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The Weekend Pitch |
January 31, 2021 
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Presented by West Monroe |
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The saga of GameStop is a story about the stock market. But it is also a story about politics. About power. About laws, memes, tech startups, wealth inequality, trolling, social media moderation, nostalgia, online organizing and mass psychology.
And it is also a story about the private markets—which are, after all, the domain of this newsletter. But let's get into all of it. Because it feels impossible to talk about just one aspect of GameStop's surreal, spiderwebbing week without also talking about everything else.
Welcome to The Weekend Pitch. I'm Kevin Dowd, and you can reach me at weekend@pitchbook.com. VC darlings Robinhood and Reddit assumed center stage as an informal army of retail traders rocketed GameStop's stock to spectacular heights—and brought multibillion-dollar hedge funds to their knees. And that's one of 11 things you need to know from the past week: |
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| The game's afoot. (Tom Eversley/Getty Images) |
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1. Can't stop, won't stop
In July, GameStop was widely considered a downtrodden brick-and-mortar retailer from a bygone time battling to survive in our new ecommerce-driven world. You could buy a share of its stock for less than $4.
In August, a 34-year-old financial adviser from Massachusetts, operating under the nom de plume Roaring Kitty, posted a video on YouTube highlighting a stock market extremity. Certain hedge funds held huge short positions in GameStop, so huge that they made you question the math: More than 100% of the company's shares had been sold short. The shares were theoretically open to a textbook short squeeze. A flood of buying could drive the stock price up, which would force the short-sellers to buy new shares to cover their existing positions, which would in turn drive the stock price higher, in a self-perpetuating cycle where the buyers would make gobs of money (on paper) and the short-sellers would lose their shirts.
The idea gained attention. On Reddit, many members of the WallStreetBets community seized on it and began to buy up GameStop shares, known as GME. By the end of the year, GME had climbed to nearly $20. And in the past 10 days, GME started to spike—past $60, past $100, past $200, topping out this week at $483. The prophesied short squeeze had come to pass. Roaring Kitty said his initial investment of $53,000 had ballooned to $48 million.
Those are the numbers. The result was chaos. Hedge funds that were among the biggest GameStop shorts, such as Melvin Capital Management and Citron Research, found themselves spending hundreds of millions to cover their positions. And on WallStreetBets, some posters rallied around the idea of sticking it to the hedge funds, to Wall Street, to The Man, to the whole financial apparatus.
That sense of comeuppance might be particularly strong among the generation of people most likely to be found on Reddit, who came of age during a shattering financial crisis. The lack of consequences for figures at the root of that crisis only added to many Americans' cynical view of the financial system. They see it as a rigged game designed to increase the wealth of the already wealthy. And those views have only been exacerbated as America's wealth gap has continued to widen during the pandemic. For these people—who certainly are not everyone on WallStreetBets—the GameStop squeeze took on an almost mythic quality, a battle of David versus Goliath.
On Thursday, after three-plus days of wild volatility and front-page headlines, Robinhood entered the fray. Valued at $11.7 billion by venture capitalists, the stock-trading company has grown wildly popular in recent years for its cheerful, easy-to-use app that aims to open day-trading to the masses. It became the favored platform of the sort of traders who were driving GameStop's rise.
But Thursday morning, Robinhood (along with some other brokerages) halted new purchases of GME and several other stocks that had become the subject of similar sorts of social media-driven booms, including AMC Theatres and BlackBerry. GME shares plummeted immediately after the cessation, and retail traders just as immediately brought out the pitchforks.
Online, speculation was rampant that Robinhood had bent to pressure from frustrated members of the Wall Street establishment. By the end of business on Thursday, Robinhood was already facing multiple lawsuits alleging that its decision had cost its users fortunes, and politicians ranging from Alexandria Ocasio-Cortez to Ted Cruz were condemning the company.
The reality seems to be less nefarious. Soon, it emerged that Robinhood had been forced to draw hundreds of millions from its credit lines and raise $1 billion from existing investors to meet higher margin requirements caused by the flood of highly volatile trading—a deal that must be in the running for the quickest $1 billion venture round ever raised. The New York Times reported that the company needed the new cash to keep it from being forced to limit trading even further.
And on Friday, with trading on Robinhood and other platforms restored, GME again soared, closing at an even $325 per share, up 68% in a day.
One big question for Robinhood now is whether that explanation for the trading halt will matter to its users, many of whom seemed to feel a deep sense of betrayal. Robinhood did, after all, name itself after a legend who stole from the rich to give to the poor. It did recently pay a $65 million SEC settlement over charges that it failed to seek the best price for customer orders. It has always tried to foster a certain sense of outsider-ness. Will that change going forward? And what might this new public scrutiny mean for the company's looming IPO?
In a way, Robinhood's trading halt echoes a broader debate about the role of tech companies seeking to moderate user behavior. Yes, banning Donald Trump from Twitter is different from pausing trading on a brokerage app. But both controversies highlight questions of how much sway these companies should exert over their platforms. As it turns out, promises of utopic tech-powered freedom only go so far.
