TikTok’s Silence Speaks Volumes

September 23, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on September 23rd, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

TikTok dominates youth culture in the West, but when critical questions come up, they put a lid on it.

Who actually calls the shots at the world’s most popular app right now?

The question is being widely debated around the world, but a blog post by Swedish Marika Tedroff, a former employee on TikTok’s policy team, offers some insight. By her third week on the job she was writing global policies — that is, the rules dictating which content is published and prioritised — that affected a billion people.

In an interview with the newsletter Platformer, she describes how decisions were made lightly and quickly.

“I never got the impression that they [TikTok] had bad intentions, but rather a lack of awareness. […] I think the company’s hierarchical culture influenced these kinds of decisions; finishing the task was more important than doing it properly.”

Tedroff stresses in the interview that her experience at TikTok was mixed — she describes the company as both a fantastic place to work and toxic at the same time. A picture confirmed by others SvD has spoken with.

Keeping order among a billion users, while understanding how content is viewed in different cultures, is a complex task to say the least. And with low transparency both inside the company and toward the outside world, plenty of question marks remain about how decision-making at TikTok actually happens.

In connection with the Pontus Rasmusson investigation, SvD has contacted the company several times without receiving a reply. It is probably easier for TikTok to stay silent than to explain how they view Pontus Rasmusson’s posts, with their repeated sexual references, or the fact that he let young users call premium-rate numbers during a live broadcast on the app.

When SvD investigated TikTok last autumn with a focus on how the app handled issues around eating disorders, it also took a long time before a written answer came. Just before Christmas last year, TikTok announced that they had problems with the algorithm serving the same content and that it could be problematic if it concerned things like “extreme dieting”.

In light of the above, the interview with Marika Tedroff is interesting. She describes a complex internal process preceding decisions about TikTok’s rules. According to her, it involves legal, PR, lobbying, child safety and advice from outside experts. And she is clear that their work made a difference.

Fair enough. But without transparency about how these rules are followed, it is hard to judge what responsibility the platform actually takes for its content.

Several heavyweight names internationally are now taking a similar line.

Mathias Döpfner, CEO of media group Axel Springer, said in a conference speech that “TikTok should be banned in all democracies”. He accused Western governments of being “naive and dangerous” for allowing the app to operate in their countries. In the follow-up interview, Döpfner went a step further and called the app “a tool for espionage” for the Chinese regime.

One important dimension is that TikTok is only a product for Western markets. The domestic predecessor Douyin (which is also very popular, but in China) has entirely different rules and regulations. This despite the fact that the parent company, ByteDance, is the same. For Douyin the entertainment profile has been toned down considerably, and the company now says it is on its way to becoming more of a “lifestyle app” instead. That Chinese tech companies have shifted strategy in response to input from Beijing is something we have seen many times before.

The question the West should now be asking is how to relate to the power and influence the big tech platforms have. A billion people in a single app means many minutes spent every day. And even if the app is not explicitly engaged in outright spying, influence can still happen through the content that is presented. Former employees at parent company ByteDance have claimed they gave more visibility to pro-China news in another of the company’s apps. That this happens on TikTok can therefore not be ruled out.

Given all this, you can understand why TikTok does not want to respond when SvD gets in touch. The silence is telling. Do the Swedish spokespeople even know themselves how everything works?

But as long as the users keep coming back, the criticism is a lesser problem for TikTok. For the rest of us, the problem risks becoming all the greater.

Instabox and Budbee Merge as Venture Capital Demands Profitability

September 19, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on September 19th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

When Instabox and Budbee merge, a new delivery giant is born. Behind the merger sits a bigger trend: venture capital owners think it is time for the companies to get big — so they can become profitable.

This summer the American magazine The Atlantic ran a piece on how the subsidies for the millennial lifestyle were over. After years of cheap taxi rides, food deliveries and parcel couriers, reality had finally caught up. It was time to pay what it actually cost to deliver all these services — and it turned out to be pretty expensive.

That is the same reality now catching up with both Swedish startups and consumers. For many years, historically low interest rates led to over-enthusiasm among investors around growth and high risk. Startups could — and were encouraged to — burn money to win market share. The idea was that new habits would be established with consumers, economies of scale would emerge and then the market would normalise (read: price hikes and less competition).

This is the light in which to view the big deal where delivery companies Budbee and Instabox are merging. Combined valuation: SEK 18 billion. Delivering parcels is profitable. Or rather — delivering parcels is going to be profitable. The companies together lost around SEK 190 million last year on combined revenue of just over SEK 1.3 billion.

Increasing scale is a central part of the deal. Both companies work in freight and deliveries and reasonably have many similarities in their organisations. To SvD, the company’s new CEO Fredrik Hamilton plays down cost synergies and says it is too early to say. It is an understandable comment, but it would be close to unreasonable to assume the merger will not lead to savings.

The elephant in the room is called PostNord.

But cost cuts alone are not what makes scale important. A larger company has an easier time negotiating with business partners and can expand faster internationally. The aforementioned economies of scale mainly appear at very large scale, and it is cheaper to reach that together than as separate companies. In some categories, the business is impossible to run profitably without being a giant.

