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When SoftBank buys shares in a startup and then invests again at a higher valuation, Son says he has made a profit. That is legal under accounting standards, bu

When SoftBank buys shares in a startup and then invests again at a higher valuation, Son says he has made a profit. That is legal under accounting standards, but SoftBank receives no money. The only change is that SoftBank has boosted the value of its original stake from, say, $1 billion to $2 billion by raising the value of the startup. In SoftBank’s income statements and return calculations, at least some of the additional $1 billion can be counted as profit. Hmmm.

chewz 7y ago
Everyone is really doing this. GAAP allows for this. Making value out of hot air. Generating paper profits through re-valuation of assets, especially intangible assets or where there is no mark-to-market. Softbank had been a little bit more creative then usual (arranging large loans to founders to lead another round of financing) I must admit. At some point the music stops and then you have a quarter or two of really funny quarterly reports where everyone is taking all skeletons in the closet and repricing them down "due to unpredictable external factors like recession in Botswana or extreme solar activity". And then the game continues.
- scotth 7y ago
  Interesting. Where can I read more?
  - chewz 7y ago
    Reading company reports. Personally I had been lucky gossiping for years with a friend of mine who is reading and analyzing company reports in professional capacity. And never tired of discussing latest findings over a drink. He also has a column in a newspaper and lectures on accounting tricks and frauds at economic university. He always jokes that he only shows old tricks to his students and keeps the best bits to himself. Accounting tricks is also an arms race of sorts apparently.
FBISurveillance 7y ago
Never gets old: https://signalvnoise.com/posts/1941-press-release-37signals-valuation-tops-100-billion-after-bold-vc-investment https://signalvnoise.com/posts/1941-press-release-37signals-...
- amoitnga 7y ago
  Thanks. It's fun.
- hef19898 7y ago
  Honestly, for the first third or so I wasn't sure if it was satire or not...
- rchaud 7y ago
  > We’re excited to roll out a list of unconfirmed revenue possibilities that involve crowdsourcing, a robust set of widget creation tools, 3G, augmented reality, social stuff, and an app store. They joke, but WW were literally doing exactly this, updated for 2019 of course. A bunch of ill defined tech projects with no real link to their core business.
castratikron 7y ago
That's known as unrealized capital gains, which is a totally normal thing to measure. But what's important is how the value is determined. With a company on the public market you theoretically have millions of actors constantly evaluating the price of something using the same information (10K, etc.). If it's a house you have an appraiser from the government to tell you what it's worth. These two examples are considered securities in the US and so everything is federally regulated. But when it comes to valuation of a private company you can pretty much do what you want (see: "community adjusted EBIDTA"). So it's totally possible for a company to be irresponsible and overvalue itself, to the extent where it might be considered fraud if the company ever went public.
- perl4ever 7y ago
  Matt Levine wrote that it's not as bad as it could be, because Softbank generally only counted valuations where at least some other investors were participating. So they weren't completely setting arbitrary numbers by themselves.
zby 7y ago
"We have talked about this strategy before, and actually reading the article mostly assuaged my concerns about SoftBank’s bookkeeping. In fact, SoftBank says that it doesn’t aggressively mark up its unicorn portfolio (and take accounting profits) every time it pumps in more money on its own. When it invests in later rounds alongside other investors, providing some external validation for the new valuation, it will mark up its stakes (but “only after taking into account future cash flows and public market proxies, as well as private market funding prices”). But, for instance, SoftBank and its associated Vision Fund “never took profits from WeWork by marking it all the way up to $47 billion,” since it was the only investor in at those levels; instead it marked WeWork at levels that other investors also paid." from Matt Levine newsletter Journalists exaggerate as always - it is hard to get real info from mainstream press.
- empath75 7y ago
  So one guy thinks it’s fine. Everybody, it’s okay.
  - zby 7y ago
    There is more than just Matt Levine's opinion - there is his explanation. The SoftBank accounting is not exactly what the journalists suggest, I still don't think it is fine (I don't quite agree with Levine) - but the article is not correct either.
phire 7y ago
This is normal accounting practice. Not only is it legal, it's essentially legally required for companies to track the changes in the value of their assets. It matters more in the downward direction, a company has to know when they are insolvent (owe more money than assets they hold) because they are required to file for bankruptcy. Value of an asset goes down, they need to update the books and make sure they don't have too much debt. The only real issue, are the valuations accurate? If they're not, then it might be accounting fraud.
joshu 7y ago
this is why venture funds leading consecutive up-priced rounds is rare. their LPs do not like them to price their own shares and would prefer if there was external validation. (when you see the previous lead do another round it can be at the same valuation which isn’t quite the same thing)

