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  • Vinay Nair

SoftBank Makes the Whole World Fat!!!

Updated: Feb 19, 2020

When we look back at the timeline of SoftBank, spanning over the last four decades, we see a history of ups and downs. Interestingly, however, the free-spending venture capital firm has always recovered from debacles in the past, boosting their confidence to carry on with their questionable investment strategy.

This time around, though, it seems that Masayoshi Son may have used his credit card just a little over its limit. Crippling credit card debt has ruined many a spendthrift in this consumer culture, and Son probably knows how it feels to stand in one of their shoes now. While Son himself may still be very far from bankruptcy even after losing his company 8.9 billion dollars from a single investment, his Vision Fund is looking like it's gone above the rails.

Why, you may ask?

I'd blame it on the excessive funds it pumped into the startup space, and the gaudy uselessness of it all. The funds themselves did precious little for the once-coveted startups, except for fattening their bank balance and getting to their heads, often in a way they could never recover from.

Now, much like the self indulgent spendthrift with a maxed out credit limit, SoftBank is having to drag itself away from new deals and fresh investments, in a desperate bid to save any more money that Son could potentially lose with his current business strategy. The company's once glorious Vision Fund is paying the price for Son's excesses: the result of stuffing the portfolio with every promising startup he came across. Son cut fat cheques for whichever startup founder caught his fancy, with little concern about the basic business model!

Decades of bad decisions seems to be finally catching up to him, with excessive funds adding needless weight to his portfolio companies, but shrivelling the precious Vision Fund. Somehow, I find the behaviour of an undisciplined spendthrift oddly reminiscent of a pattern that I often see in the international venture capital scenario these days, especially with Masayoshi Son's SoftBank and its Vision Fund, flushed as they are (or were) with cash. In an approach that closely resembles heedlessly stuffing our mouths with unnecessary, low-nutrition food items, SoftBank routinely pumps startups with funds they do not need, and definitely do not know what to do with. While the rest of us do it just occasionally, the entirety of Masayoshi Son's recent investment moves seem to be centered around reckless ambition and limitless spending, with little strategic planning to back it up.

By flooding new businesses with unnecessary funds and ballooning their valuations to obscene levels, SoftBank only seems to be making the whole world fat.


SoftBank's Investment Strategy

At a time when lean production practices and strategic measures are all the rage, SoftBank has managed to adopt practices that only add needless weight to its portfolio companies. In fact, the poorly devised strategy behind their investments has also managed to disrupt the sustainability of many praiseworthy unicorns by handing them more money than they knew what to do with. SoftBank's reasons for acting like an indulgent step-parent trying to smother the founders with the allure of cash have always been less than altruistic. The core philosophy lying at the heart of its investment decisions has long been to capture the greatest chunk of the market share, and possibly create monopolies.

As former SoftBank executive Nikesh Arora explained to CNBC,

SoftBank's basic idea is  to wire enough money to a promising startup so that it can quickly grow to stupendous size and effectively steamroll any competition.

There are multiple reasons why this monopoly-oriented strategy is a recipe for disaster: both in terms of business ethics and SoftBank's own sustainability.

For starters, monopolies pave the way for exploitation. As large corporations get larger, they leverage their position of dominance to fix prices and alter service quality, with little regard for suppliers, consumers, or any of the other smaller stakeholders.

In the digital age, Facebook is a prime example of monopoly power gone wrong.

It is the largest, most influential social network on the planet; and nothing, not even grilling by the United States Senate can get it to 'fess up to all the shady things it does with our data. It has been implicated in a number of scandals involving political propaganda and ideological manipulation, the most notable case being the Cambridge Analytica Scandal.

While Facebook is not a part of the SoftBank portfolio, its path so far is emblematic of what the Japanese conglomerate wishes to achieve with its investments: build a giant company that crushes competition to the ground. Leaving aside the moral considerations of SoftBank's investment strategy, it is important to remind ourselves that even if we disregard the ethical implications, the strategy still wouldn't be successful at the way Son seems to be implementing it these days. As it seeks market domination with each of its portfolio companies, there is no clear strategic outlook to ensure that the companies will be sending back fat cheques to their investors if and when such a dominant position is achieved.

For example,

While Uber is one of the most notable investments of this VC firm, it has also invested in other ride services, in order to spread out its bets.

By diversifying investments within the same sector, SoftBank is essentially pitching its own portfolio companies against each other, which makes little sense when it wants each of them to crush their competition.