An additional advantage is that the two companies no longer have to compete with each other and can instead focus on the other players in the market. The elephant in the room is called PostNord — by far the biggest on the Swedish market. Another is competitor Airmee, which has Amazon as a major customer.

The deal between Instabox and Budbee is conditional on approval from the Swedish Competition Authority. A safe bet is that the deal goes through. You only have to look at the American market to see where the big threats are coming from — as early as 2020, Amazon’s own shipping arm became bigger than FedEx in terms of volume. Having large domestic players that can take on global giants could, if anything, be seen as positive for competition.

Venture capital has been paying your tab for many years.

As a consumer you may sometimes wonder how certain services can even add up. Some things have been unreasonably cheap for a very long time. You don’t have to look further than the pavement and all the e-scooters to see a clear example.

The answer is that venture capital has been paying your tab for many years. They have done it so the companies they invest in become indispensable in your life. To become the market leader that survives and thrives. But not all e-scooters or delivery solutions will survive. Companies will withdraw from markets, go bankrupt or merge as risk-willing capital dries up. This is only the beginning.

The companies that do survive, however, will dictate terms and prices. And it will get more expensive. Instabox and Budbee are the first on the Swedish market to merge and make a combined push. But they will not be the last.

YouTube Is Practically Lawless When It Comes to Children

September 14, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on September 14th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Platforms like YouTube earn billions from children using their service. But the big grey zones that arise are something neither influencers nor the platforms want to tackle.

“Today we’re launching YouTube Kids, the first Google product built from the ground up with the littlest ones in mind. The app makes it safer and easier for children to find videos on subjects they want to explore.”

That was the messaging back in 2015, when YouTube and its parent Google first created a dedicated app for children. Before that, children had to click around the video site like everyone else, potentially ending up in unsuitable corners of the internet.

There was only one problem — children didn’t have to use the app.

It was just as easy to keep watching the way they had before, except now YouTube had an alibi that the main site was only for adults. The age of the site’s viewers has always been unknown — even if you could make an educated guess about who was watching children’s cartoons for hours on end.

Five years later, YouTube was forced to rework its systems anyway. The US Federal Trade Commission, FTC, hit them with a $170 million fine and pushed through changes where videos made for children had to be treated differently in terms of user comments, and the precision of ads was reduced.

This caused profitability for children’s videos to drop sharply — in many cases by more than half.

If you wonder why video creators don’t want to be classified as making content for children, it is now crystal clear: you make less money. Here is a possible explanation for the actions of Pontus Rasmusson, the influencer SvD has investigated in podcasts and articles.

There is no doubt that Pontus Rasmusson is a children’s idol. But according to YouTube’s systems, he makes videos for adults.

Looking at their own rules, though, you end up in something close to a Catch-22 around Rasmusson — the references to sex make his videos inappropriate for children. At the same time, the audience for the content is obvious. And in that grey zone, nothing happens.

Beyond ad views, YouTubers also make money on the content itself, through what is euphemistically called “collaborations”. These are ads dressed up as regular content, handled directly between the company and the video creator. YouTube as a platform cannot regulate this.

But the fact that Pontus Rasmusson “collaborates” with toy company Moose Toys gives a clear indication of who both parties to the transaction believe his audience to be.

The question this raises is how parents are supposed to know what their children are watching. In a comment to SvD, YouTube says that they “give parents the ability to control which YouTube content their children can see, including the ability to allow only content from trusted partners” — provided you use the YouTube Kids app.

But, as noted, not all children do.

Not in 2015 when the app came out, and not in 2022 either. Why would they start? The video content for children is still on the main site too — and then some.

The possibility of controlling the video offering for your children — channel by channel — is also wholly unrealistic for the average parent. It would be like having to pre-listen to every song on Spotify before the children could hear it. Theoretically possible — sure. But in practice both impossible and undesirable for most.

All platforms that involve children have an interest in painting pictures of families sitting on the sofa watching educational videos together. It probably looks like that sometimes. But the most common scenario is that the children are sitting alone, choosing what to watch, far from parents’ gaze and attention. The solutions need to start from reality and how it actually works, rather than from a glamorised ideal society.

Companies like YouTube and Instagram tend to say these are hard problems to solve. The precision of content judgements is not always as good as one might wish. That’s true. But this is a problem that did not have to exist in the first place.

You don’t have to mix content for children and adults together. You can restrict access to videos with various kinds of age verification. But all the economic incentives go against doing that. It is more profitable to put the burden on every individual parent than to fix the problem you yourself helped create.

SvD’s investigation of YouTuber Pontus Rasmusson shows that it is still close to a lawless land for children online. And the economic incentives point to it staying that way.

He is one of Sweden’s biggest YouTubers — among children. But parents accuse him of tricking their fans out of money. And why does he mix the child-friendly clips with constant sex references? Alice Aveshagen and Henning Eklund portray the Pontus Rasmusson phenomenon. A documentary from SvD.

Polestar’s Losses Keep Growing — When Does the Money Run Out?

September 4, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on September 4th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Polestar’s losses are ballooning, driven by expensive costs from its SPAC listing. The EV company has been squeezed, and the question now is how quickly its owners will have to step up with fresh capital.

