Why this professor says you should root for Uber’s IPO to fail
[ Transcript of CNBC video: https://www.cnbc.com/video/2019/05/13/why-this-professor-says-you-should-root-for-ubers-ipo-to-fail.html ]
Mihir Desai, Harvard Business and Law School professor, joins CNBC’s “Squawk Alley” team (SAT) to discuss his op-ed in the New York Times criticizing investments from companies like SoftBank into mature businesses.
SAT: Softbank has altered market dynamics by pouring money into startups. Is this justice, has it happened yet, or is there more to come?
MD: I think there is more to come. I think no one would like to see blood in the streets. But prices are signals. And we need a verdict on mega venture capital which says it’s excessive because venture capital and investment management is about raising money – not about investing. And it’s excessive because lots of investors and young people are looking around for pay day and lottery tickets in a way that is distorting their choices.
SAT: What about the argument that Amazon is in effective doing this in itself, but under the argument that there are so many industries that are changing massively and they have a huge war chest to pour money into those areas and dominate them if nobody else steps in to challenge them. And we should be doing that.
MD: They should be doing that. But that doesn’t mean you need be doing the mega venture capital model which is writing billion dollar cheques to pretty mature companies who aren’t ready for it. And as a consequence that externalities to the whole eco-system are large, which a way of saying everyone wants to be raising a hundred billion dollar fund, everybody wants to be writing cheques. It’s not about doing the hard work of figuring out, wait what is a good investment. That’s the problem for all of us. That’s why we should in fact be rooting for something negative here.
For consumers we’ve been winning. I’ve been loving the discounts but it is also unsustainable, unviable business model. And it’s not good because everyone starts pursuing unviable business models. Everyone is competing on who gets funded – not on the quality of your product. And the one who ends up winning is not the high quality product but the one who have access to the stupid money. And that is something we don’t want to see. And it goes on and on and on.
I love it. I admire Uber company but these larger distortions are much important to the overall economy.
SAT: How much is this systematic of monetary policies prolonged low interest environment we are certainly seeing the argument today that venture capital and tech but you see it in other markets like reinsurance rates which should be lower than should be given in catastrophic events, we’ve seen in recent years.
MD: Absolutely, this is part of a broader picture of reaching for yield, reaching for return, cause you have go back to Softbank’s funders and you have to think for yourself wait what are they looking for. The answer is they are looking for returns they have holes in their pension fund, sovereign fund, and they need big big promises of returns. And so what’s happening is people like Softbank are willing to offer big big expected returns which is kind of irresponsible and people fall for it, and we are into this cycle, and we are going to have this kind of distortions on and on.
But the underlying reality is risk is mispriced because of artificial lower rates.
SAT: So if you are betting on this falling apart, what is the best way to do it?
MD: So I’m not in the betting game. First of all I will stay away, certainly if you are reasonable investor you would stay away. And you would kind of want to be very fundamental in this. So in the book which I recently came out with, I really wanted to focus on the fundamentals of finance. And that is not about chasing companies with ten billion operating losses, that’s about it real cash flows, it’s about real value creation, and that is what we should all be focussed on.
SAT: Do kids in HBS, do they want to do this, they want to be Travis (Travis Kalanick was Uber’s former CEO).
MD: You are right. There is a huge appetite for tech and in part that’s what I’m concerned about right? Which is the misappropriation of talent, when you see all these things happening. I don’t care how stupid the business model is but I got a check from Softbank. And that’s not good for them, that’s not good for anybody. But fortunately our students are wise, they are kind of come back, they realized, wait a second.
SAT: So it is turning out to be a good case study.
MD: Well, I personally think in response to I came out with. People hate to see for rooting for something bad because it feels negative. I don’t want to write something that is negative. But I was really surprised how many people said you are right, it’s nasty, it’s got to stop, and I think what the author is trying to get at.
SAT: The book is “How Finance Works”. The HBS guide to thinking smart about the numbers, very pretty book, lots of great charts, and info in here, can’t wait to dig into it. Mihir Desai, thanks for being with us.
RATING: #RobertReview (Investments; IPO; Uber; Softbank): 9.5 | 10
An excellent analysis of the Softbank’s unrealistic promises on ROI, and why the Uber IPO fail is a good lesson for investors.
Grab is also making the same mistakes as Uber as billions of funds from Softbank are poured in to Grab to offer unsustainable discounts to Grab Food, and Grab Delivery to kill off competitors who are actually creating real value creation like Food Panda and Deliveroo.
Published: 17th May 2019.
Watch CNBC video: https://tinyurl.com/y5com9yx
Why the Uber I.P.O. Fail is The Best Lesson for Softbank’s Unrealistic Promises on ROI (in New York Times, By Harvard Professor)
Why You should Root for Uber’s IPO and Grab to Fail because of Softbank’s “Stupid Money” & Funding (CNBC)