TheChek News Flow

DAX:

MDAX:

SDAX:

Sorare is not completely shuttering its New York office but is shifting more employees to Paris

Web3-enabled fantasy sports platform Sorare laid off 22 employees based in its New York office in February. The move comes as the startup wants certain teams to be concentrated at the company’s Paris headquarters to improve communication and efficiency, a source familiar with the matter told TechCrunch.

“As we plan for our next stage of growth, Sorare has made the decision to centralize some of our functions at our Paris HQ,” Nicolas Julia, the co-founder and CEO of Sorare, told TechCrunch through email. “This primarily affects our product development team as we believe that bringing that team together in the same space in Paris will allow them to collaborate more effectively as they continue to build best in class products across our football, baseball and basketball offerings.”

An additional 11 employees in the New York office were asked to relocate to Paris, a source familiar with the matter said. The company will backfill most of these laid-off roles in Paris, according to Julia, with plans to hire more than 20 roles in the next six months.

Sorare is not shutting down its New York office. It will keep certain teams there like those that work with U.S. customers or on its U.S. brand partnerships with leagues like the MLB and NBA, according to Julia. Sorare’s partnerships with these sports leagues are locked in for several years, a source added.

While a source familiar with the matter said that these layoffs were not financially driven, the source did add that like many other web3 companies, the time horizon for how long it will take Sorare to reach its growth goals is longer than it originally thought. Sorare’s users can buy and sell NFT cards from other players on its platforms, although Sorare primarily makes its money by issuing and selling new cards. Sorare saw $200 million in user transaction volume in 2023, a source familiar with the situation said. The company declined to say if it was profitable or what runway it had left.

Sorare hasn’t raised capital since its $680 million Series B round in 2021, which valued the company at $4 billion. According to secondary data platforms, Sorare hasn’t been garnering much interest from investors there. To be fair, the declining interest isn’t strictly an issue for Sorare — web3 companies have largely fallen out of favor with investors. Startups in the category raised $7 billion in 2023, according to Crunchbase data, a drop of 74% from 2022’s $26 billion. For context, overall venture funding dropped 38% in the same timeframe.

Web3 companies focused on gaming have struggled to find meaningful traction. Last month, video game–focused VCs told TechCrunch that the market for web3 games turned out to be significantly smaller than some investors had hoped. This has become evident.

Mythical Games, a web3 gaming startup, raised nearly $300 million in venture money before holding three rounds of layoffs. Dapper Labs, another startup in the category, has also held numerous rounds of layoffs.

This is not to say Sorare will see the same fate. The company has an active community of nearly 13,000 people on Reddit posting regularly about the fantasy games and a community of third-party media dedicated to these competitions. Hopefully, even if the web3 winter continues, Sorare’s reorg will be enough.

A directive known as Document 79 ramps up Beijing’s effort to replace U.S. tech with homegrown alternatives

For American tech companies in China, the writing is on the wall. It’s also on paper, in Document 79.

The 2022 Chinese government directive expands a drive that is muscling U.S. technology out of the country—an effort some refer to as “Delete A,” for Delete America.

Document 79 was so sensitive that high-ranking officials and executives were only shown the order and weren’t allowed to make copies, people familiar with the matter said. It requires state-owned companies in finance, energy and other sectors to replace foreign software in their IT systems by 2027.

American tech giants had long thrived in China as they hot-wired the country’s meteoric industrial rise with computers, operating systems and software. Chinese leaders want to sever that relationship, driven by a push for self-sufficiency and concerns over the country’s long-term security.

The first targets were hardware makers. Dell, International Business Machines and Cisco Systems have gradually seen much of their equipment replaced by products from Chinese competitors.

Document 79, named for the numbering on the paper, targets companies that provide the software—enabling daily business operations from basic office tools to supply-chain management. The likes of Microsoft and Oracle are losing ground in the field, one of the last bastions of foreign tech profitability in the country.

The effort is just one salvo in a yearslong push by Chinese leader Xi Jinping for self-sufficiency in everything from critical technology such as semiconductors and fighter jets to the production of grain and oilseeds. The broader strategy is to make China less dependent on the West for food, raw materials and energy, and instead focus on domestic supply chains.

Officials in Beijing issued Document 79 in September 2022, as the U.S. was ratcheting up chip export restrictions and sanctions on Chinese tech companies. It requires state-owned firms to provide quarterly updates on their progress in replacing foreign software used for email, human-resources and business management with Chinese alternatives.

