SoftBank Is No Longer Getting a Pass

WeWork was one of the biggest debacles of 2019. It was on the verge of IPOing at a $47 billion valuation as a high-flying tech startup oozing with untapped upside.

Instead, investors saw a flawed and poorly executed real estate play.

Its valuation plunged by $40 billion… all the way down to $7 billion. And that was its best-case scenario.

If not for the bailout from its biggest investor, SoftBank, WeWork would probably have gone under. And its overpriced real estate holdings would have been sold off for pennies on the dollar.

That didn’t happen. Still, WeWork should have served as a hard lesson for its biggest investor, SoftBank. Its $100 billion Vision Fund reported an operating loss of $8.9 billion in October related to WeWork and Uber. (It’s about $500 million underwater on its Uber investment alone.)

SoftBank’s CEO, Masayoshi Son, even muttered words of repentance in the wake of the bailout. He promised to be more discerning. SoftBank would give greater weight to a company’s ability to show profits at some foreseeable point in the not-too-distant future, he said.

You’d think this is Investing 101. But not in startup land. The bottom line takes a back seat to the more valued imperative of super-fast growth. The idea is to become a dominant player through the sheer size of one’s operations, sales and customer base. Not making a profit is tolerated. Actually, it’s often encouraged.

And hypergrowth takes money… lots and lots of money. SoftBank may not be great at choosing superior companies, but it does have deep pockets. For better or for worse, the $100 million (or more!) checks it writes fit perfectly into the startup investing handbook’s core idea of growth above all.

In most cases, it’s for worse.

I wrote about SoftBank’s problematic approach in July 2018. And in the wake of the poor post-IPO performances of Uber, Snap, Tesla and a dozen other startups, I feel more strongly than ever about this.

Handing enormous sums of money to startups that haven’t quite figured things out yet and then telling them to go crazy and break things is one of the stupidest things I’ve come across.

If too much power corrupts (something I absolutely believe in), too much money is just as corrosive. It makes founders and CEOs sloppy. They try things with a low chance of success because, unlike bootstrapping companies, they can.

I take the opposite view of SoftBank’s philosophy: Failure is a luxury that no startup should be able to afford.

Empty Promises

2019 was not a good year for SoftBank. The downside of its investing philosophy was exposed in a big way.

But there was a potential silver lining to all this bad news. SoftBank could have emerged as a humbler investor, with a keener understanding of the limits of what big money can accomplish.

Unfortunately, that didn’t happen.

While SoftBank was declaring a new attitude late last year, it was also making a number of big investments. SoftBank wrote big checks for Indian financial technology startup Paytm and Chinese real estate tech company Beike Finance. It also participated in six other mega-rounds of more than $100 million, according to PitchBook data.

So much for turning over a new leaf.

Son keeps doing this because he seeks the biggest returns startups can give. The billion-dollar exits that many venture capital companies go after are below the minimum that SoftBank seeks. It wants multibillion-dollar exits.

And conquering these huge global markets takes loads of money.

But SoftBank’s big money cannon approach doesn’t work nearly as well as it thinks it does. And there’s a growing perception that it doesn’t work, period. Its second Vision Fund has raised a measly $2 billion to date. The two sovereign wealth funds that contributed nearly half of the original Vision Fund – Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala Investment – have yet to commit to the new fund.

Son’s investing philosophy is no longer getting a free pass. In light of recent events, another point of view has emerged… that bigger doesn’t mean better. And a big vision backed by big money does not guarantee big success.

The startup investing world is moving on. Son’s vision of multiple $100 billion Vision Funds is dead in the water.

Thankfully, his first Vision Fund will also be his last of that size.

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