SoftBank v. Zume Here is a Bloomberg Businessweek story about Zume Pizza Inc., the startup that was going to have robots make pizzas in delivery trucks. That was its real pitch, it raised $375 million from SoftBank Group Corp.'s Vision Fund, the very recent past was absolutely wild. "In January, Zume cut 360 jobs, leaving a little over 300 employees, and said it would focus on packaging and efficiency gains for other food delivery companies," getting out of the robot pizza business. But while it was in that business, hoo boy: Zume did a so-so job delivering its first pizzas in 2016. Although some reviewers on Yelp appreciated the fresh ingredients and speedy delivery—"Clearly better than low end pizza places," one wrote—several complained about undercooked dough or small amounts of sauce and toppings. Eventually, [co-founder Julia] Collins's team gave up on the dream of baking the pies while driving to customers, according to two people familiar with the matter. The cheese tended to run everywhere as the trucks turned or hit bumps in the road. Instead, the oven trucks began parking in central locations, with runner cars or mopeds transporting the cooked pies. I love the path-dependency here. "Why do the robots cook the pizzas in trucks?" "Well, in an earlier version of the business plan the trucks were moving; it was a terrible idea, but by the time we figured that out we already had the trucks." I suppose you save on real-estate costs. Also: [Co-founder Alex] Garden's specialty was pitching to investors. Former employees remember joking about his "jazz hands," referring to his tendency to spin things as positively as possible. Strategic and retail consultant Brittain Ladd says Garden contacted him in 2017, after Amazon.com Inc. purchased Whole Foods, to ask for help proving to SoftBank that Zume was thinking big enough for Son to invest. "He said, 'I want to be the Tesla of fresh food, and the Amazon of fresh food,' " recalls Ladd, adding that he liked the big thinking but it needed to be backed up by action. Around this time, say several people familiar with the matter, Garden's attention began shifting to a grander vision of the company's place in the food chain. In 2018, Zume applied to trademark the name "Gigaranch," describing a facility that would create meats and cheeses using plant proteins, like Beyond Meat Inc. Think of how many pizza delivery businesses there are in America, from your local pizzeria with one part-time teen driver up to Domino's. One of them got showered with cash from the SoftBank Vision Fund; the other, like, million of them just have to make due selling pizzas for more than it costs to make them. If you run a pizza business, how do you make it so that SoftBank picks you, as the one company in the pizza category that gets all that money? The most important part of the answer is, surely, just to think of it, to imagine the extremely counterintuitive possibility that SoftBank might be looking to get into the pizza delivery business. Presumably many local pizzeria owners have never heard of Masayoshi Son; presumably many more just would never have thought "oh we're actually a pizza tech company and we need hundreds of millions of dollars of venture capital funding to scale." But if you have the proper mindset, if you believe in yourself, if you are not a guy opening a pizza place but a founder who previously sold a tech company, if you hire a strategic and retail consultant, if you test out various combinations of "[giant tech company] of [broad category including pizza]" for the pitch, if you call your pizzeria "the Gigaranch" or "the Pizzaplex" rather than "Al's Pizza & Subs," and sure sure sure yes fine if you employ some robots to careen around town sloshing cheese around trucks, then maybe you can be the pizza proprietor to rake in Masayoshi Son's millions. And then there is no stopping you: In the fall of 2018, SoftBank delivered its Vision Fund cash. After one conversation with Son, Garden choked up relaying the details to a confidant, saying, "Masa says I'm going to change the world," this person recalls. Just, what a closed loop it is. You run a pizza delivery business. You craft a pitch calculated to convince Masayoshi Son that your pizza delivery business will change the world. You meet with Masayoshi Son. He convinces you that you will change the world. Now you are all believers, all in it together. He hands you piles of money. You go home and weep to your friends, "I am going to change the world." The friends are like "wait what with the pizzas?" But it is too late for skepticism, you have the money, the robots are in the trucks, they are fanning out across town, the cheese is everywhere, they cannot turn back. T. Rowe v. WeWork The T. Rowe Price Mid-Cap Growth Portfolio filed its annual report on Wednesday, and