Softbank, made famous by its huge $100 billion Vision fund and larger than life CEO – Masayoshi Son, is now beginning to look like any other VC with a rookie at the helm. Last week, Softbank, which made a wild bet on WeWork, a company that is burning thorough $2 billion a year, took it another step further and pumped in another $5 billion into WeWork to become its majority owner.
This second round of financing from Softbank comes after its $2 billion initial round that valued WeWork at $47 billion. After a failed attempt at an IPO at $20 billion valuation, Softbank’s new investment puts WeWork at less than $7.5 billion valuation. Not a pretty picture for a company that was touted by JPMorgan Chase and Goldman Sachs running the IPO, with potential market caps as high as $63 billion and $96 billion.
This is the latest debacle at Softbank – whose investments in Uber, Slack among others, have all gone south. Finally, Softbank announced that it is scaling back its high risk strategy and is expected to scrutinize its deals and executive teams of its portfolio companies. And, Son is out fundraising.
Future Wealth View
It has been widely written that Son and Neumann, WeWork’s CEO, had met for less than 30 minutes back in 2016 before Son decided to invest $2 billion in WeWork, with a promise to invest another $8 billion. If WeWork’s and Uber’s IPO had been successful, Son may have been raised to the levels of respect that only Warren Buffett commands.
But, that will never happen because Buffett’s systematic methodology for valuing companies coupled with his patient approach, is in stark contrast with Son, who apparently invests with his gut and looks like he fell for Neumann’s charisma instead of looking closely at WeWork’s books. Probably the highlight of its S-1 filing for IPO was that WeWork was on the hook for $47 billion in future lease payments to building owners while having committed revenue of only $4 billion. Last year’s loss jumped to $1.9 billion on revenue of $1.8 billion — for every dollar it made, it was spending two.
Did Softbank’s Son read the filing? Hard to tell, given that he committed the rookie mistake of falling for the sunk cost fallacy – that investments (sunk costs) justify further expenditures, even if they are not appropriate. Even as his dreams of an IPO was dashed, Neumann, who cashed out $700 million in WeWork stock ahead of the IPO, was further generously offered $1.7 billion in stock, $185 million in consulting fees and $500 million in credit to help repay his loans to J.P. Morgan Chase, UBS and Credit Suisse, by Softbank’s Son. Almost sounds like Stockholm syndrome, a condition which causes hostages to develop a psychological alliance with their captors during captivity.
Losing money is bad but throwing good money after bad is another matter entirely.