According to News18, twenty out of the top four hundred start-ups in the world are from India. Out of those, eleven have been funded by Japanese conglomerate SoftBank. There is no doubt that these funds offer hope and give a jumpstart to these start-ups, but what are the risks that companies and shareholders have to face?
Founded by Masayoshi Son in 1981, SoftBank had its beginnings as a software distributor. With some luck and well calculated decisions, Softbank saw exponential growth. Today it is involved in almost every industry you could think of - from telecommunications, Artificial intelligence, data science and e-commerce to renewable energy, biotech, financial technology and nanotechnology, from Alibaba and Tencent in China to Yahoo! Inc.
Most of their investments and acquisitions have been made through their Vision Fund, ideated in 2017. As its name might suggest, the fund was instituted to empower innovative firms and become a driving force for modernisation and a technological revolution. Far from being plain ideological, the attractive prospects of the fund garnered investments from countless powerful entities like Microsoft, Qualcomm, Foxconn, Oracle founder Larry Ellison, Taiwanese iPhone maker Foxconn, Alibaba as well as Saudi Arabia’s Public Investment Fund (PIF) and Abu Dhabi’s Mubadala. Finally, the fund stood at a massive $100 billion.
Masayoshi Son’s vision for SoftBank and Vision Fund is of unparalleled scale, considered as a genesis of a new age in investment culture and Artificial Intelligence. In an interview with CNBC, Son said that in thirty years, things will be flying and going a lot faster without accident, that we’ll live longer and healthier. He also calculated a 300-year growth plan for his proprietorships. We have been waiting for this level of ambition and belief in scientific temper, along with facilitation of essential capital required to guide the disoriented and expansive AI industry. This was quite a responsibility to take on.
To date, SoftBank, through its fund has invested in about 88 largely successful firms. Son reportedly takes personal interest in selecting companies for the portfolio of the Fund and dedicates about $100 million to each, more if he’s especially intrigued. In the pursuit of a mission for innovation, he also provides for a free rein to business leaders to take the idea forward. Paytm, Flipkart ( sold for a profit to Walmart), First Cry and many others have tasted success from the hands of SoftBank.
SoftBank’s generosity and dedication to AI evolution may be translating quite differently. There seems to have been little congruence in their investment policy and action; two precious additions to their portfolio, OYO and WeWork, have been real estate enterprises. We are yet to hear of a major tech breakthrough stimulated by a deal with the Vision Fund. There’s also the problem of Masayoshi Son’s aggressive investment strategy and misguided valuation of firms. In case of OYO; an Indian hotel chain, SoftBank has poured almost $1.5 billion into the cash burning company since their first investment in 2015, which pushed its valuation to $10 billion, one of the Fund’s highest. OYO grew in size, coverage and valuation, and also went international in a very short period of time. OYO’s nouveau riche status allowed them to go international and aim at becoming the biggest hotel chain in the world through international acquisitions and expansions. This, coupled with bad timing, bad publicity, and speculative practices, resulted in a highly unsustainable business model. OYO’s management soon announced more than five thousand international job cuts and pay cuts, a consequence that was seen coming.
A worse outcome of the same strategy was seen with WeWork, which was seeking to breathe new life into co-working. The company was valued at $47 billion at its peak. SoftBank admitted to investing around $18.5 billion into the company by October 2019. The company’s unprecedented rise to the top and their looming IPO was abruptly cut short by billions of dollars in losses, a constant stream of departing employees and co-founder Adam Neuman’s failure to maintain investor-interests by virtue of his dicey financial activities, which eventually led to the company’s downfall. SoftBank recently walked away from a share buy back, hanging the company high and dry; WeWork’s valuation dropped to $8 billion. SoftBank went all in with WeWork to such an extent that the failed IPO of the company has hurt all other start-up ventures. Vision Fund reported almost $18 billion in losses, and SoftBank an annual operating loss of $12.7 billion – the worst in its history. Looking at the past, OYO is being called the new WeWork.
Quite similar is the state of the Vision Fund’s other investments. This year, Zume closed its robotic pizza-making enterprise and announced job cuts for about half of its workforce. SoftBank sold its shares in Wag, a dog walking company, at a loss last year. Uber posted a $1.2 billion loss at its IPO in May last year. A construction company, Katerra, had staff cuts. OneWeb, Getaround, Rappi and others have been included in this list, again due to irresponsible spending of their main backer. According to a report by The New York Times, workers of companies backed by SoftBank have held protests in Bogotá, Mumbai and New York. Though SoftBank has a considerable presence in Silicon Valley, over the past few months, firms in the technology hub becoming familiar with SoftBank’s belligerent tactics and their frequent antics of walking away from deals, word has started to spread against considering a tie up. These failed investments show the backers’ profligate tendency and poor judgement that made its struggle in the current environment quite apparent. Son was recently persuaded to conduct a share buyback of $41 billion to salvage their falling share values. Son even admitted to Vision Fund 1’s poor performance and failed ventures. In spite of being in the middle of a crisis, the CEO of the Vision Fund Rajeev Misra, got a 113% pay hike.
With Vision Fund 1 closing in September and about $75 billion spent, Vision Fund 2.0 was announced last year, with hopes to lengthen their reach. A few previous contributors opted out like the PIF and Mubadala. Still, the fund stands at $108 billion dollars, with SoftBank putting in about $38 billion earned from its previous successes with Vision Fund I. This certainly opens up a lot of opportunities for India’s young enterprises. It’s first investment in India was Lenskart Solutions, an eyewear store. They’re looking to spend about $13 billion in India, according to some reports, which might get delayed. In the past, SoftBank looked to invest in companies with exciting prospects, which is a trend that might not emerge this time around; they might be looking to change tactics. Rajeev Misra said in an interview with the Economic Times, that they are certainly still interested in India and hinted at focusing on buying out investors. He offered reassurances to more a responsible investment strategy. Certainly, they need to re-evaluate their modus operandi, considering the unsure state of most of their dependents.
Vision Fund’s reputation is rolling in the glory of a small chunk of successes, like Flipkart, Alibaba, Paytm, Yahoo Japan and a recent sale of the American telecommunications company, Sprint Corporation. SoftBank is essential for start-up survival and transformation, with their openness and generosity with regards to operation and ideas. Their unorthodoxy may leave a sour taste in some mouths coupled with frustration at their tendency to overreach. This reaction should not be branded as sceptical. The tech revolution of our science fiction dreams is within our reach, if only its facilitator enacted some prudence, patience and, proportionality.
image source: The economist.