the managers' letter to investors has some harsh words about one of the mid-cap growth companies in the portfolio: Finally, a word about WeWork. In 2014, we made a small private investment in this upstart provider of amenity-rich office space that, unfortunately, has since caused us outsized headaches and disappointments. Explicit in our investment was an understanding with WeWork's management that they would slow the company's blistering pace of growth and focus instead on developing a more sustainable business strategy. They took our advice for a few months, but new investors soon arrived who convinced management to put its foot back on the accelerator. Massive losses soon followed, but the CEO promised profitability was just over the horizon. We did not take him at his word, and we communicated to WeWork's management and board our displeasure with its eroding corporate governance. In 2017 and again in 2019, we sold stock in tenders totaling about 16% of our shares and 50% of our initial investment. We also had a tentative deal to sell our remaining shares to a large investor in early 2019. Unfortunately, WeWork's management had to approve the transaction, and they refused. In the wake of intense public scrutiny, WeWork abandoned its IPO plans this fall, leaving our remaining shares worth a fraction of their earlier valuation. While it's possible that WeWork's new management will improve operations somewhat, we are ready to declare this a terrible investment. We seek to learn from our missteps, and it is clear that we misread the motivations of WeWork's management and our investment partners. The Wall Street Journal's Eliot Brown pointed this out on Twitter (and noted that T. Rowe co-led that 2014 financing, valuing WeWork at $5 billion), and I mention it to you mostly because who can resist investors dunking on WeWork and SoftBank? ("New investors soon arrived who convinced management to put its foot back on the accelerator" refers, of course, to SoftBank.) "We are ready to declare this a terrible investment" is not a line you see every day. That's not, like, an SEC-mandated label. Your auditors don't run a series of tests and come to you and say "you need to reclassify this investment as terrible in your financial statements." That's just something you volunteer, because you're mad. But the other thing to notice here is how completely this letter embodies private companies' stereotypes of public investors. You know the stereotypes: Venture capitalists care about growth and scaling, make long-term visionary bets on potentially world-changing companies, and are founder-friendly; public investors care about quarterly profitability, don't like companies to invest in long-term growth at the expense of profits, pressure managers to meet short-term targets, and will dump their stock if they miss those targets. And here is a public investor—a mid-cap mutual fund that "ended 2019 with just 0.58% of our portfolio in non-listed securities"—that led a financing round for a fast-growing private company, because private markets are the new public markets and private companies raise money from mutual funds now. But the investment was made with an "understanding" that WeWork would cut back on growth and focus on becoming profitable in the near term, and when that didn't happen T. Rowe started dumping its stock. It would have dumped all its stock if it could have, but, since WeWork stock didn't trade freely on an exchange, it couldn't. Meanwhile WeWork had another, more venture-y investor who loves making long-term visionary bets on world-changing companies and funding growth even if it involves huge losses, etc., you know how that went. Now it does kind of seem like T. Rowe's advice was correct and SoftBank's was bad. I mean T. Rowe are not the only ones ready to declare WeWork a terrible investment. But the question you might have is: Is the difference due to their differing readings of the particular circumstances of WeWork (a real-estate company that should try to make money, or "the world's first physical social network" that should prioritize scale above all else?), or is it an inherent characteristic of their different approaches? Is T. Rowe, a public mutual fund, always going to be biased in favor of near-term profitability and quick to sell out of companies that miss targets? Is SoftBank, a … tech … vision … thing, always going to be biased in favor of scale and growth? Does one approach make sense for some companies and the other for others? Two things that we often talk about around here are (1) private markets are the new public markets, meaning among other things that private companies can raise large amounts cash at high valuations from mutual funds that would previously have invested in public companies, and (2) private company founders are often suspicious