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Arm’s financials and the blurring future of the semiconductor sector

Published May 18, 2020

Amidst the blitz of SoftBank earnings news today comes the financials for all of SoftBank’s subsidiaries, which includes Arm Holdings, the most important chip design and research company in the world that SoftBank bought for $32 billion back in 2016. Arm produces almost all of the key designs for the chips that run today’s smartphones, including Apple’s A13 Bionic chip that powers its flagship iPhone. In all, 22.8 billion chips were shipped globally last year using Arm licenses according to SoftBank’s financials.

It’s a massively important company, and its finances show a complicated picture for itself — and the semiconductor industry at large.

We sat down with Arm Holding’s CEO Simon Segars last year to discuss the company’s growing appetite for ambitious research, fueled by SoftBank dollars and the bullish vision of the conglomerate’s chairman Masayoshi Son:

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Pandemic reset leads investors to focus on resilience, adaptability

Published April 23, 2020
Mahendra Ramsinghani
Contributor

Mahendra Ramsinghani founded Secure Octane Investments, which includes Demisto, CyberGRX and 16 other infrastructure and cybersecurity companies. Mahendra authored “The Business of Venture Capital” and “Startup Boards.”

For the vast majority of startup founders who were planning their capital raise in Q1 2020, the COVID-19 blow was so dramatic and sweeping, we cannot see all its effects at once.

One big question on the minds of most founders: How should we plan our next raise in terms of timing, valuation and amounts?

Sarah Guo, partner at Greylock Partners, says the fundraising environment has slowed down significantly, but founders who have built ties with VCs via informal coffee updates and check-ins are at a clear advantage. “Early-stage bets require relationship-building,” says Guo, who has been investing in seed through Series B rounds.

Ram Shanmugam, founder and CEO of AutonomIQ*, a seed-stage code and process automation company, has been strengthening his relationships. For a company that has low operating expenses and a community of 600,000 developers, he says he is not fazed. “Our automation code brings efficiencies and in fact, we have nine inbound leads in Q2. Having said that, we are being realistic at the pace at which we can close these contracts.”

Similarly, Fred Blumer, who exited Hughes Telematics at an enviable $750 million, says he is taking a more pragmatic approach to the Series A raise for his new company, Mile Auto. “We expect to have a 5x growth in our business in 2020, even after adjusting for COVID,” he said. “Our pay-per-mile insurance is a great fit for people who are driving less.” Because so many drivers are sheltering in place, legacy insurance companies are refunding hundreds of millions of dollars to customers, which offers an advantage (and an opportunity) to a startup like his.

“But we need to be patient and mindful. While our families, health and safety are top priority, we are staying focused on our customers,” Blumer said. “Insurtech is a resilient arena, and in my past company we raised $100 million, so working with investors has never been a challenge. Keeping up with growth and perfecting the customer experience are what keep us up at night.” He said he plans to get out in the market after investor confidence returns.

Which may be a good idea, considering Jason Lemkin’s Twitter survey, where only 32% of respondents said they plan to deploy the same amount of capital as in the past. But another 30% are on the opposite end of the spectrum, deploying 40% to 60% less capital.

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As Adam Neumann reportedly faces pressure to step down, it’s looking like a fight for life between WeWork and SoftBank

Published September 22, 2019

According to a new WSJ report, certain members of WeWork’s seven-person board, which includes cofounder and CEO Adam Neumann, are planning to pressure Neumann to step down and instead become We’s non-executive chairman. The move, says the outlet, “would allow him to stay stay at the company he built into one of the country’s most valuable startups, but inject fresh leadership to pursue an IPO that would bring We the cash it needs to keep up its torrid growth.”

The WSJ and Bloomberg are reporting that it is SoftBank specifically that wants Neumann to step down. Neither WeWork nor SoftBank is commenting publicly.

It’s a fascinating development, the kind we saw when Uber’s board successfully forced cofounder and longtime CEO Travis Kalanick to abandon his role as CEO. Still, we’d caution against drawing too close a comparison. While the venture firm Benchmark, which spearheaded Kalanick’s ouster, stood to lose billions of dollars if Kalanick dragged down Uber and continued to push off an IPO, Benchmark was not in a do-or-die situation because of its Uber investment.

