This is fun

SoftBank is under fire, with a prominent Silicon Valley venture capitalist querying the way the $97bn (£79bn) mega-fund behind the WeWork debacle proposed to pay investors returns.

The charge was levelled by Chamath Palihapitiya after part of a SoftBank investor presentation was put online.

The post showed SoftBank offered to pay a fixed return to preferred investors, but this might come from their cash, not from growth in the value of companies in its Vision fund. In effect, investors would be paying themselves. Palihapitiya tweeted: “SoftBank Vision Fund is essentially running a Ponzi scheme if this is true.”

A source close to SoftBank said the fund was structured to cater to the different risk appetites of its investors, and payouts would only come from shareholder funds if its portfolio didn’t deliver sufficient returns.

Preferred stock isn’t exactly unknown and it’s not conclusive evidence of a Ponzi either. It rather depends upon exactly what the terms were/are.

If it’s a return regardless of what the fund’s performance is doing then, well, that’s edging toward it, no? Or at least that’s more like debt than equity…..

13 thoughts on “This is fun”

  1. Or it could be an interim position while they get out of WeWork. Like a letting agency still paying your returns while getting rid of a delinquent tenant who’s not paying rent.

    (Or, as happened to me, an agency paid me my wages even though the client had stopped paying the agency.)

  2. Where exactly have all the SoftBank billions come from? They keep buying stuff left right and centre, whose $$$ is it really?

  3. Son – the guy who runs it – made two absolutely massively successful bets.

    1) Yahoo Japan when Yahoo was still 15 people handwriting links (I exaggerate, but not much) and Alibaba when $20 million bought a significant chunk of the firm.

    One of those was a 58,000 percent return or summat.

    But he’s also set up VC funds. One of which has raised $100 billion from investors. People like the Saudi Government. Who are rumoured to be less than happy about WeWork….

  4. I fail to see the problem. Any VC investor who wants a fixed return must accept the possibility that at some point he’ll be paid out of the capital he contributed.

    However, The Vision Fund’s credibility has been hit by the investment in WeWork. Either they are idiots or were part of a dodgy plan to ramp up the stock in order to fleece those who bought in at the IPO.

  5. As you said, it depends on the terms, but a typical VC investment in a start up will be in convertible preferred stock with a stated dividend yield, however, that dividend is only payable if the board of directors (with the VC sitting on it) declare the dividend. Else it might not be paid at all that quarter or accrued as a liability, which would increase the VC’s stake vis-a-vis the common shareholders but still behind outside any employees’ unpaid payroll or outside creditors in the event of a liquidation. In the event of a successful exit the VCs may convert the shares plus any unpaid dividends to common shares.

  6. But he’s also set up VC funds. One of which has raised $100 billion from investors. People like the Saudi Government. Who are rumoured to be less than happy about WeWork….

    I thought the MO of VCs was to make a dozen bets, 11 of which will be WeWork-style flops and one that will (inshallah) give a 58,000% return.

  7. Chris, yes, but now they are to be severely criticized for the failures and castigated should the success make anyone billionaires. Also, the model of a few successes and many failures does mean that the benefits will be unequally distributed among the non VC participants, ie, the founders and early employees of the successful ventures will score big and become unequal, whereas the founders and early employees of the failures won’t, or at least not on this attempt. So, helping to create a few billionaires is also leading to great castigation and calls for guillotines.

    From the viewpoint of investors, however, there are a lot of VC funds out there now and not all of them led by geniuses, though certainly they are all led by people who think they are geniuses. Investors should be cautious, though managers of government wealth funds probably all think they are infallible geniuses too.

  8. Dennis, He Who Calls Out Bullshit

    Sorry, but if you strip away all the “sophisticated” financial flapdoodle, what you have is either an operating Ponzi Scheme or a Ponzi Scheme waiting to happen. End of discussion.

    Venture capitalism and preferred stock are oil and water.

  9. Dennis, He Who Has Sensitivity Out The Blow Hole

    I thought the MO of VCs was to make a dozen bets, 11 of which will be WeWork-style flops and one that will (inshallah) give a 58,000% return.

    You thought right, Chris Miller, which is why the existence of preferred stock is a huge red flag.

  10. Dennis, all preferred stock really does is put the preferred stock holders ahead of the common stock holders in the event of a bankruptcy. And why not? They’re ponying up real cash to fund some entrepreneur’s idea.

  11. Dennis the Peasant

    TD –

    You are missing the point. SoftBank was using it to offer investors a fixed return on their investment. A VC firm offering a fixed rate of return to investors is oil and water.

  12. Dennis. Depends on the terms. As I noted above, the terms of a preferred stock deal often allow for a coupon at a stated percentage rate, but then allow the board of directors to declare it or not. Generally, they only get declared if the firm is successful and generates the cash flow or if there is a liquidity event in which case the dividends can be declared, the liability accrued and then converted into common shares. If Softbank’s terms are as you suggest then it does sound a bit sketchy, but that’s not the norm from the terms I’ve read in other funding proposals.

  13. Tim, i guess there isnt much stronger motivatuom than the desire to avoid being carried out of an embassy in several sports bags.

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