Scott Galloway Sat, 10/05/2019
The unicorn barn is on fire. Ablaze. A feckless FTC and DOJ, no longer countervailing forces to private power but co-conspirators, have enabled invasive species (Amazon, Apple, Facebook, and Google) to devastate the ecosystem. What to do? No worries, just double up on the MDMA of our economy — charismatic CEOs cut with cheap capital — and the illusion of prosperity party rocks on into the morning. Not that I’ve done a lot of drugs in my life, but they make for gangster metaphors, no?
Unfortunately, the later the lights go on, the uglier the reality. The markets have been dancing and partying with young firms with a seductive rap: “I think of myself as a tech, SaaS kind of guy.”
But as the lights come on, it’s clear he’s a rich kid exiting the bathroom with short-lived confidence from the cheap capital around his nostrils. He doesn’t have a real job (viable business model), and, worse, his parents are fed up and about to cut him off. (If I sound like someone who spent too much time at Pangea, Lotus, Rose Bar, Bungalow 8, and Butter in 2003 NYC, trust your instincts.)
The lights are on, and the market is now discerning between overvalued unicorns:
And those that could lose more than 80 percent of their value or disappear:
— Tesla. Dear Twitter trolls: yes … I’m an idiot, I can’t do, so I teach, and I don’t understand genius. It’s a tech/energy play. I get it… Save your breath. Yes, he is a genius, Tesla has changed the world for the better (I believe this). And … Tesla doesn’t have the scale to compete in a well-run, low-margin business — auto.
— WeWork. Shared workplace concept that’s been in the news lately. Founder has great hair.
— Robinhood. Until yesterday, Robinhood was a disruptor. But Schwab announced they were eliminating commissions on trades, and Robinhood’s top of the funnel (customer acquisition) collapsed. Schwab has other products/revenue streams. Robinhood’s VCs must now fund a company whose $7.6 billion valuation (see above: white powder around nostrils) was cut in half yesterday. Similar to Walmart, Schwab’s leadership will result in multiple expansion. Look for Schwab stock to recover its 8 percent one-day loss within 30 days.
— Lyft. Imagine a shitty business, ride hailing, minus a global brand or Uber Eats. Lyft is all the calories of Uber, with none of the great taste.
— OYO. Just like WeWork, OYO is a REIT with too much SoftBank capital. Masa owns 45 percent, and as one of the lead investors in every round since 2015, he has pushed the valuation from $400 million to $12.5 billion. Smoking their own supply.
To be fair, it’s easy to see why we continue to do this. The stable (the US information economy) produced Secretariat, Seattle Slew, Zenyatta, and Spectacular Bid (awkward equestrian metaphors for Amazon, Apple, Facebook, and Google). We also feel a sense of hope/justification, as Airbnb is just hitting its stride and could be one of the greats.
The Betty White powder was cut with a variety of things: frothy markets, idolatry of innovators/founders, and weak oversight. But the central nervous system stimulant here is cheap capital. And the substance mixed into the fine Columbian has been SoftBank, whose $100 billion Vision Fund was disruptive, on several levels.
The case study we’ll be teaching for decades in b-schools around the world about the Vision 1 disaster (not fair, it’s a total f**king disaster), writes itself. The strategy was (wait for it) capital as a strategy. Specifically, more of it, so you could win deal flow and be the fuel that helps portfolio firms make the jump to light speed, leaving competitors behind and befuddled.
Easy to see how this makes sense. But it doesn’t. Capital is in fact a weapon in private equity, where only a few firms can bid for the truly great, proven assets with enormous cash flows. However, in venture, and growth, the secret sauce is dislocation, a market ripe for disruption, and crazy genius founders who are too stupid to know they will fail. When your ability to deploy heaps of billions into a concept becomes the priority, as it does when you have $100 billion to deploy, your returns go down. This is evident across SoftBank’s portfolio.
Venture is Local
My NYU colleague Professor Pankaj Ghemawat published gangster research showing business and trade are, despite rumors of the death of distance, a function of geography. A retail store’s profitability is correlated with proximity to HQ. Sequoia Capital was the lead investor in my second firm, and the partner on our board told me a key tenet was they would not invest in a firm the partner could not drive to.
Masa and Adam would agree to meet in-between their 13 time zones (I think that’s Hawaii). Similar to when the Japanese acquired US movie studios and golf courses in the eighties, SoftBank will leave with less yen than they came with. If you found the previous sentence uncomfortable, racist even (as I initially did), you’ve fallen victim to the same monoculture PC virus infecting our universities. Japan did buy US golf courses, and their currency is in fact the yen.
Smoking Your Own Supply
Another tenet of venture, expressed by every investor I’ve raised money from (General Catalyst, Maveron, Sequoia, Weston Presidio, JPM, Goldman, and others) is they will not lead subsequent rounds. Good investors resist the temptation to smoke their own supply and require third-party, arms-distance validation of the firm’s value here and now. SoftBank was the only lead investor in WeWork, through multiple rounds, since 2016.
Ironically, the real damage on the capital side will be on SoftBank employees, as they own common stock in Vision 1. Saudi Arabia Public Investment Fund and Mubadala own preferred stock that captures a 7 percent (preferred) return each year, sequestering returns from the few winners in the portfolio. So, Vision 1 has pneumonia, but the common equity holders in Vision 1 are on a ventilator.
The spoon, baking soda, and heat that turns overvalued firms into crack is charisma — people who trade likability and their reputations for hundreds of millions (often billions) to wallpaper over ugly truths about a business and its impact on other people and the commonwealth. Think of it as information economy money laundering. Masayoshi Son is the Walter White of money launderers, washing dirty money and procuring his take.
A question: if the relationship between Saudi Arabia’s Public Investment Fund and SoftBank became strained — as it often does between criminals and money launderers — would Mohammad Bin Salman dispatch operatives to intercept him on foreign soil, strangle him, and then dismember him with a bone saw? And, another question, if they did … would Prime Minister Shinzo Abe do more than ask Mohammad Bin Salman to buy additional weaponry from Mitsubishi Heavy Industries?
Addiction is the long-term inability to moderate or cease intake. Someone with an addiction will continue to misuse the substance in spite of the harmful effects. British-Venezuelan scholar Carlota Pérez has written powerfully about the link between technological innovation and extreme income inequality. We see evidence of a Hunger Games economy everywhere. Life has become harder for two of every five Americans.
However, the idolatry of winners, constantly promoted on CNBC and Instagram, creates a high we’re all chasing, the “innovator” badge. Its spoils, coupled with the false narrative that we live in a meritocracy, have dulled our sense of empathy.
We feel it in our gut. We witness immense prosperity, but little progress. A shrinking middle class, depressed teens, and fractured alliances. Still, we continue to look away. As a species, we’re easier to fool than convinced we’ve been fooled. We refuse to face the truth: The innovation industrial complex has ripped at the fabric of our democracy, fomented a caste system, and dulled our sense of empathy.
We’re lying to everyone. We’re lying to ourselves. We’ve lost sight of what’s important. We’ve lost ourselves. We’re addicted.