The directive came down from the agency overseeing the country’s massive state-owned enterprise sector—a group that includes more than 60 of China’s 100 largest listed companies.

That agency, the State-Owned Assets Supervision and Administration Commission, and the country’s national cabinet, the State Council, didn’t respond to requests for comment.

Spending by China’s state sector topped 48 trillion yuan, or about $6.6 trillion in 2022. The directive leverages that purchasing power to support Chinese tech companies, which in turn can improve their products and narrow the technology gap with U.S. rivals.

State firms have dutifully ramped up their buying of domestic brands, even if the Chinese substitutes sometimes aren’t as good, according to a Wall Street Journal review of data and procurement documents, and people familiar with the matter. The buyers include banks, financial brokerages and public services such as the postal system.

Back in 2006, “China was the land of milk and honey, and intellectual property was the main challenge,” a former U.S. Trade Representative official involved in previous technology discussions with the Chinese said. “Now, there is a feeling that the sense of opportunity is off. Companies are merely hanging on.”

The push to localize tech is known as “Xinchuang,” loosely translated as “IT innovation” with a reference to technology that is secure and trustworthy. The policy has gained urgency amid an escalating tech and trade war with Washington, which has cut many Chinese entities off American technologies.

Premier Li Qiang reiterated the push during China’s annual legislative sessions this week. China’s central government plans to increase its spending on science and technology by 10% to about $51 billion this year, according to a budget report released on Tuesday—up from a 2% increase last year.

At some trade fairs across the country, vendors tout homegrown tech as an alternative to foreign brands. One semiconductor equipment maker stall in Nanjing put it bluntly, offering to help buyers “Delete A” from their supply chain.

Domestically developed alternatives are growing more user-friendly. A local official recalled how in 2016, it took a whole day to open and close a spreadsheet on a computer with an operating system known as KylinOS, developed by a Chinese military-linked company. He compares the usability of the latest KylinOS version to Microsoft’s Windows 7, introduced in 2009—workable if not great.

As recently as six years ago, most government tenders sought hardware, chips and software from Western brands. By 2023, many were seeking Chinese tech products instead.

When the customs department in the eastern Chinese city of Ningbo sought to purchase rack servers in 2018, it stated a preference for brands such as Dell and Hewlett Packard Enterprise, and for hardware powered by Intel’s Xeon central processing units. Five years later, the same agency asked for rack servers made by Chinese companies and equipped with Huawei chips.

These servers are typically assembled by state-owned tech manufacturers that barely sell equipment overseas, such as Beijing-based Tsinghua Tongfang. Tongfang’s controlling shareholder is a state-owned company in charge of China’s civilian and military nuclear programs.

Some government officials in China’s capital had their foreign-branded PCs replaced with those made by Tongfang and officials last year were told to use Chinese phones instead of Apple’s iPhones for work.

Losing orders

Over the past decade, Xi has repeatedly emphasized technological innovation and the use of trusted homegrown technology in government departments and industry. Revelations by former National Security Agency contractor Edward Snowden in 2013 that U.S. authorities had hacked into Chinese mobile phone communications, universities and private companies strengthened Xi’s resolve. More recently, Xi has told senior officials that China should leverage its strengths and market to break bottlenecks in the development of essential software such as operating systems.

As China focused on replacing hardware, IBM’s China revenues have steadily declined. It downsized its China research operations in Beijing in 2021, more than two decades after it opened.

Cisco, once a technology powerhouse in China, said in 2019 that it was losing orders in the country to local vendors because of nationalist buying. American PC maker Dell’s market share in China almost halved in the past five years, to 8%, researcher Canalys said.

Hewlett Packard Enterprise, or HPE, which makes servers, storage and networks, got 14.1% of its revenue from China in 2018, according to estimates from database provider FactSet. By 2023, that had fallen to 4%.

In May, HPE said it would sell its 49% stake in its Chinese joint venture. The company continues to sell direct to certain multinational customers in China and sells selected products to the broader mainland market through its Chinese partner, a spokesman said.

In software, Adobe, Citrix parent Cloud Software Group and Salesforce have pulled out or downsized direct operations in the country over the past two years.

