How SoftBank, World’s Biggest Tech Investor, Throws Around Its Cash

The venture capital investing world is ruled by risk, and people are willing to take those risks trusting in little more than their personal instincts. One investor who has done so with mastery is Softbank Group tech magnate, Masayoshi Son, UC Berkeley alumni. In 1981, Son founded SoftBank as a software distributor, leading to investments in more than 1,300 companies. The group, and Mr. Son, gained even more importance in the industry after the launching of Vision Fund, which started with under $100 billion in investments and a 12-year term, ushering a new force into a tech-investment world long dominated by Western bankers and Silicon Valley financiers.

 

But how Mr. Son spends his money shocks people in this industry due to the large sums he is willing to pay for start-up companies, and this astonishment affects even Mr. Son’s directors. Many were against him when he purchased Arm Holding PLC, an U.K. chip-design firm that Mr. Son paid $32 billion for after only two weeks of negotiations. They affirmed that this transaction marked a “paradigm shift” at the company to invest in the Internet of Things. Another time, he decided to invest $200 million in a startup that grows vegetable indoors after a 30 minute of contemplation. Subsequently, he continued a “buying spree,” purchasing stakes in several other companies, many of them characterized as being what is known as “unicorns” – startups that have grown to valuations over $1 billion – such as Uber Technologies, Inc. or WeWork Companies, Inc. In several of those deals, Mr. Son had to argue with his directors and advisors who were saying that he was paying too much.

 

These high valued investment and expensive purchasing of startups has led to many in the tech industry to believe his investments help keep startup valuations high. “We all thought the unicorn stuff was going to start slowing down,” says Tim Connors, founder of Silicon Valley venture capital firm PivotNorth capital. “Then along comes SoftBank and lobs another $90 billion into what many people thought was already an overheated market.” Investors want to understand just how Mr. Son goes about deciding on his billions of dollars of bets, among the largest in the tech industry, and according to those working closely to him, his thought process can be as methodical as it can be haphazard.

 

Understanding how Mr. Son thinks matters because of his outsize impact. Softbank has led investments totaling about $145 billion in companies since 1995, including $22 billion to buy U.S. mobile carrier, Sprint. He managed the world’s biggest tech fund (Vision Fund), and a $6 billion affiliate, brandishing investments that often makes him the company’s biggest shareholder. He affirmed that his goal is to take big stakes in a coalition of companies driving technological change that will help the group sustain long-term growth for the next “300 years,” strengthening Softbank’s role as one of the biggest players in the industry.

How SoftBank, World’s Biggest Tech Investor, Throws Around Its Cash (PDF)

U.S. Supreme Court’s Pending Review of American Express Merchant Fees

Eleven states including Ohio, Connecticut, Idaho, Illinois, Iowa, Maryland, Michigan, Montana, Rhode Island, Utah, and Vermont, are involved in a lawsuit against American Express. These states argue that American Express’ unfair practice of prohibiting retail merchants from advising customers to use a credit card with lower transaction costs violates federal antitrust laws.

 

In the credit card industry where there are a small number of market players, as in an oligopoly, anti-competitive practices may result. In 2010, American Express, Visa, and MasterCard were accused of unfair practices. Subsequently, Visa and MasterCard voluntarily reached a settlement and agreed to give up their anti-steering provisions, which left America Express to proceed with a trial.

 

A policy known as an  “anti-steering” clause was imposed on merchants and retailers in American Express’ merchant agreement. This provision contractually forbids merchants from suggesting to customers that they should use competitors’ credit cards, such as Discovery, which has lower swipe fees. This was seen as stifling price competition. Merchants usually pass this hidden cost to customers in the price of goods or services. Therefore, the court has to determine whether businesses can encourage or discourage customers from using lower cost credit cards for their transaction payments.