An ordinary IPO is usually preceded by a long and cumbersome process. The company has to be prepared for a whole new set of requirements and rules, management has to be trained, and a new way of reporting financial information has to be put in place.

On top of that comes the sales pitch to the market. This is where you display historical metrics and show how the business has developed up to today — which indirectly says something about how the future might look.

With a so-called SPAC listing, you get to skip that last part. No history is required; you can go public entirely on the basis of future hopes instead.

That fits perfectly for companies that have no history to offer. It is also much faster to get to the stock market, which suits young and innovative companies that need capital quickly.

It is no accident, then, that so many EV companies have gone public via SPACs. Tesla’s enormous stock market success is enough to pull the whole category along as the car industry heads toward general electrification. Faraday Future, Canoo, Rivian, Fisker and Lordstown Motors are all examples of EV companies that have benefited from this trend and listed relatively recently.

And then there is Swedish Polestar, which just reported its quarterly numbers. The figures showed a doubling of revenue but also runaway losses. On just over a billion dollars in revenue the loss was $885 million. Of that, a full $372 million was costs directly attributable to the SPAC listing.

That is equivalent to roughly SEK 4 billion.

Speed to market has its price, to put it mildly.

The choice of a SPAC for EV companies as a category may be logical, but for Polestar specifically it raises a number of questions.

Polestar is not a straightforward startup in this context — it was a wholly owned subsidiary of Volvo Cars. Volvo Cars is in turn listed on Nasdaq Stockholm since October 2021. And to make it even more complicated, Volvo Cars is 82 percent owned by the Chinese company Zhejiang Geely Holding Group (which is also the main owner of listed Geely Automotive). Access to capital exists at many different levels, and this Russian doll of listings looks like a complex and expensive way to solve the problem.

To understand a plausible motive, you need to go back about a year in time, to when news of Polestar’s combination with SPAC vehicle Gores Guggenheim first emerged. Back then enthusiasm was flowing on the stock market and money was pouring in.

A lot can happen in twelve months. The speed at which they moved to catch these favourable market conditions — even with the SPAC method — simply wasn’t fast enough. The Nasdaq 100 index fell around 20 percent between Polestar’s announcement and its first day of trading. But they still needed the capital.

Now an entire generation of listed EV companies has one more thing in common — it looks like their money is running out. As early as May this year, Fisker, Canoo and Lordstown Motors all warned that they might not have enough cash to last a year. Their share prices have also fallen between 42 and 62 percent apiece — just since the start of the year.

Polestar’s market cap, for its part, has nearly halved since the SPAC merger. Analysts at Bernstein Research wrote in June that the company might have to ask its main owners for more money.

As recently as Thursday, Polestar’s CFO Johan Malmqvist said in an interview with Bloomberg that “we are very excited about our upcoming launch”. The new SUV, Polestar 3, is released in October. But looking at the numbers, it will probably take more than additional car models to turn things around. It will take money.

If even Linkedin can’t function in China, who can?

September 2, 2022
by Björn Jeffery
The Daily

This column was first published in SvD Näringsliv, in Swedish, on October 15th, 2021.

There was only one realistic way into China as a foreign company. Now even that seems to be closed. When Linkedin dismantles its social network in the country, it could mark a new era for tech companies in China.

An established truth is that the only way to enter China as a foreign company is through partnerships. The local legislation and relations with the Chinese state simply require some form of Chinese ownership. But if you play those cards right, a huge market can open up.

It was the same story for Linkedin, when they launched in China in 2014. The Microsoft-owned social network partnered with venture capital firms China Broadband Capital and a Chinese branch of Sequoia Capital for exactly this reason. It is therefore noteworthy that Linkedin now announces that they are shutting down the part of the business where you can post articles and updates to each other. It seems that relations with the state were not sufficient to allow this activity to continue.

At the beginning of the month there were reports that Linkedin had started to remove content from journalists covering China. A reporter at the news site Axios received a message from Linkedin stating that “your profile and public activity, such as your comments and links you share with your network, will not be visible in China.” It was not specified which material was intended, but a common theme was that the message was sent to journalists who covered China, and who were thereby able to be critical of the country.

The thesis that it is about the expression of uncomfortable opinions is supported by the fact that Linkedin still retains some business in the country, but that it is through a newly started app that provides job ads. The company as such is therefore not banned from the country – it is only a certain part of the business that can no longer be carried on. The company itself specifies that it has become a “significantly more challenging environment and greater requirements for regulatory compliance in China”.

Linkedin is not alone in experiencing this “challenging environment”. In one fell swoop, the entire Chinese tutoring industry was shut down after the government deemed it unsuitable for profit. This week that industry received some redress, when those companies are now allowed to assist with vocational training at least. That fits well with the modern China that Xi Jinping wants to build. And those types of swings can happen quickly – even for the companies that are on the inside.

The picture being painted is of a China that is closing itself more and more. The harsh pressure that has been put on the domestic tech companies has attracted the world’s eyes and caused stock market prices to fall. When established foreign companies – which followed market practices – are forced to reconsider their operations, this could create more uncertainty among the world’s investors.

