WeInvest: SoftBank’s vision

MASAYOSHI SON COULD MAKE EASY WORK OF $100 BLN JOB

WeInvest: SoftBank’s vision

BY ROB COX

SoftBank is providing a good reminder about how it can be easier to invest other people’s money. The Japanese tech and telecom group may plunk as much as $4 billion into WeWork, the shared office-space upstart, according to CNBC. Masayoshi Son blanched at earlier opportunities to invest in the firm, but he is now looking at opportunities through the prism of a $100 billion fund.

There are many sound reasons SoftBank could be reconsidering its decisions not to back WeWork when founder Adam Neumann was passing the hat a few years ago. The most obvious is that the Manhattan-based endeavor is a more proven concept. The company has 125 physical locations in 38 cities and 10 countries, with 90,000 paying members, including 700 business customers.

Moreover, there is demonstrable growth and results. Last year, WeWork doubled its buildings, cities, countries, members and revenue run-rate and tripled gross profit at offices open a year-and-a-half or more. It plans to double its real-estate footprint this year, opening in Buenos Aires, Sao Paulo, Beijing, Mumbai, Paris and more.

It’s also true, though, that motivations on SoftBank’s end may have changed since it sat out a $150 million Series C round in 2013, and a $355 million Series D fundraising the following year, which valued WeWork at $5 billion, or a quarter of the $20 billion going rate now. The biggest difference is the mega-fund burning a hole in Son’s pocket, though it’s not yet clear how SoftBank will finance a WeWork investment.

In October, SoftBank launched its Vision Fund to make investments in technology globally, with at least three-quarters of the capital from external investors, led by the Kingdom of Saudi Arabia, as well as Apple and Oracle founder Larry Ellison. As part of the initiative, SoftBank has recruited many bankers and acquired even more of them with the recently announced $3.3 billion takeover of private-equity and hedge-fund firm Fortress Investment.

SoftBank has long put money into early-stage creations like Yahoo Japan and Jack Ma’s Alibaba. Bigger companies, such as U.S. cellphone operator Sprint, have been less satisfying. The Vision Fund, by dint of its size and the source of its capital, risks distorting SoftBank’s perspective.

First published Feb. 27, 2017

(Image: REUTERS/Kim Kyung-Hoon)

SOFTBANK WRITEDOWN WILL CLOUD SON’S WAY FORWARD

WeInvest: SoftBank’s vision

BY LIAM PROUD AND KAREN KWOK

SoftBank’s Vision Fund is due a writedown. The Saudi Arabia-backed tech investor, with $97 billion at its disposal, reported a 27 percent gain on $28 billion of investments as of September. That success will reverse in 2019.

Since its inception in 2017, the fund has invested at optimistic-looking valuations. Take WeWork, the money-losing office sublessor. The Vision Fund and SoftBank’s investment in 2017 valued it at $20 billion, according to the Wall Street Journal, or 13 times 2018 sales using Moody’s Investors Service estimates. SoftBank bought chip designer ARM in 2016 for around $31 billion and transferred a stake to the fund.

Those prices might make sense to Chief Executive Masayoshi Son, who touts his 300-year investment vision. But they look toppy through the lens of traditional venture-capital and private-equity methods, which SoftBank says it uses. The enterprise value of IWG, WeWork’s listed competitor, is just below one times its 2019 sales, using Refinitiv estimates, making WeWork’s multiple look stratospheric.

ARM’s valuation is set to suffer from a recent tech selloff and a slowdown in sales of Apple’s iPhones, which contain its chip designs. Shares in semiconductor rival Nvidia, in which the Vision Fund also owns a stake, fell more than 40 percent in the two months to Nov. 30. That has left Nvidia’s enterprise value at about seven times estimated 2019 sales, using Refinitiv data. Even at a generous 50 percent premium, debt-free ARM would be worth about $24 billion using Bernstein’s 2019 sales estimate, one-fifth less than SoftBank’s acquisition price.

Venture funds take writedowns all the time. Yet SoftBank is unusually vulnerable. Its size means marking down holdings could create a domino effect. The Vision Fund is also using debt, which totalled about $5.6 billion in September, to help fund its activities. Its capital structure unusually also includes preferred instruments, amplifying losses for other investors and requiring it to make cash distributions.

Moreover, Son’s partners, including Saudi and Emirati sovereign-wealth funds, might take fright at writedowns. Any losses risk undermining Son’s investing logic, which includes the notion that huge investments in emerging tech stars in and of themselves improve the chances those companies become winners. Both providers and recipients of funds, as well as investment staff, could lose faith. That would slow Son’s momentum and force him to think about the shorter term for a change.