 

The United States District Court for the Eastern District of New York, applying the rule of reason, found that American Express had violated antitrust laws because the anti-steering requirement in question caused harm to both merchants and credit card holders, who are the participants in American Express’ credit card network. The court further held that the restrictions on steering the customer’s free choice at the point of sale unreasonably restrains a competitive price, raises the cost of merchant fees, and inflates retail prices, which is in violation of Section 1 of the Sherman Act (15 U.S.C. 1). Notwithstanding the previous decision, the United States Court of Appeals for the Second Circuit conversely employed the two-sided market concept and reversed the District Court’s judgment by holding in favor of American Express. The Second Circuit held that the State of Ohio et al. had not shown that the anti-steering rules unreasonably restrain trade and cause harm to cardholders as well as merchants.

 

The credit card network is the cornerstone of a two-sided market, in which the credit card company is an intermediary linking two different user groups – customers and merchants. Merchants benefit from accepting a customer’s credit card only when there is an adequate volume of cardholders using that particular credit card, thereby covering the cost of the transaction fees charged by the credit card company. Meanwhile, using a credit card would be pointless for customers if the card could not be widely accepted by a full range of various merchants.

 

Even though the case has been pending in the United States Supreme Court, it is worth noting the possible vast impact if the Supreme Court upholds the Second Circuit’s judgment. This is because it may become the precedent case not only for credit card companies but also several large companies in other industries as well. It would enable numerous platform companies which have two-sides of users like Google, Amazon, Apple, Facebook, and Uber, among others, to be more powerful by taking advantage of such a ruling. Overall, the Supreme Court’s determination will carry great weight.

U.S. Supreme Court’s Pending Review of American Express Merchant Fees (PDF)

Telegram Seeks Over $1 Billion in Potentially Historic Initial Coin Offering

Telegram Messaging, a private digital communication application boasting approximately 180 million users, is poised to raise more than a billion dollars in potentially the largest ever I.C.O. (Initial Coin Offering). Over the past two months Telegram has already raised $850 million dollars for its newest concept, “Telegram Open Network” or “TON.” Moreover, over the next month Telegram plans to raise another $850 million.

 

Initial coin offerings rely on the creation and sale of a cryptocurrency to allow young companies to raise money. These digital vouchers can then be used in a secondary market to provide access to applications or services. As such, ICOs evade more traditional methods of fund raising, like relying on venture capitalists or initial public offerings.

 

Accordingly, ICOs offer the advantage of allowing companies to maintain complete ownership of their technology. Moreover, the crowd-funding facet of ICOs could potentially allow companies that may provide useful services but are often ignored by more conventional sources of funding, to raise money. One such sector of companies are start-ups working on open source projects such as Wikipedia.

 

Despite these potential advantages the relatively untested and unregulated nature of ICOs has created growing concerns about their legality in the United States and abroad. Many countries fear that ICOs may be used to defraud investors. That said, Telegam appears to be undeterred.

 

Telegram’s recent ICO comes on the heels of a 132-page white-paper released by Telegram that explains the company’s plans for “Telegram Open Network.” Telegram promises that “TON” will provide the support necessary to enable the creation of a new “third generation” digital currency Telegram calls “Grams.” Telegraph insists “TON” will improve upon efforts made by predecessors in the cryptocurrency field, such as Bitcoin. According to Telegraph “Grams” will offer a safer, more secure cryptocurrency, protected from the problems that have plagued other networks supporting virtual currencies. In particular, Telegraph claims “TON” will address theft via cyber-attacks and an inability to keep up with the rate of transactions.

 

In order to accomplish these objectives, Telegram plans to rely in part on its already existing private and secure communication network, which already provides encrypted voice and text message transmissions. Telegram plans to use its encrypted network to insure exchanges and transactions involving “Grams” remain anonymous. Telegram also claims that users of “TON” will be able to use “Grams” to transfer money across borders with low transaction fees and to pay for third party services. Telegram plans to release “TON” either late this coming year or during the beginning of next year.

Telegram Seeks Over $1 Billion in Potentially Historic Initial Coin Offering (PDF)

Apple in Talks to Buy Cobalt Directly from Miners

In an effort to avoid potential production issues of its devices, for the first time ever, Apple Inc.,  is in talks with miners to buy cobalt directly from them. Cobalt prices have soared of late because of an expected growth in demand thanks to the electric vehicle boom and there has been some fear of a shortage driven by this aforementioned boom. Apple wants to ensure that it will have enough of the key battery ingredient to avoid any problems, according to insiders.