SoftBank appears to be in more dire straights, making this standoff a particularly meaningful one.

Let’s back up a minute first, though, and consider who is involved and which way this could potentially go. A few days ago,  Business Insider put together a useful cheat sheet about WeWork’s board members that may hint at their allegiance.

1.) Ronald Fisher — who is vice chairman at SoftBank Group after founding SoftBank Capital, a U.S. venture arm of SoftBank — joined SoftBank’s board last year.  He oversees 114 class A shares, each of which carries one vote. Obviously, he’s going to side with SoftBank.

2.) Lewis Frankfort — the chairman of a fitness studio chain called Flywheel Sports — has been a board member of WeWork for roughly five years, and BI says WeWork once loaned him $6.3 million, which he repaid with interest earlier this year. We have to think he’d stick with Neumann out of loyalty. At the same time, he doesn’t wield much power unless he has the right to block significant actions at the company (some shareholders get these blocking rights; some don’t.)  What he know: he controls 2 million shares, and 750,000 of them are Class B shares that carry 10 votes each.

3.) Benchmark, which first backed WeWork in 2012, is represented on the board by Bruce Dunlevie, the founding partner of the venture firm. Benchmark owns 32.6 million Class A shares, and could go either way, seemingly. On the one hand, Benchmark doesn’t want to establish a reputation for pushing out founders after the Kalanick debacle, and if it supports SoftBank over Neumann, it risks this exact thing happening. On the other hand, Benchmark might not want to battle with SoftBank if it thinks it has staying power or it’s concerned (suddenly) that it allowed Neumann to amass too much control.

4.) Harvard Business School professor Frances Frei was brought in roughly a minute ago to add a much-need sprinkling of gender diversity to WeWork’s all-male board. Frei’s name first came to be more broadly recognized when she was hired to help address Uber’s battered culture, so presumably she has ties to Benchmark. We’d guess she’ll side with Dunlevie, meaning that we have no idea whose side she will take.

5.) Steven Langman, the cofounder of private equity firm Rhône Group, has ties that go back a ways with Neumann, and he has benefited richly from the association. According to an April story in the WSJ, Langman met Neumann through a shared rabbi in its earlier days and joined the board in 2012. He also invested in the company (he owns 2.28 million shares, according to a bond filing). Langman is on both the company’s compensation committee and its succession committee. He also runs a real-estate investment vehicle in partnership with We that buys and develops buildings to then lease back to the co-working company, despite that it raises conflict-of-interest questions. We’d guess he’s on Team Neumann.

6.) John Zhao is the chairman and CEO of Hony Capital, which partnered with SoftBank and WeWork to create a standalone entity called WeWork China back in 2017, and Hony has subsequently poured more capital into that subsidiary. We’re not sure how close Zhao is to SoftBank, but if SoftBank brought Hony into WeWork, we’re guessing he will back the Japanese conglomerate on this one. Hony doesn’t own 5 percent or more of WeWork’s parent company so its share holdings aren’t listed publicly.

Neumann, it’s very worth noting, is himself is far more powerful than any of these six individuals. Even after the company recently revised Neumann’s supervoting rights, which gave him 20 times the voting power of ordinary shareholders and now give him 10, he could fire the entire board if he so chooses, notes the WSJ.

Naturally, that wouldn’t be a good look for Neumann, who is already battling growing public perception that, among other negatives for a public company CEO, he smokes a whole lot of pot and that he may be delusional. (A WSJ piece last week reported that Neumann likes to smoke marijuana with friends and while airborne. It also said that Neumann has confided to different people his interest in becoming Israel’s prime minister and president of the world.)

All that said, SoftBank is also fast-losing credibility. While its CEO, Masayoshi Son, has been long revered as a visionary, a growing number of sources we’ve spoken to question the viability of his entire Vision Fund operation. They see WeWork’s ever-soaring valuation on the private market, from $20 billion to, more recently, $47 billion — which was almost single-handedly SoftBank’s doing — as just one in a costly string of poor calls.

