Mad Hedge Technology Letter
March 1, 2023
Fiat Lux
Featured Trade:
(THE VISION FUND LACKING VISION)
(WE), (SOFTBANK), (VISION FUND)
Posts
The most painful place to be in tech these days is where the venture capitalists used to make their name.
Private startups used to be glamorized, and now nobody wants to touch them with even a 10-foot pole.
VCs are the capital-rich guys who used to buy companies privately, hold onto them until they grew 10X, and then dish them off to the public once they went ex-growth.
That playbook was the surefire way to capitalize from companies during their highest growth phase.
Softbank’s Vision Fund was the poster boy for this strategy as the founder of Softbank Masayoshi Son deployed gargantuan resources from his Japanese telecom company (mostly in the form of debt) to pour into private tech firms.
Now, The Vision Fund has basically blown up as ideas like throwing $300 million at a dog walking app haven’t resulted in higher valuations from ludicrous types of aggressive investments.
Markets can behave irrationally for a while, but sooner or later, it regresses back to reality.
In the end, the world’s most brazen tech investor, Softbank, wasted billions helping to artificially lift tech valuations, only to see them plunge and lose their own money along with other adjacent investors.
In some cases like the office sub-let company WeWork (WE), they were the only investors to value assets at such lofty valuations. In WeWork’s case, they valued the company at $48 billion at its peak, and at the time of this writing, WE has a valuation of $920 million after finally going public.
So it’s not a surprise to see WE’s experience highlighting a broader failure of epic underperformance from Softbank with a decline in value for 73% of its 472 investments from an expert boutique firm that apparently is on the pulse of every new tech trend.
They would have done better with a monkey throwing darts at a dart board.
To address the headwinds, they are drastically reducing investment for the time being because they are tired of being wrong.
For the October to December quarter, SoftBank reported an investment loss of ¥731.94bn ($5.5bn), compared with a ¥1.38tn loss in the previous quarter for its two Vision Funds and a fund investing in start-ups in Latin America.
As of the end of December, SoftBank said the fair value of the $100bn Vision Fund I was down 4.4% from a year earlier due to markdowns in privately held companies despite gains in some listed holdings, such as ride-hailing groups Didi and Grab. The valuation for investments in Vision Fund II was down 6.2%
Son announced last year that he would step back from day-to-day operations to basically get out of the way of himself.
I applaud him for doing that because many arrogant leaders don’t understand when their time is up.
The private markets aren’t what they used to be and the deal breaker is higher rates.
This part of tech won’t come back until cheap money floods visionary ideas because these ideas are usually risky and most attempts become a zero.
Tech stocks will continue to be choppy in the meantime and continue to represent ideal trader markets for investors to jump in and out of tech stocks.
It’s natural for a reversion to the mean after a blistering January and big moves up and down will be the likely story in this stock pickers market for 2023.
However, the time for those 10Xers from VCs is dead until further notice.
Mad Hedge Technology Letter
August 15, 2022
Fiat Lux
Featured Trade:
(JUST LET IT FLOW)
(ADAM NEUMANN), (WE), (AAPL)
Flow, a residential real estate company helmed by a famous tech CEO, and a famous tech venture capitalist, is worth $1 billion and has 0 revenue.
Adam Neumann is back!
If many have forgotten, Neumann was that guy who shook down Softbank’s Masayoshi Son by buying up commercial offices and subletting them as shared office space with a pay-as-you-go subletting model.
This was bizarrely branded as a tech company called WeWork (WE).
From the get-go, the business model sounded illogical, but Softbank went with it and before downgrading the valuation to $9 billion, it was supposed to be worth around $50 billion.
Neumann exited the business with a $480 million payout after Softbank negotiated the payout down from $960 million.
The hefty golden parachute is the capital he’s leveraging for his new residential real estate business that now has venture capital backing it.
Famous venture capital giant, known for investments in 100-baggers like Twitter, LinkedIn, and Facebook, Andreessen Horowitz led by Marc Andreesen said it would invest $350 million in Adam Neumann’s residential real estate company Flow.
Andreesen comically claimed that Neuman is a “visionary leader.”
In the same blog, Andreesen explains that renters need a “sense of genuine ownership.”
Smaller housing is now what developers are doing to combat inflation.
My guess from Andreesen’s blog is that giving “renters a sense of security” could mean taking Neumann’s massive real estate portfolio and creating an atrocious tiny house or sleeping pod network.
They could then resell these mini clusters for a giant profit before Neumann’s next victory lap.
Neumann might install free artisanal coffee or frisbee golf for the “making it cool” effect like he did for his office sharing space as well.
According to a Wall Street Journal report in January, Neumann had acquired majority stakes in over 4,000 apartments, valued at $1 billion altogether.
Why not chop them up into 20,000 units, claim these assets are $5 billion, and double the rent or sell them for a higher price?
It’s low-hanging fruit, right?
Flow is scheduled to launch in 2023 and I can tell you there is nothing “visionary” about Adam Neumann and his insidious entrepreneurial spirit.
This is just a glaring example of the late cycle euphoria of tech that will most likely result in the median American living worse off and Andreesen losing $350 million.
This is not only a late cycle but the latest this cycle can get with this type of idea.
We are still living off the Apple (AAPL) iPhone technology and we are on version 13 and up to well beyond a $1,000 price point.
Innovation has hit a saturation point, and once we start getting to iPhone 15 or 17 at a $3,000 or $5,000 price point, the diminishing returns will accelerate.
Investing in a “transformative” big tech-infused residential real estate company headed by Adam Neumann sounds like a suicide mission for Andreesen’s reputation.
Monetizing small apartments is bad optics for Andreesen. It’s not his bread and butter…it’s not cutting edge.
Andreesen’s behavior most likely reveals that one of the leading VCs thinks the metaverse is just a bunch of castles in the sky.
However, these developments also show how minuscule the opportunities are in the land of big tech today.
Lastly, Flow has kept under wraps the master plan for this revolutionary company because of fear of giving away the new secret sauce to residential real estate.
It’s most likely because the secret sauce is not that tasty.
THE GENIUS TECH CEO THAT IS NOT A TECH CEO