Contrary to some criticisms that it was all nothing but a pump-and-dump, there was real logic behind the bet against GameStop: The huge short position, the genuine optimistic hopes of some that the addition of Chewy co-founder and former CEO Ryan Cohen to the company's board could spark a shift to ecommerce. Not the fundamentals most investors talk about, but reasons nonetheless.
And yet it's obvious the mania was also aided by the strange realities of Reddit, and online life in general. GameStop might be a good investment, but it also holds a nostalgic place in the minds of many millennial gamers and Redditors. The company's stingy trade-in policies have made it meme material online for years, and for many, there was something extra funny about buying this particular stock. And the idea of an anonymous online mass taking on huge hedge funds holds obvious appeals to the trolling ethos of Reddit—that same impish inclination that gave the world Boaty McBoatface.
Whatever the motivations, the GME backers found a play that was working. Wall Street is often described as a casino, where the house always wins. But this was a bet where the odds could be skewed in the favor of small investors. And the small investors were winning. Reuters reported on Thursday that estimated losses from shorting GameStop had topped $1 billion, while short-sellers across the whole of the US had losses of nearly $71 billion in 2021—a sign that GameStop is the biggest story, but also just the tip of a larger iceberg.
That was why it was so galling to so many when trading halted Thursday. Investors had been playing one game, and then suddenly, the casino changed the rules.
But with GME's sharp recovery on Friday, that trading halt is looking more like a blip than the beginning of the end. Where does this whole thing go from here? The SEC is already planning to investigate. Congress will likely do the same. Will GameStop's shares soon plunge? Will they go even higher? How will Robinhood respond? Will Reddit-fueled short squeezes continue? Will Wall Street ever be the same?
We'll just have to wait and see. For now, even after all of the insanity of the past seven days, there are still a lot more questions than answers.
2. WeSPAC
It had to happen. WeWork is in talks with a special-purpose acquisition company to merge in a potential deal that could value the company at $10 billion, The Wall Street Journal reported, a move that would link one of the most headline-grabbing startups of the past two years with one of the most headline-grabbing financial trends. WeWork could instead opt to raise new capital in a private funding round, the report said. In semi-related news, Jared Leto and Anne Hathaway are set to star as Adam Neumann and Rebekah Neumann in a new Apple TV miniseries called "WeCrashed."
3. A toppled tycoon
Leon Black agreed to step down from his role as CEO of Apollo Global Management this week after an independent investigation found the private equity baron had paid more than $150 million to Jeffrey Epstein for various tax and advisory services, far more money than had previously been thought. Black will remain as Apollo's chairman, with fellow co-founder Marc Rowan becoming CEO. The probe cleared Black of all criminal conduct. But stepping down because of ties to a convicted sex offender is probably not how Black imagined the end of his reign at Apollo.
4. Hoop scoop
The NBA is opening its doors to private equity ownership, with Sportico reporting this week that the league's owners have agreed to a new framework where firms and other institutional investors can acquire up to 20% of any one team and can own stakes in up to five teams. It's the latest sign of leagues working to sate the appetite of investors eager to capitalize on booming franchise valuations. But not every such effort has been successful: PE-backed SPAC RedBall Acquisition has ended talks to take the parent company of the Boston Red Sox and Liverpool FC public in an $8 billion deal, Axios reported this week. |
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| Commissioner Adam Silver and the NBA have big plans for basketball dealmaking. (Kevin C. Cox/Getty Images) |
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5. Join the club
Red-hot social chat startup Clubhouse raised a new $100 million round led by Andreessen Horowitz, with Axios reporting a $1 billion valuation—up tenfold from the $100 million valuation the company reportedly attained last May. Clubhouse's invitation-only chat rooms have won prominent fans among investors, tech thinkers and influencers alike. But they have also sparked their share of controversies, including debates over the need for better content moderation.
6. A new Ant
Last November, Ant Group stunned investors by postponing its planned mega-IPO amid a new push toward financial regulation in China, and founder Jack Ma vanished from public life. Ma resurfaced last week, though, and this week, Ant revealed some major changes: It will reportedly convert into a closely regulated financial holding company overseen by China's central bank, a departure from Ant's recent ambitions of becoming a larger internet technology giant.
7. Blank checks
Electric vehicle startup Faraday Future agreed this week to go public in a $3.4 billion SPAC deal. Private jet startup Wheels Up might merge with a SPAC, with Reuters reporting a deal could be worth $2 billion. Consumer DNA startup 23andMe could combine with a SPAC backed by Richard Branson, according to Bloomberg. And, as my colleague James Thorne writes, that is only scratching the surface of the week in SPACs.
8. Capitalizing on crazes
Faraday Future's SPAC deal is an example of the ongoing investor appetite for all things electric vehicles. Two more examples: Sila Nanotechnologies, which makes materials for EV batteries, raised $590 million this week. And FreeWire Technologies raised $50 million for its EV charging offerings. If any startup space has been as hot as EVs, it's probably deliveries. And for that, we had Wolt, a Finnish food delivery startup that hauled in $530 million this week.