Indeed, despite the roughly $10 billion that SoftBank has sunk into WeWork, the financial loss it would take if WeWork falls apart would pale in comparison to the reputational hit Son would suffer, and you can bet there will be ripple effects.

Our suspicion: given the Vision Fund’s impact on the startup industry over the last few years, there’s a lot more riding on what happens with WeWork than meets the eye. Stay tuned.

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ARM shows SoftBank does tech PE the right way

Published June 12, 2019

Private equity firms get a bad rap — and not without reason. In the prototypical example, a bunch of men in suits (and these folks always seem to be men for some reason) swoop in from Manhattan with Excel spreadsheets and pink slips, slashing and burning through an organization while ladening the balance sheet with debt in an algebraic alchemy of monetary extraction.

Vultures, parasites, octopuses — these are folks who almost certainly won popularity contests in high school and now seem to be shooting for most unpopular person to be compared to a crustacean in the Finance section of the WSJ (and there is some damn strong competition in those pages).

Sometimes that restructuring can save an org, and yes, many companies need a Marie Kondo armed with a business plan. But it’s a model that works best for, say, retail chains, and traditionally has been wholly incompatible with the tech industry.

Tech is a tough place for private equity buyouts, as the biggest expense for most companies is talent (i.e. R&D), and cutting R&D is usually the quickest path to cutting the valuation of the asset you just acquired. Unlike retail or manufacturing, there are just fewer cost levers to manipulate to make the numbers look better, and so PE firms have generally shied away from big tech acquisitions.

So it was interesting talking to Simon Segars this week in New York. Segars is the CEO and longtime executive at ARM Holdings, the U.K.-headquartered chip designer that powers billions of devices worldwide. Over the past two decades, ARM has had an incredible run: Last year, its designs were imprinted on 22.9 billion chips, thanks largely to the now ubiquitous adoption of smartphones across the world.

That success has been under stress though. As Brian Heater analyzed in his State of the Smartphone, smartphone growth has slowed in most markets as consumers extend their upgrade cycles and the pace of innovation has slowed. Add in the ongoing trade kerfuffle between the U.S. and China, and suddenly being the worldwide leading designer of smartphone chips isn’t as enviable as it was even just a few years ago.

As a public company facing this landscape, ARM would have faced incredible pressure from investors to meet short-term revenue targets while cutting back on R&D — the very source of future growth the company has relied on its entire history. But ARM isn’t a public company — instead, SoftBank founder and CEO Masayoshi Son bought out the company entirely in 2016 for $32 billion.

Rather than being pegged to its stock price or a quick return to a PE shop, ARM is now seemingly evaluated on growth in its intellectual property and strategy for capturing new markets. “I’m in a very fortunate position where, despite the slowing of the smartphone market … I’ve got an owner that says, invest, you know, invest like crazy to make sure you capture these ways of growth in the future, which is what we’re doing,” Segars explained to TechCrunch.

The company could have just doubled down on its existing product lines, but SoftBank’s ownership has opened the floodgates to explore other areas that could use ARM expertise. The company is now focused (if one can focus on many things) on everything from 5G and networking to IoT and autonomous driving. “We look to be in the right place at the right time with the right technology to catch the upswing into the future,“ Segars said.

That strategy requires some serious audacity though. ARM’s EBITDA was $225 million last year (21% lower than the year before) on $1.8 billion in net sales, which year-over-year grew a paltry 0.2% according to SoftBank’s latest financials. Meanwhile, operating expenses are up from the addition of hundreds of new employees and a new headquarters campus in Cambridge, outside London. R&D isn’t cheap, nor does it payoff quickly.

Yet, that is exactly how Son and SoftBank approach this take-private transaction. “During the acquisition process, Masa said to me, ‘You run the business, I only care about long-term strategy, not going to interfere, you know, you know what you’re doing.’ … [and] Masa has been absolutely true to his word on that,” Segars said. “From a day-to-day basis, SoftBank leaves us completely alone.”

And unlike the bean counters that plague most PE shops, Son isn’t interested in detailed operational data from the firm. “When I give tactical updates… he’s asleep, [but] try stopping him when he’s talking about long-term strategy,” Segars said.

