Mar 3, 2019

Axios Capital

Felix Salmon

Wanna buy a minotaur? On the current list of VC-backed private companies that have raised more than $1 billion in equity capital: Lyft, Uber, Airbnb, Slack and Pinterest, all of which could go public this year.

1 big thing: How Tesla lost its minotaur soul

Illustration: Aïda Amer/Axios

Tesla was never, technically, a minotaur: When it went public in 2010, it had raised just $482 million in equity capital, along with a $450 million loan from the Department of Energy. And even the IPO only raised another $276 million. Nevertheless, Elon Musk comes from true minotaur stock.

  • Musk is a paid-up member of the PayPal Mafia — the group of entrepreneurs who all but invented the modern version of blitzscaling. His other company, SpaceX, is a fully fledged minotaur, having raised $2.4 billion in equity capital to date. Tesla also raised an astonishing $1.5 billion in a 2016 secondary offering designed to give Musk enough capital to build the Model 3.
  • For all its enormous size, the ambition behind the 2016 offering was so compelling that it drove Tesla's stock up, not down. Similarly, Dan Galves, an automotive industry analyst at Wolfe Research, tells Axios that if Musk wanted to do another large offering, that too would be bullish for the stock, since it would assuage market worries about a possible cash crunch.
  • Musk's compensation package is contingent on him reaching market-cap milestones that start at $100 billion and range all the way up to $650 billion. If he reaches that goal, he gets more than 20 million shares, which could be worth more than $50 billion. The deal gives him every incentive to remain in hypergrowth mode.

The other side: Maybe PayPal co-founder Peter Thiel drank all of Musk's minotaur blood, because Musk now has the zeal of the convert when it comes to cutting costs.

  • Tesla is effectively shutting its entire retail network to bring the price of the Model 3 down by 6%. For those keeping count, that makes three rounds of layoffs in less than a year, after significant cuts in June and January.
  • Elon Musk told Axios on HBO in November that the company came "within single-digit weeks" of death — that "if we didn't solve these problems in a very short period time, we would die." Which is to say: Musk considered running out of cash to be akin to death, even as the stock market was clearly showing that he could raise new equity capital at will.
  • The latest round of cost cutting coincides with the maturity of a $920 million convertible bond. Because the Tesla share price is below $360, the whole bond is being paid out of Tesla's shrinking cash pile.

Driving the news: Given Musk's rapidly escalating war with the SEC, trying to issue new equity at this time would require a decidedly uncharacteristic level of delicacy and diplomacy. But that doesn't fully explain why Musk doesn't want to keep on growing as fast as he can.

The bottom line: Musk has persuaded himself that a company making 500,000 cars per year can and should be able to fund itself out of its own cashflows. Just like we saw with Tesla's door handles, once he's made that decision, no force on Earth is going to be able to move him.

Bonus: Tesla's losses
Expand chart
Data: FactSet; Chart: Naema Ahmed/Axios

By mid-2018, Tesla had cumulative losses exceeding $6 billion. Its most recent two quarters showed profits, but Elon Musk has warned that in the first quarter of 2019, the company will once again swing to a loss.

2. The red stuff flows at Warner Media

Illustration: Aïda Amer/Axios

Hollywood was stunned Thursday by the simultaneous announcements that Richard Plepler and David Levy, the respective heads of HBO and Turner, had "decided to move on" from their plum roles at the top of the WarnerMedia empire. Talk of imminent "massive layoffs" inevitably followed.

  • Plepler ran HBO as a very lucrative high-end operation, bringing in profit of about $2 billion per year as well as some 160 Emmys and an Axios show. He also made it clear that he needed little if any help from his parent company, and that he valued his independence.
  • HBO's parent company, Time Warner, was bought by AT&T last year. It was renamed WarnerMedia and placed under the aegis of John Stankey, a telecommunications executive suspicious of HBO's big-spending ways. When Plepler pointed to how much money he was making, Stankey retorted that it wasn't enough.
  • HBO is now being run by an efficiency-minded bean counter. Stankey is looking for growth rather than cuts, but that's not stopping HBO employees from worrying that they're going to go through the kind of pain that Kraft Heinz went through when it got taken over by 3G.

