And so it begins......Playing catchdown?
Beware of financiers bearing pre-IPO opportunities
A main focus of the venture sector over the last few years (or even decades in some cases) has been disruptive proto-businesses, whose purported uniqueness makes them both potentially attractive but also hard, if not impossible, to accurately value. This challenge has created additional opportunities for claimed returns - especially if early stage professional or institutional investors can build a portfolio, almost like a bank, of technology or software businesses. However, the late stage of that, typically the stage with the greatest instances of overvaluation and crowding out, may now be starting to unravel. Sadly, when the happens the finance industry still tends to look for ways to maximise the return on its exposure.
Caveat investor!
We’ve already seen private banks offering investors the opportunity to invest small stakes (e.g. $100,000 of secondary shares) in Softbank-backed pre-IPO businesses.
Of course, it may be that these businesses do need ‘small change’ funding prior to their ultimate listing. Or it may be that the early stage investors, like Softbank, want additional funding rounds simply for the sake of validating their own stakes (which can then be revalued at the new subscription price - in the latest example that we’ve seen a 60% premium at a time when we might have expected a discount).
What does this mean?
For one thing, be very wary of assets whose pricing is determined by such artifice and possible chicanery - listed assets are currently having a difficult enough time working out what reasonable valuations might look like - unlisted ones are even more challenging.
Secondly, it might be overstating things to say that companies like Softbank are in greater trouble now than in the tech wreck (when Softbank’s shares fell more than -90%) but pretty soon, that may well be the case.
Finally, this kind of manipulation has the potential to act as a toxin that could ultimately infect all capital markets.
Softbank share price during the ‘techwreck’ (Feb 2000-Feb 2001)
As we noted in our April 2022 client outlook-
A major warning shot has been fired by the IPO market. A report from Renaissance Capital confirmed that the US IPO market in Q1 was the slowest since 2016, a fall of 95% year on year, with only seven companies raising more than $50 million.
As few retail investors participate in IPOs, why is this such a concern?
For the last few years, we’ve talked of the scourge of VC and its poster child Softbank.
Our concern is that the whole unicorn phenomenon is a repeat of the dotcom nonsense of over 20 years ago, where asset prices of Potemkin businesses are ramped to such ridiculous levels that investors are writing cheques that the companies can never fulfil.
This led to the dotcom bust, tech-wreck and NASDAQ crash at the start of this millennium.
Is History Repeating? Softbank Share Price 2000-2022
Today, implausible VC valuations are a bed of nitro-glycerine (to borrow Bill Gross’ iconic phrase) atop which reside the likes of ARK, which like Softbank, has history. Following the Dotcom bust, the NAV of Cathie Wood’s Tupelo CM Fund fell by well over -80%.
Is The ARKK More Like The Titanic?
The consequences of such a repeat meltdown are highly explosive as well. Contagion would move from VC, through Tech to Growth, ultimately rendering all risk assets potentially vulnerable.
Do the broader indices have some catching up, or rather catching down still to do?
For any more background on these points, please don’t hesitate to drop us a line.
These discussion points also form the basis of our Quarter 2 Outlook, provided to clients of MBMG.
Flash subscribers can also receive this by replying to this email requesting a copy.
Click >> REQUEST MBMG OUTLOOK Q2/2022
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Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
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