Tidbits in the News: Samsung Redemption, Twitter’s Mixed Tweets, Softbank’s Spending Spree

This week marked the start to the Olympic games in Pyeong Chang, South Korea, as well as the worst single day drop in DJIA history (in terms of points). But there was a lot of smaller, rather important, news stories that largely flew under the radar this week.

So let’s get started.

Samsung’s Get Out of Jail Free Card

Samsung’s vice chairman, and heir to the Samsung empire, Lee Jae Yong, was released earlier this week on 5 years probation, marking an end to appeals hearings in Korean courts. This is in stark contrast to the ruling by lower courts, finding Lee guilty of most charges brought against him by prosecutors, namely bribery. He was sentenced to 5 years in that hearing.

There’re a few things to talk about here, so let’s start off with the basics. Is this unexpected? No. In fact, the Korean courts have a long history of letting off prominent business leaders with light sentences, particularly in appeals hearings. In fact, they call it the “3-5 rule”, where the defendant is found guilty, but is sentenced to 5 years probation, with a discretionary 3 years if necessary. You can read more about it here, a compilation of all the sentences involving prominent business leaders. The source is, however, in Korean.

This was long seen as a way for courts to show leniency to the owners of the largest Korean conglomerates, while, at the same time, acknowledging their wrong doing. This would, usually, follow in a presidential pardon soon thereafter.

But many in Korea, especially now since the candle light revolution took place, were expecting this de facto rule to be scrapped as well. We now know that didn’t play out. In fact, many have expressed their regret concerning the light sentence given to Lee. Of course, there are also those who have expressed gratitude to the courts for finding Lee “innocent”, but the general consensus in Korea seems to be that this is an abuse of power by the court of appeals.

Now, why is this significant?

If you are doing business in Korea, you’ll know that if the owner is incarcerated, or debilitated under any circumstances, all operations are in full maintenance mode. In other words, no new business. This is regardless of the size of the company. In fact, I remember that Lee’s arrest affected business talks at Cheil, their marketing unit, while similar investigations concerning Lotte halted most talks with their accelerator unit. Lee’s release will alleviate these tensions, mostly, despite the case seemingly headed to the Korean supreme court.

On a more general note, however, it’s a sign that while the leadership has changed, the system has not. There’s an overhaul that’s looking to fundamentally change the system, to make it fairer, to see to it that perpetrators are convicted, regardless of socioeconomic background. But, this process can take years, even extend beyond Moon’s administration, into his successor’s (assuming Moon’s successor is of the same political leanings as him). But, while things at the top won’t change, the general sentiment this has created in the country will change things from the bottom up. And, often those changes prove the most effective.

Twitter’s Mixed Messages

Twitter has had an interesting week, itself, despite the markets. Earlier this week, it saw its head of AR/VR take his leave. Then, just yesterday, it posted its first ever profit, beating street expectations on just about every metric. Its stock price soared nearly 25% as a result, valuing it above Snapchat, which, itself, saw stocks soar on revitalized growth trends for its DAU metric.

There’s a lot to digest here, so bear with me.

First, let’s tackle the simplest part of this story. Why did Snapchat’s stock soar? That’s simple — future potential. The company’s investors know that Snap can’t reasonably turn a profit, yet. They’re banking on the company’s potential to grow into something bigger, perhaps a rival to Twitter, even Facebook, and generate profits far beyond imagination. The largest concern they had, thus far, was that Snapchat’s DAU metric was growing far slower than expectations. With that problem seemingly “solved”, investors are willing to give the company a second shot.

Then, why is Twitter stock higher by 25%, and why is it valued more than Snap? First, Twitter stock is seemingly higher based on its first real profit. The expectation is that, based on this one time event, Twitter now understands how to make a profit from the services it offers. This profitability is also why Twitter is valued more than Snap — Snap doesn’t have profits, yet.

As you can tell, I don’t like any of this.

First, these are one time events. You can’t get a trend from one off data points. As far as I’m concerned, Twitter doesn’t know how to make a profit reliably, yet. It does, however, know how to increase its revenues reliably. It’s just now realizing it needs to cut its costs to remain efficient in the process. Whether this continues is something to watch for in the next quarter.

Snap’s story is even worse. It seems that this growth in DAU QoQ is a one off event, as a result of a design change in its Snapchat app. A design change often drives an increase in DAU figures, as it stimulates user curiosity, prompting infrequent users to come back and check out the redesign. Is it a reliable metric to value a company off of, then? No. But, in Snap’s case, there’s little else to go off of.

The bigger story should have been the resignation of Twitter’s head of AR/VR, Alessandro Sabatelli. I say this, not to be a contrarian (which I clearly am, obviously), but to bring up a point about Twitter cutting costs, and the profitability of its new ventures. Twitter is famous for botching up its acquisition of Vine in 2012. And, seemingly since then, the company seems to have struggle in finding ways to generate new revenues from new services. AR/VR is another example of this. The company did a couple of experiments with 360 video, but that’s about it. Whereas Facebook and Google are powering through with AR/VR, Twitter seems to have largely neglected it.

If Twitter is profitable in terms of its now 280 character micro blogging service, then, perhaps, it is time to cut and focus efforts on that niche market. It might need to consolidate its UX on this single, profitable business, and expand from there, as opposed to the rather scattershot approach it tried so far.

Softbank’s Spending Spree

It was about half way through last year that Softbank announced its Vision Fund, a $93B US fund that would be used to invest in companies of all industries. Well, approximately 9 months in, the fund announced that it’s invested $35B of that already.

Well, it’s good news, then, the company’s raising a Vision Fund 2, then.

Softbank’s spending spree actually raises a couple of concerns, and a couple of benefits. The concerns first, though. First, startup valuations. This has been an ongoing concern in Silicon Valley, and the greater startup world — startup valuations are being pushed ever upwards, seemingly based on nothing, if anything at all. Softbank’s Uber deal is a good example of this, especially considering Uber is still burning through cash rather quickly. another concern is that this may cause overheating in the VC funds space, pushing traditional players, like Sequoia, into the stratosphere in terms of new fund sizes. This may cause a vacuum in the pre seed/seed funding stages, as players move to later and later investment stages, which seems to be a very legitimate concern.

2 possible benefits of this is that this could prompt more newcomers to earlier stages, which can help entrepreneurs attain favorable deals, and that bigger fund sizes might put VC funds in direct competition with PE funds, prompting players like the Carlyle Group to at least consider VC investing.

The last point, there, is rather key. $35B is the number I want to focus on for this. This wasn’t a result of hundreds of small deals averaging $50M a cheque. Each deal Softbank does is in the billions, and that’s no mistake. This is a clear signal that there’s a lot of opportunities that are ripe for the taking, especially in pre-IPO companies. Traditionally, these companies would either go IPO, or fund themselves through their profits and stay private, rather than seek additional rounds of funding. Some, still, seek out PE funding, be it secondary buyouts, or LBOs. This is key. Softbank is using a VC fund to do traditionally PE deals.

Right now, the playing field is just Softbank at this level. Pretty soon, big VC funds will join in, once they close their new, mega funds. Deals by these funds will, no doubt, provoke PE funds. Whether they take the opportunity to fill the void below is doubtful, but they might move down stream to compete more directly with these mega VC funds.

But that’s all speculation at this point.



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