chewz 7y ago

Everyone is really doing this. GAAP allows for this. Making value out of hot air. Generating paper profits through re-valuation of assets, especially intangible assets or where there is no mark-to-market. Softbank had been a little bit more creative then usual (arranging large loans to founders to lead another round of financing) I must admit. At some point the music stops and then you have a quarter or two of really funny quarterly reports where everyone is taking all skeletons in the closet and repricing them down "due to unpredictable external factors like recession in Botswana or extreme solar activity". And then the game continues.

scotth 7y ago
Interesting. Where can I read more?
- chewz 7y ago
  Reading company reports. Personally I had been lucky gossiping for years with a friend of mine who is reading and analyzing company reports in professional capacity. And never tired of discussing latest findings over a drink. He also has a column in a newspaper and lectures on accounting tricks and frauds at economic university. He always jokes that he only shows old tricks to his students and keeps the best bits to himself. Accounting tricks is also an arms race of sorts apparently.

FBISurveillance 7y ago

Never gets old: https://signalvnoise.com/posts/1941-press-release-37signals-valuation-tops-100-billion-after-bold-vc-investment https://signalvnoise.com/posts/1941-press-release-37signals-...

amoitnga 7y ago
Thanks. It's fun.
hef19898 7y ago
Honestly, for the first third or so I wasn't sure if it was satire or not...
rchaud 7y ago
> We’re excited to roll out a list of unconfirmed revenue possibilities that involve crowdsourcing, a robust set of widget creation tools, 3G, augmented reality, social stuff, and an app store. They joke, but WW were literally doing exactly this, updated for 2019 of course. A bunch of ill defined tech projects with no real link to their core business.

castratikron 7y ago

That's known as unrealized capital gains, which is a totally normal thing to measure. But what's important is how the value is determined. With a company on the public market you theoretically have millions of actors constantly evaluating the price of something using the same information (10K, etc.). If it's a house you have an appraiser from the government to tell you what it's worth. These two examples are considered securities in the US and so everything is federally regulated. But when it comes to valuation of a private company you can pretty much do what you want (see: "community adjusted EBIDTA"). So it's totally possible for a company to be irresponsible and overvalue itself, to the extent where it might be considered fraud if the company ever went public.

perl4ever 7y ago
Matt Levine wrote that it's not as bad as it could be, because Softbank generally only counted valuations where at least some other investors were participating. So they weren't completely setting arbitrary numbers by themselves.

zby 7y ago

"We have talked about this strategy before, and actually reading the article mostly assuaged my concerns about SoftBank’s bookkeeping. In fact, SoftBank says that it doesn’t aggressively mark up its unicorn portfolio (and take accounting profits) every time it pumps in more money on its own. When it invests in later rounds alongside other investors, providing some external validation for the new valuation, it will mark up its stakes (but “only after taking into account future cash flows and public market proxies, as well as private market funding prices”). But, for instance, SoftBank and its associated Vision Fund “never took profits from WeWork by marking it all the way up to $47 billion,” since it was the only investor in at those levels; instead it marked WeWork at levels that other investors also paid." from Matt Levine newsletter Journalists exaggerate as always - it is hard to get real info from mainstream press.

empath75 7y ago
So one guy thinks it’s fine. Everybody, it’s okay.
- zby 7y ago
  There is more than just Matt Levine's opinion - there is his explanation. The SoftBank accounting is not exactly what the journalists suggest, I still don't think it is fine (I don't quite agree with Levine) - but the article is not correct either.

phire 7y ago

This is normal accounting practice. Not only is it legal, it's essentially legally required for companies to track the changes in the value of their assets. It matters more in the downward direction, a company has to know when they are insolvent (owe more money than assets they hold) because they are required to file for bankruptcy. Value of an asset goes down, they need to update the books and make sure they don't have too much debt. The only real issue, are the valuations accurate? If they're not, then it might be accounting fraud.

joshu 7y ago

this is why venture funds leading consecutive up-priced rounds is rare. their LPs do not like them to price their own shares and would prefer if there was external validation. (when you see the previous lead do another round it can be at the same valuation which isn’t quite the same thing)