Vision Bloomberg Businessweek has a big hilarious story about SoftBank Group Corp.'s messy Vision Fund, which invests $100 billion of largely Saudi money into an odd collection of startups, especially WeWork. I don't really know what to think about the Vision Fund, which is run by SoftBank founder Masayoshi Son. I make fun of it around here sometimes, because it is funny. The story has more funny anecdotes to make fun of. But it's not obvious that the Vision Fund is bad. Like, at investing. It has some hits and some misses. The current mark to market on WeWork is terrible, but maybe it'll all work out and the story will be that SoftBank was bold and brilliant in buying WeWork cheap because the public didn't want it. Uber seems to be another black eye. But there have been some nice wins. Overall returns for the fund seem to be positive. It would be sort of satisfying, after months of making fun of WeWork, to read that the Vision Fund is a disaster and no one there knows what they're doing. But that's not quite the lesson of this story; the fund has lots of sophisticated investment professionals, and it's not all a disaster. It's just all … weird. It's sort of random. There's no theme: The strategy that Son and his all-male phalanx of managing partners followed seemed less about any specific technology than about placing large bets on the buzziest startups: WeWork ($10.7 billion), Uber ($7.7 billion), on-demand pizza maker Zume ($375 million), and dog-walking app Wag ($300 million). They invested in a few hardcore artificial intelligence companies, too. The companies are goofy: After Vision Fund invested $375 million in Zume Pizza Inc., whose mission to use robots to automate pizza making had shades of Silicon Valley frivolity, CEO Alex Garden expanded his mission to include rethinking the entirety of U.S. food production. Employees were unnerved. "Are we the next Theranos?" went one anonymously submitted question at an all-hands meeting over the summer. Afterward, Zume banned anonymous questions at the meetings. The investment process is haphazard: One Silicon Valley CEO recalls an early pitch meeting with Son over video chat. Unbeknownst to the CEO, the feed to Tokyo fell a minute behind the audio, so he was narrating slides SoftBank's top brass weren't yet seeing. "They were all superpolite and nodding their heads," said a person with knowledge of the meeting, who wasn't authorized to discuss it. "I didn't find out until after that none of it made any sense." The fund ultimately invested in the late-stage startup. The performance reviews are salad-focused: Masa has been convening his top people to discuss the company's missteps. One such meeting, at Son's Woodside compound, featured a tasting session with lettuce and kale from Plenty, a SoftBank-backed vertical farming startup. The produce was judged on "flavor notes and mouthfeel and finish," says one managing partner who attended. Why does it work? I feel like the way asset allocators are supposed to choose their investment managers is by asking a lot of questions about strategy and process and due diligence and repeatability of results. And then Masayoshi Son went to Saudi Arabia and was like "well sometimes I can't follow a company's pitch because the audio is garbled but I invest anyway because they have good energy" or whatever, and then the Saudis gave him $45 billion. What is the strategy here? What is the source of alpha? Why would you let Son make your investment decisions rather than flipping a coin, when his decisions always seem so … coin-flippy? I don't know. Part of the answer might be a sort of undefinable connoisseurship; Son really has picked some huge winners in the past, and perhaps he has seen enough successes, and has a sharp enough ability to recognize patterns, that he can meet founders for five minutes and correctly intuit whether they will change the world. Part of the answer—the answer often mentioned by competing venture capitalists, and also sort of SoftBank's official answer—is that having $100 billion gives you an unfair advantage in venture investing: But the real strategy behind the Vision Fund seems to involve another Masa principle: Big money means big strategic advantages. The idea is that festooning entrepreneurs with hundreds of millions of dollars and urging them to spend at an exorbitant pace will scare off competitors and allow the Vision Fund to mint behemoths. No one "wants to pick a fight with a crazy guy," he told Bloomberg Businessweek last year. I wonder though if part of it is that Son is particularly good at motivating founders. If the Vision Fund is short on process and organization, and long on Son's personal charisma, maybe that's a good thing for the founders that it funds. Maybe they will work harder and dream bigger and do better things if they think "I have been anointed by a mad genius" rather than, like, "my five-year financial projections have been approved by a committee." And the anointment is intense: Many SoftBank-backed founders have Masa stories. These often begin with a summons to the 26th floor of SoftBank's green-tinted glass headquarters in Tokyo or to Son's home in Woodside, Calif., a 74-acre compound whose massive main residence features a foyer with a large marble statue of a horse and chariot. The entrepreneur might then sit across a table from Son, answer a few questions, hear that their idea is even more promising than they thought, and, by the end of the conversation, be anointed "the next Jack Ma." "You feel enabled, you feel euphoric," says a chief executive officer in Asia. "You've been told no a hundred times, and then he says he believes in you. Every entrepreneur dreams of having that kind of backing." Classically the model of venture capital investing is that you invest in a lot of startups, and most of them fail, but a few change the world and return your entire fund. One requirement of that model is that you have to invest only in companies that might change the world, companies with big risks but big ambition, and those companies are