Masayoshi Son’s Own Singularity

Masayoshi Son may not make it to Singularity. Today in Barcelona at Mobile World Congress, Mr. Son spoke about the future and answered the question: Why do we need so much money? Based upon the announced deals so far, Softbank is committed to investing $25 billion in Vision Fund, $3.3 billion for private equity firm, Fortress, and a rumoured $2 billion for WeWork. In addition, Softbank is part of the new, $500 million funding round for SoFi.

At the end of last year, Softbank had about $22 billion in just cash, even after making the $32 billion ARM purchase in July 2016. Selling its stake in Supercell for $8 billion added to Softbank’s cash balance last year. To find more money, Softbank has done a sale-leaseback for $2 billion and raised $8 billion by monetizing its Alibaba holdings in 2016.

Besides cash, Softbank needs to worry about debt; in this case about $30 billion, some of which came from the Sprint acquisition. It appears, Softbank is trying to unload its Sprint investment through a merger with T-Mobile. If that’s true, then it would be a reversal of Mr. Son’s original vision and evidence of another problem: Mr. Son sometimes acts more as gambler than businessperson. 

Fortune portrayed Softbank’s foray into India’s tech scene this way:

Around the time Arora joined SoftBank, Masayoshi Son decided that India was the next big growth opportunity, and Son tackled investing in the region in his usual swashbuckling style. He approached Kunal Bahl, founder of fast-growing e-commerce startup Snapdeal, with an unheard-of offer to invest $1 billion for a majority stake.

Just like Singularity, Mr. Sons’ ambitions may exceed the practical limits of Softbank’s balance sheet. So a better question for Mr. Son is: How does he spend money?

 

 

Kicking Otto Tires

Did Uber really kick Otto’s tires, given the recent Waymo lawsuit?

Alphabet’s self-driving unit, alleges, among many things, that its lidar designs were taken by Otto co-founder, Anthony Levandowski. Formed in January 2016, Otto was eventually purchased for $680 million just three months later by Uber.

Given the outcome of Waymo’s lawsuit, there is a possible due diligence failure by Uber. Due diligence has many definitions, but the short of it is knowing what you are buying. A due diligence failure definitely happened in hedge funds with Bernie Madoff and may be in venture capital with Theranos.

With talent scarce, traditional and tech companies compete for people with autonomous car experience and knowledge. So there is more acquisitions of startups and structures allowing for the licensing technology as seen with Ford’s majority purchase of Argo AI.  

Now with the increase in investments and Waymo’s lawsuit, there could be more thorough due diligence by parties transacting in the autonomous car arena.

 

Ebay Doubles Down

Ebay doubles down in the tech bargain basement that is India. While still retaining a small stake in Snapdeal, Ebay is rumored to be interested in making an investment in the other Indian E-commerce site, Flipkart. Due to Flipkart’s recent lower valuation, it may be a good time for Ebay to make a purchase. In fact, Snapdeal is currently cheap, too.

Ebay first invested in Snapdeal in mid-2013 and made another investment one year later. Snapdeal’s “complementary business model, good management and strong brand” were enough for Ebay to make its initial investment and eventually own nine percent of Snapdeal. Then in 2015 and with a change of heart, Ebay profited from selling some of its Snapdeal stock to Alibaba as reported in The Golden Tap.

Ebay made money exiting Snapdeal while others eagerly wanted in. At the time, Ebay said the following in a press release:  

Over the past two years, the valuation of Snapdeal has significantly increased, and because eBay was an early investor, this sale will enable us to earn a strong return on our invested capital

Snapdeal is now trying to raise more money, but at a lower valuation. In fact, Snapdeal is trying to save money with employee layoffs and the co-founders taking no salary. Such measures were necessary given Snapdeal’s financial trouble in the past year. So bad are things, that Softbank wrote-down its investment in Snapdeal last year. Based upon its latest filing, Ebay has not written down its last remaining slice of Snapdeal.

While not as bad Snapdeal, Flipkart’s turnaround seems to be succeeding under new CEO, Kalyan Krishnamurthy. Hopefully, Ebay will be lucky again, this time with Flipkart.

