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June 2022
AAM Magazine
June 2022
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PE Panorama: No soft landing for SoftBank investees

By Paul Mackintosh   
May 3, 2022

A Bloomberg report sheds more light on the parlous state of venture capital, and in particular, on the role of SoftBank Group. The venture capital behemoth, whose continuous supply of capital was apparently crucial to the valuation of many individual companies, and perhaps entire subsectors, is now reportedly cutting off the funds for some businesses which had premised their growth on those capital inflows, leaving them exposed and vulnerable.

According to the report, “for years, SoftBank’s founder and Chief Executive Officer Masayoshi Son persuaded startup founders to accept Vision Fund money by encouraging them to think bigger and promising continued support to help them expand”. Son and his Vision Fund “rewrote the rules of venture capital by deploying billions of dollars from the sovereign wealth funds of Saudi Arabia and Abu Dhabi into startups”.

As far as rewriting the rules go, look at the fate of SoftBank investees. WeWork, with its failed 2019 initial public offering and its US$1.7 billion golden handshake from SoftBank to CEO Adam Neumann for stepping down. Uber, with its stream of controversies and notoriously toxic internal culture. Didi, with its stock plunge since listing and its regulatory difficulties in China. Is this the track record of a successful venture capital? How many startups will be clamouring to be the next WeWork, or the next Didi?

Perhaps that model was never tenable in the first place. Perhaps it was always going to be dependent on SoftBank’s own huge pool of money to drive value increase in the first place. Perhaps it’s created a cohort of bloated, overvalued, overextended, highly vulnerable dinosaurs ready to collapse as soon as the business climate is slightly less favourable. It certainly doesn't seem to be favourable for a lot of SoftBank investees right now.

There's absolutely nothing wrong with a venture capital fund investing in loss-making companies – at least for a while. But it’s the scale and breadth of SoftBank’s commitment to the proposition that is worrisome, and its tendency to drive companies to even larger losses to buy market share, off the promise of SoftBank money.

There’s also the doubt that this casts over SoftBank’s value improvement and business-building capabilities – which are supposed to be the absolute basis of venture capital investing. In venture capital, you're supposed to be providing way more than pure capital, from introduction to new partners to selection of star CXO personnel.

With SoftBank, there’s long been the suspicion that its value creation is more about external re-rating factors – basically, stock market and private investor hype – rather than substantial improvement in the underlying business, or growth in the particular sector. That should worry any limited partner who has ever committed to a SoftBank fund. And right now it looks like they have more and more to worry about.