Startup Funding Dwindles Due to Coronavirus Slowdown

VC investment down by 22%. How many start ups will make it? So we had the dot.com blow up, will this now be called the crash of the fake unicorns?  ...Aivars Lode

Early-stage funding for startups is drying up as the coronavirus outbreak puts investors on edge, spelling trouble for large corporations looking to snatch up innovative technology and talent. 

Capital from seed-stage funding, often the first significant source of cash for new ventures, has declined by about 22% globally since January, according to an analysis this week by CB Insights, a market-intelligence company.

The company puts total private-market funding for startups at $67 billion in the first quarter, down from an initial forecast of $77 billion.

The declines are expected to be especially sharp for startups in hard-hit sectors, such as retail, travel and hospitality, said Anand Sanwal, CB Insights’ chief executive. Startups developing capabilities in areas such as telehealth, autonomous delivery, disease diagnosis and virtual learning are likely to fare better, he said.

SoftBank to Sell $41 Billion in Assets, Signaling End of Buying Spree

It is not going to get better for SoftBank or for the companies that they backed. Even after applying the "blitzkrieg" approach there is doubt that a lot of their bets will survive.... Aivars Lode

TOKYO—Japan’s SoftBank Group Corp., which poured nearly $100 billion into pricey, cash-burning startups in the last years of the bull market, said Monday it would sell billions of dollars in assets to prop up its plunging stock price and shore up its debt-laden balance sheet following the threat of a ratings downgrade.

The plan marks a remarkable comedown for SoftBank Chief Executive Masayoshi Son and his company, which until recently was one of the boldest providers of capital to the world’s billion-dollar unicorns. It earmarks up to $18 billion for share buybacks and another $23 billion to redeem debt and build up cash reserves. The share buybacks come after a roughly $4.5 billion share repurchase plan announced almost two weeks ago. The cash will come from the sale of as much as $41 billion of SoftBank’s assets, chief among them a stake in Chinese e-commerce giant Alibaba Group Holding Ltd. that is worth between $104 billion and $109 billion.

SoftBank told investors the buyback plan—the biggest in its history—was triggered by a drop in its share price that left the stock down more than 50% since February, amid a market rout spurred by the coronavirus pandemic. The company is also bolstering its balance sheet after a fall in bond prices and a credit-outlook downgrade from S&P Global Inc. The action “reflects the firm and unwavering confidence we have in our business,” Mr. Son said.

The news sent SoftBank’s shares up 19% on Monday, and as much as 21% in early Tokyo trading Tuesday.

Pain for PE Firms

There are many businesses that will suffer and potentially face bankruptcy due to the coronavirus pandemic. One of the industries that will suffer, apart from airlines and cruise lines, is private equity. This however is something I have been warning about for over a year. The levels and multiples of debt were never sustainable..... Aivars Lode

Private-equity shops are everywhere—from fast-food restaurants and hotels to hospitals and even the dentist—and often their investments are financed using a lot of debt, sometimes as much as 70%. 

Bill Ackman, head of hedge fund firm Pershing Square Capital Management, warned this past week that private-equity firms might go bankrupt if the crisis lasts 18 months. 

It’s not clear how much debt PE firms have piled onto their portfolio companies, but global PE groups collected $2 trillion from investors from 2006 to 2008, according to a Harvard Business School study that looked at the industry’s use of debt in the financial crisis. For each dollar of investment they raised, they typically borrowed $2 of debt, the study said.

If the current debt load comes close to or exceeds 2008 levels, there could be pain for PE firms and their portfolio companies. 

By Luisa Beltran - Barrons

2008 Vs. 2020: A Warning To The Greedy

I have the same recollection as this guy has about the past. I have been thinking the same over the last couple of weeks... Aivars Lode

Times will get better, but on the market’s schedule, not ours

During the historic events and financial chaos of the past month, I realized something that should have been obvious. If you have experience managing other people’s money in bear markets and economic crises, the most important thing you can do is help people resist their most greedy instincts.

Here is the S&P 500 since it peaked back on February 19 of this year. This is through Thursday’s close. It is down about 29% in 4 weeks.

Now, here is the S&P 500 from back in the Global Financial Crisis. This was the last time the world’s economy was in total panic mode. The headline reasons were different. There was not a global health crisis. It was the reckoning of years of leverage in the financial system, and the bubble popped. This is just about the same point in the down-cycle for stocks. It just took a month this time, versus about a year last time.

Today is no different psychologically for the markets and investors. We can point to the virus as a root cause, but the domino effect in the markets (especially the bond market) looks very similar to me. 

When it was all done, that 29% drop and its cousin, a 39% drop after the “29%er,” left the S&P 500 looking like this. The numbers don’t add up, right? 29 + 39 = 68%, but the chart below shows “only” about a 57% peak-to-trough decline for the stock market. That’s the math of negative returns for you. Once you lose 29%, you only have 71 cents of your original dollar left. If that goes down another 39%, you get to 43 cents left. Or 57 cents below the dollar you started with.

From this point forward, in March of 2009, the S&P 500 went on its best bull market run in recent history. And, its longest in duration. But it didn’t happen right away. There was still a lot of muck to get through. And a lot of emotion. And a lot of margin calls, hedge fund blowups, bond downgrades and bankruptcies.

I don’t know what path the bear market of 2020 will take. And in my next article (posting this Sunday), I will show you how I have been navigating it in the portfolios I manage.

For now, just keep in mind that history has a way of punishing the impatient. Don’t look at every spark of a rally as the start of the next giant bull market.

Even if it is, you will have plenty of time to get involved to the extent you want to. Prioritize your true long-term objectives for your accumulated wealth, and let that be your North Star amid the current chaos.

By Rob Isbitts - Sungarden Investment Management