Thursday, March 23, 2017

Shorting Silicon Valley: "Unicorn Swaps and Falling Complacency"

From M. Levine at BloombergView:

People want new ways to worry about unicorns.
We talk from time to time around here about how to short unicorns. There is a popular view that many large private tech companies are overvalued; that this overvaluation is caused in part by the structure of the market, which encourages long investors but doesn't allow short selling; and that if you could just sell those companies short, you'd make a lot of money. Themes of our past discussions include:
  1. Really if you believe all of that, the right move is to start a dumb private tech company, get dumb venture-capital funding, pay yourself a big dumb salary, and laugh maniacally when the bubble bursts.
  2. Failing that, you could just find someone -- a friend, or a bank -- to take your bet against unicorns, but it's complicated. A bank will probably demand the sort of formalities -- collateral, ISDA agreements, limiting bets to big "eligible contract participants" -- that will limit the reach of the Unicorn Failure Swaps market.
  3. Also the bank will probably want a natural counterparty on the other side. Lots of people want to short unicorns, but who would take the other side of the bet? I mean, lots of people want to go long unicorns too. But if you want to go long unicorns, and you're the sort of accredited investor who could write Unicorn Failure Swaps, you should probably just invest in unicorns instead. They keep raising money!
  4. In any case, don't try to do this on the cheap in some sort of unregistered blockchain-based unicorn swap exchange; that will not end well.
So much for the theory. Here is a Medium post from Avish Bhama of Mirror, who is actually trying to make unicorn swaps happen. His team met with 65 potential counterparties, got a sense of the market appetite, drew up an ISDA and "partnered with a valuation firm to help us mark these illiquid swap positions on their books." But he didn't find much of a natural two-sided market in most names, though interestingly the one-sidedness is not all on the short side...MORE
HT: FT Alphaville's David Keohane who noted the Medium article in today's Further Reading post, which eventually led us to this piece.