Top Executives of China’s State Semiconductor Fund Arrested

August 8, 2022

A major state-backed investment fund in China is in shambles as several top executives have been arrested. From the MIT Technology Review:

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China’s chipmaking industry descended into chaos last week, with at least four top executives associated with a state-owned semiconductor fund arrested on corruption charges. It’s an explosive turn of events that could force the country to fundamentally rethink how it invests in chip development, according to analysts and experts.

On July 30, China’s top anticorruption institution announced that Ding Wenwu, the chief executive of the China Integrated Circuit Industry Investment Fund, nicknamed the “Big Fund,” had been arrested for “suspected serious violations of the law.” Ding is not the only person in trouble. Two weeks ago, Lu Jun, a former executive at the Big Fund’s management institution, was also taken into custody, along with two other fund managers, according to the Chinese news outlet Caixin.

‘Made in China’

Let’s back up a bit. In 2014, China’s government created the China Integrated Circuit Industry Investment Fund (CICF) to invest in domestic chip making. Becoming self-sufficient in these critical components is a top priority of the Communist Party.

At that time, China could only make about 10% of the chips it needed. Its goal was to get to 70% by 2025.

The fund made over $30 billion in investments, with $20 billion more planned. But those investments have started to go sour.

The ‘Big Fund’ Takes Big Losses

One of its biggest investments, Tsinghua Unigroup, went bankrupt last year. Unigroup executives are under investigation and CICF’s $2 billion investment is likely up in smoke.

Riven by bad bets and likely self-dealing, CICF has failed to make China self-sufficient in chips. Today, China can only make about 20 or 30% of the chips it needs — well below target.

A Critical Moment

For China, being able to make semiconductors has never been more important. The US and its allies Taiwan, Korea and the Netherlands make virtually all the chips China imports.

The Trump Administration cut major Chinese telecom Huawei off from critical tech in 2019. Now, the US is pressuring Dutch chipmaker ASML not to sell certain chipmaking machines to China.

China is dependent on chip imports and cut off from the latest tech. Its efforts to develop its own industry have been mired in incompetence and corruption.

China’s Missed Opportunity

What should China have done differently?

Rather than giving government bureaucrats a mountain of state money to invest, use real investors!

With the right tax breaks, chipmakers and technology investors would’ve been eager to set up Chinese fabs. Perhaps TSMC would’ve built more plants in China and China would already be self-sufficient.

The Empire Strikes Back

Turns out another country is doing exactly this: the United States.

The recently passed CHIPS Act offers huge tax breaks for making semiconductors in America. Already, Intel, Samsung, and TSMC are setting up plants.

Worse yet for China, the CHIPS act bars companies that get those incentives from investing in cutting edge chipmaking in China.

I don’t think China will succeed in creating a major domestic semiconductor industry any time soon.

Its poor relations with other countries cut it off from foreign help. And China’s politicized investment climate results in little besides bankruptcies and prosecutions.

As much as we Americans complain about our government, turns out they’re actually doing a few things right.

What do you think the future holds for Chinese tech? Leave a comment at the bottom and let me know.

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Male Contraception with One Simple Shot

August 5, 2022

For generations, preventing pregnancy has fallen mostly on women. Men have few ways to help, aside from often ineffective condoms.

With abortion now illegal in many states, the need for contraception is the greatest in 50 years.

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So I was excited to learn today about an amazing new male contraceptive called Contraline.

Contraline is an injectable gel that blocks sperm before they’re ever released. It has no effect on hormones and ejaculation happens as normal.

The roughly 30 minute procedure happens in an outpatient clinic and remains effective for at least a year.

The gel, called ADAM, is set to enter clinical trials this year.

It works by setting up a barrier in the vas deferens. This barrier blocks the sperm from leaving the body.

When the gel has reached the end of its lifespan, it liquefies, removing the barrier.

Development of male contraceptives has long been stifled by a lack of research funding. Government grants have gone mostly to contraceptive options for women.

