Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit. Read more opinion SHARE THIS ARTICLE Share Tweet Post Email

Wag

Well here’s a trade:

SoftBank Group Corp.’s Vision Fund has agreed to sell its nearly 50% stake in Wag Labs Inc. back to the struggling dog-walking startup, according to people familiar with the matter, marking another disappointment for the Japanese investing giant. … The price at which SoftBank is exiting couldn’t be learned but is well below the roughly $650 million valuation at which the Japanese conglomerate invested $300 million early last year. The Vision Fund received two board seats with the Wag investment, which it is now relinquishing. The startup had only been seeking $75 million in funds. The Vision Fund’s strategy of flooding promising young companies with cash has backfired elsewhere including at the parent of WeWork, the shared-office startup whose valuation plummeted as it was forced to abandon its highly anticipated IPO earlier this year.

Traditionally you don’t see a lot of private companies actively trading their stock on valuation. (Public companies, oh, sure.) In general if you are a struggling startup, or a successful growing startup for that matter, you will sell stock because you need money, not because you think your stock is overvalued. And you generally won’t buy your stock at all: You need to conserve money and spend it on your business, not hand it out to shareholders. The whole point of raising equity capital is that you don’t need to pay it back when you’re struggling.

On the other hand look at this trade! Just, like, the sources and uses of cash. Wag was looking to raise $75 million. It went to SoftBank and was like “will you give us $75 million?” SoftBank was like “no haha we’ll give you $300 million,” because that is SoftBank’s whole thing, it loves to give startups vastly more money than they want or need. And so Wag took the money. And then like a year and a half later Wag will get rid of SoftBank by giving back, I don’t know, but I am going to say some number less than $225 million (“well below” the valuation at which it invested). Wag got the $75 million it needed for free.

The trade, to be clear, is: If you need a little bit of money to grow your business modestly, you can raise a lot of money from SoftBank to grow your business crazily, and then put most of it in the bank and use a little bit of it to grow modestly instead. SoftBank will be disappointed with the modest growth, and you can say “sorry it didn’t work out” and then buy them out at a lower valuation with the money you have left over from not growing your business crazily. Free (modest) growth capital!

I am sure that this was not the plan, and it was not the actual experience at Wag, which is laying off employees and which genuinely seems to be struggling. (Also if this was your plan it would be complicated by, like, SoftBank having board seats and you having fiduciary duties and so forth.) Still doesn’t this kind of sound like my imaginary version?

Wag had planned to use the cash to expand internationally and move beyond dog-walking into related pet services including grooming, boarding, food and veterinary care. But it has failed to deliver on its expansion plans and fallen behind rivals including Rover. Recently, there was a difference of opinion between the Vision Fund and some other investors in Wag, according to people familiar with the matter, with officials at the $100 billion fund preferring to sell or liquidate the company and other investors preferring to downsize the business while focusing on sustainable growth and profitability.

The salient fact of startup life over the last few years has been the influx of SoftBank money. If you’re getting that money, then you’re on the other side of the trade. If you think that SoftBank is doing something wrong, then you can try to make money off of it.

When WeWork’s initial public offering collapsed, we spent some time on my theory that founder Adam Neumann had spotted a bubble in overvalued unicorns and had made himself a billionaire by selling unicorn stock into that bubble, and particularly to SoftBank, the most egregious inflator of the bubble. This was not a theory of Adam Neumann’s state of mind or anything, and I don’t actually think Neumann had a conscious nefarious plan to short the unicorn bubble. It is just, like, if you concluded that SoftBank was inflating a unicorn bubble, and you decided to get rich taking the other side of the trade, you’d probably do something very much like what Neumann actually did.

But this is an even better trade! (My idealized trade, not Wag’s actual trade.) I mean it is a smaller-dollar trade; Wag isn’t going around buying mansions for all of its dogs. But whereas the idealized WeWork trade involves building a corporate bonfire to extract maximum money from SoftBank, and then handing the smoking embers over to SoftBank while you walk off with the money, in the idealized Wag trade you get to build a company! And keep it! And focus on sustainable growth and profitability! You don’t use SoftBank’s money (just) to prove an amusing point about SoftBank and bubbles; you use some of SoftBank’s money to build a not-very-SoftBank business and then hand back the rest with a sincere “thank you” and a superior grin.