First published Dec. 17, 2018

SOFTBANK-WEWORK MESS EXPOSES CRACKS IN VISION FUND

WeInvest: SoftBank’s vision

BY LIAM PROUD AND KAREN KWOK

Cracks are showing in the $97 billion Vision Fund. That undermines the idea of SoftBank boss Masayoshi Son as a tech sage, and makes life harder for his dealmakers.

SoftBank was last year mulling a $16 billion investment in WeWork, which was supposed to include cash from the Vision Fund. That has now shrunk to a solo $2 billion investment by the Japanese parent, Reuters reported on Jan. 7. Vision Fund backers including sovereign wealth funds from Saudi Arabia and Abu Dhabi balked at pouring so much cash into the loss-making provider of office space, according to reports by the Financial Times and Wall Street Journal.

The hiccup is mostly a function of the Vision Fund’s unusual structure. Typical venture-capital investors secure a “blind” commitment from their backers, who are known as limited partners or LPs; those putting up the cash only find out where it’s gone after the fact. Masa’s Saudi and Emirati LPs, however, are involved in the deal review process, according to a person familiar with the matter. At least one LP employee has even been seconded to the fund.

That’s fair enough, since together the Saudi and Emirati backers are providing more than half the Vision Fund’s firepower – a far greater proportion that most venture or private-equity LPs. But the apparent power to veto decisions undermines the whole premise of the fund: that Son is a tech visionary capable of spotting the next Alibaba. If that’s true, why doubt him on one of the fund’s biggest investment proposals?

The divisions also augur poorly for the fund’s future. First, it makes life harder for Son’s dealmakers working under Rajeev Misra, head of the London-based company managing the Vision Fund. Startup founders could reasonably ask whether the dealmaker they’re negotiating with has the authority to close the deal given the power of Misra and Son’s LPs. Second, Son’s long-term plan for a second Vision Fund looks more remote. It was already tricky given the Saudi government’s alleged involvement in the murder of journalist Jamal Khashoggi. Add to that an apparent squabble over tech investment ideas, and for Son siding with the Saudis again might look less appealing.

First published Jan. 8, 2019

(Image: REUTERS/Toru Hanai)

WEWORK SHOWS BENEFIT, AND COST, OF SOFTBANK VISION

WeInvest: SoftBank’s vision

BY RICHARD BEALES

WeWork’s revenue more than doubled in 2018 from a year earlier, to $1.8 billion. Yet its net loss widened marginally faster – and to an even larger $1.9 billion. The shared-office giant, recently rebranded as “The We Company,” is contemplating going public. Investors will have to square those figures with a $47 billion private valuation.

The vision of Masayoshi Son, whose SoftBank is a big backer of WeWork, is basically that throwing cash at market-leading disruptive companies allows them to supercharge their market share gains and therefore become even more valuable.

Though Son in January scaled back his most recent bet from initial expectations, it still involved injecting an extra $2 billion into the company. As a result, WeWork’s financial information, released on Monday, shows it is sitting on nearly $7 billion of committed cash. That will pay for the buildout and marketing of a lot of new locations.

That said, even initial-public-offering candidates in WeWork’s fast-growing, money-losing demographic tend to want to show losses narrowing relative to sales, moving in the general direction of profitability. Ride-hailing app Lyft, for example, due to debut as a public company on Friday, reported a loss equal to 42 percent of its $2.2 billion revenue in 2018 – an improvement on a negative 65 percent net margin in 2017.

WeWork boss Adam Neumann is instead keeping the growth hammer down. In one nod to investor sensitivities, though, he may be de-emphasizing “community-adjusted EBITDA” – a WeWork metric that brought eye-rolls from commentators. The measure, which reflects steady-state gross profit excluding the company’s substantial marketing, overhead and growth-related costs, is now also referred to as “contribution,” a plainer and better understood term.

That alone won’t get investors comfortable with a valuation range starting at more than double the $23 billion top-of-the-range indication so far from Lyft, a company with similar revenue and 2017-18 growth rate – and far smaller losses.

Back in 2017 when WeWork was valued at $20 billion, Neumann told Forbes a co-working company worth that much didn’t exist: “Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.” WeWork isn’t rushing to list. When it does, though, public-market investors are going to have to feel the spiritual energy, too.

First published March 26, 2019