Silicon Valley has (finally) an apex predator

Philippe MEDA -

We've discussed for years how Silicon Valley and the local fauna of tech bros have become a toxic force for the global innovation ecosystem. From focusing only on short-term pizza-delivery businesses, building up unprofitable platforms trying to blitzscale their way to de facto monopolies, or pure and simple fraud... examples of this toxicity abounds.

And I know, I know, we've been all thinking that things will get under control. That after the turmoil of the Trump presidency, where anything would go, Biden and a new U.S. Congress would finally reign things in. Sensible regulations. Tech monopoly breakups. Privacy protection. Well, we're not getting there anytime soon.  

Predating on unicorns

But if the U.S. government is still incapable of regulating anything about tech, since 2020, a new apex predator has emerged in Silicon Valley. A brutal force of reckoning that scan through the largest startups in the ecosystem, smells the bullshit (or the plain fraud) and pounces mercilessly. And it's anything but a benevolent branch of the federal government or activists aiming to right wrongs.

Nope. It's another toxic business...

The name is Hindenburg Research, and, despite the name, it's a predatory investment fund whose business is shorting tech companies that they deem fragile, engaging in mediatic warfare with them, trying to push them over the brink, and collecting the money when they fall off.

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Shorting an asset in finance means profiting when the asset's value falls, unlike the conventional long position where the profit comes from a rise in the asset's value. Remember the Big Short movie in 2015? This is what we are talking about. A strategy where you bet against a company's valuation. It's an extremely risky strategy where the investor will borrow shares of the stock from a broker and sell them at the current market price. If the stock price indeed falls as predicted, the investor can buy the shares back at a lower price, return them to the broker, and pocket the difference as profit. However, the investor would incur a steep loss if the stock price rises instead. 

Hindenburg Research has proven its skills in this risky game and collected several heads. They nearly pushed Nikola, the (allegedly) fraudulent electric vehicle startup, to bankruptcy in 2020; they attacked a company listed on the NASDAQ for bogus claims on Covid tests; reported HF Foods (another NASDAQ darling) for hundreds of millions of shareholder capital 'misallocation'; and the list goes on and on.

It's not personal, Sonny...

As an apex predator, this firm culls the weak but still goes after really big names to make juicy profits. It's obviously hilarious that Silicon Valley's entrepreneurs are threatened by their own (*). As Michael Corleone would say, "It's not personal, Sonny. It's strictly business."

The latest potential big fat deer in their crosshead? Jack Dorsey's company Block (formally known as Square). Hindenburg Research recently published a scathing forensic analysis of malpractices and possible plain frauds going on in this supposedly respectable pioneer of Silicon Valley.

Block: How Inflated User Metrics and “Frictionless” Fraud Facilitation Enabled Insiders To Cash Out Over $1 Billion
Block Inc., formerly known as Square Inc., is a $44 billion market cap company that claims to have developed a “frictionless” and “magical” financial technology with a mission to empower the “unban…
Hindenburg ResearchRobert DeVore

Hindenburg is remarkably smart in that, beyond their surgical approach to financial misconduct, they don't only wage war in sanitized conference rooms through attorneys and consultants. They wage war in the media, wrapping complex cases in a few bite-sized pieces of spectacular pieces of information.

I mean, you have to admire their deep cultural understanding of what makes U.S. investors tick (the whole thread is just 🍿):

In this reputation game where U.S. tech companies massively bank on investors' trust with big promises and often vague technical details, Hindenburg's tactics can be devastating. After this report was published, Jack Dorsey's virtual wealth took an overnight $526 million hit.  

Jack Dorsey’s Wealth Tumbles $526 Million After Hindenburg Short
Block Inc. co-founder Jack Dorsey’s net worth was hammered after Hindenburg Research’s latest report, which alleged the payments company ignored widespread fraud.
BloombergBiz Carson

Is there a lesson for Europe?

Certainly.

While the European Commission has been meekly trying to push against 'Big Tech' with its own tools and infrequently managing to slap a few GAFAMs around with fines, nothing much has been achieved really. For instance, when the E.U. historically fined Google €4.34 billion for breaching antitrust rules with its Android operating system, it seemed to be very dissuasive. In practice? This only represented about 14 days of revenue loss for Google.

The lesson can Hindenburg gives us is, in my opinion, vastly educative. Seeking fines through years of procedures and appeals, counter-appeals, and whatnots is one thing. Engaging in forensic finance and proper surgical media warfare aiming for the credibility and trust of these highly leveraged businesses? Far more effective!

Not to mention that these guerilla tactics would also mean hitting the founder's and executives' personal wealth hard.

Maybe it's time we stop being naive and polite.

I'm just saying...

(*) Edit for clarity: Hindenburg is based in NYC, which, seen from the U.S., might be an entirely different planet