And unlike the PE model of dumping a bunch of high-interest corporate debt on the balance sheet to eke out returns, SoftBank has — at least, so far — avoided that particular tactic. While there were ruminations that SoftBank was considering cashing out some dollars from ARM using loans early last year, such rumors have apparently not panned out. Segars confirmed that “we have none” when we asked about leverage, which has otherwise plagued much of the rest of SoftBank Group and its various entities.

While ARM clearly has a bullish owner who somehow uses financial wizardry to give the company the resources it needs to grow, Son doesn’t have an infinite timeline for the company. Much like classic PE firms with five to seven-year time horizons to harvest returns, Son has already spoken out loud about pushing ARM back into the public markets in roughly five years’ time.

“I’m pretty sure, the night before we go public again, I’m going to be thinking ‘Man, I wish we’d had more time, you know, five years sounds like a lot,” Segars said. But “the way I talk about it within ARM is we’re in an investment phase now … and the goal is that by the time we re-list … the revenues from these new markets are taking off and that’s flowing to the bottom line and we get back to a world of growing top line and expanding margins.”

In other words, ARM is a classic PE deal, but with the focus on actually getting the fundamentals in the business right without that financial alchemy and employee firing sadness. Maybe the plan will work, or maybe it won’t, but it is the right approach to handling the growth of a tech company.

How many other tech companies could use such an approach? How many other companies are currently languishing if only they had more focused owners with a true growth mindset to invest in the future? Silicon Valley has created trillions of dollars in market value over the past two decades, but there is even more waiting to be unlocked. And the best part is, it doesn’t even require an Excel macro to make it happen.

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Oil and gas giants Chevron and Occidental are backing tech to combat carbon emissions

Published January 11, 2019

Carbon Engineering, a Canadian company developing technology to remove carbon dioxide from the atmosphere and process it for use in enhanced oil recovery or in the creation of new synthetic fuels, has locked in financing from two big industry backers — Chevron and Occidental Petroleum — to bring its products to market.

The undisclosed amount of capital Carbon Engineering raised from the investment arms of two of the world’s largest oil and gas companies — Oxy Low Carbon Ventures and Chevron Technology Ventures — will be used to commercialize its technology at a time when legislation in California and British Columbia are making low-carbon fuels more economically viable, according to a statement from the company’s chief executive, Steve Oldham. The company had already managed to nab Microsoft co-founder Bill Gates as an investor.

Gates is one of several big-name backers to be drawn to renewable energy technologies in the face of a steadily warming planet that’s rapidly approaching a tipping point of no return when it comes to global climate change. Together with a group of other multi-billionaires, including Marc Benioff, Jeff Bezos, Michael Bloomberg, Richard Branson, Jack Ma, Masayoshi Son and Meg Whitman, Gates launched a $1 billion fund called Breakthrough Energy Ventures last year to back companies that are developing things like new energy storage and water production technologies.

The Squamish, B.C.-based Carbon Engineering isn’t in the Breakthrough portfolio, but is one of several companies working on making economically viable a technology called “direct air capture” of carbon dioxide.

At the company’s pilot plant in Squamish, air gets hoovered up by giant fans into a processing facility where it is treated with potassium hydroxide, which captures and holds the carbon dioxide. Then more chemicals and heat are added to the mix to create millions of small white pellets — which contain higher concentrations of the carbon dioxide.

After that, the pellets are heated again to create a gas that is almost pure carbon dioxide. That gas can be either sequestered underground (a proposition with no economic benefit for Carbon Engineering at the moment) or converted back into fuels or chemicals, or used in enhanced oil recovery.

Carbon Engineering and competitors like ClimeWorks or Global Thermostat claim they can remove carbon dioxide from the atmosphere for roughly $100 per ton, or a bit less once they can get to scale. To make money though, they’ll need to refine that carbon dioxide into some sort of product — likely a fuel, which will return that carbon to the atmosphere.

Other companies tackling carbon capture, like Newlight Technologies and Opus12, convert the carbon into plastics or chemicals, while companies like CarbonCure aim to turn the captured carbon into a cement replacement.