 

Apple, is one of the largest users of cobalt for batteries in its electronic devices, but up until now it had left the buying of metal for its batteries to the companies that actually make its batteries. According to a Bloomberg report, citing an anonymous source, Apple is seeking contracts to buy several thousand metric tons of cobalt for five years or longer. Because Apple is still “in talks,” there is a possibility that Apple’s discussions will fall apart. Last year, rights group such as Amnesty international said that about a fifth of Congo’s Cobalt production is mined by hand by informal miners including children, often in dangerous conditions, which struck a nerve. To that end, almost a year ago, Apple announced that it would stop buying cobalt mined in the Congo by hand until it could ensure that companies in its supply chain had eliminated child labor practices and dangerous work conditions.

 

According to Darton Commodities, today, over half of the worlds’ cobalt supply is consumed in rechargeable batteries which are used in portable electronics, energy storage systems, electric vehicles and other applications. Although smartphones only use about eight grams of refined cobalt, the battery of an electric car requires over 1,000 times more. This means that in the future, Apple will be in direct and intense competition with carmakers such as BMW and Volkswagen who plan on going electric as well as battery producers like Samsung to secure supplies for its products in the future.

Apple in Talks to Buy Cobalt Directly from Miners (PDF)

The Weinstein Company Reaches Deal to Sell Assets

On March 1, 2018, the board of directors at The Weinstein Company confirmed that the company is to sell its assets to an investor group led by Maria Contreras-Sweet and Ron Burkle.  New York Attorney General Eric T. Schneiderman confirmed the deal and also announced that the parties had committed to create a victims’ compensation fund at the new company along with new HR policies that would protect employees. The Attorney General stressed that his office would work with the parties to ensure they honor their commitment.

 

The announcement comes days after The Weinstein Company said it would pursue bankruptcy after talks with Contreras-Sweet and Burkle initially failed to reach a signed agreement. The Weinstein board of directors criticized Contreras-Sweet and Burkle’s investor group for failing to provide financing to keep Weinstein afloat in the meantime. However, the parties managed to reach a last-minute deal last week. Contreras-Sweet, the former head of the U.S. Small Business Administration, said she will bring a new vision to the company.

 

Attorney General Schneiderman had initially criticized the sale, arguing that it did not do enough to compensate Weinstein’s victims and protect employees from sexual harassment and assault, going so far as suggesting that the sale actually rewards those Weinstein Company officials who did nothing to stop Weinstein while he was at the company. The New York Attorney General’s office filed a lawsuit against Harvey and Bob Weinstein and the Weinstein Company for violating New York human rights, civil rights, and business laws; the suit is filed in New York State Supreme Court in Manhattan. The lawsuit threatened the sale of the company, but it appears that the parties have been able to work through any potential issues regarding the sale while also gaining the Attorney General’s support.

 

Contreras-Sweet and Burkle’s investor group will install a new board of directors, the majority of which will be female, and the group promises to issue in a new era at Weinstein. The financial details have not been made public, but people familiar with the deal said the previous bid was worth $500 million, with a $225 million assumption of debt.

The Weinstein Company Reaches Deal to Sell Assets (PDF)

Recap: BCLB Leadership Lunch Talk: “Vice Chancellor Tamika Montgomery-Reeves – The Corporate Judge”

Berkeley Law students had the privilege to meet the Honorable Tamika Montgomery-Reeves at the Leadership Lunch Talk hosted by the Berkeley Center for Law and Business (BCLB) on February 14, 2018.

 

Vice Chancellor Montgomery-Reeves received her law degree from the University of Georgia School of Law in 2006 and a B.A. from the University of Mississippi in 2003. She started her career as a law clerk for Chancellor William B. Chandler III of the Delaware Court of Chancery and then practiced in the securities and corporate governance department of Weil, Gotshal & Manges LLP. Before she was sworn in as a Vice Chancellor of the Delaware Court of Chancery on November 25, 2015, she was a partner at Wilson Sonsini Goodrich & Rosati in the Wilmington, Delaware office. As a partner, she focused on corporate governance, navigation of corporate fiduciary duties, stockholder class action litigation, derivative litigation, and complex commercial litigation.