But as more federal dollars and venture capital pour into male contraceptive development, things are beginning to change.

University of Minnesota researchers have developed a male birth control pill that’s 99% effective in mice. They hope to begin human trials this year.

A contraceptive gel for men is also in development. But that too is likely five years or more from market.

Should Contraline or another male contraceptive come to market, couples would have more options than ever. Many women find IUD’s painful and birth control pills fraught with side effects.

What’s more, men have had to trust their partners to handle contraception. If men could do it themselves, society may look much different.

John Reynolds-Wright, a male contraceptive researcher at the University of Edinburgh, may have said it best:

“Maybe I’m overstating how exciting it is, but I always think of it like the iPhone. We couldn’t have imagined how the iPhone would impact on our lives until it was invented. And actually, this is something that’s got the potential to completely, radically change how we talk about family planning, about relationships, about sex.”

I hope the awesome team at Contraline can get their product to market and change the lives of couples worldwide. If men and women can share the contraceptive burden more equally, we’ll have a better world!

What do you think the future holds for male contraceptives? Leave a comment at the bottom and let me know!

Have a great weekend everyone! 👋

More on tech:

Male Contraception With an Ultrasound Device?

Inside the Seed Funding Slowdown

The Top 5 Things I’ve Learned from Angel Investing

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Hedge Fund Giant Tiger Loses Over $18 Billion — Long Fund Down 64%

August 4, 2022

Note: This is not financial advice.

Hedge fund colossus Tiger Global Management is fighting for its life. Its public stock funds have lost between 50 and 64% this year, vaporizing billions.

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From a report that broke last night in the Financial Times:

Chase Coleman’s hedge fund Tiger Global ended the second quarter nursing heavy losses amid a tech stock rout that has caused performance across one of the world’s largest hedge funds to plummet.
A long-only fund the firm manages ended the second quarter down 63.6 per cent after fees, according to a letter sent to investors seen by the Financial Times, while the firm’s flagship fund ended the first half of the year down 50 per cent after fees.

Tiger’s public stock funds managed $35 billion at the end of last year, per the Financial Times.

This puts the firm’s losses in stocks for the year at a bare minimum of $18 billion. Those losses could be much larger depending on the relative size of the flagship and long-only funds, which is not publicly reported.

This comes in addition to massive losses in private tech startup shares:

A “crossover” strategy fund, which blends Tiger’s publicly traded and privately held investments, shed nearly 37 per cent on a net basis in the first half of 2022.

After huge losses like this, the brutal math sets in. Hedge funds have to make back all of their losses before they can start charging performance fees again.

Hedge funds generally charge a 2% management fee and take 20% of all investment gains. That 20% performance fee is how hedge fund billionaires are made.

Without those juicy fees, it’s hard to keep talent.

Tiger’s long-only fund will have to triple before it can charge a performance fee again. Even if it posts solid 10% annual returns, that will take 11 years.

Even the flagship fund has to double its capital before those fat fees kick in. How many aspiring masters of the universe want to wait that long?

Worse yet, Tiger has cut its management fee to just 1% through December 2023. It also cut its performance fee to just 10% until it not merely makes up all its losses but posts significant gains.

This lack of fees will make it hard to get and keep good people. Why not just jump ship to a fund that isn’t so far underwater, or start your own?

I expect Tiger will close the long-only fund. It’s just too far gone.

As for the flagship fund, perhaps they’ll fight their way back to even with a skeleton crew. I wish them luck — it won’t be easy.

Tiger’s massive losses show the risk of heavily concentrated bets. Going all-in on a single sector with a small number of stocks can result in disaster.

Tiger’s investors would’ve done better to buy a low-fee index fund like the Vanguard ones I own. It’s hard to outsmart the market.

What do you think the future holds for Tiger and other hedge funds? Leave a comment at the bottom and let me know!

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North Jersey’s Secret Campground

August 3, 2022

We went deeper and deeper into the forest. Tents and shelters disappeared, replaced by foxes, deer, and silence.