While these products from carbon emissions are available, they’re not yet commercially viable at a significant scale. Oldham told National Public Radio that the fuel Carbon Engineering manufactures is roughly 20 percent more expensive than regular gasoline.

That’s why states like California are putting incentives in place to offset the added costs of using these low-carbon products.

Carbon Engineering has already spent $30 million to develop its process, while Climeworks raised $31 million last year to develop its own version of this carbon capture technology.

Not all climate watchers are convinced that these kinds of negative emission technologies are the answer. They argue that it’s less expensive to use renewable energy and other carbon-free energy sources than to take carbon dioxide out of the air.

At this point, though, emission reductions may not be enough. Given the dire reports coming out of the Trump administration and the Intergovernmental Panel on Climate Change, it’s going to take pretty much a combination of everything that humanity’s got to avoid a pretty catastrophic fate for a pretty large portion of the world’s population.

Even the companies that have been notorious for their contributions to the climate crisis that the world faces are waking up to the need for decarbonization (even if it’s an open question of whether they’re being dragged to the table or sitting down of their own free will).

Oxy Low Carbon Ventures is a good example. Reading the writing on the wall, the firm has invested not just in Carbon Engineering, but another company called NET Power, which purports to have developed a power plant with zero emissions.

“It is a very important time for the air capture field right now,” said Oldham in a statement. “We’re seeing leading jurisdictions, like California and British Columbia, creating markets for low carbon fuels and technologies like DAC, through effective climate policy. These efficient market-based regulations, and action from energy industry leaders like Occidental and Chevron, show the power of policy in driving innovation and achieving emissions reductions while delivering reliable and affordable energy.”

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For SoftBank, no majority stake in WeWork as it scales down talks from a new $16 billion investment to $2 billion

Published January 7, 2019

Several weeks after it was reported by the WSJ that two of the biggest investors in SoftBank’s massive Vision Fund vehicle were cool on its planned $16 billion investment in the coworking company WeWork, those plans have changed radically, says the Financial Times.

According to its sources — and confirmed by our own — SoftBank is now in “detailed negotiations” to invest a comparatively modest $2 billion more into WeWork, plans that could be firmed up as soon as the end of this week.

A WeWork spokesperson at the company’s New York headquarters declined to comment.

The development is both surprising and unsurprising. The government-backed funds of Saudi Arabia and Abu Dhabi, which committed $45 billion and $15 billion, respectively, to the Vision Fund, haven’t been been known before to push back against the person pulling its levers, SoftBank CEO Masayoshi Son .

Indeed, given the vast sums of money that the Vision Fund has put to work since being announced in late 2016, it seemed there were few if any checks on Son or the 80-plus people who work for the Vision Fund.

Just some of its many bold bets include, most recently, a $500 million investment in Cambridge Mobile Telematics, an eight-year-old, Boston-area company that previously raised just one round of funding of less than $20 million to build out its technology. The Vision Fund also recently led a $400 million round into Emeryville, Ca.-based Zymergen, which manufacturers molecules for a wide array of industries and already counted SoftBank as an investor.

Still, according to that Journal piece, the two anchor investors were less enthusiastic about a giant new investment in nearly nine-year-old WeWork for numerous reasons, including that they see WeWork as a real estate play and both already have plenty of real estate in their portfolios; that WeWork CEO Adam Neumann would still control the company even while SoftBank was looking to acquire a majority stake; and because SoftBank has already committed $8 billion into WeWork in recent years, including through an agreement last year to invest a fresh $4 billion into the company via a convertible note and a $3 billion warrant that gave it the right to buy additional equity in WeWork.

As it stands, including the $2 billion that WeWork looks to receive from SoftBank imminently, SoftBank will have sunk $10 billion into the company. Perhaps it’s no wonder that the newest $2 billion is not coming from the Vision Fund but from SoftBank directly. (Son sometimes invests off SoftBank’s balance sheet directly, for expediency’s sake and, presumably, in a case such as this one, when there may be pushback from Vision Fund investors.)

