Issue 79

Debt-fuelled unicorns

Delivered on 25 May 2020 by Justin Pyvis. About a 5 min read.

Masayoshi Son's Vision Fund released its earnings results last week, which contained a few odd graphics on horses and unicorns, such as this one:

Son wants us to believe that despite some of his investments falling into the 'valley of coronavirus', some will grow wings and emerge as unicorns. In his own words:

The situation is exceedingly difficult. Our unicorns have fallen into this sudden coronavirus ravine. But some of them will use this crisis to grow wings.

Exceedingly difficult is an understatement. The Vision Fund business lost 1.9 trillion yen ($US17.7 billion) last fiscal year:

The valuation of WeWork has tumbled to $2.9 billion amid the coronavirus pandemic and its ongoing business struggles, a tiny fraction of its peak when the office-sharing company was among the world’s leading startups.

WeWork’s latest valuation was disclosed as SoftBank Group Corp., its largest shareholder, reported earnings on Monday. WeWork had been valued at $7.8 billion at the end of September after the Japanese company agreed to a bailout. Even that was far from its once-lofty $47 billion valuation.

It's not just WeWork, either. The Vision Fund had to write down the valuations of most of its investments, including Uber and other startups weighted heavily toward the sharing economy. Son loved to invest in companies that pay people to use their products in the hopes of one day achieving a monopoly and higher prices. And he paid for that gamble with debt:

...the capital structure of the Vision Fund makes the fund itself some-what of a perilous operating entity. Outside investors committed money into the fund in the form of 62% debt and 38% equity. SoftBank contributed roughly $33 billion solely in the form of equity, which is 50% of the aggregate equity in the fund. For the fund, the contributions resulted in an aggregate capital structure of 40% debt and 60% equity. Approximately $40 billion in debt contribution is in the form of preferred units with 7% coupon rate over the 12-year life of the fund. While the attractive coupon payout may have helped raise large chunks of money quickly, it also may have substantially increased the fund's operating risk.

There's a reasonable chance that the Vision Fund will be wiped out well before any unicorns can emerge from the coronavirus ravine. Amir Anvarzadeh, a market strategist at Asymmetric Advisors in Singapore, summed up the Vision Fund appropriately by calling its management "a bunch of dealmakers obsessed with leverage who have no business running a venture capital fund".

Debt is an amplifier in good and bad times. You can look like a genius when the tide is lifting all boats, and it was only last May SoftBank Group (which owns the Vision Fund) reported its highest ever operating profit thanks to the Vision Fund's investments. But when the tide recedes and the bad times roll in, debt makes things so, so much worse, with SoftBank's overall net loss to reach 900 billion yen this year. The problem is even the Vision Fund's profits from last year were illusory - 'paper' - based entirely on rising valuations for loss-making companies that it continuously funnelled cash into, further propping up their valuations... you get the idea.

Had the Vision Fund used more equity instead of debt, it would have had a natural shock absorber and could have ridden out the coronavirus. But it has debts to pay (at a coupon rate of 7%!), meaning it's going to have to sell assets ($US41 billion so far) - including future unicorns - just to stay alive.

Son may be right about horses emerging from the valley of the coronavirus as unicorns, but they'll probably be owned by someone else.

Other bits of interest

Apple and Google's framework is ready

...this launch means that developers working on behalf of public health agencies can now issue apps that make use of it — Apple and Google themselves are not creating an exposure-notification or contact-tracing app.

The exposure notification API works using a decentralized identifier system that uses randomly generated temporary keys created on a user’s device (but not tied to their specific identify or info). Apple and Google’s API allows public health agencies to define what constitutes potential exposure in terms of exposed time and distance, and they can tweak transmission risk and other factors according to their own standards.

Further, Apple and Google will allow apps to make use of a combination of the API and voluntarily submitted user data that they provide through individual apps to enable public health authorities to contact exposed users directly to make them aware of what steps they should take.

I'm no fan of Apple or Google and Big Tech's general love of spying on people. But this framework is the only way we'll ever have a privacy-friendly, functional, cross-country compatible contact tracing app. I hope that countries currently using a centralised version consider rebuilding their apps - 'version 2.0!' - using this framework.

The cluster-based coronavirus approach

So what is the Japan model? First, it is a cluster-based approach, derived from a hypothesis obtained from an epidemiological study based on Chinese data and conducted on the Diamond Princess cruise ship that entered the port of Yokohama on February 3, 2020.

It posits that the explosive increase in infected persons is a result of the high transmissibility of certain infected individuals, which forms a cluster. Infected individuals with even higher transmissibility appear from these clusters to form more clusters and infect many others. Based on this hypothesis, under the cluster-based approach, each cluster is tracked to the original infection source and persons with high transmissibility are isolated to prevent the spread of infection.

Key to the cluster-based approach is avoiding the "three C's":

Lockdowns aren't required (well, maybe if you fail to initially respond in time, as happened in many countries), neither are strong-armed restrictions on day-to-day activity. Along with Japan, Sweden falls into the clustering approach model and it could be the least costly method of emerging from the global pandemic with some semblance of normalcy.

Note that "for the cluster-based approach to be effective, "protective measures at airports and ports are important". International travel - particularly short trips - are shaping up as the last activity to return to normal, at least until a vaccine is developed.

WhatsApp is a no-go

Germany's data privacy commissioner Ulrich Kelber has picked a fight with Facebook:

In a letter to branches of the federal government, Kelber said that bodies must respect, and not neglect, data protection "even in these difficult times."

"Just by sending messages, metadata is delivered to WhatsApp every time," said Kelber, adding that it could be assumed that these data snippets were then forwarded directly to Facebook, WhatsApp's parent concern.

WhatsApp, cited in Handelblatt's Monday edition, rebutted Kelber's warning, saying the messaging service did not forward user data to Facebook.

"WhatsApp cannot read messages because they are encrypted throughout by default," said its spokesman.

Kelber is correct. WhatsApp is encrypted with the Signal protocol (which means the metadata are not encrypted), but Facebook holds the encryption keys. Don't use WhatsApp for anything you don't want Facebook to also have.

Issue 79: Debt-fuelled unicorns was compiled by Justin Pyvis and delivered on 25 May 2020. Join the conversation on the fediverse at