 

While practicing in Delaware, the Vice Chancellor was able to focus on corporate governance issues, while in New York she had to do other types of work (i.e. securities, capital markets) even as part of the corporate governance group at Weil. She also shared that since the practice in Delaware is small, you end up running into the same people over and over again which creates a higher expectation in terms of diligence.

 

The Delaware court system is also very unique because it is a court with limited jurisdiction by statute and is formed by five judges: Chancellor Bouchard and four Vice Chancellors. The Delaware Court of Chancery does not have juries, a feature valued by businesses, and the judgments can be directly appealed to the Delaware Supreme Court. Consequently, the litigation timeframe in Delaware is shorter (normally 2 or 3 years) than in other states. From a substantive perspective, litigation in the Court of Chancery consists of three main categories of cases: commercial and contractual matters in general, corporate matters and corporate governance cases, and disputes related to property.

 

Vice Chancellor Montgomery-Reeves always wanted to do something related to public service and her current job is allowing her to do so. She is very happy to be back in Delaware, where she was a law clerk. Moreover, her actual position allows her to do what she loves: research and write what the law is, figuring out the solution for each case. However, she is facing new challenges such as living in the public eye and the limitation of resources. Her decisions are public and consequently, scrutinized by the public opinion. Also, when she was working in private practice, she used to work in teams of approximately ten lawyers but now she has to produce her decisions with the help of just two clerks. Nevertheless, she described her two years of experience as Vice Chancellor as absolutely amazing.

Recap- BCLB Leadership Lunch Talk- Vice Chancellor Tamika Montgomery-Reeves – The Corporate Judge (PDF)

The Self-Driving Technology Mega-Lawsuit Abruptly Settles

Waymo has settled its lawsuit against Uber for allegedly stealing its confidential self-driving technologies. Its decision brings an abrupt end to a high-profile Silicon Valley lawsuit and enables Uber to move past the damaging press coverage. The case has important implications for tech companies’ willingness to refrain from fighting, and showcases how business and legal strategies can influence each other.

 

Waymo agreed to drop the lawsuit in exchange for a $245 million increase in its equity stake in Uber and an agreement not to use Waymo’s confidential information. The claim alleged Uber’s chief engineer on its self-driving project took thousands of confidential documents when he moved from Waymo to Uber last year. The lawsuit put Uber behind in its development of self-driving vehicles, a critical component of its long-term profitability goals.

 

The trial and settlement negotiations illustrate how business motives can influence legal strategy. Both Uber and Waymo had good reasons to settle. Waymo initially sought a $1 billion settlement. Uber managed to negotiate down to $245 million. Purportedly having presented scant evidence of that Uber actually used any of Waymo’s technologies, Waymo agreed to the $245 million deal.

 

On the one hand, Waymo was having difficulty establishing key elements of its case. In a departure from company historical trends, Uber actually benefited from former CEO Travis Kalanick speaking out. Waymo’s attorneys failed in provoking him during his testimony; he remained calm, collected, and delivered well-prepared responses to their questions. Little evidence had been produced indicating Uber stole any of Waymo’s confidential information, which explains why Waymo settled for a quarter of its initial settlement asking price.

 

On the other hand, Uber came into the trial with heavy baggage. The case follows a series of bruising public revelations, including allegations of sexual harassment, a toxic workplace, internal investigations, employee turnover, and federal crime probes. The revelations during this trial were another set of challenges new CEO Dara Khosrowshahi has been handed.

 

The settlement allows both companies to move past the high-profile case that has jolted Silicon Valley. The case may make other companies more careful in managing trade secrets. Personnel working on driverless technologies at other companies may be siloed. Yet the settlement still primarily impacts Uber and Waymo. Experts agree an industrywide shift is unlikely.