Another aspect of SoftBank's investment strategy can be attributed to the "greater fool theory", suggesting that there will always be someone more willing to buy out their expensive equity stake at a higher amount. This is why SoftBank often drives up the valuation just to book profits on its earlier investments and make back a much higher amount even when the portfolio company is not posting profits. This is also a highly unsustainable approach, and cracks have begun to show in this model as well, with fewer and fewer investors willing to play the "greater fool" and hike up SoftBank's returns.

What is Wrong With SoftBank?

In its earlier days, SoftBank struck gold with investments in Yahoo and Alibaba, both successes that came in the wake of the dot com boom. While its success with these two investments were enviable, it shouldn't make us forget all the other investments the company had made around the same time, but all of which came to nought.

As long as SoftBank was throwing money at digital enterprises with low costs of brick and mortar operations and upfront expenditures, their strategy made sense.

They invested in several companies, but made magic with a few, which was mostly enough to bring home plenty of money. The other strategy employed by the VC firm at the time was to buy distressed assets at low prices, for repurposing them to generate high cash flows. Son's decisions to buy Comdex computer trade show and the Ziff Davis publishing company back in 1995 were key examples of this distressed asset model.

However, as the years progressed, Son evidently began to lose sight of the outlook that had catapulted him to success. Instead of sticking to digital ventures that were less expensive to manage, and easier to build sustainably, he diversified to firms that needed huge on-ground funds.

For example,

Uber needed infrastructure for accommodating drivers and vehicles, insurance and more, WeWork needed a massive amount of real estate to make its idea stick. Son decided to place his bets on both companies and drive their valuations up to exorbitant amounts, in the hope that they would bear fruits sooner or later.

But as we have seen, Uber's IPO opened to a tepid response, and WeWork's attempt at going public was a spectacular failure that had to be withdrawn. Although SoftBank eventually worked out a package to bail out WeWork and develop it along more sustainable lines, it was a very delayed implementation of its original policy of buying distressed assets, made worse by the fact that it was originally SoftBank's own investment.

In addition, SoftBank has long had a repetitive pattern of fostering unruly CEOs: from Uber's Travis Kalanick to WeWork's Adam Neumann, both of whom have since been ousted. From the history of SoftBank's portfolio companies, I find a clear correlation between the reckless handover of funds and the prevalence of poorly organised corporate governance marred by founder-CEOs' arrogance and distasteful ways.

Clearly, SoftBank's astronomical investments are doing no one any good, not even itself. From being driven by monopolistic ethos, to encouraging chaotic governance in these companies, SoftBank's touch seems to be something that the startup ecosystem should really stay away from.

State of SoftBank Investments, now

The sorry state of affairs of some of the largest SoftBank investments give credence to the idea that SoftBank may not be able to raise another billion dollar fund anytime soon. The only way in which the venture capital fund could potentially have done that was by getting some fat cheques from one of its companies. But, considering the struggle most of its portfolio firms are currently facing, that seems fairly unlikely.

Uber and WeWork have collectively caused the Vision Fund 1 to lose over 9 billion dollars, and many have commented that this was inevitable and Son really deserved this reality check.

At the same time, Son has gone on and established the foundation for Vision Fund 2, which frankly sounds like yet another vessel for him to try and realise his monopolistic ambitions, or as is more likely at the present market situation, pour more money down the drain.

His approach has repeatedly driven up the valuation of SoftBank's portfolio companies to obscene levels, in a bid to capitalise on the "greater fool's theory". About 40% of these investments have been made in the app-based transportation sector, revealing an urge to monopolise the space, rather than mere confidence in the future of industry. By investing in the likes of Uber, Ola and Didi Chuxing, Son has reached for this goal.

Some of SoftBank's most crucial investments have been in the Indian subcontinent, with Oyo and PayTM being the most notable ones. While both these companies are yet to see their reputation take a tumble, they have started experiencing significant troubles already.

Oyo has been facing lawsuit after lawsuit from both customers and franchise hotels, and crumbling under the weight of its ambitious expansion plans. Even though the company's young founder Ritesh Agarwal has moved to address the company's mounting concerns and potentially distance the firm from SoftBank's all-encompassing influence, the risk still seems very very real.

PayTM too has been struggling to retain much of its first mover advantage in the Indian digital payments space, spending far too much money in discounts and cashbacks in an attempt to outshine Google Pay's strong turn in the market. Moreover, the pressure to go public in 5 years is definitely not helping its case, with executives scrambling to reshape the crumbling dream of owning India's online payments market.

