causing the whole thing Venture backed growth story to unravel?

Hmm, so should we call this sort of thing a "Ponzi Scheme" or a "money laundering scheme"? That is given that Softbank is a way to recycle the Saudi Billions while other schemes involve Russia oligarchs or Chinese money itching to leave it's homeland?


The Saudis don't require a means to recycle - launder - their money. Nearly the entire world will accept their money, no questions asked.

Saudi Arabia's only serious pressing concern economically, is building a non-oil-based, sustainable economy before the oil growth era stagnates or reverses course. They have rapid population growth (50% in 15 years), the clock is ticking against their ability to sustain a future with 50 or 60 million people.

It's not enough to just replace oil in the equation as it is today for their economy, they have to figure out how to do it for twice as many people. They need to figure out how to build out a $1.5 trillion non-oil economy within 30 or 40 years.


Compounded by the fact that almost their entire population lives of off generous government subsidies. Will be tough to instill an entrepreneurial spirit in the next generation.


I do actually often think twice about accepting a state fund such as from the Saudis.

But then what about buying German cars, some of which were started by Hitler (such as VW)?


That argument you put forth is entirely without substance as far as I can tell, and probably shouldn't have been made at all.

One of your examples is ongoing, the other is not.

One could change the future, the other can't change anything except other car markers margins.

One could be justified, the other can not.

I could make a much longer list, but I hope you get the gist.


What are you smoking. Germany has accepted their past, and has moved forward to rebuild and establish an advanced and civilized society.


One could say that the Saudis have moved on from spreading wahhabism and funding terrorists as well, regretted their mistakes spreading an intolerant ideology, and are now much nicer.

But I guess the kingdom is still permeated with Sunni Islam and they are willing to bomb the crap out of Yemen so it won’t fall into Shiite Houthis’ hands.


> One could say that the Saudis have moved on from spreading wahhabism and funding terrorists as well, regretted their mistakes spreading an intolerant ideology, and are now much nicer.

They executed an American permanent resident journalist, Jamal Khashoggi, in one of their consulates on foreign soil within the last two weeks, and failed at the cover up [1].

[1] https://www.cnn.com/2018/10/15/middleeast/saudi-khashoggi-de...


Please note that I am not excusing the (alleged) murder but trying to put things into a perspective (for my self).

What if Jamal Khashoggi was a Ruhollah Khomeini of Saudi Arabia [0]?

That is, what if it was not about wahhabism but about self preservation?

[0] https://spectator.us/2018/10/jamal-khashoggi


MbS: First of all, this Wahhabism—please define it for us. We’re not familiar with it. We don’t know about it.

Goldberg: What do you mean you don’t know about it?

MbS: What is Wahhabism?

Goldberg: You’re the crown prince of Saudi Arabia. You know what Wahhabism is.

MbS: No one can define this Wahhabism.

Goldberg: It’s a movement founded by Ibn abd al-Wahhab in the 1700s, very fundamentalist in nature, an austere Salafist-style interpretation—

MbS: No one can define Wahhabism. There is no Wahhabism.

https://www.theatlantic.com/international/archive/2018/04/mo...


Anyone think that SoftBank seems to be investing a dangerously large amount of money in these startups, which could be a big risk if there's multiple failures? Or is it all good if it's private money?


Based on https://www.cnn.com/2018/10/15/tech/softbank-stock-saudi-ara... https://techcrunch.com/2016/10/14/softbank-and-saudi-arabias... it seems about half of that is Saudi money, a quarter of it is SoftBank money and while there are a few trust accounts among the SoftBank principal shareholders https://group.softbank/en/corp/irinfo/stock/ownership/#sec-0... they do not seem to have a large percentage. How bad it would be if the Saudis would lose a few (ten) billion dollars, that I can't tell.

Arm Holdings is held fully by SoftBank and the Vision Fund, should they fail, i am not sure what would happen but my guess is Arm would get out of the tumble relatively unscathed, it's too valuable.


Masayoshi Son ( founder of SoftBank ) is legendary for betting big and winning big and also betting big and losing big.

During the dotcom boom, he became the richest man in the world for a few days by betting big and then during the crash, he lost almost all of his net worth.

https://www.quora.com/How-did-Masayoshi-Son-lose-70-billion-...

He was able to maintain power and keep softbank afloat while losing billions during the dotcom crash. So he has powerful backers and contacts who believe in him and are willing to carry him during rough times. That's very rare. In many ways, he reminds me of bezos and musk. For some reason, they are able to get the support of big money while losing a lot of money.


Yes, of course there is going to be a lapse in their due diligence at some point. It is just like the whole housing crisis in 08. Banks eventually were giving money to practically everyone and then we all know what happened in the end. As a VC, at some point, you need to get your money back plus a return to keep the fund going.


I think it's setting a very dangerous precedent. A lot of startups may be overvalued because of these massive investments


IMO, It is quite obvious there is a bubble in tech forming. I look at some of these companies and don't even know how they can justify the current investor expectations. I see people justify amazon's high valuation by saying stuff like "well if they get x % of WORLD retail sales...". It just shows the lack of depth in understanding that these people have. I am sure there is similar overly optimistic views occurring in the VC space as well.


I mean it's obviously bad for the LPs if it all goes to zero. But there's no systemic risk to the financial system that taxpayers will have to shoulder if that happens, which is what the government or regulators should care about.


They are using the mud-shotgun technique: throw a thousand mud piles at the wall and see which one sticks.

It may fail but it can't be a worst investment than just giving it away as dividends.


This is not right. I'm a founder of Series C startup/venture and I'd be inclined to take money from SB only if numbers are looking shaky. Going public creates a strong brand value, and liquidity for all the employees (not just VCs and founders). Not to mention, makes recruiting easy due to perception of "this company made it". While there is lot of scrutiny, I think it's worth it if your numbers are somewhat good (no need to be great as public markets have shown to be forgiving tech companies if you have bright growth prospects or you can paint a great futuristic story).


> and liquidity for all the employees (not just VCs and founders)

As mentioned in the article, SoftBank often buys employee shares, giving them liquidity without needing an IPO.


Great that the gains of american innovation are accruing to mysogynist oil sheiks


At least the Saudis are now diversifying into western markets with their capital. Which they are quickly learning comes with some social and moral constraints that have been largely invisible in the diplomatic/political world.

The finance and tech world doesn't need to compromise for some vague fragile security arrangement in the middle east. But regardless money is money and it will find an immoral taker at some point. The best we can do is keep the pressure on companies to hold their investors accountable.

That said, I'm not a fan of bringing the fanatical political tribalism, which is very popular in the US at the moment, into the tech/business world.


"The finance and tech world doesn't need to compromise for some vague fragile security arrangement in the middle east. "

Once they have investors from there aren't they pretty much beholden to them?


What social and moral constraints exactly? They invest money through SoftBank, reap the dividends, and then spend it on wars and oppression just like before. It's fine to just admit that the tech world has shaky morals. But utterly delusional to think that investing in tech will somehow make Saudis more pliant.


I want to upvote you, but I'm afraid you're mostly dreaming. What companies have refused Saudi money? Maybe a few do, but there's plenty of other takers (talking about startups and hedge funds - it's almost impossible for a publicly traded company to "refuse" an investor I think).


So what is it, those investments are stupid and overvalued and will never make money? Or the Saudis are gaining so much profit from it?



Off topic, but how does this work? How can the crawlers bypass the paywall?


They explicitly allow eg the Google crawler. Not sure about others.


Oh ok! Thx for explanation




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