Microsoft, the world’s biggest software provider, historically dominated computer operating systems in China. A Morgan Stanley poll of 135 chief information officers in China found that many expected the share of computers powered by Microsoft’s Windows operating system installed in their companies to fall over the next three years. They expected Linux-based UOS, or Unity Operating System, an effort co-led by a state-owned company, to gain in the shift.

Even as Microsoft’s top executives and its co-founder Bill Gates have frequently traveled to Beijing for high-profile meetings with senior Chinese leaders on subjects like cooperation on AI and U.S.-China trade relations in recent years, the company has decreased its offerings in China. Microsoft President Brad Smith said in a subcommittee hearing last September that China made up just 1.5% of the company’s overall sales. The company posted sales of $212 billion in the last fiscal year.

Microsoft declined to comment.

Some state-owned companies are dragging their feet on orders to replace foreign IT products that are essential to their core businesses, people familiar with company procurements said, over concerns about the stability and performance of domestic alternatives.

But in addition to growing more advanced, China’s own technology is also well plugged into the local ecosystem. Providers of domestic business software allow interoperability with WeChat, a ubiquitous chat messaging app widely used in place of email among Chinese businesses.

The buy local policy is trickling down to privately run companies, which are showing greater inclination to buy domestic software, according to Morgan Stanley’s CIO survey.

Homegrown shift

A shift toward hosting and managing data on cloud servers instead of servers on the premises has also allowed Chinese companies to narrow the gap. Oracle, IBM and Microsoft dominated the database software market in China in 2010. Since then, Chinese companies including Alibaba and Huawei have come up with their own database management products to replace American technology.

China-based vendors took more than half of that market in China—worth $6.3 billion overall—for the first time in 2022, and continue to grow, according to researcher Gartner. Tenders examined by the Journal also show more state-linked entities and companies have opted for Huawei’s databases in recent years.

China’s banks, brokerage firms and insurers have sped up procurement of homegrown databases, Yang Bing, chief executive of Chinese database company OceanBase, said at a Beijing conference in November. OceanBase, developed by Alibaba and its fintech affiliate Ant Group, replaced Oracle databases at Alibaba and Ant in 2016.

Western companies are being replaced not just by Chinese national champions such as Huawei but also more specialized companies. Yonyou Network Technology, a Shanghai-listed firm with a market value of $6 billion, provides systems to manage businesses’ human resources, inventory and finances.

Yonyou has been gaining users at the expense of Oracle and SAP, which together used to dominate more than half the market, according to data from Chinese researcher Huaon Research Institute. By 2021, Yonyou had become the largest player in the market, holding 40%.

There continue to be pockets of opportunity in China for Western companies, especially in more advanced tech where China still lags behind and in sales to multinational companies operating there.

Looking forward, analysts say the preferential demand from China’s state sector could mean Western ones keep slipping further behind in the Chinese market.

“The growth of software requires continuous feedback from users,” said Han Lin, China head of the Asia Group, a business advisory firm, “and that will be the advantage of domestic providers.”

‘Continuation funds’ gain popularity amid subdued market for initial public offerings

The subdued market for initial public offerings in Asia is prodding private equity investors in the region to pursue a controversial strategy for exiting investments: selling assets to so-called continuation funds they raise themselves.

Five continuation funds closed in Asia last year, the most in a year since 2010, according to data from Preqin, and dealmakers say interest in creating more of the vehicles is rising, particularly in China.

“We have received many, many requests from the Chinese players,” said Won Ha, head of Singapore and South Korea for French private equity firm Ardian, which recently invested in a DWS continuation fund focused on infrastructure.

Private equity firms face pressure to sell their holdings because they raise money from their investors for set periods of time, typically up to 10 years. To lock in profits, they sell their holdings through initial public offerings or to other investors.

The IPO option has become more difficult because of challenging market conditions in places such as Hong Kong and China. “The equity markets, especially in Hong Kong and China, are very poor,” said a private equity manager who has been raising capital in Asia for a single-asset continuation fund.

The problem with continuation funds is that the firms involved are in effect sellers and buyers of the same assets, raising the question of how they can arrive at fair prices for such transactions.

One senior deal adviser at a global consulting group said private equity managers can put off the recognition of losses by selling investments to a continuation fund rather than listing them on public markets. Continuation funds typically last for seven years, dealmakers said.