If even the world’s second highest valued tech company, Microsoft, can’t manage to navigate the political landscape – what will all other companies do?

This column was first published in SvD Näringsliv, in Swedish, on October 15th, 2021.

New phenomenon turns players into investors

September 2, 2022
by Björn Jeffery
The Daily

This column was first published in SvD Näringsliv, in Swedish, on October 11th, 2021.

– When I started, I played almost four to five hours a day, says John Ramos, a 22-year-old man from the Philippines.

It sounds like a quote you’ve heard many times before from someone caught up in a gaming addiction. But this is something else, and it ends in a different way than they usually do.

Ramos has made gaming into a job. He has recently bought several homes with the winnings he has accumulated in the game “Axie Infinity” since he started last November. It is part of a new phenomenon in the gaming and crypto world called “play to earn”.

Behind the game is the Vietnamese game studio Sky Mavis, which was recently valued at $3 billion when the American venture capital giant Andreessen Horowitz invested in them. It is a company that has only existed for three years. Development has been rapid – and continues to do so. Revenue from purchases inside Axie Infinity is projected to reach $1 billion by 2021, with 17 percent of that going to Sky Mavis.

The trend is in an early phase, but can also be found in Sweden. The game developer Antler Interactive is developing a game called “My Neighbor Alice” together with the blockchain company Chromaway. It uses its own cryptocurrency Alice, which was publicly launched in March this year. While the trading of Alice is already underway, the actual game itself is not finished yet. It is expected to be released sometime next spring.

Making money playing computer games is nothing new in itself. But “play to earn” still differs from e-sports and game streaming to the extent that it is the game itself that generates the revenue – not the viewers and sponsors around. E-sports is rather similar to regular sports in its business model. You play to collect virtual objects and cryptocurrency within the game itself, and it can then be traded on crypto exchanges outside.

It may sound like a small difference in the grand scheme of things, but it turns the traditional business models of the gaming world upside down.

Normally, the revenue for a game goes directly to the gaming company that developed it. Sometimes the money is shared with game publishers who helped develop and market the game. Somewhat simplified, you can say that the more people play, the more profitable the game becomes – regardless of the underlying business model.

With “play to earn” you also play games, but the difference is that the more people participate, the more valuable what you own in the game becomes. You as a player thus profit from the success of the game by the fact that the assets you have acquired in the game get more potential buyers. The most expensive Axie – a cartoon animal that looks like a mix of a cat and a fish – was sold at the end of last year for about 125,000 dollars.

The more people playing, the more people can participate in the trade. Seen from this perspective, it is more like a cryptocurrency or a common stock, where the value is governed by supply and demand. If you then drape this trade in a game, you get a hybrid where players have clear incentives to spread the game on to others. You don’t spread the game necessarily because it’s so much fun – but because you can profit from it yourself.

This development is interesting and fast-growing, but it also brings with it an aftertaste of industries that one might not want to associate with. Recruiting new players to make one’s own investment more valuable is similar to MLM (multi-level marketing, i.e. sales where individuals sell directly to other individuals) and also has some similarities to pyramid schemes.

When you start playing computer games to earn money, many new questions appear. Is this entertainment or an investment business? Is it perhaps more like a casino than a board game? In an almost lawless land between gaming and cryptocurrencies, we’ve only seen the start of this trend – and its problems.

This column was first published in SvD Näringsliv, in Swedish, on October 11th, 2021.

The Number That Should Worry Klarna’s CEO Most

August 31, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on August 31st, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Klarna will shrink its loan amounts to bring down credit losses. But while the company’s focus has been on the US, the Swedish business is now shrinking for the first time.

It is every CEO’s job to present and package reality as positively as possible. Sebastian Siemiatkowski, CEO and co-founder of Klarna, knows this very well. Which comes through clearly when you read the company’s interim report for the first half of the year, and his letter to shareholders in particular.

The more complex picture — the one Klarna does not communicate — is not quite so rosy. The company is losing around SEK 35 million a day. Cash flow is negative SEK 9.8 billion, of which just under a third is acquisition-related, compared with positive SEK 1.5 billion in the same period last year. And while the American market is growing fast — but expensively — revenue from Sweden is actually falling by 9.5 percent. That is the first time it has happened.

The fact that the Swedish market is shrinking is notable.

Klarna has been the clear market leader in Sweden for many years, but has faced increasing competition from similar products and offerings. That the company’s focus has been on the US has been obvious — revenue there is growing by more than 100 percent — but now, for the first time, there are signs that this may have come at the expense of more established markets. The fact that Swedish e-commerce has declined overall after a pandemic-fuelled boom probably plays a role as well. Finally, a change in the company’s product mix, where a sort of “perpetual credit” has been scrapped, also contributes.

Even Germany, Klarna’s single largest market, grew by just over 6 percent in the period. Klarna is the country’s second-largest payment system after PayPal, but a long line of challengers is appearing on the horizon there too. And this summer came the news that even the big bank Deutsche Bank is entering the hot “buy now, pay later” market in the country. Competition is intensifying.