We pulled up to a small clearing, scarcely another human in sight.

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This is Steam Mill Campground in Stokes State Forest. The 16,000 acre park in northern New Jersey is popular with campers, but today we were off the beaten path.

This beautiful spot is less visited than other camping spots in Stokes. The sounds of music and conversation were replaced with bird calls.

Dinner was an incredible coq au vin courtesy of our friend Jim*. A lengthy reduction of the broth left it redolent of bacon and wine.

We weren’t the only ones who loved the smell. As darkness fell, an adorable baby raccoon wandered onto our campsite!

He was so tame, he rubbed against my leg like a cat. My friend Tim* named him Roscoe.

As he ambled back into the forest, we heard his mother scold him with a loud shriek. I guess little raccoons can be as naughty as little humans.

Our days were for exploring.

We hiked Tillman Ravine, a steep and dramatic landscape of rock and evergreen. It reminded me of the hills and pine forests of the Pacific Northwest.

After a short hike, our friend Victor* casually mentioned “I think the car is this way.” Some campers prefer the hot dogs to the hiking. 🙂

Eager to go further, I took a long stroll down an abandoned fire road. The isolation and quiet does wonders for the mind.

But I wasn’t entirely alone. A huge barred owl glided across the path and landed in a tree, looking down at me.

In all our lives, what were the odds that we’d ever see each other? But I’m glad we did!

That night, unexpectedly heavy rain came down. I suffered a catastrophic tent failure and ran to the car.

Settling into the dry seat, I was so grateful for civilization. Sometimes you need to rough it just a bit to feel that gratitude.

Despite its remote location, Steam Mill is quite livable.

There’s delicious spring water on tap a short walk away. Many sites have platforms for tents and there’s even a bathroom…sort of.

The toilet seat is like the one you have at home, but it sits above a deep pit. 😨 It may not be the Four Seasons, but it’s serviceable.

Flush toilets and showers are a couple of miles away at the Lake Ocquittunk camping area, among others.

If you yearn for quiet and wildlife, Steam Mill is for you. It’s a bit less comfy, but the tranquil beauty makes it more than worthwhile.

Hope to see you there!

What are you favorite natural spots? Leave a comment at the bottom and let me know!

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*Not their real names.

AMC’s 9 Million Missing Shares

August 2, 2022

Trading in shares of AMC Entertainment Holdings Inc. just gets stranger and stranger.

A new report from the SEC shows fails to deliver dropped to 205,675 shares in the first half of July, the latest reporting period. This is down from a high of nearly 9.7 million just two weeks ago.

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So, were exchanges busy little bees cleaning up over 9 million shares worth of failed trades?

Maybe. Or maybe those shares went somewhere else…

The Depository Trust & Clearing Corporation (DTCC) settles most US securities transactions. It has an “obligation warehouse” where it puts failed trades.

Once those failed trades go to the obligation warehouse, they basically cease to exist.

We don’t know for sure if that’s what happened with these 9 million shares because the SEC and DTCC won’t tell us. But given the complexity of settling that many failed trades, I’m willing to bet the DTCC just wiped the slate clean.

So why does this matter?

Allowing huge numbers of trades to fail enables naked short selling. Naked short selling is selling short shares without borrowing them first.

It’s a powerful way to push down a stock’s price. After all, if you don’t have to find shares to borrow, you can short as many shares as you want!

No wonder Compliance Week calls it “one massive embezzlement scheme that for years has mostly gone ignored.”

Why would the DTCC do this? Perhaps because of how it’s funded.

The DTCC makes money by clearing trades and is owned by its users.

Hedge funds are some of its heaviest users.

No wonder the DTCC just sweeps trades under the rug instead of investigating what happened.

The SEC should investigate the pattern of massive fails to deliver in stocks like AMC. And the DTCC must ensure trades are actually completed.

Until then, we’ll continue to see these shenanigans in markets.

What do you think happened to these 9 million shares? Leave a comment at the bottom and let me know!