Tiger Global Whimpers

Once roaring in India, Tiger Global now whimpers. After pouring millions into Flipkart, Lee Fixel of Tiger Global is now struggling to stabilize his big wager in Indian E-commerce. Lee Fixel heads the private equity side of Tiger Global; the other side is a hedge fund. Trading public equities is simpler than managing private companies, as Mr. Fixel has discovered.

Tiger Global started investing small in Flipkart in 2009 by backing founders Binny and Sachin Bansal. Since then, Mr. Fixel has invested approximately $700 million only to see his investment turn south, in part, due to poor execution by management and competition from Amazon. Then last year, Tiger Global, along with others, effectively took control by replacing the original Flipkart co-founders.

Tiger Global alumnus, Mr. Krishnamurthy took over as Chief Executive Officer while the Flipkart co-founders found other duties. So far, Flipkart has started to turn around, at least, from where it was last year. It’s reported that Flipkart is seeking additional funds from Microsoft, Tencent, Ebay, and Paypal, but raising money is currently difficult; many Indian Unicorns have received lower valuations as seen by Softbank’s write down of its Snapdeal and Ola investments.  

Mr. Fixel needs to wait longer for an exit either through an acquisition or public offering. Until then, he must continue to directly managed his Flipkart investment. As a former stock analyst, Mr. Fixel must be realizing that the private equity world is very different than public stock markets.

 

More Snap Hardware?

Before the WSJ reported on Spectacles, Snap took the trouble to set up Snap LLC in Nevada. Snap, Limited Liability Company, was formed on June 30, 2016 and registered for business in California as of September 19, 2016. Snap’s head of hardware, Steve Horowitz, is listed as the Chief Executive Officer of Snap, LLC on the California filing.  

In another filing, Snap LLC got a reseller’s permit in Nevada. Then on February 13, vegasinc.com reported Snap LLC received a “general retail sales” license and the listed address is the Stratosphere. It appears Snap set up a subsidiary for selling the Spectacles based upon the timing and the filings themselves.

If that’s true, then Snap when through some work and money just for one product, unless there are other products to come or even a Spectacles store.

 

Warning: Temasek Opens SF Office

Private Equity just got harder in San Francisco. Rolling into town and establishing an office, is Singapore’s Sovereign Wealth Fund, Temasek. With its people closer to the action, Temasek is better able to source deals for direct investments, such as its recent minority purchase of life science company, Verily.

In addition to billions, Temasek doesn’t have any pesky limited partners as do traditional private equity or venture capital firms; so there is no need to necessarily exit an investment early. Direct investments pose another threat since they bypass private equity and venture capital firms all together. Temasek’s San Francisco office complements its other one located in New York City.

 

 

Stories of Snap and LA VCs

Snap tells stories, in fact everyone in Los Angeles tells stories. Snap Inc. isn’t about disappearing messages, instead it’s a “camera company”, as the prospectus proclaims. Snap’s story tells investors: We are capable of more. It’s similar to Apple dropping the Computer after the success of the iPod. Not only is Snap telling stories, but so it seems, Los Angeles investors are doing the same.

Snap joins Dollar Shave Club and Maker Studios as examples of recent exits for the Los Angeles tech scene. Unfortunately, none of the Los Angeles based venture capital firms will participate in Snap’s success. Instead, Silicon Valley based Lightspeed Ventures and Benchmark Capital will reap the billions.

It’s that drama of lost fame and fortune which made it into the Los Angeles Times. Quoted in the article was Upfront Venture c0-founder, Mark Suster, who explained his decision for not investing in Snap. Feeling the need to further clarify his side and the Los Angeles Times, Mr. Suster blogged the following: How Do I Feel About the Snap IPO Given I Didn’t Invest?.

Mr. Suster cites, as one of many reasons, that Snapchat was not the right fit for Upfront Ventures. He then goes on to frame Snap’s IPO as the next step for the growing Los Angeles tech and venture capital scene. Again it is the framing of stories: Snap Inc. will lead to a “Snap Mafia” and the founding of more companies. Hoping to capture some of that magic is Mr. Zhou of Fika Ventures, who told the Financial Times:

“Snap will be one of the anchor tenants,” he said. “Their valuation shows you can build and scale in LA. Even if  they don’t get $25bn, even if they get $15bn, it will be an awesome success story for the city.”