Turning the business back to profitability requires both that established markets keep working, and that the US expansion stops bleeding money. Klarna writes in the report that they have changed their approach to credit losses and that they will lend smaller amounts to reduce that outflow. It remains to be seen what effects this will have, but between the lines you can at least sense some seriousness about the enormous losses the company continues to have.

Looking ahead, the challenge is exactly this balancing act between maintaining established, mature markets and growing into new ones at the same time. Siemiatkowski writes that the credit losses have been a “conscious consequence” of the company’s growth rate. It is true that growth has been rewarded by investors — almost at any cost — for many years. But it is, to put it mildly, optimistic to believe that changing their lending would not affect existing and future customers in ways beyond just credit losses.

The company has large and established competitors in the US as well, including Affirm and Afterpay (part of Block). Klarna’s success and growth rate there is tied to its competitiveness, something that can be diluted by changes of this kind.

The optimism from Klarna’s chief is familiar. In an interview with Dagens industri in May this year, Siemiatkowski said that “I am optimistic and I think there are good conditions” to defend the company valuation of around $45.6 billion that Klarna had previously received from investment company SoftBank. Less than two months later they raised new money at a valuation around 85 percent lower.

A positive outlook is a good starting point for a CEO. But that alone will not pull Klarna out of the tough market situation it finds itself in. Retooling a giant operation like Klarna can take longer than you think. Because the money is running through the company and the conditions for attracting new investors on favourable terms are harder than they have been in many years.

SoftBank and Masayoshi Son Face the Fight of Their Lives

August 30, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on August 30th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

They lost billions in the scandal-ridden WeWork, handed Klarna a record valuation and allowed Uber to steamroll its competitors. Now Japanese SoftBank and its CEO Masa are fighting the match of their lives. Can they survive the tech chill?

Dressed in a black suit and black turtleneck, Masayoshi Son, CEO of SoftBank Group, steps onto a stage in Tokyo in May 2021. He looks pleased. With good reason, you might say. He is about to present the best result in Japanese corporate history.

The presentation begins with a black-and-white photo from 1981. It shows Fukuoka in southern Japan — the city where the story of Masayoshi Son, usually called Masa, and the company SoftBank begins. Masa tells the audience how he once told his first two employees that one day they would count the company’s value in the trillions of yen.

That day came and went long ago. And now he is about to blow past that milestone as Masa announces that SoftBank has made a profit of 4,900 billion yen — around SEK 380 billion at today’s exchange rate. To put that in perspective, it is roughly twice what Toyota made in profit during the same period.

A year earlier the situation was radically different, with a loss of 800 billion yen, SEK 62 billion. The result stands out on the chart of the company’s 40-year financial history that Masa layers over the photo of his hometown.

Masa concedes that, depending on how the stock market develops, the company may see “a few peaks and valleys”.

That would turn out to be the understatement of the year.

A year later, in May 2022, Masa steps onto the stage again. This time he is sombre. Masa has to explain how that record profit has now flipped — again — into a record loss. Covid-19, inflation and the tech chill on the stock market have made for a tough year for the Japanese conglomerate. The bottom line ends at minus 1,700 billion yen, about SEK 132 billion. In a single year.

“We are now going into defence mode,” Masa says, a little grimly.

The big question everyone is asking is whether SoftBank can turn this around and climb back to the same heights — or whether Masa will be remembered as the tech boom’s loudest cheerleader.

Even early in his career, Masa had an eye for good but risky investments. SoftBank started as a software distributor and quickly added both computer magazines and events to its offering. Interest in computers exploded during the late 1980s and SoftBank became Japan’s largest events company in computers and technology.

In 1994 Masa took SoftBank public at a valuation of $3 billion. That allowed him to start investing in internet companies. One of them was called Yahoo, and the partnership evolved into a joint company the following year — Yahoo Japan. The site went on to become enormously dominant in the country over the coming years, just like its American counterpart on the other side of the Pacific.

With the success of Yahoo Japan behind him, Masa could crank up his risk appetite further. In 2000 he invested $20 million in a young Chinese entrepreneur named Jack Ma and his company Alibaba. Today the company is one of our era’s largest and most important tech giants — and 20 years after Masa got in, the investment’s value has grown to more than $150 billion. Very likely one of the single best investments in history.

Masa’s eye for talented entrepreneurs also led him to another man who used to wear a black turtleneck on stage — Steve Jobs, then CEO of Apple.

In an interview with TV journalist Charlie Rose, he described his reasoning:

“If I’m going to get into the mobile operator market, I need a weapon. And who can create the world’s best weapon? There is only one person — Steve Jobs.”

This was 2005, two years before the iPhone was released, and Apple had enjoyed great success with the iPod music player. The company had never publicly mentioned a phone. Masa, however, had his own idea of how it might go:

“I called up Steve Jobs and went over to see him. I brought my little sketch of an iPod with phone functionality and gave it to him. He said, ‘Masa, don’t give me your sketch. I have my own.'”

Masa saw the potential years before the iPhone even existed. And he tried to get Jobs to give him exclusivity in Japan on this prospective phone — whenever it might be released. Jobs said he couldn’t do that, mainly for one very obvious reason: SoftBank was not a mobile operator.