The bottom line: If efficiency engineering doesn't work for ketchup, it's even harder to make work in Hollywood — a place that can credibly claim significant positive returns on lavish spending, without ever really being able to explain how that works. The culture clash is only just beginning.

3. Where capitalism gets its green light

Illustration: Aïda Amer/Axios

If the U.S. government had got its way, maybe Richard Plepler wouldn't have lost his dream job. The government sued to prevent AT&T from acquiring Time Warner, lost, appealed the case, and, this week, lost again. There will be no more appeals.

The big picture: When corporations and financiers want to do something, they just go ahead and do it. The government can't stop them — it can only sue to stop them, in a court of law. And what the government wants, it doesn't always get.

Puerto Rico provides the most striking example of a situation where the interest of the people is regularly being overruled by a court thousands of miles away.

  • When Puerto Rico defaulted on substantially all of its debt in 2016, the government tried to cobble together a solution that would respect the interests of the bondholders while ensuring the best outcome for the island as a whole. The result was that it gave control of the island to an unelected oversight board, the majority of which was appointed by House Republicans. Puerto Ricans were (and are) understandably unhappy about this, but there was nothing they could do.
  • The oversight board has made a series of decisions that most Puerto Ricans consider far too creditor-friendly. Those decisions were then approved by the island's bankruptcy judge, Laura Taylor Swain. But still the creditors weren't happy, and they have repeatedly appealed Swain's decisions to the First Circuit Court of Appeals in Boston. Every time, the creditors have won, and Swain has been overruled.
  • In the most recent case, the oversight board itself has been ruled illegal, in a case where, once again, the First Circuit overruled Judge Swain.

The bottom line: Capital is insatiable, and it generally has the law on its side. In Puerto Rico, the equities of the case would be far less generous to creditors than even the oversight board and Judge Swain have been. But bonds come with contractual rights that even a government-appointed oversight board can't circumvent.

4. Lyft files to go public

Illustration: Rebecca Zisser/Axios

The Uber vs. Lyft war has never been hotter, and now Lyft has beaten Uber to the S-1 punch, filing its IPO papers on Friday. Expect Uber to follow suit soon.

  • Lyft is much smaller than Uber — it only operates in the U.S. and Canada — but its role in the ride-share ecosystem is hugely important. Lyft has managed to grow its market share to 39%, which makes it ubiquitous enough that riders can easily and regularly compare price quotes between Uber and Lyft to see which one is cheaper.
  • So long as Uber and Lyft continue to fight for market share, consumers will benefit, and each company will prevent the other from being able to collect monopoly rents. Since the two companies provide largely identical services, they will both find it functionally impossible to build significant brand loyalty.
  • Lyft lost more than $900 million in 2018, and it is still very much following the minotaur playbook of buying growth at almost any cost. It enters a public market where large high-growth unprofitable companies are rare, and where even Tesla is now trying to show profits every quarter. Many small investors who were unable to invest in such companies while they were private will be eyeing the Lyft IPO as an opportunity to finally get in on the minotaur game.

The number that matters: 20, which is the number of votes that every B share has. Only the two founders get B shares, and that in turn means those two men will have effective control of the company, even when they own much less than half of the total outstanding stock. The dual-class stock means that Lyft will never enter the S&P 500 and never have stable long-term shareholders in the form of S&P 500 index funds.

Editor's note: This post has been corrected to reflect that Lyft operates in the U.S and Canada (not just in the U.S).

5. Tobin lives

Illustration: Aïda Amer/Axios

The financial transactions tax, or FTT, is also known as a "Tobin tax," after James Tobin, the Nobel laureate who proposed a small tax on currency transactions in 1972. It's a popular way of raising revenue: The UK has had such a tax for decades, and there's a good chance that France's existing tax could be extended to encompass the entire EU.

