Will the Death of a US Journalist in Saudi Arabia Crunch Cash Flow to Two VC-Backed Dallas RE Firms?

Saudi

The death of journalist Jamal Khashoggi in Saudi Arabia has created a ripple effect in the financial world (photo courtesy Flickr).

Money is a funny thing. You never know where it has been and whose hands have touched it.

This week the SoftBank Vision Fund, $93 billion strong and investing heavily in local real estate start-ups Compass and OpenDoor,  has come under the microscope because Saudi Arabia is a major investor in the fund. And the Saudi Arabian embassy in Turkey is the place where American journalist and Washington Post columnist Jamal Khashoggi disappeared mysteriously earlier this month.

Now international and U.S. media reports are suggesting that Saudi Arabia’s Crown Prince Mohammed bin Salman, or members of his family or contingent, either had something to do with Khashoggi’s death or perhaps even ordered it.

Khashoggi was a loud critic of the Saudi royal family and culture. He went to the Saudi consulate in Istanbul to sort out paperwork for his upcoming wedding.

Okay, you say, how does this tie to SoftBank and Compass and Opendoor?

There is a growing fear that if the Saudi Royal family had anything to do with this man’s death and dismemberment, the financial community — especially in Silicon Valley, and maybe the real estate community — may pull back. I mean, even Dr. Robert Jeffress, the pastor of the 13,000-member First Baptist Church of Dallas, has condemned it and I’m not sure he even realizes the Dallas connections. 

Investor confidence in the fund has already been taken a hit:

Masayoshi Son (Photo by Scott Olson/Getty Images)

SoftBank’s stock price has fallen 20 percent from its peak this month, and investors are rethinking their investments in the Vision Fund, as well as the prospect of contributing to future SoftBank tech funds, news outlets are reporting. In addition, SoftBank “could face a revolt in Silicon Valley if entrepreneurs begin to think taking its cash is akin to blood money,” Bloomberg reported.

One thing is clear: the international crisis is not good for business: amid the alleged murder, concerns over SoftBank’s deep relationship with Saudi Arabia has pummeled investor confidence in SoftBank.

SoftBank was founded by Masayoshi Son, one of the world’s 500 richest people (according to Bloomberg) worth about $15.5 billion. He bought an estate in Woodside, California, for $117.5 million in 2012, and I’m sure that’s not his only place.

His investments have been super tech-heavy (Softbank Group Corp, a holding company, made millions investing in Alibaba, the Chinese equivalent of Amazon), but SoftBank’s $100 billion Vision Fund has backed (or intends to back) many tech businesses with everyday names like Uber Technologies Inc., WeWork Companies., Didi Chuxing, and Slack Technologies Inc. to name a few. To be sure, there are many, many companies benefitting from the Saudi investment in SoftBank– not just Compass and Opendoor.

Full disclosure: we use Slack here at CandysDirt.com.

The trouble for Son is that his grand vision depends on Crown Prince Mohammed bin Salman, who pledged $45 billion for the Vision Fund after a 45-minute pitch from Son and has promised a similar amount for the next fund. Not only are those commitments now in question, but SoftBank could face a revolt in Silicon Valley if entrepreneurs begin to think taking its cash is akin to blood money.

Now Vanity Fair is on hot the trail: “There are limitless other sources of raising capital — nobody needs to raise from SoftBank,” one founder, told the writer. “I wouldn’t take that money right now.”

How will that affect the two real estate companies with Dallas ties in which SoftBank has most heavily invested: Opendoor and Compass?

Son is definitely bullish on the two companies:

Sources familiar with SoftBank’s real estate investment strategy say SoftBank has decided that Opendoor and Compass are the leading representatives of the two dominant residential brokerage models of the future: the iBuyer (Opendoor), and the tech-powered, full-commission brokerage (Compass).

According to Inman, Compass is remaining quiet for now on the Saudi’s potentially barbaric behavior:

A Compass representative declined to comment when asked several questions about the company’s reaction to the journalist’s disappearance, alleged murder, and the company’s relationship with Saudi Arabia-funded SoftBank.

The VC-flush firm is no stranger to political opinion: it has condemned President Donald Trump’s immigration policies in the past.

I sent an email to Compass Thursday morning, too, and had not heard back by press time. Compass has drawn $400 million from SoftBank with another $400 million pledged.

San Francisco-based Opendoor has also drawn $400 million from the SoftBank Vision fund (I guess $400 million is a magic investment number in real estate), which is, according to Inman, 40 percent of the start-up’s total equity financing of $1.045 billion.

I also emailed Opendoor, who had not replied by press time, either. Further, Opendoor has a managing partner on it’s nine seat board from the Softbank Vision Fund, Jeffrey Housenhold, managing partner at SoftBank Investment Advisors. Housenhold has said the “digital transformation” of real estate is “only beginning.”

The other fallout this week is that high-profile financial executives, from Jamie Dimon to the CEOs of Uber and Blackstone, are not attending a high-level Saudi financial investment conference. Even Richard Branson has called off Saudi talks — he was poised to invest over $1 billion there in his space companies. And on Thursday, Goldman Sachs Group Inc. and Treasury Secretary Steven Mnuchin canceled plans to attend, and Fox Business pulled out as a media partner to Davos in the Desert.

And the grisly news could derail a potential $20 billion Vision Fund investment in WeWork, one of the fastest-growing, most-profitable shared workplace spaces in the nation on track to lease more NYC real estate than banks.