hard to find. Perhaps Son's innovation is that people come to him with self-evidently small-scale ideas like "we'll let you hire a dog walker online" or "we'll use robots to make pizzas," and he just tells them that they'll change the world. And they believe him, and they feel enabled and euphoric and, who knows, maybe some of them go out and do it. Perhaps Son has an unusual ability to increase the number of big bets in his portfolio, by convincing those around him that their ideas actually can be big bets. The downside is not just that some of those bets won't work out—which is generally true in venture investing—but also that, when they don't work out, the mismatch between their ambitions and the reality will always be embarrassing. "We are a community company committed to maximum global impact," began the prospectus for WeWork's failed initial public offering, though by that point WeWork was so grandiose that it had changed its name to "The We Company." Well, no, it turns out you were an office real estate company. But for a little while Son got them to believe the story about maximum global impact. Maybe that's what he does. Enchanted Forest review Again, the basic traditional model of venture investing is that you invest in a lot of startups, and some of them fail, and some succeed and go public and make up for the failures. This contrasts to the basic model of public stock investing, which is that you invest in a lot of stocks, and some of them go up and some go down, but the performances are sort of normally distributed around the average market return. The typical result of a startup investment is either losing all your money or returning a multiple of it; the typical result of a mature public-company investment is that you get a bit more than your money back. The Wall Street Journal has a fascinating package of charts on "a decade of unicorns," the billion-dollar-plus private tech companies that rose to prominence, and then often did initial public offerings, this decade. The most interesting chart, to me, was the first one, comparing "final private-market rounds, initial public offerings and market cap at end of IPO year" of the decade's unicorns. Unicorns that went public between 2015 and 2019 were valued at $203.7 billion in their final private funding rounds, and $211.4 billion at the end of the years in which they went public. Now going from $203.7 billion to $211.4 billion is not great. (The S&P 500 Index has averaged more than a 9% annual growth over those five years.) But notice that this measure only counts unicorns that went public during that period. This measure only counts the successes. If you invested in the final private round of those unicorns, and they went public, you got a bit more than your money back. That's the good outcome; you invested in a pre-IPO company and it successfully IPOed. And you made like 4%. The key point here is that if you invested in 10 startups, and nine of them failed, and the one that succeeded went up 4%, then that would be a catastrophe. But of course those are not the economics of unicorns, or of "FPOs," as final private offerings are called these days. If you are investing in the final private round of a multibillion-dollar venture-backed tech company, you are not expecting a venture-like return profile. You are not making big risky bets, hoping for a few big successes to make up for a bunch of total write-offs. You are just buying stock in a mature stable company. You hope the stock will go up a bit. One thing that I often say around here is that "private markets are the new public markets": Private companies can now achieve multibillion-dollar valuations and global household-name status while raising billions of dollars from traditional public-market investors, all before going public. This chart is a great illustration of the other side of it: Big private tech companies, in the late 2010s, were just valued like public companies. There was no expectation of huge returns to make up for huge risk. They were public companies already, even though they were still private. They just sold stock. Elsewhere: "Big Tech continues to find new and profitable ways to sell ads and cloud space, but it has failed, often spectacularly, to remake the world of flesh and steel." Direct listings We have talked a few times about a proposal to allow companies that go public via direct listings to raise money on their first day of trading: Rather than doing a traditional initial public offering, the company could just open for trading on the stock exchange one day, but it could also sell some of its own shares into the opening auction to raise money. This proposal is in limbo right now—the Securities and Exchange Commission rejected it, though it may still approve a variant—but here is a post from Latham & Watkins LLP pointing out that you don't need to raise money in a direct listing when you could, like, raise money and do a direct listing: Following the direct listings by Spotify and Slack, there has been markedly more interest in this approach to becoming a public company as an alternative to a traditional IPO. Unlike IPOs, due to regulatory limitations, companies are not able to use the direct listing process to concurrently raise capital for the company whose shares are listed. However, companies with a need for capital may explore ways to raise capital prior to, or shortly after, the direct listing event. Companies considering a capital raise prior to a direct listing may complete a traditional private placement of convertible preferred stock shortly prior to the direct listing. In addition, such companies may also consider issuing convertible notes that convert into common stock of the company in connection with a direct listing or IPO. These can be structured to convert (or become convertible) into common stock based on the trading price of the common stock on the exchange. Similar to convertible notes issued by early stage companies in a seed financing or bridge financing, this alternative allows the company and the investors to