More on markets:

AMC Fails to Deliver Hit 9.7 Million

How DTCC Makes Fails to Deliver Disappear

Wall Street Banks Turn on Each Other as Federal Probe Looms

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Sequoia Comes to the Big Apple

July 29, 2022

Exciting news out this week as legendary venture firm Sequoia Capital comes to NYC. Its new offices near Union Square are the firm’s first American branch outside the Bay Area.

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From The Information:

Sequoia Capital, the Menlo Park, Calif.–based venture capital firm known for its early investments in Google and Instagram, plans to open an office in New York City, its first U.S. facility outside Silicon Valley, according to two people with direct knowledge of the matter.

The move by Sequoia, the most prominent tech startup investor, underscores a broader shift by venture capitalists to plant roots outside the San Francisco Bay Area following the pandemic-fueled boom in remote work, which spurred more founders to start companies in other regions and cities, including New York

I actually heard about this through the grapevine several months ago, but now it’s official! The firm will take offices in a beautiful new glass high rise on East 14th Street.

I happen to know the area well. Next door is the only Trader Joe’s in the city with a wine shop.

Perhaps Senior Steward Roelof Botha will pop in for some $4 red?

The arrival of the greatest firm in the history of venture capital is a landmark moment for New York. Venture funding in the city has jumped over 250% in the last 2 years.

I’m seeing more and more awesome startups here. Two of my last three investments have been NYC-based companies.

Remote work is fueling the New York tech scene. Founders who had to be in the Bay Area in the past are now free to live where they like.

The accelerators that birth so many startups, like Y Combinator and the LAUNCH Accelerator, are all online now. And VC’s are comfortable investing over Zoom.

So, many founders are abandoning the Bay and coming to NYC. It’s denser than San Francisco with more to do, safer and (a little) cheaper.

Entrepreneurs used to go where the VC’s were. Now investors are following founders.

Andreessen Horowitz is also opening an office in New York, along with LA and Miami. Soon, I expect every major US venture firm will have a presence in NYC.

If density of capable people and chance meetings fuel the startup world, New York seems like a natural choice.

It’s denser than anywhere in America, by far.

I can walk between offices of numerous venture firms and startups in just a few minutes. At NYC tech events, I randomly bump into the same people almost every time.

It never made sense for an industry predicated on instant worldwide communications to cluster all in one place. I’m delighted to see this dynamism that began in California spread nationwide.

Welcome, Sequoia! And here’s a tip: head across the river to Hudson County, NJ.

It’s just better. 🙂

What do you think of New York’s tech scene? Leave a commnet at the bottom and let me know!

There will be no blog on Monday. I’ll be in the woods celebrating a friend’s birthday!

See you on Tuesday. Have a great weekend everyone! 👋

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Photo: Roelof Botha “509307017DH00078_TechCrunch” by TechCrunch is licensed under CC BY 2.0.

Chinese Stop Paying Mortgages as Real Estate Crisis Spreads

July 28, 2022

Chinese homebuyers are refusing to pay their mortgages in a boycott that’s spreading across the country. Many fear the homes they’re paying for will never be finished.

Now, suppliers to builders are also defaulting on loans.

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From ABC News Australia:

A fast-growing mortgage boycott across dozens of cities in China has prompted some property suppliers to cease their bank loan repayments, raising fears the escalating situation could trigger a further downward spiral in the sector and even threaten the country’s financial stability.

Hundreds of landscapers, sculpture-makers and construction companies have expressed their anger that they have been bled dry because some debt-saddled developers did not pay their bills while they continued to service or help build apartments, Chinese media Caixin reported.

Chinese usually buy homes and start making payments before they’re complete.

The boycott has spread to 90 cities in mere weeks.

The Chinese government is censoring reports on the boycott, per Bloomberg. So the situation inside China may be even worse than reported.

A real estate meltdown is a catastrophe for the average Chinese saver. Chinese put 70% of their wealth in real estate, compared to 35% in the US.

The property sector accounts for about 25% of GDP. China’s GDP growth has flatlined as the sector sputters.

