recorded on iPhone using Tincup Voice in the default Safari browser.
This post is about investment ethics.
Specifically, what are the dynamics of a very large investment into a rapidly growing company that is positioning itself as the market leader in a lucrative market, especially a new market - one that previously has not existed?
I’m gonna focus on WeWork in this post.
WeWork has been discussed quite a bit. Scott Galloway was one of the more recent very vocal analysts to call out WeWork’s issues. That’s got me thinking about the ethics behind these incredibly large investments for which Softbank is notorious. I purposefully used the word notorious.
I don’t think these are good things. It creates perverse incentives on both sides.
When Softbank makes these extraordinarily large, multimillion or billion-dollar investments in these companies that are attempting to both define & capture a market simultaneously, it enacts an almost completely hands-off approach to the founder CEO.
Here is a giant pot of cash. Go do whatever is necessary - without regard to following the law, following regulations, doing fundamental basic due diligence on markets, suppositions & hypotheses - just go out and capture as much of this market as you can.
So that, you know, on the other side of this, we (Softbank) will reclaim a very large return on our investment. We really don’t care about the dirty work that occurs between today and that point in the future.
This creates an incredibly dark set of incentives for a founder to do bad things. And if that founder is someone of dubious character (it certainly seems that this founder of WeWork fits that definition - there’s plenty of data to paint that picture) those incentives are going to very easily and quickly elicit unethical behavior and frequently illegal behavior.
The amount of self dealing that occurs as either first or second order effect here is extraordinary. Again, this has been widely reported. Look at the S-1 that WeWork filed. There’s simply no escaping the amount of self dealing that Neumann and his wife undertook. It’s just extraordinary.
Let’s come back to Softbank. What in the world was going through their minds when they saw WeWork doing all these awful things that are eyebrow raising now because “oh, my God, how could he do that?”
He’s been doing it up until this point, somewhat privately of course; I’m using “privately” with a bit of qualifier there. He certainly wasn’t doing it in secret, but it wasn’t as visible as it became the moment that shit showed up in the S-1.
Softbank didn’t suddenly become ethical. Softbank is trying to do damage control. They didn’t give two shits about ethical conduct prior to the public’s reaction to WeWork’s S-1. If they had, they wouldn’t have invested in WeWork - they would not have invested in Neumann. They would have, at a minimum, done something to unwind their exposure prior to the public markets getting a glimpse of WeWork’s insane financial structure.
So I think there’s a lot to unwrap here.
Is Softbank a fundamentally unethical operation? I think that’s a fair question to ask. Do large amounts of cash act as a divining rod for unethical individuals? There’s an argument for that as well.
When you put these together, you have a recipe for the sort of financial shenanigans that we’ve seen WeWork undertake.
Do large investments prompt unethical behavior or simply locate it?- jbminn