On the international front too, SoftBank's poor turn has gone beyond the mega flops that were Uber, and worse still, WeWork. SoftBank itself has been acting pretty much like a headless chicken in dealing with its most recent investments.

  • It has left Creator, a San Francisco startup high and dry after signing an exclusive term sheet.

  • Interestingly, SoftBank has also withdrawn from similar deals with startups like Honor and Seismic, causing alarm about their ability to invest and manage funds effectively in the days ahead.

  • An even more concerning situation has emerged in promising pizza startup Zume, which raised $375 million from SoftBank, attained a sky high valuation of $4 billion, and then went on to get rid of about 80% of its employees within a year. It has also seen executive exits from its management, raising eyebrows all around the startup ecosystem.

SoftBank recently made headlines as reports of a possible rift between Son and Vision Fund head Rajeev Misra resurfaced. Misra is reportedly looking to create a new fund to invest in listed stocks, in a significant departure from their original strategy of investing in private equity deals, particularly those involving technology-based startups with unique value propositions. A change of strategy may have been feasible at an earlier point, but now, when SoftBank is already staggering under the burden of piling losses from its PE deals, it seems unwise to experiment. The time should ideally be used to reverse the damage Son's policies have caused and focus on more frugal approaches, rather than throwing money in a different direction, and hoping it will come back.

Concerns Around SoftBank's Dubious Deals

SoftBank is no stranger to controversies that go beyond its poor investment decisions. It is frequently criticised for its strong ties to Saudi crown, the sovereign wealth fund of which is a crucial partner of the Vision Fund. As the Saudi Arabian government is routinely implicated in matters such as the murder of journalist Jamal Khashoggi, repeated threats to democracy, and other geopolitical issues, SoftBank's ties with the crown in advancing certain business enterprises on the global stage is often seen as being unethical. However, as we have established before, SoftBank does not seem to be awfully worried about moral considerations. The only thing that continues to baffle me is why it does not do much about its financial losses either.

Another charge levelled at SoftBank is that it operates in a manner similar to Ponzi schemes. This allegation first caught on when Ali Al-Salim posted a slide from a SoftBank presentation online. The slide explained how LPs were used to pay back to LPs, and how certain investors owned preferred stocks that guaranteed them guaranteed returns. This led to venture capitalist Chamath Palihapitiya also calling out the conglomerate for running a Ponzi scheme.

Although the slide can easily be explained by SoftBank as simply accommodating to investors' risk appetites and granting them preferred stocks, the concept of a fixed return does sound more like debt than an equity stock.

SoftBank seems to have a penchant for a messed up business model, be it in its own organisation or in the portfolio companies.

No wonder Uber still hasn't found the way to its own!

Can Austerity Save SoftBank?

Following the series of disasters that have struck Masayoshi Son's investments of late, the CEO of SoftBank has decided to roll back his ambitions and focus on growing sustainably for the time being. Recently, reports surfaced that Son had cut back on plans to launch a second Vision Fund in the wake of a 99% loss in profits witnessed by the first. However, Son's idea of hitting the brakes is quite different from most of us, since SoftBank has recently put up $2.5 billion on Vision Fund 2. As most of us are left shaking our heads at Son's refusal to mend his ways, he better hope that this wild bet pays off big time. Clearly, an austere approach should be the way to go for this Japanese conglomerate now, in order to reverse the barrage of misfortunes that seem to be headed its way.

Although austerity is traditionally defined as a reduction in state spending, the principle could very well be extended to private spheres. Economists are divided on this question, especially during recession, with Keynesians firmly against it; but many others feel that such a strategy could pay off in the form of long term economic gains.

As is evident from the firm's spiralling situation,

SoftBank has a lot to worry about before it can resurface on the global stage as the indulgent moneyed uncle who is ever so ready to sign cheques.

I have a feeling that unless it strikes gold with at least one mega Return on Investment, we will hear only about some more deal withdrawals from SoftBank. Similarly, being cautious with its funds can help SoftBank rebuild the base it seems to have nearly razed to the ground, and create a portfolio that has a clearly defined growth outlook instead of just lust for monopoly power.

The firm can potentially take a leaf out of the book of its own countrymen, as the Japanese are often known for their frugal practices. Although Japanese millennials are frequently encouraged to abandon their frugality in favour of greater spending to boost growth, SoftBank should definitely hit the brakes for a while and do what the Japanese have been doing for years. Frugal principles lying at the core of their culture have catapulted them to high levels of development, and it's about time SoftBank took a lesson from that!




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