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We’ll Sit This Calamity Out

To our Valued Investors:

Last October, shortly after Palantir Technologies had gone public and AirBnB was teed up for a December debut, Iron Edge VC was in search of a blockbuster private company in which we could invest and share with our clients. Social Finance, Inc. (aka SoFi) was still private at the time, and its shares were selling robustly before the public knew that it would soon be announced as a SPAC target. Still, we were on the hunt for a new “tentpole”. It was time for us to put our feelers out. We batted some ideas around with many of our respected peers throughout the private equity universe and we paid close attention to the various “special requests” we were fielding from our clients. Throughout the course of these conversations, one particular phrase seemed to keep popping up: “The Chinese Uber”.

Early into our study of DiDi Chuxing, we clearly understood that “Chinese Uber” was a simplification and a rather significant understatement. After all, DiDi had already swallowed Uber China, apparently preferring to buy the smaller company (which had been losing $1 billion annually in the region) rather than be annoyed at Uber’s meek attempts to compete. DiDi was the result of the 2015 merger of Didi Dache and Kuaidi Dache, which had recently raised about $1.3 billion collectively from heavyweight investors Alibaba and Tencent Holdings in aggressive funding rounds. Shortly after the 2016 Uber China purchase, DiDi began expanding into ride sharing, auto rental, bike sharing, food delivery, designated driving (wherein one can hire a chauffeur to drive one’s own car when one is unfit to drive), and even various financial services. They have invested in competitors like Grab, Lyft, Ola, Uber, Bolt, and Careem, acquired Brazilian ride hailing app 99 in its entirety, and expanded into Latin America, Australia and Japan. As of last year, DiDi had raised $23.44 billion. The company was generating healthy profits and had begun talking about conducting an IPO. Having learned these and other intriguing details about DiDi and its growth potential, we considered the dominance of the ride hailing industry on our own shores. China’s population is approximately 4.25 times greater than that of the United States, and Chinese passengers prefer ride hailing over taxis by a more than four-to-one margin, according to a 2018 study. It seemed clear that we had found a winner.

The thing is, good due diligence shouldn’t have an expiration date. Our enthusiasm for the company was abundant, as was our excitement in having identified a large-scale DiDi investment opportunity, but those things didn’t prevent us from keeping our eyes and ears open. Even as we created numerous series within our own fund that represented DiDi ownership, some items in the news were beginning to make us uneasy.

Right around the same time that our interest in DiDi was starting to percolate, the outspoken Chinese billionaire Jack Ma suddenly became less vocal and less visible. In fact, nobody seemed to know where he was for a few months. Ma, the founder and former CEO of the Alibaba Group and its affiliate Ant Financial, had last been seen delivering a speech that openly criticized Chinese banks and regulators. The timing of Ma’s disappearance, and of the government scrutiny of his businesses, was fodder for much speculation about what really might be going on behind the scenes. Fortunately, Ma resurfaced in January, complete with a much more compliant attitude.

It is not Iron Edge VC’s station in life to proclaim political opinions at home or abroad, nor would it be likely to make much of an impact if we were to editorialize on matters of government. Our function is to seek out the investment opportunities that appear to have a high potential for making great returns, to build wealth for our clients and, naturally, to avoid situations that could do the reverse. Seasoned investors know how to weather the bad news with the good, but uncertainty is a different beast altogether. Since the advent of securities trading, all markets have always hated uncertainty, and at Iron Edge VC we avoid it like the plague. As the swirl of uncertainty surrounding Jack Ma, Alibaba, and Ant Financial intensified, the large DiDi commitment in which Iron Edge VC was readying to partake suddenly felt a lot less like a “grand slam”.

The fund manager’s job is not one-sided. We need to know when to hold ‘em and when to fold ‘em. Still, the decision to back away from a sizeable investment that we had been promoting and for which we had been accepting capital is not one that can be taken lightly. What’s more, sending out wires to return client funds that had been earmarked for a specific purpose is a most unpleasant endeavor. At the end of last year and the beginning of this one we did it, though, because we felt uncertainty. Especially as we compared the DiDi investment to the intensifying SoFi and the “green shoots” of earlier-stage private companies that have since become some of our mainstays, we knew that we needed to walk away from DiDi.

Last April, The Wall Street Journal reported that Ant Financial (now called simply “Ant Group”) would be converted into a financial holding company overseen by China's state-controlled central bank.

DiDi’s American Depository Receipts (ADRs --- certificates representing shares of a foreign company's stock) --- began trading at the New York Stock Exchange two weeks ago today (NYSE: DIDI). Over the following weekend, the Chinese Communist Party (CCP) suspended downloads of the DiDi app on any phone in China, citing cybersecurity risks regarding sensitive consumer data. Immediately, speculation arose that the shocking move might have been motivated by more political circumstances. Recently, the CCP has had its sites on Chinese companies that choose to issue ADRs because the practice circumvents the government’s tough restrictions against raising foreign capital. DiDi had incorporated in the Cayman Islands in order to attract overseas money, but that also diluted the CCP’s influence over DiDi. Many observers have concluded, then, that the creation of DiDi ADRs caused the CCP to deliver a devastating blow directly to DiDi’s life source --- a blow that has already weakened the infant stock nearly 40% from its June 30th high. At Iron Edge VC, we immediately realized that almost all pre-IPO investors who bought DiDi since last fall were in the red less than five days into a 180-day insider lockup period.

Other examples of Iron Edge saying “no, thank you” to pre-IPO deals that wound up transitioning poorly into the public markets include Marqueta, UiPath, and Coinbase. We clearly understand the quality of enterprises like these, but sometimes after a thorough look under the hood we simply don’t like them as pre-IPO plays. Case in point: shares of Coinbase were changing hands in the second market at $600 apiece a couple of weeks before the company listed on the Nasdaq, with Iron Edge sitting that one out. Today, a mere three months later, you can buy the stock (Nasdaq: COIN) under $230.

We don’t celebrate the misfortune of others. We sincerely do not like to see anybody lose on an investment, even if it is an investment that we have conscientiously chosen to avoid. We do, on the other hand, take pride in seeing our clients benefit from the time, the effort, and the care we put into curating our portfolio. Aside from the better-known names among our offerings, many of the private companies in which we deal are well within the “up-and-comer” category, not as broadly familiar to the public. They are the product of meticulous research into where the greatest stored potential might reside. If you or anybody you know would like to learn more about them, please don’t hesitate to contact us by clicking “Get in Touch” below.

If you have enjoyed this article, visit the Iron Edge Blog for past updates on other pre-IPO investment opportunities.

 As always, shares of our Funds are available on a first come, first served basis.

All the Best,

Paul Maguire
Founder & Managing Partner

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