defer a valuation until the applicable liquidity event. The convertible notes idea is essentially: You find some investors to buy your stock from you shortly before the direct listing, you sell them stock at a price to be determined later, and that price is determined by your trading price after the direct listing. You get some of the benefits of the IPO (mainly raising money, but also selling your stock to specific investors chosen by you), but you also get the main benefit of the direct listing: The price of your stock is determined by the market, not by negotiations with the big initial investors. Enter few baby It was nice of the Securities and Exchange Commission to time this insider trading case for the week before Christmas and Hannukah; it makes it feel like a present for me. It's a good one! According to the SEC's complaint, Janardhan Nellore, a former IT administrator then at Palo Alto Networks Inc., was at the center of the trading ring, using his IT credentials and work contacts to obtain highly confidential information about his employer's quarterly earnings and financial performance. As alleged in the complaint, until he was terminated earlier this year, Nellore traded Palo Alto Networks securities based on the confidential information or tipped his friends, Sivannarayana Barama, Ganapathi Kunadharaju, Saber Hussain, and Prasad Malempati, who also traded. The SEC's complaint alleges that the defendants sought to evade detection, with Nellore insisting that the ring use the code word "baby" in texts and emails to refer to his employer's stock, and advising they "exit baby," or "enter few baby." The complaint also alleges that certain traders kicked back trading profits to Nellore in small cash transactions intended to avoid bank scrutiny and reporting requirements. After the FBI interviewed Nellore about the trading in May, he purchased one-way tickets to India for himself and his family and was arrested at the airport. You know my First Law of Bribes, which is that when you are texting or emailing about bribes you should use a boring neutral business-y term like "success fees" or "corporate marketing expense" rather than a dumb swaggery euphemism like "chickens." You think you are clever and will avoid detection, but if anyone actually ends up reading your communications, "chicken" is really going to stick out. This rule does not really work for insider trading, though, because there is really no good way to text or email your friends to tell them to buy put options because the company you work for is going to miss earnings tomorrow.[1] Thus the Third Law of Insider Trading, which is "don't text or email about it." (The correct approach is eating Post-it notes, though this is of course neither legal nor dietary advice.) Still, while "baby" didn't exactly make things worse for these guys, it didn't help. Especially because their texts included the translation key: Nellore and the other traders frequently referred to PANW as the code word "baby" in texts and emails when discussing tips and trades to further mask their communications. For example, when Malempati sent Nellore a text, "Sold half of PANW," Nellore promptly urged Malempati to use the code word instead, saying, "It's baby," after which Malempati used the code word. Yes see "sold half of baby" sounds perfectly natural, no one who reads that text will have any further questions! Come on! You don't want your euphemisms to sound like vastly worse crimes than your actual crimes. He was so close to getting away, too: On or about May 7, 2019, agents from the Federal Bureau of Investigation approached Nellore, to discuss, among other things, his trading in PANW securities. Sometime after the interview, Nellore secured one-way flight tickets for himself and his family to India. The FBI intercepted Nellore at the airport on May 8, 2019 while he was trying to board the flight. Exit, baby! Things happen Fiat Chrysler Agrees to Binding Merger With Peugeot Maker to Create $50 Billion Auto Giant. Apollo and Blackstone Are Stealing Wall Street's Loans Business. WeWork Clinches $1.75 Billion in Financing With Goldman's Backing. 'Gutsy' Scot in line to be first female boss of Citigroup. State Street takes hit from TD Ameritrade-Schwab merger. Regulators Find Shortcomings in Resolution Plans at Six Large U.S. Banks. California Law Spurs Companies to Add Female Directors. Aramco Closes Below $2 Trillion as Stock Extends Decline. How a French farmers' favourite made hay in investment banking. How believing in Bitcoin is like rooting for the New York Jets. Crypto mansplaining. Michael Platt Riffs on Wealth to Cabbie in Instagram Video. Fox Business reporter busted bringing crack pipe into Manhattan courthouse. "An extended office bathroom break could be a thing of the past thanks to a new toilet that developers say will make people want to leave the loo after five minutes." If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] I'm being a little loose here, and there are some actual parallels. The way it works is that if you are a government official asking for a bribe, or a corporate insider conveying inside information, there is no good way to do that in writing, no neutral bland way to do it that you can later explain as a legitimate transaction. But further down the chain there are good and bad ways to do euphemism. If you're a local consultant telling a banker that he needs to wire you some money to bribe government officials, you say "corporate marketing fees" rather than "chickens" (or "bribe money"). And if you're a trader who got an inside tip and wants to share it with your trader buddies, you say "I did some fundamental research and spent time on Yahoo Finance message boards and think this stock is a strong buy," or whatever, rather than "I've got a hot insider tip" or "enter baby." In either case there are plausible legitimate and illegitimate explanations for what you're doing, and you want your written descriptions to have a veneer of legitimacy. | 
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