9. The road to Wall Street
A few weeks ago, I wrote about how social gaming startup Roblox was poised for an enormous IPO. But this week, the company postponed that listing, with Reuters reporting the delay is due to regulatory questions about how Roblox has recognized its revenue. Another high-profile tech unicorn, meanwhile, is getting closer to its public debut. Coinbase announced that it will conduct a direct listing instead of a traditional IPO, following a path previously tread by Palantir Technologies, Spotify and others.
10. Teeing up mega-funds
TCV closed its latest flagship fund this week on $4 billion, the firm's biggest stockpile yet for a new slate of tech investments. Thrive Capital, meanwhile, is aiming to raise $2 billion across a new early-stage fund and a growth fund, The Wall Street Journal reported. And a recent Reuters report indicated that KKR is setting its sights on $15 billion for the firm's latest North American buyout fund.
11. Screen time
Private equity also played a role in this week's short-squeeze drama: Silver Lake converted $600 million worth of AMC Theatres debt into stock, reducing the company's significant debt load in a bid to capitalize on AMC's sharp rise. The firm then reportedly sold the stake for $713 million. On smaller screens, TPG is in exclusive talks to buy a minority stake in DirecTV from AT&T, Reuters reported. And on even smaller screens, online video platform operator Vimeo raised $300 million in funding at a valuation north of $5 billion.
View the full list online |
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A message from West Monroe
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Outlook remains strong for high-tech and software M&A in 2021
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The appetite for deals in the high-tech and software sector is anticipated to increase in 2021. 70% of investors plan to acquire as many as two high-tech & software companies over the next 24 months, and 27% intend to make three or four acquisitions.
Are you ready to seize opportunities?
Access our latest report detailing trends and opportunities for dealmaking and value creation in this sector in 2021 and beyond. |
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| (Rizky Panuntun/Getty Images) |
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Indoor farming has long been on the venture capital industry's radar. Now, new advancements and more affordable technologies are making the prospect of finding profits in the space more likely than ever before. In a new note, PitchBook analyst Alex Frederick examines all the recent developments around indoor farming that are causing new opportunities to sprout.
Talk of new opportunities is also in the air across the broader private markets. Nearly 90% of respondents to a recent J.Thelander survey of private companies said they plan to be hiring in 2021. Priyamvada Mathur examines how the shift to remote work could affect that optimistic outlook.
Growth was also top of mind this week for Blackstone: The firm grew its Q4 distributable earnings to $1.46 billion, the highest quarterly figure in the firm's history, according to The Wall Street Journal. As Adam Lewis writes, during 2021, the firm and COO Jon Gray are expecting more growth in the infrastructure sector. |
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| (Volanthevist/Getty Images) |
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The European venture capital market was as busy as it has ever been during 2020, as investors smashed annual records for both deal value and deal count. The latest edition of PitchBook's European Venture Report examines how the sector has thrived during the pandemic—and whether the good times will continue to roll.
There was much more of a chill last year across the world's private debt markets. Driven largely by a decline in direct lending vehicles, investors closed fewer new funds in 2020 than in any year since 2011, and fund value ebbed to a five-year low. Our 2020 Annual Global Private Debt Report has the skinny on the recent private debt cooldown. |
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| (MirageC/Getty Images) |
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If your problem with other dating apps is that you're seeing too much of other people's faces, the venture world has a solution for you: S'More, a New York-based startup that raised $2.1 million in seed funding this week, according to a TechCrunch report. S'More's unique twist on the dating app game is to keep the photos of other users blurry at first, with the true form of your prospective companion only revealing itself when the two of you begin to talk.
S'More's services are currently available in just six cities, so you might have to wait. Thankfully, marshmallows, graham crackers and milk chocolate can be found at a grocery store near you. |
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Recommended reads
An interview with Andrew Left of Citron Research, a veteran short-seller who found himself at the center of this week's GameStop firestorm. [Institutional Investor]
Are hit songs the new real estate? The investors buying up the song rights of some of American music's biggest names seem to think so. [Pitchfork]
Why tech moguls are obsessed with building utopian cities. [Marker]
For the 22% of Americans who say they lost money to a phone scam during the past 12 months, a question lingers: Who was on the other end of the line? [The New York Times]
The practice of killing exotic animals for sport is certainly a controversial one. At the Ox Ranch in Texas, they've turned it into big business. [Texas Monthly]
For tech giants, the pandemic could be the long-awaited impetus for a boom in the use of digital wallets. If only people could figure out how they work. [The Wall Street Journal]
Many older Americans don't use the internet and don't have a broadband connection. That's proving a serious hurdle in the race to vaccinate the country's most vulnerable. [Recode]
Chinese tech companies boast impressive statistics when it comes to hiring and promoting women. But there's a lot more to ending sexism than getting a seat at the table. [Protocol] |
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Quote of the week
"People need to take the time to understand the social dynamics of this. What are the problems that have created this class of retail investor who seek to completely destroy your industry, and how do you remedy that?"
—Josh Holmes, former chief of staff to Sen. Mitch McConnell (R-Ky.), speaking to CNBC about the need to reckon with the populist undertones of GameStop's wild week |
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The Weekend Pitch is produced by editor Kevin Dowd.
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