People are worried about Unicorn

While we’re talking about cynical ways to trade the unicorn bubble: If you’re a startup, and you have some money, and you are maximally cynical, you might decide to spend 100% of that money on customer acquisition and 0% on building a good product or whatever. Adding users gets you the rapid growth that venture capitalists want, allowing you to sell a big stake in your company to VC funds, pocket the cash, and leave the problem of building the product to them.

This is obviously schematic and oversimplified and it doesn’t actually work that way. I mean, the basic model has a certain validity, and we have discussed it before, but you can’t take it that far. You won’t really get rapid growth without a product, no matter how much you spend on Facebook ads.

Anyway!

Unicorn, the electric scooter startup from the co-creator of gadget tracker Tile, is shutting down operations after blowing all its cash on Facebook and Google ads but only receiving 350 orders for its glossy white e-scooters, it claims. In an email to customers, the company says it lacks the resources to deliver any of its $699 two-wheelers, and won’t be issuing refunds “as we are completely out of funding.” In a remorseful email, Unicorn CEO Nick Evans said the company had “totally failed as a business” and has also “spread the cost of this failure to you, the early customers that believed in us.” … The company is working on selling its remaining assets in order to give partial refunds, but Evans warns that even this is “looking unlikely.”

Yeah look the good news about only pre-selling 350 scooters at $699 each is that it only costs you $244,650 to pay everyone back. The guy founded another VC-backed company that has raised $104 million, surely he can find $244,650 somewhere to shut down this company in a less … Ponzi-ish? … way? Honestly! The business model here was that people sent him $699 so he could buy $699 worth of Facebook ads to get more people to send him $699. You could imagine that working; you could imagine that $699 worth of Facebook ads could bring in more than $699 of funding to buy Facebook ads and create a virtuous cycle of revenue growth. But, why?

Direct listings

We talked last month about a proposal from the New York Stock Exchange to allow companies to raise money with direct listings: Instead of doing a traditional initial public offering, in which underwriters market the company to investors, build a book of demand and set a price for the IPO based on investor feedback, companies could just list their stock on the exchange and sell some shares in the opening auction. This would be a pretty big change in the U.S. capital markets, but it does seem like where the market is heading. “Soon Direct Listings Will Raise Money,” was my headline, in the future indicative. I just assumed that everyone would be fine with the proposal.

But maybe not? On Friday the Securities and Exchange Commission rejected NYSE’s proposal. It’s not clear why, or how serious this is: “We remain committed to evolving the direct listing product. This sort of action is not unusual in the filing process and we will continue to work with the SEC on this initiative,” a NYSE spokesperson told Axios, and maybe they’ll quickly work it all out. Or maybe the SEC is really opposed to companies raising money in direct listings.

Why would they be opposed? Again, they didn’t say and I really don’t know, but I’d like to speculate a little. One problem is that traditional IPOs usually clearly disclose how many shares are being sold and at what price: The underwriters will market a fixed number of shares at some range of prices, and will usually price that number of shares within that range, though sometimes they’ll price a bit above or below the range, or upsize or downsize a bit. There are SEC rules limiting issuers’ ability to change the price or size of an IPO by more than 20% without re-filing their disclosure documents. The idea is that investors are entitled to know, in advance, in writing, roughly the price and dilutive effect of an IPO.

If the issuer can just put shares into the opening auction and sell them at whatever the opening price is, if it can put in more or fewer shares depending on how the auction goes, and if all of this plays out in an electronic order book over the course of a few minutes, then you can see how the SEC might think that investors aren’t getting enough information. Unlike in an all-secondary direct listing (in which the company sells no stock), the size and pricing of the offering will affect the company’s pro forma financial statements, and the SEC might just not want to let brand-new public companies be entirely opportunistic in selling stock for the first time.

