Decisions Have Long Shelf Lives

Decisions Have Long Shelf Lives

An idea that is not new to any of us is that successes or mistakes that we make when we are young can come back to support or hurt us.

Both big and small: perhaps it’s the decision to move halfway around the world. The decision to marry a spouse. The decision to sleep in one day and hit the snooze button. All of these decisions actually have the potential to change our lives in meaningful ways. There’s a beautiful and simple movie I watched many years ago about this idea, Sliding Doors, that I’d recommend for anyone who enjoys popcorn and a relaxing night at home. I’m sure there are also some remakes of a similar narrative.

Hardly a day goes by now when we don’t see some publicized event of a politician or business leader apologizing for something they did a decade ago. Most recently, Justin Trudeau has faced his share of challenging press for deplorable actions he took while he was a teacher, before his political career began.

I’m not here to discuss particular actions of particular people and how we should handle those situations. That can be for another day. Aside from the innumerable political scandals over the last few weeks, there was one decision that really caught my attention - it was at the root of a much larger story.

Many writers and business pundits have been quite enthused to discuss the WeWork debacle over these last two weeks. In short, WeWork planned an Initial Public Offering (IPO) this year, but scrapped it due to both achieving a much lower valuation than they were hoping for and also continued revelations of corporate governance issues that involved the CEO, Adam Neumann. Neumann’s self-dealings have been plentiful and in the wake of both issues, he and his wife were asked to step down from the executive ranks of the business. The plans now are to also fire about 1/3 of the global staff, divest much of the non-core assets (including the private jet) and business units (including Flatiron School, a coding bootcamp). There’s been quite a bit written about the results of the botched IPO across a host of publications, so I’d encourage those of you who are interested to learn more.

What I want to dive into here is one of the reasons why I believe this all happened but isn’t getting as much airtime: Masa’s fund structuring.

Whoa - a really uninteresting punchline. But hear me out. An article by tech journalist Ben Thompson tipped me off to this idea. Masa (Masayoshi Son) is a prominent businessman in Japan. He is the CEO of Softbank, a large Japanese technology and investment company. You may have seen his name in the news any time in the last three decades, but especially in the last three years. His creation is Softbank’s ‘Vision Fund,’ a $100 Billion Dollar (USD) fund to invest in the longest-term and most audacious businesses he can find. WeWork was one of the fund’s largest investments, along with FlipKart (India), One Connect (China), Grab (Singapore), AUTO1 (Germany), Uber (USA), SenseTime (China), and many more. There’s no question it’s one of the most influential funds and groups of companies in the world.

One of the LPs (Limited Partners) in the Vision Fund is the Saudi Arabia Public Investment Fund, also known as PIF. A Limited Partner is one person/group who lends money to an investor (the GP, or General Partner) to invest on their behalf. Common LPs are pension funds, university endowments, companies, banks, and even ultra-high net worth individuals. In some investment funds, the GP (the person or team that actually makes the investments) need to obtain the permission/approval of the LPs for investments of a certain size.

Let’s imagine that I (Mike) invest 1 Million RMB in LearningLeaders Ventures, an education technology focused investment arm of LearningLeaders. I trust LLV makes great investments there. Now imagine that LLV wants to make a 10 Million RMB investment. LLV may come back to me and ask, “Hey Mike, can I get your approval to put in your entire 1MM RMB into this deal? It’s going to be great!” I may then say yes or no, depending on what I want my risk/reward profile to be. Every fund writes up their own agreements and ways of arriving at these conclusions – in some agreements the LP doesn’t have the right to have input. In some agreements, they do. In some agreements, the LP even has veto powers. If the LP doesn’t want to invest, then they can veto this investment. Plain and simple. As you might imagine, LPs generally favor being asked for approval each time, while GPs don’t favor needing to ask for approval each time. LPs want more control over their money and GPs want more control over making the investment decision.

So, PIF is an LP of Masa’s Vision Fund. Masa has already invested billions of dollars into WeWork (now, ‘The We Company’) and he wants to invest more. Masa goes to PIF to receive their blessing, since they’ve provided capital for a massive percentage of the Vision Fund - he needs their thumbs up. But this time, they give him a thumbs down!

They don’t believe that WeWork is going to grow or for another reason they don’t want to fund this deal any more. Now Masa is in an absolute bind! He can either not invest more in it from the fund and watch the company struggle and possibly die (they are losing ~$1.7BB per year at this point), or he can invest as much as he can to help it. In this case, he chooses the second and injects $2BB into the company in January 2019 - some of this is his personal capital as well. This is much less than the $10BB+ he had expected to invest.

At this point, Masa doesn’t even want the company to IPO, since he wants the valuation to continue to climb while the company is still private, giving him an outsized proportion of the upside. But yet he’s caught now, because as PIF didn’t fund the January 2019 round, it’s unlikely that other companies would really want to do so either. People talk, after all. So the next best option is to actually take the company public and reap whatever rewards could be gained at this point in time. But now that the business model is proving (potentially - I’m not an expert here on their business, but the S-1 didn’t look great…) untenable and unprofitable and Neumann’s corporate governance malfeasances are coming to light, no banks or retail investors want to touch the deal. (Aside from JP Morgan, who has been irresponsibly lending money to Neumann so he can buy buildings to then lease back to WeWork…)

Bottom line: it’s a mess for Masa.

The final result here is that Masa’s investment thesis may have been the correct one. It also may not have been - we don’t know. But regardless of the thesis and thoughts behind it, a simple clause in a contract will stop him from realizing the WeWork dream as an investor. This clause allows PIF to veto the deal if they want.

It’s an example of a decision that was made years ago that only now is coming back to bite Masa, even though this clause probably hasn’t even crossed his mind in the last few years, much less harmed him in any meaningful way. A small decision like the clause in a contract could catalyze Billions of dollars of value being destroyed, thousands of jobs being cut in the coming weeks, and many other ramifications we cannot even see yet.

The key takeaways for me from this were twofold: First and less consequential - everyone is nice and friendly until money gets involved, especially the potential of losing lots of money.

Second and more thought-provoking to me - there are decisions we all make that we don’t think about until they rear their ugly (or beautiful) heads years later. They are small pieces of otherwise larger decisions, often.

What are those decisions going to be and how can we reduce the chances of making them to zero? Or at the very least, reduce the chances of having those decisions negatively affect us as much as possible? When taken to its extreme, the answer is simple: make no decisions of consequence or that could possibly be negative in the future. Never say anything contentious. Don’t commit to any future course of action, agreements, or plans.

But then I imagined a world where that was the case and how dreary that must be.

So where on the scale of ’no decisions of consequence,’ to ‘every decision possibly comes back to hurt you later on, whether it is your ‘fault’ or not’ should we position ourselves?

Knowing that decisions have potentially long shelf-lives, and knowing that none of us makes perfect decisions 100% of the time, where do we aim to be?