of public markets because of their alleged short-term-ism. Those things fit kind of weirdly together? If you worry about the short-term-ism of public markets, sure, stay private, but if you're staying private while raising your funding rounds from public investors, isn't that kind of like going public anyway? CDS un-orphaning A credit default swap lets you bet on whether a company will default on its debt. (Because you think it will, or you think it won't, or you own some of the debt and want insurance against default, etc.) But it is a bet on whether a company will default, and many of the things that we think of as companies are actually collections of companies, parents with lots of subsidiaries and affiliates, all of which are different legal entities. A company might issue debt out of a financing subsidiary, and then CDS on that company will reference that financing subsidiary, and if the debt of that subsidiary defaults then the CDS pays out. But one thing the company could do would be to set up a different financing subsidiary, and issue new debt out of that, and use some of the proceeds of the new debt to pay off the old debt from the old subsidiary. Then the old subsidiary will have no debt outstanding, so it can't really default, so CDS on the old subsidiary will be worthless. (The term is "orphaning.") Meanwhile there will be no CDS on the new subsidiary, and someone will have to start writing it. This is not particularly common because it is, from the company's perspective, sort of tedious and pointless. CDS contracts are just side bets among hedge funds; the company doesn't make or lose money on them, and doesn't have much incentive to disrupt CDS markets. In general it seems likely that well-functioning CDS markets are good for companies (if investors can hedge, they are more willing to lend you money), though companies are sometimes suspicious (if your investors are too hedged, they have no incentives to work with you and will be trying to get you to default). Still sometimes CDS stuff creeps into the real economy. The people buying and selling CDS will probably also own your debt, or be willing to buy more of it. And if you're a company with a financing subsidiary, you have something to give them, or to take away from them: You can issue debt out of a new financing sub and make their CDS worthless, or you can issue it out of the old one and make their CDS valuable. And you can use that leverage over CDS buyers and sellers to try to negotiate a better deal for yourself. So that happens, and we talk about those stories from time to time. Here's another one: U.K. pub company Stonegate's announcement on its debt refinancing plans stunned traders who had bet heavily that the firm's credit insurance would soon prove worthless. Stonegate, which runs over 700 bars across the U.K. -- including the Slug and Lettuce, Walkabout and Yates' chains -- said on Wednesday that it will use an existing funding vehicle to guarantee at least some of the new notes and loans it plans to offer. It's expected to sell 1.35 billion pounds ($1.74 billion) of bonds for its owner TDR Capital's acquisition of rival U.K. pub chain EI Group Plc, possibly as early as this month. The company's credit-default swaps subsequently jumped as high as 250 basis points, up from around 80 on Tuesday, according to people familiar with the matter. Traders had expected Stonegate to use a new funding unit to back the forthcoming issuance, thereby rendering almost $300 million of credit default swaps worthless because they would be left with no debt to insure. … "Seeing a company explicitly reference CDS in a press release or cleansing statement is pretty unprecedented in European High Yield," Steven Hunter, CEO and founder of high-yield analytics firm 9Fin Ltd, told Bloomberg News. Here is the press release, which actually doesn't mention CDS except in the headline. The body of it is just a bland one-paragraph factual statement about who will be guaranteeing the bonds and loans, but the headline is "Update on financing structure in relation to outstanding existing CDS." The brevity and blandness of the statement supports the view that this is a "cleansing statement," that what is happening here is that (1) someone involved in the financing talks—an investor, or perhaps one of the advisory banks—wants to trade CDS, (2) they knew that the CDS was worth more than the market thought it was, and (3) they figured Stonegate had better tell the market before they traded, because otherwise they'd get in trouble for insider trading. "The company had previously said it was 90% certain that it would issue the debt out of a new vehicle, according to management's comments on an investor call," so if you knew otherwise it would probably be a bad but lucrative idea to buy CDS. Oh elsewhere McClatchy