Either way, $2 billion more from SoftBank is “hardly a stinging rebuke” of WeWork or its business model, says one person familiar with SoftBank’s thinking. This same source also notes that the $16 billion figure bandied about late last year was “never a lock. There were always numerous options on the table.”

Whether SoftBank regrets what remains a huge bet can only be known in time. A shifting public market certainly seems like reason for worry, given that unprofitable WeWork relies increasingly on freely spending corporate customers for its revenue, including both companies that install their employees at WeWork’s coworking spaces, and those that license the company’s technology and aesthetic to WeWork-ify their own offices.

Unsurprisingly, Neumann, when asked how WeWork would fare in a downturn, told us at a Disrupt event in 2017 that it was positioned perfectly. “Business is a flexible thing,” he’d said at the time. “Space is fixed. Being able to give people that flexibility if a recession comes or when a recession comes is actually going to be a very needed product.”

According to the FT, SoftBank’s earlier plans for WeWork included SoftBank and the Vision Fund paying $10 billion to buy out all outside investors in WeWork. A further $6 billion would have been injected directly into the company, including a $2 billion commitment this year, and a commitment to invest a further $4 billion based on agreed-up performance targets for WeWork in 2020 and 2021.

Our sources say that, as of this writing, the $2 billion being discussed will be split evenly to purchase both primary and secondary shares from earlier investors. We’re also told that the company’s post-money valuation, assuming this newest deal is completed, will be $47 billion, a total that includes $1 billion that Softbank invested in WeWork last year via that convertible note and the $3 billion more than the SoftBank committed last year to invest in the company this year.

WeWork’s losses in the first nine months of 2018 nearly quadrupled from a year earlier to $1.2 billion, says the FT, which says it viewed an investor presentation. The company’s sales meanwhile hit $1.5 billion during the same period.

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The disappearing Form D

Published November 7, 2018

We are experimenting with new content forms at TechCrunch. This is a rough draft of something new — provide your feedback directly to the authors: Danny at danny@techcrunch.com or Arman at Arman.Tabatabai@techcrunch.com if you like or hate something here.

Ignoring the midterm hysteria, we continue our obsession with SoftBank today by looking at the group’s IPO of its telecom unit. But first, some thoughts about Form Ds.

Recently, I was looking up the investment history of Patreon (Note: I was an investor in the company through my previous venture firm CRV). I did what I normally do: I went straight to the SEC’s EDGAR system and started searching for the company and its filings. And came up with nothing. Full-text search, office address searches and founder name searches — nothing was returned.

And yet, the company has publicly raised more than $100 million in venture capital according to Crunchbase, and to my knowledge, is not incorporated outside of the United States.

There should be a whole spate of filings, and yet none exist. What’s up with that?

After some investigation, my working hypothesis is that startups are (increasingly?) not filing disclosures with the SEC as a specific strategy to avoid scrutiny.

To take a step back, when companies take money from investors, they sell those investors securities. Under American laws, all securities need to be registered with the Securities and Exchange Commission using pre-defined templates (such as an S-1 registration form) to ensure that all investors know exactly what they are buying.

However, registration is expensive and time-consuming, and so U.S. law also provides a set of exemptions from registration for companies where that process is impractical. Startups take advantage of these exemptions and stay private, until they eventually want to become public through a registration with the SEC.

One mandated component of taking advantage of these registration exemptions is that the startup needs to file a Form D with the SEC. The Form D is free to file and relatively simple, requiring basic information such as the amount of capital fundraised and who the investors were in the round. It’s required to be filed 15 days after the first sale of securities, and, conveniently, the form preempts most state securities laws so that startups don’t have to file in state jurisdictions.

There are theoretically large penalties for failing to file — a company could open itself to investor lawsuits, and there are various financial felonies available that could be applied, as well.

But that’s legal theory, and the practicalities are that almost nothing bad happens to startups that fail to file a Form D. American courts, along with the SEC, have upheld that a startup does not lose its covered security exemption by failing to file the form. The only additional requirement is generally to file state security forms in lieu of the federal form.

A bigger question is why go through this when filing is easy and free? The obvious answer is that startups don’t want to put their round’s information out in the public eye where the good people at TechCrunch will see it and report on it. Of course, the whole point of Form D disclosure is to provide the public a modicum of information about what is happening in the economy.