“At best, there’s an appearance of a conflict of interest. At worst, there is a real conflict of interest,” said Rodney Muse, managing partner at Malaysia-based Navis Capital, which in 2021 closed a $450mn continuation fund with investments in five companies. In 2022, it sold one of those holdings, TES, a battery recycling group, to South Korea’s SK ecoplant for $1bn.

To manage conflicts, Navis solicited bids for its assets from 50 institutional investors and used the best one as the price for sales from its original fund to its continuation fund, Muse said. Investors in its original private quity funds, known as limited partners, had to live with the results, he added.

“It was still a discount — that’s the harsh reality,” Muse said. “There’s a whole lot to it to make sure that it doesn’t tarnish your brand, and that you really are looking after the [limited partners].”

To increase the appeal of continuation funds, managers also tend to lower their fees and commit more capital than they would in a typical fund “so there’s a strong alignment of interest”, said Jan Philipp Schmitz, executive vice-president at Ardian.

Hamilton Lane, a US private equity firm that has been a lead investor in at least three Asian continuation funds totalling $830mn since 2020, said it avoided being both a seller and buyer of the same underlying asset, according to Mingchen Xia, co-head of Asia investments. The three continuation funds include two managed by the Chinese group Legend Capital and one by US-based L Catterton.

Regional lender’s shares plunge 40% but recover following news of a deal to shore up its finances

New York Community Bank will raise more than $1bn in a deal led by the investment firm of former US Treasury secretary Steven Mnuchin, in an effort to shore up its finances and calm fears after weeks of turmoil surrounding the bank.

The regional lender also appointed Joseph Otting, a former Comptroller of the Currency in the Donald Trump administration, as its new chief executive. Otting replaces Alessandro DiNello, who became CEO of the bank less than a week ago and will return to a previous role as non-executive chair. Mnuchin is also joining the board.

Mnuchin said: “With the over $1bn of capital invested in the bank, we believe we now have sufficient capital should reserves need to be increased in the future to be consistent with or above the coverage ratio of NYCB’s large bank peers.”

NYCB’s shares had plunged more than 40 per cent earlier on Wednesday, before being halted at $1.86 for the announcement, after a report about the potential stock sale. The stock, rebounded on the news of the deal, almost doubling from its lows, but is still down about two-thirds since the end of January. The shares closed up more than 7 per cent at $3.46.

The latest fall in NYCB’s stock was not echoed in the wider regional banking sector. The KBW Regional Bank index, which includes NYCB, closed down just 0.4 per cent on Wednesday.

The investor group will purchase NYCB’s common stock at a price of $2 per share and convertible preferred stock at the same conversion price, according to a press release. It will also receive warrants to buy additional non-voting shares at $2.50 per share.

Mnuchin’s firm, Liberty Strategic Capital, is being joined by other investors including Hudson Bay Capital, Reverence Capital Partners and hedge fund Citadel. The group cautioned that its $1.05bn total investment was subject to “finalisation of definitive documentation and receipt of applicable regulatory approvals”.

Mnuchin started Liberty in 2021 after leaving the Trump administration. It has raised more than $2.5bn and struck a handful of small deals, including building a minority stake in movie studio Lions Gate Entertainment and four cyber security companies. Liberty’s backers include SoftBank and Saudi Arabia’s sovereign wealth fund.

Reverence Capital, founded by three former Goldman Sachs executives, is led by Milton Berlinski, who founded the investment bank’s financial institutions group and has targeted mid-sized financial services deals.

DiNello said the involvement of Mnuchin, Otting and Berlinski was “a positive endorsement of the turnaround that is under way and allows us to execute on our strategy from a position of strength”.

In 2009, Mnuchin led a group of private equity investors that bought IndyMac, a mortgage lender that failed in the 2008 financial crisis, from the Federal Deposit Insurance Corporation. After the deal closed, Otting was named chief executive of the bank, which was renamed OneWest and later sold to CIT.

Shares of NYCB have been under pressure since late January, when the bank reported a surprise loss of hundreds of millions of dollars. Moody’s cut the company’s credit rating over the weekend to junk status, days after the lender disclosed it had replaced its chief executive and identified “material weaknesses” in internal controls that guide how loans are reviewed.

NYCB is working with Jefferies as a financial adviser. Its legal advisers are a team lead by Sven Mickisch, a Skadden Arps partner who was recently hired by Simpson Thacher.