So what’s the worst that could happen? With Masayoshi Son being worth $15.5 billion, he surely has other connections. I reached out to two industry experts, west-coast based Victor Lund, principle with the WAV Group, a consulting firm that tracks and advises the Real Estate Industry, and my New York City  real estate expert, Jonathan Miller, MillerSamuel CEO and a highly-sought real estate observer/appraiser.

“I’m not really sure,” said Miller, “but I cannot imagine there isn’t some impact given what appears to be a fluid relationship between SoftBank and The Kingdom. The scope of funds flowing to Compass have been enormous.”

But Lund totally blew off any negative ripples.

“No effect at all,” he told me, “Pure fluff. It’s all a million miles away — they are so far away from Compass, the Saudis probably don’t even know they are an investor in Compass. It’s a sovereign nation, they will make amends, and the fund will move on. Compass is growing a business: they are smart, precise, and Compass executes effectively.”

A lot depends on SoftBank’s next moves. But if it turns out that Khashoggi was murdered by anyone with close ties to the Saudi Royal family, this could be a  “watershed”, self-actualization moment for Silicon Valley culture and the VC dollars funding wealth for a well-sheltered generation who say they want to make the world a better place:

Jeff Kingston, a professor at Temple University in Tokyo, said SoftBank could see its reputation take a hit with technology startups if the Saudi regime is found culpable. Tech workers have increasingly pressured employers to steer clear of relationships they see as politically compromised. Google, for example, decided not to renew a contract with the U.S. Defense Dept. after protests from employees.

“Son is going to find a chillier welcome in Silicon Valley,” said Kingston. 

Investing with a regime that allegedly had a hand in the murder and dismemberment of a journalist is beyond what most people would consider progressive, but the crown prince has of late tried to position himself as a progressive reformer.

The prince has presented himself as a reformer intent on opening up the kingdom’s economy and culture, and has used that image to try to influence White House policy in the region and to woo Western investors to help diversify the Saudi economy.

But the international revulsion at the reported assassination and mutilation of a single newspaper columnist — Mr. Khashoggi, who wrote for The Washington Post — has already sullied that image far more than previous missteps by the crown prince, from miring his country in a catastrophic war in Yemen to kidnapping the prime minister of Lebanon.

3 Comment

  • I doubt you will see hang tags saying a MBS (Mohammad Bin Salamin ) company under COMPASS signs anytime soon!

  • Compass powered by terrorists is pretty catchy… $850M of $1.1B raised is from Softbank. Why can they not find as much money in the USA? Is it because the balance sheet is a joke and investors know a brokerage model with high commissions split is a losing battle? Half of Softbank Vision fund #1 of $100B is Saudi PIF fund money and so is Vision fund #2 if it happens.

    -Why wont Compass comment on their investors beliefs as quickly as they press release about their glow in the dark gimmick signs? They are ok with money no matter where is comes from is my assumption.

    – Typical VC guys trying to IPO with DAU ( daily active users) on an app and sell those clients info to third parties is the play here… That is a conversation that should be discussed. When you sign a contract with compass you are required to use their collections software/ app within 45 days and to list your properties with their Compass coming soon for 5 days. This way they can show “growth” to investors on the tech side? Not what they tell the agents I am sure.

    – Anyone could do what they have done with that amount of cash to blow on buying off agents and entire brokerages. It is artificial market share, not organic growth like they tell you.

    – Zero Real Estate experience between the 2 founders. They are faking it until they make it in Real Estate and hiding behind the agent first motto…

    – Don’t let these agents fool you. Realtors are looked upon as money hungry used car salesmen and Compass played to this by offering signing bonuses. The agents did not join Compass because they believe in the tech being so much greater, all this software has been around for YEARS. The agents got PAID massive bonus checks and empty stock option promises. They use fancy words like “end to end platform”, “machine learning AI”, “the next UBER” , which is code for we don’t have anything special.. They use mailchimp as the CRM, which is a free application for ANYONE. $1B in cash and you use Mailchimp CRM and outsource all other parts of the business.

    – In the past Many compass agents would leave after the 1 year contract expired so they did not have to pay back the bonus or lose any “investment” stock options. Compass addressed this problem by making the term for all agents until 2020. If you leave before then, which is their assumed IPO target date you have to pay back all your bonus money, and you lose any stock investments, and you pay back the free marketing fees they gave you. How do agents not realize this scam? They think they will win the lottery on the IPO. The stock purchase options are also contingent upon board approval…

    – Wait until year 2 of the agent contract when they start to reduce the agents commission splits and the agents have zero leverage because they would be forced to pay back any money they received. Do you want the company you work for to have you handcuffed?

    – the $4.4B valuation is a running joke in the industry.

    – FACT- Compass a NYC company had no problem taking Saudi money even though 15 of 19 Sep 11th hijackers were Saudi.

    From the Real Deal

    “Compass does not limit the amount of stock options that agents can purchase, according to the document, but it does require them to invest a minimum of $10,000 if they participate in the program. If the agent leaves Compass before the end of 2020, they forfeit any commissions they’ve already contributed.

    Though Compass is already flush with capital, the stock option plan also enables the firm to essentially borrow cash from agents who invest in the program. “This is cheap money for Compass,” the New York brokerage executive said.

    Shapiro also called it “a risk that I don’t think most agents are going to understand.” The company, he added, is “asking them to invest in a stock that doesn’t even exist.”

  • mm

    The same Jeffress who said (Thou shalt not kill) God gave Trump OK to kill North Korean leader Kim Jong Un last year?
    .
    http://www.firstdallas.org/news/pastor-robert-jeffress-god-has-given-trump-authority-to-take-out-kim-jong-un

    MBS isn’t a reformer. Gave women right to drive and then arrested women who protested for the right before it went into effect. Just one example.