But that was a problem Masa could solve. The following year SoftBank acquired Vodafone’s Japanese operator business, and in 2008 they got exclusive rights to the iPhone in Japan. The rest is history.

Having a long time horizon is a recurring theme throughout SoftBank’s history. And while ordinary companies tend to struggle to even figure out where the business should go more than five years out, Masa is aiming centuries ahead. In 2010 he speculated about what SoftBank would look like 300 years from now, and he regularly gives presentations in which he lays out his view of the coming 30 years.

But vision without execution doesn’t create much shareholder value. To capitalise on his visions Masa needed money. A lot more money, in fact. And to fill the coffers he had to go far outside the public markets to cover his needs. This was where both the risks, and the world’s attention, really started to accelerate.

In 2017 SoftBank Vision Fund was born — a standalone venture capital vehicle sitting under the SoftBank Group umbrella. The fund raised $100 billion, of which SoftBank itself put in $28 billion. The rest of the money came from more controversial places, as the majority came from sovereign funds in Saudi Arabia and the United Arab Emirates. Two years later the fund raised another $100 billion-plus.

Vision Fund quickly made a name for itself by investing enormous sums at very high valuations. And given the fund’s size, they could do it in many companies at once, within a short period and all over the world. The portfolio companies are well known and include TikTok’s parent ByteDance, transport company Uber, crypto platform FTX and office hotelier WeWork. In Sweden, Vision Fund led Klarna’s 2021 funding round that valued the fintech at $45.6 billion, more than 400 percent higher than their round the year before. That was the valuation that then had to be cut by around 85 percent when Klarna needed to refill the coffers earlier this summer.

This is where SoftBank starts to become a liability rather than an asset for the companies they invest in.

In a boom where everything points upwards, SoftBank’s money was a fast way to accelerate growth. You could buy market share and outspend your competitors.

But when sentiment in the market turns — as it clearly did in the tech world earlier this year — the high valuations can go from a trophy to a heavy yoke. Staff options are usually tied to the company’s valuation, so having to cut it can have big consequences for your employees. But finding investors willing to top — or even match — where SoftBank and Vision Fund have come in is not easy. And then big drops in value can suddenly appear. That was the trap Klarna fell into — and they are far from alone.

So Masa stands on the stage again, in August this year. He is under pressure once more. Vision Fund has just posted a record loss of $23.4 billion, about SEK 246 billion — in a single quarter. When Vision Fund’s many companies went public, SoftBank’s value surged, but when tech stocks crashed it fell just as quickly. Masa is now promising cutbacks to restore the market’s confidence.

There is much to suggest he can turn the company around again. SoftBank has been through many transformations in its roughly 40 years. From events company to mobile operator to one of the world’s leading tech investors. More transformations are probably still to come.

But he cannot do it alone. Because although Masa’s timing has been remarkable, the question is whether his enthusiasm is enough to charm new investors in a tech world where the air has gone out of the balloon and most people are planning for months rather than years.

Not everyone, as we know, is working on the same 300-year horizon as Masa.

Elon Musk’s New Chance to Walk Away From Twitter

August 24, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on August 24th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

A whistleblower claims Twitter has a bigger spam problem than the company admits — exactly what Elon Musk has been saying. But that doesn’t necessarily mean the billionaire can walk away from the deal to buy the company.

There isn’t a Twitter user in the world who doesn’t know the service has a spam problem. It ranges from Russian bots spreading disinformation to scammers luring people in with cryptocurrency. The phenomenon is well known and beyond dispute. That the service is influential among politicians and media — and therefore a plausible arena for political influence — is equally uncontroversial.

The question that has come into focus lately is more about how big these problems actually are, and how much they affect Twitter as a company.

It’s in this light you can see the latest report from a Twitter whistleblower. And not just any whistleblower — it’s the company’s former head of security, Peiter Zatko. In an extensive document, Zatko goes through a long list of violations, including that the company misled both its board and regulators about its security practices, and that it lacks the resources and tools to understand how big the spam problem really is.

A complicating factor is that Zatko was recently fired from Twitter. After just a few months as new CEO, Parag Agrawal decided to fire both Zatko and the company’s chief information security officer. According to the company, it was due to “poor performance”. This happened in January of this year, so you can’t rule out that the conflict between them still lingers. At the same time, there are considerably less dramatic ways to signal dissatisfaction with being fired than writing an 84-page whistleblower report and going public with your name in CNN and the Washington Post.

At first glance, Tesla CEO Elon Musk looks like a winner in all of this. He is currently in a legal dispute with Twitter as he wants to terminate the deal to buy the company for around SEK 470 billion. Musk claims Twitter’s user numbers are inflated and that the volume of spam bots and fake accounts is far higher than previously stated. Zatko’s report is therefore tailor-made for Musk, and his lawyers have already requested more information from him ahead of the trial that starts on October 17th in the state of Delaware in the US.

It’s not quite that simple, though.

That Twitter has a spam problem is, as noted, well known — including to Musk. He explicitly asked for more information on the volume of spam, which suggests the problem was known before the agreement to buy the company was signed. The question of whether Musk needs to honour his side of the deal isn’t primarily about the volume of spam, either — even if he has tried to make it sound that way.

