Have you heard of Softbank $100 Billion vision fund? Backed by Saudi, UAE, apple and Qualcomm, this fund is investing in some of the new age companies like Uber and WeWorks.
While most of the companies they invest in are driving great ideas, they have burgeoning valuations with massive losses.
Take for example WeWorks. It had a $47 billion valuation with a loss of $1.6 Billion and when you compare this to Regus which does the same business (which wework denies), Regus delivers a profit of $195 Million with a valuation of just $2.6 billion.
Little to no asset is owned to justify these valuations, something which would disappoint legendary investor and billionaire Warren Buffet.
There are several companies following this route of creating massive valuations with a standard template of having a few founders from ivy League schools or in the case of India, IITs or IIMs. Be the first to run an idea which will save society (wonder if society needs saving at all) or address an issue like Uber does which is one of lack of public transport and so on and so forth.
But all these companies rarely make a profit and are brilliant at raising capital to continue an acquisition spree (of sorts) of various markets and territories and the burn is tremendous.
Back home in India, we recently have seen a domino effect of banks, NBFCs and cooperatives tanking as a result of a similar mechanism followed by the likes of softbank of taking money from several investors and betting on a sector, be it real estate or infrastructure etc. PMC bank is a classic example where of their 8400cr book, 6500cr was siphoned off by the Wadhwans of HDIL/DHFL fame. So when no ivy League founder is around, then street smarts plays to work the powers like the Wadhwans did. When the Wadhwans overnight became billionaires, it was suddenly a thing that India has arrived and minting billionaires this quick was possible.
If you take the Wadhwans case, PMC was their softbank. Albeit their methods , they took the money, invested some in realty and infrastructure, siphoned some and the story goes on. No different from a case where softbank invests in companies like Uber etc which do almost the same thing.
However the burn or losses in each of these cases is treated differently by the government.
In the case of Wadhwans, the government will find in their investigations, most of the money. (If the investigations are corruption free). In the case of Uber, there is no asset, so the entire game depends on a valuation and a large company or stock market willing to buy it at that valuation. If the valuations tank like what has happened in recent times, then the money isn’t available to repay the investors.
In the end, from what I’ve seen, valuations increase the market price and smaller players with little capital either get bought out or vanish. The innovation asides, so much money in the hands of few definitely tend to dissuade entrepreneurs to enter that space as the climb is too high. This money changes the market value and artificially inflates it which in time slows the market down. A Fifth Discipline Effect.
The world is not one of profit but one of illusion where it’s all about magic money.
Raj Kaushik – Vitarkka