A bigger problem is the traditional gatekeeping function of IPO underwriters. In a regular IPO, an issuer hires banks to be underwriters, and they do due diligence and make sure the company is not cooking its books, and they put their names on the cover of the prospectus, and everyone buying the stock can say “well I know this deal is good because it is a Morgan Stanley offering and Morgan Stanley would only underwrite good deals.”

One should not take this gatekeeping role too seriously; in modern markets, banks that underwrite an IPO are not understood to promise that the company is good or the price is fair. They are middlemen; if there are willing buyers for the stock at a price the company is willing to accept, then they’ll make the trade happen. But there is still a significant gatekeeping function. For one thing the banks will do due diligence, and help write the prospectus, and generally try to make sure that the company is fairly and accurately telling its story and disclosing all the important information. And the banks are legally liable to investors if the prospectus is misleading, so they have incentives to get it right.

Even beyond the legal liability for accurate disclosure, banks do have some reputational stake in leading good IPOs. If an IPO performs disastrously, or if the company goes bankrupt in six months, or if the the CEO turns out to be a crook, then that can embarrass the bank and lose it goodwill with its investor clients. The investors do a lot of repeat business with the bank, so it matters to the bank to be able to say “you should trade with us because we bring you lots of good IPOs.”

With direct listings, banks are not hired as underwriters, so you might think that none of the above would apply. In practice I think most of it actually does. Banks are hired as financial advisers, and while their names don’t go on the cover of the prospectus, they are pretty prominently associated with the deal and so have similar reputational risk as they would in an IPO. Also similar legal risk: While it is not entirely clear, lawyers seem to think that the financial advisers might be considered underwriters for legal purposes, and so they should do the same sort of due diligence and prospectus review as they’d do in a regular IPO. In fact because direct listings for big U.S. companies are relatively novel, the stakes for the banks are probably even higher than they are in an IPO: If you do 100 IPOs, everyone will understand if one or two are duds, but if you do the fourth direct listing ever and it’s a disaster, people will remember.

But that’s for the fourth. By the 100th direct listing, things will look different. Direct listings will lose their novelty, and messing up a direct listing will be no more embarrassing than messing up an underwritten IPO. Less embarrassing, probably, with your name not on the cover. More fundamentally, a direct listing doesn’t require a financial adviser at all. Practically speaking it does, now, because (some) banks know how to do direct listings and companies don’t. But when it becomes a standard tool it will be easier for companies to do on their own, with just a checklist from the stock exchange, or with help from smaller and less reputable advisers than the big banks that have led direct listings so far.

So you can see why the SEC might be nervous. If it approves NYSE’s proposal, the first company to raise money via a direct listing won’t be some fly-by-night fraud doing an offering on its own with no bankers or lawyers to review the deal; the NYSE, and the banks, and the investors all have good incentives to prevent that. But once you open the doors to private companies going public with no underwriting, it’s hard to close them again. A world in which private companies can routinely go public and raise money with direct listings is one in which the big banks might lose their gatekeeping role. Which is probably exactly what a lot of private companies and venture capitalists want! But it’s not necessarily what the SEC wants.

Bribes

It is not legal advice or anything but there is kind of a Money Stuff First Law of Bribes, which is that when you are talking about bribes, particularly in writing, you should not refer to them as “bribes,” and you should certainly not refer to them as “chickens” or “sugar” or some other clever euphemism; you should refer to them by boring but technically accurate terms. For example if you are trying to get a government official to award your company a big contract, and you hand him a sack of cash to speed that along, when it comes time to account for that sack of cash in your financial records you can call it a “corporate marketing fee.” That is literally true! You paid a fee to market your corporation! To him! Really bribery is the most straightforward and elemental form of marketing.

Or we have talked a few times about “success fees.” You pay a fee and your bid is successful, it’s a success fee, there is no problem here. “Consulting fees” is perhaps the most standard approach of all: You hire a local guy as a consultant, you pay him a large consulting fee, and his consulting consists of (1) knowing which local officials need to be bribed and (2) handing them some of the consulting fee.