And it gets worse. Chinese banks have lent huge sums to property developers.

As developers default, bank runs are spreading across China. Government thugs have beaten protesters desperately trying to recover their life’s savings.

Amid a bleak economy and constant COVID lockdowns, workers are struggling. Youth unemployment has spiked, hitting over 19% last month.

Consider the picture for the average Chinese person: most of your savings are tied up in an apartment that will never be completed, the rest is in a bank that’s insolvent, and your only child can’t find work.

Revolution might start to sound good.

In the US, we know that a property crisis fueled by heavy debt can spread quickly. Huge liabilities pop up at different institutions unpredictably.

This undermines confidence in the entire financial system. When that happens, you get a financial crisis.

That’s what China is facing today.

At stake is the legitimacy of the Chinese Communist Party. Officials have staked their power on offering ever-increasing living standards.

Those days may be over.

I can only hope that Chinese citizens prevail and oust a government that has brutalized them for generations.

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Photo: Unfinished Chinese apartment buildings being demolished in Kunming, China

Crypto VC’s to Crash: “YOLO”

July 27, 2022

Despite cratering crypto markets and a slowdown in venture funding, crypto VC’s are upping the ante. From a report out yesterday in Reuters:

Even as the crypto sector shivers in the bleak winter, venture capitalists are pouring money into digital currency and blockchain startups at a pace that’s set to outstrip last year’s record.

In the first half of the year, VCs bet $17.5 billion on such firms, according to data from PitchBook. That puts investment on course to top the record $26.9 billion raised last year, a warmer and happier time for bitcoin and co.

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Overall US venture funding fell in the first half of the year. But US crypto investments are on pace to increase almost 50% over 2021.

Why are crypto VC’s behaving so differently? Because they don’t have much choice.

Numerous venture firms recently raised huge crypto funds. Predictably, Andreessen Horowitz is at the front of the conga line, raking in $4.5 billion in May.

Electric Capital pulled in $1 billion, and Bain Capital launched a $560 million fund.

All that money has to go somewhere. But deploying giant crypto funds today could be a big mistake.

Giant funds have to focus on late stage deals. After all, there’s no way a16z is going to hand out 1,000 seed-stage checks of $4.5 million.

It’s simply more meetings, diligence, and oversight than any firm could handle.

So they’ll put a lot of that in late stage megarounds. Since the startups are close to going public, their valuations depend on public markets.

But markets in public tech stocks and crypto tokens are extremely unpredictable right now.

These firms may pay prices that public markets soon find laughable.

If that weren’t bad enough, the SEC could soon be breathing down the necks of VC firms.

Yesterday, the SEC announced that it’s investigating Coinbase for offering unregistered securities. Crypto VC’s have likely sold similar securities.

The crypto venture market looks seriously overheated. I see companies with no product or customers getting valuations of $100 million or more regularly.

You don’t often see that in non-crypto deals. And there’s no reason why the rules should be any different for crypto.

I think crypto could have some awesome applications. Cheap international money transfer may be the best use case.

But thus far, speculation has been rife and useful projects few.

Meanwhile, I’m going to keep investing in great early stage companies with awesome products and happy customers. And if a crypto company can deliver that, a salute!

More on tech:

Inside the Seed Funding Slowdown

Why Technical Founders Win

The Top 5 Things I’ve Learned from Angel Investing

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Why Technical Founders Win

July 26, 2022

You have an amazing idea. But can you make it a reality?

That’s the question facing a lot of non-technical startup founders.

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I often meet with entrepreneurs with amazing ideas. They want to raise capital to build their product.

But this isn’t how venture capital works.

A technical team can get to first base before a nontechnical team leaves the dugout.

Investors rarely if ever want to give you money to create a product. They want to give you money to scale up an existing product that has some early traction.

That money could let you hire more engineers and salespeople. The additional staff could let you add features and find more customers.

But how are you supposed to get the product built in the first place? That’s why being a technical founder is so important.

