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October 17, 2018 | One More Thing To Worry About, Saudi Edition

John is author or co-author of five books, including of The Money Bubble, The Collapse of the Dollar and How to Profit From It, Clean Money: Picking Winners in the Green-Tech Boom and How to Profit from the Coming Real Estate Bust. A former Wall Street analyst and featured columnist with TheStreet.com, he currently writes for CFA Magazine.

Ah, Saudi Arabia, land of heat and contradictions. One day they’re jailing women’s rights activists for wanting to drive, the next day they’re dismembering still-living Washington Post journalists. And yet they can count the world’s capitalist democracies as friends, because today’s dysfunctional economic/geopolitical system depends on both Saudi oil and Saudi willingness to keep their (apparently even crazier) Middle East neighbors in line.

Now it turns out that even Silicon Valley has a Saudi problem because – get this – the Kingdom is the biggest single funder of tech start-ups. From today’s Wall Street Journal:

Saudi Money Flows Into Silicon Valley—and With It Qualms

The kingdom is now the largest single investor for U.S. startups, an unsettling fact for Silicon Valley

As international backlash grows over Saudi Arabia’s alleged involvement in the possible murder of a journalist, Silicon Valley faces a potentially unsettling fact: The kingdom is now the largest single funding source for U.S. startups.

Crown Prince Mohammed bin Salman has directed at least $11 billion of Saudi money into U.S. startups since mid-2016, either directly or through SoftBank Group Corp.’s $92 billion tech-focused Vision Fund, to which the Saudis committed $45 billion, according to a Wall Street Journal estimate of data from research firm PitchBook. The total invested by the kingdom so far in U.S. startups is far bigger than the total raised by any single venture-capital fund.

Some of tech’s most prominent young companies have welcomed Saudi money, including Uber Technologies Inc., office-sharing company WeWork Cos. and augmented-reality device maker Magic Leap Inc. For Uber, the situation could be particularly dicey: A prominent Saudi official sits on its board.

For now, the companies are preferring to keep quiet about the escalating controversy. Of the 22 startups in which the Vision Fund or the Saudis have invested, all but one declined to comment or didn’t respond to requests. Uber pointed to a recent statement from CEO Dara Khosrowshahi, who said he planned to pull out of a Saudi-sponsored business conference and that he was troubled by the reports about the journalist, Jamal Khashoggi.

For the startup community, “there are incidents where you have to look and decide which side of history you want to be on, and if this is true, this is one of those,” said Venky Ganesan, former chairman of the National Venture Capital Association and an investor at Menlo Ventures, which has invested in Uber. “It’s more than about startups and money—it’s fundamentally about what you think about human rights.”

Tech companies are in a particularly conflicted spot given the idealistic missions espoused by many leaders in Silicon Valley, where employees routinely rebel over contracts they find unprincipled. WeWork, for instance, has banned meat over concerns about its environmental impact.

“Silicon Valley has been incredibly hypocritical in accepting investments from an anti-Semitic country, [which] criminally punishes gays and de jure discriminates against women,” said Keith Rabois, a venture capitalist at prominent firm Khosla Ventures, in an email.

Saudi Arabia VC investment

Mr. Rabois’s position also illustrates how pervasive Saudi money is: Multiple startups backed by Khosla have raised money from SoftBank’s Saudi-backed Vision Fund, including online home-selling company Opendoor Labs Inc., of which he is a co-founder.

The sheer scale of money is unprecedented—and to some founders, irresistible. The Saudi-backed Vision Fund—where the majority of investment decisions are made solely by SoftBank—has led at least 20 deals totaling more than $17 billion of investment in U.S. startups, according to PitchBook. Saudi’s Public Investment Fund has committed another $4.9 billion to Uber, Magic Leap and electric-car maker Lucid Motors Inc.

After Uber co-founder and then-CEO Travis Kalanick flew to the kingdom to meet with the crown prince two years ago, he secured a $3.5 billion investment from PIF within weeks, people familiar with the matter have said. A condition of the deal: The PIF would receive a board seat.

Some Silicon Valley leaders criticized Uber, saying that by accepting the PIF investment it was tacitly endorsing Saudi policies, which at the time included a ban on women driving. Uber executives, in response, denied any policy support, saying the U.S. and Saudi Arabia were allies and that the ride-hailing service was a valuable tool for women. Uber board member Arianna Huffington said then she believed the Saudi government should allow women to drive—and they since have.

Uber doubled down on Saudi Arabia. When Mr. Khosrowshahi succeeded Mr. Kalanick as CEO last year, he made finalizing what ultimately became a $7.7 billion investment from the Vision Fund one of his first orders of business. That deal effectively netted Saudi Arabia about 10% of Uber, including the PIF investment.

In the days after Turkey accused the Saudi government of killing and dismembering Mr. Khashoggi at the Saudi consulate in Istanbul, many executives and investors have said they would suspend projects with the Saudi government or cancel their plans to attend its coming business conference.

On Monday, Alphabet Inc. said that Diane Greene, head of Google’s cloud-computing unit, wouldn’t attend the conference. Robert Thomson, chief executive of Wall Street Journal-parent News Corp, had planned to attend but is reviewing the situation, a company spokesman said.

Others who have backed out are Mr. Khosrowshahi and Ms. Huffington, who was scheduled to speak at the conference.

Yasir Al Rumayyan, the head of PIF, sits on Uber’s 12-member board and, according to people familiar with the matter, Uber is contractually obligated to hold a seat for PIF as a result of its investment. Such arrangements, which are customary in venture capital, generally mean it is difficult for boards to remove such a director except in cases of impropriety or when an investor’s stake drops below a certain level, these people said.

The take-away? The Saudi thing is probably going to affect the oil market and possibly Middle East stability — and now maybe the funding of Silicon Valley start-ups.

This is, in short, one more potential catalyst for the coming financial crisis. Though the list is now so long that it’s hard to see one more making much difference.

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October 17th, 2018

Posted In: Dollar Collapse.com

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