The Self-Driving Technology Mega-Lawsuit Abruptly Settles (PDF)

Airbnb Reinvents Itself as Core Business is Halted by Regulations

In March 2017, Airbnb received more than $1 billion from investors and was valued at $31 billion. Airbnb was expected to continue its impressive growth, and several analysts anticipated that Airbnb would go public in 2018. However, increasing regulations stymied Airbnb’s momentum in the market, forcing the rental giant to reinvent itself. Airbnb responded to recent regulations in two ways: by focusing on margins and diversifying its services.

 

Airbnb is trying to increase margins by establishing a bigger presence in the luxury short-term rental market. On February 22, 2018, Airbnb launched “Airbnb Plus,” which includes properties that are inspected by Airbnb and guaranteed to have certain amenities, such as soap, shampoo, and empty cabinets. Concurrently, Airbnb launched “Beyond by Airbnb,” which is a tier beyond Airbnb Plus, and includes some of the most luxurious homes in the world.

 

In addition, Airbnb will place a greater emphasis on promoting “Airbnb Trips” in an attempt to diversify its services. This platform allows consumers to book experiences in conjunction with vacation housing. Airbnb’s biggest competitor in the space will be Viator, a TripAdvisor company. Airbnb is confident it is a more convenient platform for travelers who do not want to spend extensive time researching and want all of their vacation accommodations booked on a single website.

 

Many cities across the world – including New York, San Francisco, Los Angeles, and London – have regulated the market for short-term property rentals in order to restore the market for long-term housing. In unregulated markets, commercial operators tend to list real estate on Airbnb for short-term rental instead of making the real estate available for purchase. This makes it difficult for prospective property owners to purchase real estate, a critical resource; regulators insist this in turn inhibits social mobility.

 

Regulation presents many problems for Airbnb. First, the regulations curtail Airbnb’s core competency and most reliable revenue stream. For example, rentals in San Francisco decreased by 54% after the city instituted the regulations. In addition, the cities that have decided to regulate have done so in different ways. As a result, Airbnb must adapt itself to cities across the world based on local legislation, which is very costly. Lastly, short-term rental regulation continues to be a hot topic, even in cities that have already adopted legislation. According to one Senator, the issue is “not going away” any time soon. Thus, the future of short-term rentals is uncertain, and investors remain concerned about the prospects of Airbnb.

 

While Airbnb has been set back by regulations, it still seems to be well-positioned in the market. Airbnb has an opportunity to use its powerful brand in order to expand its footprint and become a more comprehensive platform to book travel. Nevertheless, with regulation often comes uncertainty; as a result, Airbnb’s plans to go public are on hold – at least for now.

Airbnb Reinvents Itself as Core Business is Halted by Regulations (PDF)

Waymo and Uber Reach Surprise Settlement

In day five of a trial expected to last at least two weeks, Waymo and Uber reached an unexpected settlement to end the trial that rocked the technology world for nearly a year. The final settlement saw Uber granting Waymo 0.34% of Uber’s equity, valued at approximately $245 million, and agreeing to measures to ensure that Uber does not incorporate any Waymo technology in the future. Uber expressed regret and noted that it still did not believe that it had used any of Waymo’s proprietary technology. While Travis Kalanick, the disgraced cofounder and former CEO of Uber, took the stand and gave stirring testimony, the trial ended before Larry Page, the billionaire cofounder and CEO of Alphabet, Waymo’s parent company, could testify.

The lawsuit began when Waymo engineers were accidentally CC’ed on an email involving Uber employees and a contracting firm that makes LiDAR, a critical technology for self-driving cars, which included schematics similar to proprietary technology developed at Waymo. The inventor of that technology, Anthony Levandowski, had left Waymo and started a new company called Otto, which was then acquired by Uber, thus raising suspicions that Uber had appropriated Waymo’s trade secrets.

