#5 - Softbank
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📰 1 topic: Softbank
Softbank is a Japanese company that’s now famous for its Vision Fund, a $100bn pool of capital they raised a few years ago to invest in companies (mainly startups) creating “foundational platforms” for the “next stage of the Information Revolution.”
Softbank has seemingly been all over the news for the past year, and there’s a lot to Softbank, but I’ve consolidated some of the recent praises and criticisms.
Some of the praises:
Capital as a moat. Startups need some sort of defense against competitors — otherwise, venture capitalists wouldn’t risk their money on the startup. Classic ‘moats’ include strong network effects, robust intellectual property portfolios, and recently, capital. Because Softbank has so much capital to throw around, it can essentially pick winners by injecting so much cash into a company to ensure it outlives all of its competitors. This strategy kinda’ makes sense: Lots of non-pure-software startups aren’t profitable (see Uber, Lyft) and are capital-intensive, so sustained capital allows these startups to continue aggressively pursuing new markets while undercutting its competitors until, well, it’s the last one standing. Moreover, festooning entrepreneurs with hundreds of millions of dollars and urging them to spend at an exorbitant pace will scare off competitors. According to Masa Son, Softbank’s CEO, nobody “wants to pick a fight with a crazy guy.”
Global reach. Softbank’s international presence is beneficial to startups for 2 main reasons: (1) In relatively capital-starved countries, an investment from Softbank has enabled companies like Flipkart (e-commerce in India) and Grab (ride-sharing in Singapore) to grow and exit. Flipkart, at one point, was struggling to raise capital and SoftBank’s infusion helped them to close a $16bn deal with Walmart. (2) Softbank can help its portfolio companies aggressively expand abroad.
Track record. Softbank has made some really strong investments in its portfolio, so its judgment has to be at least decent. A few examples: Softbank earned a 60% (roughly $1.5 billion) return on its 2017 investment in Flipkart. In 2018, it led a ~$535m round in Doordash, a food delivery company, at a $1.4bn valuation. A year later, Doordash ballooned in value to ~$13bn and has reportedly (confidentially) filed for an IPO. In 2015, Softbank invested $600m into Kuadi Dache, a Chinese ride-hailing firm that soon merged with Didi Dache (in a merger worth $6bn). Didi is now privately valued at $62bn, as of 6 months ago.
Renewed discipline (?) I’m not sure how big of a point this is, but I think it’s worth mentioning. Masa Son is under a lot of fire for his investment strategy in general and his investment into WeWork in particular (discussed more below). After Softbank took control over WeWork’s floundering business, Son apologized regarding his aggressive investment into the firm: “There was a problem with my own judgment. That’s something I have to reflect on.” He proceeded to talk about financial discipline and WeWork’s road to profitability. Take this apology for what it’s worth.
Here are some of the criticisms of Softbank:
Founder delusion. Masa Son is known for picking people with grandiose visions for changing the world, and then convincing those people that their visions aren’t grand enough. Look no further than the infamous WeWork story. WeWork’s founder, Adam Neumann, was nothing short of eccentric before he took money from Softbank. He… walks around barefoot (even on the streets of New York); jumps on tables; and is trying to live forever. Masa Son apparently “appreciated how he was crazy—but thought that he needed to be crazier.” Fast forward to right before WeWork is about to IPO, and WeWork re-named itself to “The We Company”; its “mission is to elevate the world’s consciousness” (from its S-1); and Neumann is going around saying he wants to be the world president and the world’s first trillionaire. Now, to be fair, the infatuation with visionary founders is understandable. You need to have some level of conviction and passion to start, stick with, and grow a company to a billion-dollar business. And also, to be fair, I don’t know where the direction of causation lies (did Masa Son actually make Neumann even crazier?) BUT, in such a capital-intensive business like WeWork (and the other capital-intensive business Softbank invests in), investors probably should be focusing on financial discipline rather than encouraging founders to be even crazier.
What, exactly, is the Softbank strategy? In July 2018, Softbank invested nearly $250m into Brandless, a direct-to-consumer company that offered hundreds of everyday household items—from organic maple syrup to tree-free toilet paper—at just $3 a piece. A few weeks ago, it went under. Apparently, the fact that everything it sold was $3 “‘flabbergasted’ and intrigued” Masa Son. This goes with the point above, but if I’m reading this correctly, it seems that the way to win > $100m from Softbank is to “flabbergast” Masa Son with a crazy idea and a world-building vision. Nevermind the fact that Brandless’ cost structure is fundamentally unsuited to direct-to-consumer.
Investor relations. Taking an investment from Softbank often entails a ‘get big fast’ strategy, which may be antithetical to the strategy other investors have advised for the startup. Recently, T.Rowe Price, an investor in WeWork back in 2014, wrote about their investment: “Explicit in our investment was an understanding with WeWork’s management that they would slow the company’s blistering pace of growth and focus instead on developing a more sustainable business strategy. They took our advice for a few months, but new investors soon arrived who convinced management to put its foot back on the accelerator.” Those new investors were none other than Softbank.
Multiple portfolio companies in the same market. Softbank now has billions of dollars of investments in various ride-sharing companies: Uber (America and Europe), Didi (East Asia), Grab (Singapore), and Ola (India). Softbank has leveraged this power and influenced some of these companies to exit a geographic market, allowing a different company to dominate the region. This tempers competition in a particular market and stymies a company’s ambition. Granted, venture capitalists often sit on the board of their portfolio companies, and one of their jobs is to help shape the company’s strategy. However, investing in multiple, essentially competing companies is a practice that’s frowned-upon. Such a practice, in effect, creates conflicts of interest to forgo the the interest of the startup for the better interest of the venture firm’s investment.
Overall, I’m a Softbank critic. Now, to be fair, if Softbank offered me money, I’d certainly have a hard time turning it down. On one hand, I have Masa Son crowning me king of an industry, handing me a $100m check, and whispering in my ear that all my dreams will come true. On the other, I’d need to have extremely deep convictions regarding my company, the strategy, and the underlying economics, and have the discipline to build a sustainable business for the long-run. But, if that were the case, maybe Softbank wouldn’t invest in my company in the first place.
What are your thoughts on Softbank?
📚 5 articles
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