What will be settled in court is whether what Twitter told Musk affects the company in a “materially adverse” way. So what counts as material, in this context?

According to Matt Levine, a Bloomberg columnist and former lawyer specialising in corporate acquisitions, the Delaware court has previously said that a revenue shortfall of around 40-50 percent can be considered material. A very high bar, in other words. That would mean Musk has to show that the spam volume is so high it would result in Twitter losing half its revenue. That is a considerably harder thing to prove than simply showing there are more spam accounts than previously stated.

The report from the whistleblower could therefore harm Twitter in more than one way. If it turns out that information was withheld from regulators, that alone could result in hefty fines. But if new grounds can be found in the report for why the company has suffered material harm, it may also have given Elon Musk the ammunition he needs to get out of the deal.

Musk’s original bid for Twitter was $54.20 per share. Yesterday’s close was $39.86. He has billions of reasons to look for new arguments, in other words.

How Sweden Went from Startup Paradise to Tech Black Hole

June 24, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on June 24th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

In a matter of months, Sweden went from one of the world’s hottest countries for startups to dark headlines about layoffs and cutbacks. A deeper look shows that what has crashed, above all, is a particular way of building companies.

“AI will affect us all. Get to know it and get to know your path forward.”

In a foreword to a book from 2018, Marcus Wallenberg reflected on the phenomenon that would reshape industries and revolutionise business: AI — artificial intelligence.

The book was written by Luka Crnkovic-Friis, CEO of the AI company Peltarion. On its shareholder register you’d find Wallenberg’s holding company FAM, which alongside EQT invested SEK 110 million in the company that same year. The vision was to build a platform for AI that other companies could use, and so accelerate that transformation of society.

The headlines were big and the customer list impressive. The company was one of Sweden’s most hyped.

Even before Peltarion had even launched its product, NASA, Tesla and General Electric were said to be customers. The company took part in seminars in the Swedish parliament on the opportunities and challenges artificial intelligence could bring to Sweden. The future looked bright — for Peltarion, and for Swedish tech more broadly.

Then came 2022.

The market’s enthusiasm turned abruptly. Tech companies that had listed in 2021 had already started falling in the autumn, and the slides kept coming. Many companies have now lost more than 70 percent of their market value.

Old memes — joking internet phenomena — resurfaced talking about “buy the dip”, buying assets in a downturn. Except now with the pitch-black addition that “the dip keeps dipping”. The declines don’t seem to stop.

And from sending out press releases about helping social services deal with vulnerable children, or building platforms for the education of the future, came a different kind of news. Peltarion had been acquired. The buyer was the games company King, the company behind the mega-hit Candy Crush Saga.

Instead of revolutionising society, they would now build their AI into King’s mobile games. The artificial intelligence — which was supposed to help digitise and transform society — will make sure more candy gets swiped.

What actually happened?

If you listen to the company itself, it is “a monumental chapter in Peltarion’s history” and “King’s scale and reach […] are a good match for our technology”.

Becoming an AI division for a global games company isn’t a bad outcome for a business. But in an interview with Dagens industri in 2018, Crnkovic-Friis said that even if they had tens of thousands of customers on their platform, it would be “a drop in the ocean compared with the companies that could benefit from it”.

The shareholder group had written down the value of their investment significantly in the years before the deal. No price tag has been disclosed either, which usually suggests it wasn’t as high as had been hoped.

Whatever happened behind the scenes, you can tell a big shift has taken place. And it’s probably no coincidence that it’s happening right now.

A lot of startups are in exactly the same situation. The surrounding conditions have suddenly changed. Companies like Peltarion — and many others — may have to pivot on short notice.

Let’s take a quick look in the rear-view mirror.

In 2000 the dot-com bubble was a fact. You could call it a business-model crisis. Many of the companies simply had no real revenue to speak of, and therefore very limited profitability. The companies’ valuations reflected a belief in the future that suddenly went up in smoke. With a weak business model at the core, there was no saving them.

In 2008 came the financial crisis. It had nothing to do specifically with tech companies, except that the whole of society got dragged down in a dark spiral. In hindsight, that period became the start of an enormous boom for tech. One that accelerated further around the Covid crisis in 2020, when central banks printed money like never before and interest rates were at record lows.

Now, in 2022, startups in Sweden and around the world face a funding crisis. The situation is serious, but markedly different from 2000. Today, most companies have more realistic business models at their core. But they may have become overvalued, and forced a type of growth the company can’t quite sustain.

After more than ten years of huge venture investments in growth-at-all-costs, the tap has now been turned off. And it has happened very quickly.

A new report from the investment bank GP Bullhound shows that in the second quarter of 2022, barely half as much money was invested in large venture rounds as just three months earlier.

The IPO window is closed too. In 2021, companies went public for $46 billion. Half a year into 2022, the equivalent figure is one (1) billion dollars. The outlook for the rest of the year doesn’t look much brighter.