The trial was dramatic, and as with any major lawsuit, surprising information came to light. It was revealed that Lyft almost bought Otto and that Waymo feared falling behind in the self-driving race. Shockingly, Otto’s technology may turn out to have been worthless. Otto was widely lauded in the press, but Lior Ron, Otto’s cofounder, only received $20,000 from the deal due to missing every benchmark for the acquisition. The settlement agreement implicitly revealed Uber’s valuation, $72 billion, which was kept under wraps during its most recent Softbank-led round.

Though a settlement was unexpected, in hindsight it is perhaps unsurprising. A study from 2008 showed that 82-90% of cases settle before the trial is concluded. Furthermore, despite the damning Stroz report alleging serious misconduct, Waymo suffered a series of setbacks over the course of the lawsuit, as previously reported by BBLJ. Waymo’s complaint was narrowed from over a hundred claims to merely eight by the time of the trial. During the trial, Judge Alsup criticized Waymo for showing little of substance, suggesting that there was little basis remaining in their stripped-down claims.

The settlement was widely considered a success for Uber’s new CEO and general counsel. Uber’s new CEO, Dara Khosrowshahi, previously of Expedia, has thus far spent his short tenure putting out the fires of previous leadership. A failure in this lawsuit could have resulted in a devastating blow to Uber’s self-driving ambitions and, consequently, possibly destroyed the company. Uber’s brand new general counsel, Tony West of Pepsico, negotiated the settlement down from a reported $1 billion in cash. Alphabet was already a significant investor in Uber.

Waymo and Uber Reach Surprise Settlement (PDF)

U.S. Financial Watchdogs Call for Federal Oversight of Cryptocurrency Trading

In a hearing on Tuesday February 6, 2018, U.S. regulators encouraged Congress to consider expanding federal oversight of cryptocurrency trading. The volatility of bitcoin and other cryptocurrencies has many banks and lawmakers apprehensive. Bitcoin increased in value by more than 1,300% last year, reaching a high of $20,000 in December. Early 2018 has seen that valuation fall by more than 50% to below $7,000 on Tuesday. The hearing was intended to discuss how virtual currency fits into U.S. financial regulation and how to best protect investors and consumers moving forward.

 

Jay Clayton, chairman of the Securities and Exchange Commission (SEC) testified that cryptocurrency is analogous to securities, commodities, and currency exchanges, which are regulated at the federal level with oversight by the SEC or the Commodity Futures Trading Commission (CFTC). U.S. cryptocurrency exchanges currently register as “money-transmission services,” which are regulated at the state level, often with great variation from state-to-state. Clayton stressed that replacing this patchwork approach with a federal regulatory framework will protect investors while continuing to foster innovation.

 

CFTC Chairman J. Christopher Giancarlo testified “appropriate federal oversight may include: data reporting, capital requirements, cyber security standards, measures to prevent fraud and price manipulation and anti-money laundering and ‘know your customer’ protections.”

 

Financial groups are eager to create bitcoin and general cryptocurrency-exchange-traded funds (ETFs) to make the currency more accessible to investors. Previous attempts at a bitcoin ETF were not approved by the SEC, but expanding regulatory authority and federal oversight could provide the foundation for cryptocurrency ETFs in the near future.

 

So far, the SEC has been focused on initial coin offerings (ICOs). An ICO enables a company to raise funds by offering investors virtual tokens in return for their cash or cryptocurrency, rather than obtaining shares in the company as in a traditional public offering. Investors are supposed to eventually be able to redeem the digital coins for goods and services. Clayton believes many ICOs have been done illegally. He says every ICO thus far has been a securities offering, with none of them registering with the SEC. Clayton warned that professionals structuring these transactions, namely lawyers and accountants, “are squarely in the cross-hairs of [the SEC’s] enforcement division.”

 

For its part, Giancarlo reported that the CFTC is preparing to bring more enforcement actions against fraudsters targeting investors through virtual coin scams.

 

The crypto industry’s response to the hearing has been overall positive. Jerry Brito, executive director of Coin Center, a blockchain think tank in Washington D.C., said the hearing demonstrated that lawmakers want to fight crypto frauds and scams while letting Americans exercise a right to own cryptocurrencies.

U.S. Financial Watchdogs Call for Federal Oversight of Cryptocurrency Trading (PDF)