“45 minutes, $45 billion, $1 billion per minute”, this is how SoftBank’s Chief Executive Officer Masayoshi Son, described his meeting with Saudi Arabia’s Crown Prince Mohammed bin Salman. After this meeting, the Public Investment Fund of Saudi Arabia (PIF) became the largest investor in SoftBank’s outrageous $93 billion technology investment fund, the Vision Fund. This fund was unlike any other fund that anyone had ever seen before - bigger, bolder, and better. The CEO’s exuberance was even highlighted in the size of the fund which was introduced. With this particular fund, Son wanted to make a presence in tech companies working in artificial intelligence, robotics and the Internet of Things. The fund did fulfil its purpose by giving the company a major share in some of the world’s ‘up and coming’ startups like OYO, Paytm, WeWork, Didi, Uber, Ola, Flipkart, along with 83 others. However, at what cost?
Masayoshi Son has always been famous for his gut-led investment style, and it seems that he invests in people rather than in companies. One such person in whom Son invested was Alibaba founder, Jack Ma. Son himself said that Ma had no business plan, but he had “strong eyes”. However unconventional that might sound, it did turn out to be the most profitable investment of SoftBank till date. The investment in Alibaba, $20 million in 2000, turned into $60 billion when the company went public in September 2014. Masa expects every person in whom he invests to become the next Jack Ma. This strategy seemed to be working for the company as it reported a 62% return in the mid of 2019, after making 71 investments for a total of $64.2 billion, and the ride was supposed to be smooth from this point. On the flip side, the company has started facing hurdles and the return on the fund is negative 6%, compared with 62% just a year ago. The fund has lost more for the company than it has earned for it.
Son’s weakness for charismatic and flashy founders led him to invest in WeWork’s Adam Neumann. Through a combination of glamour and millennial charm, Adam was able to sell WeWrok to Son. It wasn’t even a tech company. Although Son was impressed, the company failed to impress financial analysts. People couldn’t understand the business model of WeWork and were reluctant to invest in it. Even after these speculations, the company decided to go public and as a result of this, their valuation came down to $3 billion from $47 billion in just a year. WeWork’s struggling finances, huge losses, hard-partying culture, and the CEO’s antics sank the ship. Eventually, SoftBank had to step in and buy the company. It came up with a $9.5 billion ‘rescue package’ and took over 80% of the shares. This takeover added dead weight to the company’s balance sheet as the onus to make the real estate firm profitable lay on it.
Another such investment that might come to haunt SoftBank in the near future would be OYO. Son invested $1.5 billion in the company and asked the 26-year old founder, Ritesh Agarwal, to make it the world’s largest hotel operator by room count. The business model that worked so well in India wasn’t an obvious fit for the US and European markets, which already had well established, quality hotel chains. In a hasty attempt to expand outside India, OYO faced many logistical and technological challenges. These included double booking of rooms, failing to keep track of the keys, and reducing the rent of the landlords to mere pennies and taking days to fix these glitches. All these failures left the consumers as well as the vendors highly unsatisfied. OYO’s figures haven’t been impressive either, the company had revenue of $951 million for the fiscal year ending in March 2019, while losses surged six-fold to $335 million year-on-year. Furthermore, the young founder has further borrowed $2 billion, to buy out some investors. The loan has been personally guaranteed by Son, in a bizarre deal. The cash-pumping strategy has hampered the company’s natural course and put it on a path to become what many experts believe ‘the next WeWork’.
With the ongoing pandemic, tech companies have faced the most brutal brunt of the lockdowns across the globe. These unicorns have had to let go of people, lose consumers and face burgeoning costs. Uber, another major investment of SoftBank, has been one of the hardest hit. It had merely recovered from the saga of its poor-performing IPO that it had to face the impact of the virus. This has further added to the tensions of the Son-led company. The current scenario has dimmed the hopes of the CEO who was hoping for a $108 billion Vision Fund part-two.
In order to tackle the mounting problems, the company has had to sell shares in Alibaba, its most valuable holding, to raise $11.5 billion. SoftBank is also likely to sell stock in its Japanese telecom unit SoftBank Corp and T-Mobile US Inc. Furthermore, the Japanese company also plans to spend up to ¥500 billion to buy back shares through March 2021, on top of an existing repurchase plan of the same size. That has helped to stabilise SoftBank shares giving them a boost of more than 75% from their low in March. The massive buyback remains the only good news for the shares. The company did not announce any dividend for the first time in its history this year and it has no plans to announce one next year as well.
Separately, SoftBank said Jack Ma will step down as a director. Additionally, three new directors have been nominated. Son’s increasingly risky bets over the past few years coincided with departures from its board of some of its most outspoken members. With no famous outside directors left on SoftBank’s board, it’s not clear who is going to hold Son responsible anymore. It remains to be seen how that bodes for the company.
Undoubtedly, the Vision Fund has made massive losses for the company, it can still be argued that Masayoshi Son has faced worse after he made $70 billion in losses after the dot-com bubble burst and bounced back even stronger. However, to ensure that there is a comeback this time as well, the company needs to make some strategic changes. Instead of investing huge sums of money in these startups in their early stages and making them cash-burning machineries, they should let them grow according to their organic speed. The kind of ‘growth at all costs’ that comes with an asterisk with such large investments is what ruins a good company with a good business plan. Moreover, focussing on profitability rather than on growth solely would help in making the situation better for the company.
The lesson to learn here is that money can’t always buy success. The cheques that Son was blindly cutting for the companies were harming them more than they were helping. He was actually creating bigger and bigger bubbles, which came back to burst right in his face. Although, the enthusiastic CEO has reiterated several times during the past few months that he has learnt his lesson. It remains to be seen as to what he actually does to turn the situation around. Maybe, his self-confidence and stubbornness will help the company after all.
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