What the market is seeing is the effect when very strong momentum turns. Picture a rubber band that can be stretched and expanded. At some point it can’t go any further, and the rubber band flies off in the other direction — or snaps entirely.

In a recent podcast interview, Aswath Damodaran, professor of finance at NYU Stern School of Business in New York, talked about exactly this phenomenon.

“Momentum is the strongest force in the market, much bigger than earnings, cash flows or any other fundamentals. As a trader you live on momentum, but you die with it too. That means you make money when momentum is with you, but if you don’t get out in time, the momentum that was your friend suddenly becomes your enemy.”

The funding crisis companies now face is the effect of momentum that has turned. Over ten years — and the last two years in particular — of access to highly risk-tolerant capital, many companies optimised for the conditions that prevailed. Growth was what was rewarded, and as fast as possible.

The business models may be better this time around, but many need more time to play out. There’s talk of “growing into your valuation”, meaning you need to live up to the promises you made when you took in your investment. But valuations of young companies are highly subjective. Many entrepreneurs are now stuck between the expectations of their previous valuation and the now-sober view the market offers.

LinkedIn co-founder and investor Reid Hoffman published a book in 2018 called “Blitzscaling”. The title referred to growing your business so fast that competition simply couldn’t keep up. It could be expensive and complicated, but once competition was out of the picture you’d catch up.

The clearest example of blitzscaling is the transport company Uber, which grew enormously fast but has also been saddled with enormous losses and big problems around working conditions and regulation. On the surface, though, they’ve been a success. Uber has come to represent a kind of on-demand economy and was used as a reference in thousands of startup pitches. “We’re like Uber, but for X” could be heard in hundreds of meeting rooms around the world.

To be able to “scale” fast, you need lots of staff. Uber was rumoured to send employment contracts to developers before even meeting them, to save time. Even in Sweden, people looked towards Silicon Valley and saw those methods as the ones leading to success, willingly financed by venture capital firms. So they started hiring lots of people and taking bigger risks. Maybe a bit too much — but now the business was going to scale up, and it needed to happen fast.

The difference between the dot-com bubble and now is precisely this. Look at Klarna, for example: they were profitable and growing up until 2019. After that, the growth rate accelerated sharply and losses grew large. A profit of around SEK 560 million over 2016–2018 flipped quickly to a loss of over SEK 9.3 billion between 2019 and 2021.

What has happened now is that venture capital no longer wants to finance this kind of strategy. The same investors who urged speed in growth are now urging speed again — this time in pivoting to profitability. Klarna recently announced it wants to cut ten percent of its roughly 7,000 employees. The online doctor service Kry is doing the same.

Turning around a business that is bleeding money is hard, and takes time. It’s therefore quite possible that ten percent in layoffs won’t be enough. And that the cuts should perhaps have been done differently.

Apple’s former chief evangelist, Guy Kawasaki, put it in the simplest possible way back in 2006:

“Cut deep, and only once.”

Kawasaki argues that companies often start with smaller cuts, believing the wind will turn. But it often doesn’t — or at least not as fast as the company’s leadership hopes. Then you have to make more cuts, which can result in low morale among the employees who remain.

If you can’t turn a company profitable in time, you either have to sell or shut it down.

The tech world doesn’t move in a vacuum — it’s very much influenced by the world economy at large. How inflation, interest rates and the broader business cycle develop will affect how deep, and how long, the industry’s crisis becomes.

But already now you can say with reasonable confidence that the startup world is facing a number of major changes because of what has happened.

To begin with, several industries will face a large consolidation wave. Having eight different e-scooter companies in Stockholm much longer is unlikely. Just this week, one of the market leaders, Voi, announced it’s cutting staff at its head office. The competitor Bird has — since its SPAC listing in November last year — lost over 93 percent of its market value. There will be acquisitions, mergers — and surely a bankruptcy or two.

The funding crisis is most visible among the biggest companies. When the stock market’s valuations set the benchmark, it’s the companies closest to a potential IPO that get hit first.

Brand-new companies that need capital probably have seven to ten years ahead of them before they reach that kind of size, and the market may well have turned again by then. The smaller you are, the less you feel this crisis.

For the somewhat larger companies, timelines get stretched. Blitzscaling is expensive to execute, but it often works in the sense that development happens fast. If the financing for that isn’t there, you have to choose an alternative, probably slower, path forward.

It may therefore take considerably longer to become a unicorn — a company valued at over a billion dollars — now than a few years ago. The next Klarna may well lie a fair distance into the future.

Look one step further back, before companies are even founded, and the sentiment may shift too. Entrepreneurship as a career choice looks different in a downturn, and probably attracts fewer people.

As company valuations fall, more option programs become worthless. The money that previously flowed to startup employees was in part invested in new, smaller companies. The total pool of money for early-stage startups is likely to shrink, and starting a new company may become harder than it was a couple of years ago.

A more positive reading is that the companies being built now will be more resilient. Founders have to choose business ideas that don’t only work in a world of low interest rates. You’re forced to chart a path to more independent financing — and to prioritise it — from day one. You know, the way ordinary companies have always had to do?

A funding crisis is hard to live through, but for the next generation of unicorns it may turn out to be the best thing that ever happened.