But actually, the motivations go far beyond that. One reader, Paul David Shrader, saw our note yesterday that we were investigating Form Ds and offered this list of reasons on why companies in general (and to be clear, not specific to any company he has advised) choose to forgo filing:

As for the “why,” there are a few reasons why management, the board of directors, or even investors may be sensitive to fundraising disclosures:

1. The company doesn’t want the increased scrutiny internally that comes along with a new funding round. This can come from employees demanding different levels of compensation.

2. The company doesn’t want increased regulatory scrutiny. Many startups operate in regulatory gray areas, and increased attention from regulators before they are ready can be a Bad Thing.

3. The company has security concerns. For startups that operate in certain environments internationally, raising a monster round can place a target on the backs of its employees. This has been an issue in Latin America from time to time.

4. The company has competitive concerns. Raising a big round may attract new entrants to the market or heighten attention from existing competitors before a startup has solidified its position in the market.

5. Investors don’t want disclosure. Some investors want to disclose new investments on their own timeframe, and they make this a condition of their investment. Publicly-traded investors or sovereign wealth funds may only want to disclose at the time of their quarterly reports.

6. Flat rounds or down rounds can suck away any positive momentum. When founders are trying to convince customers and employees to join the rocket ship that is their company, a flatlining fundraise can look like… well, a flatlining company.

7. The round may not be closed yet. Companies sometimes have optimistic goals about the size of a round (“We’re raising $4 million!”), but only have a smaller amount committed at the outset of the round. Sometimes a single round can take 18+ months to close, even though a sizable (or not so sizable) percentage closed at the outset.

Some of these are obvious, but others, such as internal compensation concerns or international security concerns, were more surprising to me. Thanks Paul David for the thoughts.

Now, I said at the outset that my hypothesis is that startups are increasingly foregoing Form D disclosure. Arman and I are still doing work on this (the SEC has some data sets), but to be frank, it is very hard to operationalize and prove. Form D filings are up or steady, which makes sense given that the number of startups in areas like San Francisco have skyrocketed over the past decade. We are trying to prove something that doesn’t exist, and Karl Popper has helpfully explained that that is impossible.

Nonetheless, we are still interested in whether the legal norms have shifted here, and will hopefully report back on this again. If you are a startup attorney with an opinion here, please email Danny@techcrunch.com or Arman.tabatabai@techcrunch.com with your thoughts.

SoftBank’s telecom IPO weirdness

Photo by Alessandro Di Ciommo/NurPhoto via Getty Images

Talking about filings, one of the most complicated filings in the world is underway. While we were digging into SoftBank’s financing strategies yesterday, all the activity around the looming IPO of its telco business caught our attention.

As we analyzed yesterday, though SoftBank’s debt balance continues to balloon, the company’s balance sheet has rarely prevented it from pursuing investments in the past.

SoftBank continues to dole out multi-billion-dollar checks with stunning regularity, having invested around one-third of its $90+ billion Vision Fund. And we know SoftBank has no intention of slowing its torrid pace, with chairman and CEO Masayoshi Son previously stating he plans to raise $100 billion funds that would spend around $50 billion annually, every two or three years.

One way SoftBank is looking to access additional funding to pour into the next batch of unicorns is by taking a portion of its Japanese mobile business public. For some context, SoftBank is generally considered to be the third largest telco in Japan behind NTT DoCoMo and KDDI.

Even though initial estimates expect SoftBank to only sell around 30-40 percent of the company’s shares, the offering is widely expected to be one of the largest listings ever at potentially more than $25 billion, which would value the overall business at $90 billion on the high end. Reuters recently reported via a Japanese news service that the Tokyo Stock Exchange is expected to give SoftBank approval to list shares next Monday, with a likely listing date of December 19th.

But the progression of the IPO has been oddly complex and unique from the beginning.

First, there was an issue with a set of bonds SoftBank had issued in 2013, which were guaranteed by the telecom business and had covenants requiring that the company hold investment-grade credit ratings before pursuing a sale of any sort. However, SoftBank’s bonds hold junk status from major credit ratings agencies. To fix that roadblock, SoftBank issued a new set of bonds with better terms to buy back the bonds with the prohibitive covenants, undercutting and aggravating some investors of the initial bonds.