The tax is also popular on the American left, and this week Brian Schatz, a U.S. Democratic senator from Hawaii, proposed his version of it: a flat 0.1% levy on the sale price of all stocks, bonds and derivatives.

  • FTTs are more effective in larger markets, because those taxes are harder to circumvent. If the U.S. simply signed on to the Franco-German proposal, that would create a global tax capable of funding ambitious global climate-change initiatives.
  • An FTT would reduce high-frequency trading, which is an activity loved by precious few. High-speed algorithmic trading contributes to a key risk in the market — that a "flash crash" could wipe out trillions of dollars of wealth in a matter of seconds.

The bottom line: Schatz's bill is not going to pass with this Senate and this president. But as we enter the 2020 race, expect most Democratic candidates to include an FTT on their list of revenue opportunities.

6. Febrile Britain

Illustration: Sarah Grillo/Axios

Welcome to March! The United Kingdom is due to leave the EU this month. And yet if anything, there's less clarity than ever about whether and when the U.K. might actually leave, and under what terms it might do so.

  • British politics is more fractured than ever: 11 MPs have left the Tories and Labour to form The Independent Group, which is not so much a party as a cry for sanity.
  • The opposition Labour party now wants a referendum, perhaps, and the governing Conservative party now is OK with a short delay, perhaps, but neither option seems to command a majority in Parliament. There's no agreement even as to what question a People's Vote might ask, and there's similarly no clarity on what could realistically change between now and the end of the short delay period.

The bottom line: It's easy to pass votes against a no-deal Brexit on March 29, but it's impossible to enforce them unless there's also a vote for some alternative. In the absence of a positive vote for something else, No Deal remains the default outcome. Market analyst Helen Thomas of Blonde Money still thinks No Deal is the most likely outcome, with a probability of about 40%.

7. This week: A new jobs report

Illustration: Rebecca Zisser/Axios

Expect a ton of talk about what's ahead for the global economy this week, writes Axios' Courtenay Brown.

  • Policymakers in China will almost certainly dial back the country's economic growth target for 2019 to somewhere between 6% and 6.5%, Reuters reports, when the National People's Congress meets in Beijing on Tuesday.
  • The OECD will release its latest economic outlook on Wednesday. Don't expect anything too rosy: Back in November, the OECD said global expansion had "peaked."
  • The European Central Bank won't announce an interest rate hike on Thursday. However, there will be more attention to the ECB's economic forecasts, against a backdrop of deteriorating European growth and Brexit chaos.

In the U.S., the jobs report comes on Friday. Forecasters say the unemployment rate should tick down to 3.9%, while the economy is expected to have added 180,000 new jobs in February.

Of note: Saturday marks 10 years since the S&P 500 hit an ominous intraday low of 666, before closing at 676.53 — the lowest point of the financial crisis.

  • The S&P has risen 310% since then.
  • Some may celebrate the bull market's 10 year anniversary. Others, who say the bull run ended with the S&P's 20% intraday drop in December, won't.
8. Building of the week: Mjos Tower

Photo: Erik Johansen/AFP/Getty Images

As Justin Fox has documented, America is sprouting thousands of architecturally undistinguished mid-rise apartment complexes of 3–6 stories, their height limited by the fact that they have a wood frame.

  • Elsewhere, however, wooden buildings are getting much, much taller.

Mjos Tower, which houses the Wood Hotel, currently holds the record for the tallest wooden building in the world. Standing 18 stories and 280 feet tall, it was built in Brumunddal, Norway, to a design by Øystein Elgsaas of Voll Arkitekter.

  • It's not just the building's frame that's made of wood; all of the paneling, too, is made of glue laminated timber.
  • The tower, which cost about $50 million, is designed to produce the same amount of energy that it spends, thanks in part to solar cell panelling and heat pumps drilled into the earth and a neighboring lake.
Felix Salmon