An entrepreneur with coding skills can build it herself!

Many great founders create a product in their spare time. As it gains momentum after launch, they can quit their job and focus on it 100%.

As they start to bring in customers, they’re in a strong position to raise capital.

The non-technical team can’t build it themselves. They must hire costly engineers or pay a fortune to a development shop.

A technical team can get to first base before a nontechnical team leaves the dugout.

No wonder Y Combinator Managing Director Michael Seibel looks for teams that are at least 50% technical.

Being able to build in house cheaply or free is especially important when capital is scarce. No one wants to fund a company that burns cash like crazy in today’s market.

What’s more, a technical team can quickly improve their product.

Let’s say the sign-in flow is difficult and users are giving up. If you have to contact a dev shop, who knows how long it will take to get fixed?

But if you know how to fix it yourself, you could have a better product today.

And those dev shops that seem so appealing can screw you over big time. Some refuse to give you the source code or take a huge slice of your company’s equity.

This makes it hard to ever leave the dev shop. That’s no accident.

What’s more, giving an agency a huge slice of your cap table makes you unfundable by venture capitalists. There’s simply not enough equity left for the founders, employees and investors!

It’s hard to create a software company if you don’t know how to build software. Be sure you have at least one builder on your founding team.

And if you don’t have the skills to build your dream, go get them!

It’s never been easier to learn to build software. There are numerous online courses available, many of them free.

Even if you never reach the Stanford Comp Sci level, being able to poke around in your product is a huge advantage for any leader!

So let’s build skills, keep the burn down, and make something awesome!

How do you view technical vs. non-technical founders? Leave a comment at the bottom and let me know!

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Photo: Patrick Collison, CEO of Stripe. Collison’s strong technical background gave him an edge. “File:Patrick Collison.jpg” by JD Lasica is licensed under CC BY 2.0.

Former Congressman Arrested for Insider Trading

July 25, 2022

Former Congressman Stephen Buyer was arrested today for insider trading. From Politico:

Federal authorities filed criminal and civil insider trading charges against former Rep. Stephen Buyer in U.S. court in Manhattan on Monday, alleging that the Indiana Republican used information gleaned from a golf outing with a T-Mobile executive to purchase securities before the company’s planned acquisition of Sprint.
Buyer was arrested on Monday, said U.S. Attorney for the Southern District of New York Damian Williams at a press conference.

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Buyer also made suspect trades in at least one other company. His trades made him over $300,000.

He may have even used his mistress to hide the trades:

The SEC’s complaint claims that Buyer netted roughly $330,000 from the transactions, which he spread across multiple accounts belonging to associates and family members, as well as an unidentified friend with whom he had allegedly engaged in a romantic relationship.

I was put in mind of a great scene from The Wolf of Wall Street. Leonardo DiCaprio realizes his elegant Swiss banker is telling him to hide his money under someone else’s name:

Politicians trading on inside information is nothing new. Congressional representatives beat the market on average, despite many having no background in investing.

House Speaker Nancy Pelosi has been particularly successful. Her performance is 6th best out of 435 members of Congress.

I guess power has its perks.

The public will not trust markets like this. If the powerful use inside information to get ahead, the average person will conclude the game is rigged and walk away.

This means companies won’t get the capital they need. And savers won’t be able to build wealth.

These crooked politicians also undermine trust in government. If you’re profiting from your office, you’re not doing the people’s business.

High government officials and their families should keep their assets in a blind trust. That way, they have no way of using inside information for profit.

I hope these prosecutions start hitting a much higher level. There’s plenty of opportunity here for an ambitious prosecutor to make his career by taking one of these major pols down.

What do you think of politicians self-dealing? Leave a comment at the bottom and let me know!

More on markets:

Wall Street Banks Turn on Each Other as Federal Probe Looms

AMC Fails to Deliver Hit 9.7 Million

Shorts Having Their Worst Month Since January 2021

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Use this link to sign up and you’ll save $15 on your first order.

Photo: Former Congressman Stephen Buyer