After fundraising for six months, Fika Venture began marketing itself this month as a seed fund with $38.5 million. Fika Ventures was formed with Ms. Ho leaving San Francisco based, Susa Ventures, after deciding not to participate in the firm’s next $50 million fund. Instead she joined “long-time friend” Mr. Zhou, who himself left Karlin Ventures as managing partner, to form Fika Ventures. 

So for Ms. Ho and Mr. Zhou, LA is the place to find the next Evan Spiegel or Bob Murphy.  Per the Fika Manifesto, the Los Angeles tech scene is changing, especially….

If you walk down the halls of CalTech, USC, Harvey Mudd, or UCLA, many students now not only want to start or join a tech company, but do it in LA

Fika Venture has an impressive online presence , but its physical presence appears to be a different story. According to SEC filings, Fika Ventures lists a West LA home as its headquarters. In addition, residing at the same residence is Fika Ventures managing partners, Mr. Zhou and Ms. Ho.

May be not in Silicon Valley, but at least in Los Angeles, everyone tells lots of stories.

 

 

Close Shave at Dollar Shave Club

Dollar Shave Club avoided a close shave over the weekend. Last Friday, news leaked of Kraft Heinz’s friendly talks for acquiring Dollar Shave Club’s parent, Unilever. By Sunday, Kraft Heinz withdrew its $143 billion offer for Unilever. With Kraft Heinz’s expansion scuttled, Unilever’s growth plans continue, at least, for now.

In an otherwise mature business, Unilever is spending billions for growth. Last year, Michael Dubin and Mark Levine of e-Commerce, Dollar Shave Club, received some of Unilever’s cash after selling out for $1 billion. Unilever paid five times Dollar Shave Club’s expected revenues which some say was rich by itself.  Not only Dollar Shave Club, Unilever also lavished money on Seventh Generation after passing on The Honest Company.

Unilever’s playbook has been followed by other large, mature companies. Walmart acquired e-commerce site, Jet.com, for about $3 billion to catch up with Amazon after its own online efforts languished. Food companies in particular face the same issues as Unilever: old brands struggling among changing tastes. Instead of acquisitions, these companies, such as Kellogg and General Mills, are using venture capital as a tonic for growth.

Kraft Heinz’s investor, private equity firm 3G Capital, expands through acquisitions. 3G Capital likes acquiring companies with fat costs which can be improved with efficiency. Using zero-based budgeting, 3G Capital reduces costs and then uses the saving to acquire more companies. Kraft Heinz is the result of 3G Capital first acquiring Heinz and then Kraft. Its strategy also created the now, beer colossus, Anheuser-Busch InBev.

Unilever was to be 3G Capital’s next target for growth and visa versa. Until now, Unilever’s growth strategy is acquiring startups and expanding them globally, but this takes time. While its acquisitions benefits entrepreneurs, such as Levine and Dubin, Unilever’s billions have had no immediate impact on growth. Rather than cost savings, 3G Capital may see in Unilever an opportunity to save money by halting its lavish acquisitions.

 

 

SoFI Gets Softbank High

More money rushes into Social Financial or SoFi, especially from Softbank. Private equity firm, Silver Lake leads the new funding round, according to the Wall Street Journal. Softbank joins Silver Lake and others, after investing $1 billion back in 2015.

For Softbank, the new funding is good news. Former Softbank executive, Nikesh Arora left his fingerprints on Sofi and four other investment before leaving Softbank last year. Besides SoFi, Nikesh Arora invested in Snapdeal, Ola, Housing.com, and Coupang in a two year period between 2014 and 2016.

Later in 2016, Softbank wrote down Arora’s Snapdeal and Ola investments by $350 million. Housing.com faired better; it merged with PropTiger in 2017. Coupang is doing well, with encouraging results reported last year by Bloomberg. Sofi’s now stands out as Softbank’s only winner out of the five.

 

Small Bytes From Intel

For 2016, Intel wrote down and took a loss of $184 million on its investment in private companies. These are companies where Intel owns twenty percent or less and are of the type assumed to be part of Intel Capital.

Intel’s portfolio companies also declined in terms of fair market value. At the end of December 31, 2016, the private companies had fair market value of $2.4 billion. At the end of prior quarter, the fair value at $2.6 billion.