Co. filed for bankruptcy and will be taken over by its largest creditor, Chatham Asset Management. Chatham has been sort of everywhere at once in McClatchy—it was the largest shareholder outside of the McClatchy family, a major lender, and apparently a seller of CDS—and in 2018 it almost did an orphan-CDS trade, offering to lend McClatchy money on favorable terms in exchange for orphaning the old financing entity and rendering the CDS that Chatham had sold worthless. Instead people who had bought that CDS ended up going to McClatchy with a better deal, and the CDS did not get orphaned. If everyone has the same positions they had a year and a half ago, then presumably Chatham is sad that its CDS didn't get orphaned (since now it will pay out), and presumably the CDS buyers are happy. On the other hand the CDS buyers got that result by buying the company's debt, which is now in bankruptcy. There are no particularly clean results here; the way you get the stuff you want is by weaving it together with the stuff you don't want. Goldman I wrote yesterday that "I used to work at Goldman Sachs Group Inc., and I always enjoy reading stories about Goldman that depict the firm as sort of a high-class literary salon, even though they do not especially match my experience," so I suppose I am obligated to point out this story, which does not depict the firm as a high-class literary salon, though it also does not especially match my experience: A former intern for banking titan Goldman Sachs' San Francisco office claims in a lawsuit that he was bullied and hazed by company employees, and attacked by a wealth advisor who choked him unconscious, threatened to have him killed, and left him with a brain bleed. Goldman Sachs said in a statement Tuesday that the alleged incident central to the lawsuit occurred at a bar after work. "When it came to our attention we investigated immediately and took action, including to ensure the plaintiff was receiving medical care," the company said. "We are committed to maintaining a safe and welcoming workplace – the alleged behavior does not reflect our values." I dunno, if the accusation is "my boss at Goldman hazed me until I got a brain injury," it is not an entirely satisfying response for Goldman to say "well yeah but at a bar, and you were able to go the hospital." Blockchain blockchain blockchain This is fine, this actually makes total sense, but still it's a little funny: There's "an Ethereum-based token backed by and pegged to Bitcoin." If you live in Ethereum and you want to buy a Bitcoin, but you don't want to travel all the way over to the Bitcoin blockchain, you can just buy a Bitcoin(-backed token) on the Ethereum blockchain. We talked last year about a company that was building Ethereum-based tokens backed by things like Tesla Inc. stock; I wrote: It's fine! It's useful. It's a thing. The way I think about this is that these tokens are effectively depositary receipts on Tesla shares, only they are not, like, European depositary receipts but blockchain depositary receipts. They let people trade Tesla shares, not in Europe, but in the Invisible Republic of Crypto. Same idea except there's no Invisible Republic of Crypto; there is a loose confederation of individual crypto states, and if you want to live in Ethereum but own Bitcoins, you can. It's like a stablecoin, which I think of as a way to live in Ethereum but own dollars. This is just a stablecoin pegged to Bitcoin. Why not. Elsewhere, if you live in the United States of America and you want to vote, like for real, like for the government of actual America, should you do it using an app on the blockchain? To ask that question is to answer it, but just in case, the New York Times has this answer: "In a new report shared with The New York Times ahead of its publication on Thursday, researchers at the Massachusetts Institute of Technology say the app is so riddled with security issues that no one should be using it." Things happen Path to Confirmation Dims for Fed Nominee After Republican Objections. U.S. Borrows for 30 Years at a Lower Cost Than Ever Before. Epstein links leave Barclays boss in a precarious position. Tesla Faces a New S.E.C. Investigation. Tesla Stock Offering to Price at $767 a Share. "As an athlete, you can be walking down the street and people are pitching you deals." Finance on Instagram: what's not to like? Why Didn't Ancient Rome have Dungeons and Dragons? Long Chile. "A Tory hereditary peer has encouraged people to eat grey squirrels, after telling the House of Lords they are 'extremely good to eat.'" 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♯⊗⋮ 2020 Noticias del Gran Mundo PelÃcula Completa En LÃnea released 2020. story: Cinco años después del fin de la Guerra Civil estadounid...
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