The EconomistNovember 2nd 2019 Finance & economics 672
Buttonwood VC after SoftBank
D
ealmakers aresmooth talkers.
They need to be. But which branch of
finance has the slickest ones? Consider
the polished, public-school manner of
the City investment banker—or the
high-velocity spiel of the Wall Street
bank boss. Both have a strong claim. But
the venture capitalists, or vcs, of Silicon
Valley have a stronger one. They spend
their time either being pitched to by, or
pitching on behalf of, entrepreneurs who
hope to be the next Zuck or Larry-and-
Sergey. Peddlers of such extravagant
dreams have to have silver tongues.
They certainly have some catchy
phrases. They speak of “vanity metrics”
(misleading measures of a startup’s
progress); of the importance of “product-
market fit” (how well a piece of software
meets the customer’s needs); and “deal
heat”, the fever that causes investors to
overpay. After a while even a normally
buttoned-up Buttonwood is asking to
“double-click” on a topic when he wants
more detail from a voluble vc.
A subject guaranteed to get them
talking is the flood of capital into Silicon
Valley. In the popular metaphor, the vc
business used to consist of a flotilla of
small boats fishing in a well-stocked
lake. It was all very collegial. Now the
lake is an ocean. Trawlers are out there—
big institutions, such as sovereign-
wealth funds and pension-fund manag-
ers, that increasingly invest directly in
technology firms before they reach pub-
lic markets. The abundance of capital has
made the vc game more competitive. It
has also distorted the market for private-
ly held firms.
That new firms are staying private for
longer is both a cause and a consequence
of this change. The deeper reasons for the
shift are debated. Some vc types put it all
down to regulations that made it costlierto become a public company and easier to
remain a private one. Others place more
weight on the changing nature of new
firms, which need less capital than they
once did, both to start and to grow. The
building blocks for business software or
smartphone apps are freely available as
open-source code. Computing power can
be leased. The result is a shift in the bal-
ance of power from suppliers of capital
towards entrepreneurs, who want to be
spared the scrutiny of public markets.
Perhaps a more important shift than
the fall in demand for capital has been a
steady rise in its supply. The secular slump
in long-term interest rates, caused in part
by abundant savings, was given an extra
shove after the financial crisis by central
banks’ easy-money policies. Yields on
listed stocks have fallen, too. The venture-
some, noting the boom in the share prices
of tech stocks, moved into pre-ipo financ-
ing in search of higher returns. Sums that
not so long ago could only be raised
through a stock-exchange listing are now
routinely raised privately.
One consequence has been a fall in thenumber of listed companies. By the time
a tech startup goes public, its days of
supercharged revenue growth may be
over. This fear only fuels desperation to
get in on the act sooner. There is much
shaking of vc heads about the participa-
tion of institutions based back East in
even the early funding rounds for new
tech firms. vcs pride themselves on
pastoral care: the support, expertise and
contacts they provide to fledgling firms.
What do “tourists” from Boston and New
York bring, apart from their big cheques?
As more and more money crams into
Silicon Valley, valuations inevitably
become inflated. Last month WeWork, an
office-sharing firm, was forced to pull its
ipo when public investors balked at the
price tag. A bail-out by SoftBank, We-
Work’s main backer and a writer of big
cheques more generally, valued the firm
at $8bn. Yet a funding round in January
put the firm’s value at $47bn. “The dam-
age done by SoftBank is incalculable,”
says one Silicon Valley bigwig. “If you
make a firm go faster, it does unnatural
things.” There is a growing sense that
capital is being wasted. “Businesses that
shouldn’t be funded are getting funded,”
says another vc. Sales and marketing
budgets are swollen. Firms lose track of
whether their product is any good.
Nevertheless a general view is that it
will take something dramatic—a melt-
down in tech stocks or a sharp rise in
interest rates—to scare the money from
Silicon Valley. Big dreams are part of
venture capitalism. Everyone fishing in
these crowded waters still hopes to land
a whale. Look at it another way, says a vc.
In 2012 Facebook paid $1bn for Insta-
gram, a firm that had 13 employees and
was not yet two years old. That seemed
profligate, he says. But with the benefit of
hindsight, Facebook underpaid.What happens when the wellspring of the best business ideas meets too much moneyHouse of Representatives voted to restrict
arms sales to Turkey, sanction the country
over its purchase of a missile-defence sys-
tem from Russia, and investigate Mr Erdo-
gan’s wealth. Lawmakers also passed a mo-
tion recognising the Ottoman slaughter of
Armenians in 1915 as genocide. Though the
sanctions package is unlikely to become
law, relations with America are at their
worst in decades.
Another source of anxiety is an investi-
gation in New York into whether Halkbank,
a Turkish state lender, circumvented
American sanctions against Iran. In an in-dictment unsealed on October 15th, prose-
cutors allege that senior Turkish officials
took millions of dollars in bribes to keep
the scheme running. A former Halkbank
executive who was convicted for playing a
role in the operation returned to Turkey
this summer after two years in prison. On
October 21st he was appointed head of the
Istanbul stock exchange.
Turkey expects growth of 0.5% this year,
and 5% in 2020. If interest rates are cut fur-
ther in pursuit of that goal, the country
risks another currency crisis. The central
bank has already burned through billionsof dollars in reserves to prop up the lira. It
may no longer have the means to defend
the currency in the face of sanctions, or if
global interest rates rise. Turks have run to
the dollar for safety. Foreign-currency de-
posits at Turkish banks have surged.
And lack of independence makes mon-
etary policymakers’ job harder. “They have
a credibility issue,” says Kerim Rota, a for-
mer banker. Interest rates will need to be
higher to control inflation than if the mar-
ket believed the central bank was in charge,
he says. But no one now thinks it can raise
rates without Mr Erdogan’s say-so. 7