I recently had the pleasure of interviewing Alok Sama, author of The Money Trap, on my podcast. The book is a fantastic and entertaining read about the highs and lows of his six years as CFO at Softbank. But, beyond the wild ride, there are some useful lessons are there for the risk community – see below for eight key points I took away.
- The perils of neglecting asset-liability matching
Softbank was a huge investor in WeWork, the office leasing organisation. I have been a user of WeWork, and I loved the financial alchemy with which they transformed a long-term fixed cost – facilities – into a monthly variable cost. However, I never understood how the other side of the trade worked – I was right. Sama says “WeWork’s assets were mostly short-term office rental agreements, many with early-stage companies and individuals. Its liabilities, however, were long-term, frequently ten-year-plus lease agreements with commercial landlords. In a recession (or a pandemic!), this mismatch could destroy a balance sheet.”
2. Knowing your weaknesses – and when to get out
Son’s brilliance and vision in spotting trends and moving them around the world were evident in the book. However, all heroes have flaws, and some early errors in missing a killer deal, or not going in big enough, were over-compensated for in later years “For Masa, missing out on Facebook— the $10 billion would become $1 trillion in 2021—evidently made a profound impact. In tech investing, sometimes not being aggressive enough can be an expensive mistake.”
“while Masa had an impressive track record investing ahead of technology megatrends, he frequently held on too long”.
3. Being the “crazy guy”
One of Son’s favourite phrases was that the “crazy” guy would beat the smart guy any day. Sometimes this chutzpah and conviction helped them to pull off audacious deals. Sometimes however, investor scepticism of his approach held them back. “We needed to convince them that Masa’s vision was supported by disciplined portfolio and risk management”. As Son regroups for his third act, it will be interesting to see who goes along with him.
4. “Sometimes markets really are efficient”
The author details the exquisitely executed acquisition of UK chip manufacturer, Arm, right in the scorched-earth aftermath of the Brexit vote. The entire deal, from first approach, to the new owner speaking to the Arm staff took a blistering two months. However, they had paid a high price and the markets penalised them for this – the valuation of Softbank dropped by $10bn, almost exactly the premium they had paid. In the author’s words; “There were no synergies, nor did we provide other arguments to justify this premium.” Not that this was viewed as a failure by Son – the positioning, insight and strategic imperative he felt he gained meant he was thrilled by the deal.
5. Cyclicality and time horizon – the diversification effect of time
When you have a $100bn (yes, billion) fund to invest, finding quality and riding economic cycles can be a challenge. Time is itself a diversifier. “There is a frequently overlooked temporal dimension to diversification. Other things being equal, a fund that invests $100million a year over ten years is less risky than a fund that invests $500 million a year over two years.”
6. The effect of leverage – and double leverage
Included here for the most evocative metaphor I’ve ever read for using debt to turbo-charge your investing – “Double leverage is like chasing espresso martinis with Red Bull shots— you could fly to the icy peak of Mount Everest and crash to the dark bottom of Mariana Trench faster than a cheetah chasing a gazelle.”
7. The importance of being agnostic
Technologies that succeed are those that serve all market players equally and don’t depend on the success of one over the other. “Crucially, like Intel and Cisco and the makers of picks and shovels used in the California gold rush, Nvidia’s business model was agnostic.”
8. The lack of due diligence in a bull market
It’s so obvious in hindsight, isn’t it – or even at the time. In the euphoria of tech booms “speed of execution, with minimal diligence, became a selling point when growth investors competed for deals in this frenzied “spray and pray” investing market.” Moderate, cautious voices and due diligence take a back seat in favour of frenzied deal-making, and we know what happens next. Although, take a listen to Alok’s point of view on this in my podcast, where he provides a more nuanced perspective.
