Will Temasek be played by the deep pocket syndrome

The past two decades has been a confluence of cheap money and vast accumulation of wealth by few. This led to the rise of direct non-bank funds as an important source of capital in the form of private equities. From this faucet flows so much liquidity that capital is no longer seen as a limited resource of production. With the market drowning in liquidity, wealth owners take on higher risk in order to chase higher yields. Angel investors, who are often relatives and friends of the entrepreneurs, come along to provide the seed money. Private equity funds provide the venture capital. These funders take on equity of startup companies. They hope to make vast gains when the venture goes public, but aware of the possibility of a wipe out if the companies fail.

Apple and Microsoft have one thing in common. Both Steve Job and Bill Gates started their ventures in their parents' garage. Today, entrepreneurs of startup ventures literary can fly before they can walk. Adam Neumann of Wework bought his US$60M luxury private jet with investors' money. With easy money, what do startup entrepreneurs do? They develop their business using cash burning models. At one point, Wework was burning US$100M a month! Whereas Job and Gates focused on revenue to drive their project forward, today's startups practice a form of medicancy which do not take place on dirty sidewalks but in plush conference halls with flashy powerpoints. 

Deep pocket investors that build concentrated equity in companies face a moral hazard of pouring good money after bad money. To do so is putting more money at increased risk, not to do so means certainty of wipe out. Walking away from a bad investment is never easy, and hope springs eternal. The sunk cost fallacy is something that is easy to understand, but difficult to accept, even for the most astute of investors. And so we see Softbank pouring additional billions into a collapsing Wework.

One thing medicants do know. In cash crunch times, gyrate to the major funder or the ones with immense resources. This is the deep pocket syndrome. And so Softbank, and increasingly Temasek, are often invited to lead new funding rounds. Masayoshi Son and Ho Ching are two persons you want to exchange business cards with if you are thinking of a startup venture.

Some funding rounds are planned, some necessitated by failure to meet projections. With the cash burning model, startups do not build reserves for emergencies. Cash calls to tie over shortfalls are common. That's the risk environment for venture capital. The virus pandemic has thrown a spanner in the work for all startups. Lockdowns and economy shut downs are causing all businesses huge problems with loss of revenue and tight credit squeeze. The longer the situation persists, the more severe the outcome. Businesses with good reserves fare better. Startups with no reserves are in turmoil.   

The reorganisation in Temasek after Ho Ching took over the reigns in 2004 has seen the sovereign wealth fund took on a significant number of startup investments in their portfolio. The risk level has risen several notches after 2004. These are busy times for Temasek. The liquidity crunch will see increased demands for financial resources from operating subsidiaries and startups in distress.

At a time like this, what can be more challenging is to have fellow investors removed from the table and not able to share the risks. New Delhi's anti-China stance in investment will translate to capping the inflow of Chinese FDI into the country. Unlike Singapore that has no security worries of having a million Indian workers in the country, the Modi government is wary of too much Chinese million $ in India. The FDI cap has constrained investors like Ali Baba, Tencent, Shunwei Capital, Fosun Group, etc who are co-investors with Temasek in many Indian startups. Temasek now carries a heavier burden. For starters, Ali Baba and Tencent are in talks with Temasek for the US$100M funding that Indian food delivery platform Zomato, is requesting. Temasek may see opportunities in the chaos to invest more. Or it may accommodate Chinese investors in some round robin tripping mechanisms to bypass Indian regulation. We have seen in the Shin Corp and Keppel Shipyard sagas that such shenanigans are not beyond a state agency dressed in whites.

  
Temasek is not managing the extra cash of Hollywood celebrities, but Singapore tax payers' money. Let's hope extra prudence and sunk cost fallacy is on the altar. Christmas is near, but we sure do not wish to see Ho Ching playing Santa Claus.

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