This is all well-known stuff, and it’s not like an automatic get-out-of-jail-free card to tell prosecutors “that wasn’t a bribe, it was a consulting fee.” Still using boring business terms gives you a fighting chance of not getting caught, and even if you do get caught you’ve got a fighting chance to persuade a jury that it was all fine, and even if you do get convicted it is just, I mean, it is aesthetically a bit less embarrassing than if you’d used the dumb euphemisms.

Last week Swedish telecom company Telefonaktiebolaget LM Ericsson agreed to pay more than $1 billion of fines to the U.S. Justice Department and SEC for bribing officials in China, Saudi Arabia and Djibouti, and the SEC complaint is full of detail on how a large professional multinational company accounts for bribes. For instance:

Internally, EAB employees referred to these payments as “corporate marketing fees” which some employees believed to be code for bribes.

Or:

Ericsson China improperly recorded these payments as “other external services,” “site acquisition services” and “service fulfillment of contract.”

Or:

On or around December 18, 2013, the head of Ericsson’s Middle East region signed the Consultancy Frame Agreement on behalf of EAB’s Qatar branch. The agreement stated that EAB’s Qatar branch engaged Kuwait Consultant to provide services “within the area of marketing and sales support to increase customer satisfaction and enhance Ericsson business in Kuwait . . . with the purpose of winning the LTE business with [Kuwait SOE].” These services were never provided.

No, I disagree, surely the consultant did increase customer satisfaction (by giving the customer money) and enhance Ericsson’s business (with bribes). These things are all code for “bribes,” but they are also all, in their way, honest.

Soul Rider

Look, I don’t know anything about this job ad for “The Soul Rider LLC,” I am not going to make any efforts to find out about it, I make no representations as to whether it’s a joke or not, but here you go:

Using Supernormal Cognition our private fund aspires to provide a 75% accuracy rate in the prediction of near-term financial markets. You will be our private fund’s advisor. Your long expertise and great reputation in financial investments are paramount. You must have 20 years as a financial industry expert AND as an advisor to 10-figure funds. Depending on whom you listen to, we’ve heard that annual, gross commodity, equity or ETF ROIs between 80% and 100% are do-able. The private fund with which you’ll work is in its second iteration within the same legal charter. The first iteration successfully used Remote Viewing to forecast market motion of a SPY-related index. Our extensive research hasn’t found any other company with both a similar charter and methods, in any country. ... Now, please let me know your answers to these questions below? 1. What is the single most scientifically-inexplicable event of your life? 2. What do you feel and see about that event? Thank you. I’ve heard most every imaginable sort of answer. This is not the time to be fearful, shy, terse or laconic. Please communicate clearly and fully about your answers. Lots of thoughtfully expressed words and/or concepts are a very good thing in this case. If you read between the lines of our team's professional bios you will appreciate that our team has both seen and done lots of things which seemed impossible.

Reading the ad I am not quite sure if (1) they have a psychic and are looking to hire a hedge fund manager to make trades based on the psychic’s visions, or (2) they have a hedge fund and are looking to hire a psychic to tell them what trades to make. Or, you know, (3) they have neither a psychic nor a hedge fund but want to amuse the internet, that is always a possibility. Anyway if you get the job please do email to let me know, and while you’re at it maybe tell me the date, time and manner of my death.

Things happen

New York City Paid McKinsey Millions to Stem Jail Violence; Instead, Violence Soared. Repo Firepower Reduced by Falling Cash Levels at Big U.S. Banks. Morgan Stanley Eliminates About 1,500 Jobs in Year-End Cuts. How Fed Chairman Forged Rate-Cut Consensus. Morgan Stanley fined €20m over European bond trades. Goldman Jumps Into WeWork Cleanup With Debt-Financing Plan. WeWork’s Adam Neumann Eyes Potential Sale of Gramercy Penthouse. What does the Aramco IPO tell us about Saudi reforms? Big Banks Making Most Progress in Libor Transition, Study Finds. Sovereign Gold Bonds in 2019: Really? “I’ve spent the last five years since then adopting Venmo as my love language, attempting to infuse that same joy into the lives of my friends by sending them small amounts of money in their times of heartache and need.” Video chat Santas. Horse at PetSmart. The Influencer and the Hit Man.

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