Then, it was reported that while lining up the underwriting banks for the IPO, SoftBank reportedly asked banks to commit to loans to the Vision Fund that total around $9 billion, a claim SoftBank has not commented on. As reported by Bloomberg:

The IPO’s top underwriters, which include Nomura Holdings Inc. and Goldman Sachs Group Inc., have given non-binding assurances while they finalize terms of the loan to the Vision Fund, the people said. Stakes in around five of the investment fund’s holdings will be used as collateral, according to the people, who asked not to be identified because the information is private.

Deutsche Bank AG, Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. were also among banks chosen to lead SoftBank’s wireless unit IPO, Bloomberg News reported last week. Details of the loan are still being worked out, and terms could change, the people said. Meanwhile, Deutsche Bank and Goldman Sachs committed about $1 billion each, they said.

While the fund’s holdings (perhaps Uber or WeWork or others) would be set as collateral, Bloomberg also reported in the same article that the loans were non-recourse, meaning that if for some reason SoftBank were unable to repay the loan, the lenders would have no claim to any assets outside of the company stakes set as collateral. The loan terms become more concerning with the Vision Fund since it invests in many unlisted and, in many cases, unprofitable companies. As we noted yesterday, at least one potential lender, Bank of America, decided not to participate due to concerns that the terms were too risky.

Such sausage-making isn’t usually visible to the public, which would seem to indicate that at least some of the banks are grousing to reporters about terms they find egregious. As always, feel free to grouse to us as well.

What’s next

  • Definitely drop us a line if you have thoughts about Form Ds or SoftBank — we are continuing to investigate

Reading docket

What we are reading (or at least, trying to read)

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SoftBank is considering taking a majority stake in WeWork

Published October 10, 2018

SoftBank may soon own up to 50 percent of WeWork, a well-funded provider of co-working spaces headquartered in New York, according to a new report from The Wall Street Journal.

SoftBank is reportedly weighing an investment between $15 billion and $20 billion, which would come from its $92 billion Vision Fund, a super-sized venture fund led by Japanese entrepreneur and investor Masayoshi Son.

WeWork declined to comment.

SoftBank already owns some 20 percent of WeWork. The firm invested $4.4 billion in the company in August 2017, $1.4 billion of which was set aside to help WeWork expand in China, Japan and Southeast Asia.

This August, WeWork raised another $1 billion from SoftBank in convertible debt. At the same time, WeWork disclosed financials to a handful of media outlets, sharing that its revenue had doubled to $763.8 million in the first half of 2018 as losses increased to $723 million.

SoftBank, for its part, seems to have a hankering for real estate tech. Not only has it become a key stakeholder in WeWork, but it has deployed significant amounts of capital to Opendoor, Compass, Katerra and others.

Last month, the Vision Fund backed Opendoor, a platform for buying and selling homes, with $400 million. The same day, it led a $400 million round for Compass, valuing the real estate brokerage startup at $4.4 billion. As for Katerra, SoftBank poured $865 million into the construction tech business in January.

WeWork, founded in 2010 by Adam Neumann and Miguel McKelvey, has raised nearly $5 billion in a combination of debt and equity funding to date. It was valued at $20 billion in 2017, though reports earlier this summer estimated its valuation would fall somewhere between $35 billion and $40 billion with additional capital from SoftBank. A $40 billion valuation would make it the second most valuable VC-backed company in the U.S. behind only Uber.

WeWork has more than 268,000 members across 287 locations in 23 countries.

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Billionaires make it rain on Plenty, the indoor farming startup

Published July 19, 2017

 SoftBank Vision Fund, the huge tech-investment vehicle helmed by Japanese billionaire Masayoshi Son, has led a $200 million investment into indoor farming startup Plenty. Joining Son are notable tech billionaires Eric Schmidt and Jeff Bezos. Plenty farms can grow anything except tree fruit and root vegetables, and produce crops at yields 530x greater than a typical field. Read More

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