BY LIAM PROUD AND ROBERT CYRAN

Bad gamblers chase their losses all the way to financial oblivion. SoftBank Chief Executive Masayoshi Son risks making the same mistake with The We Company, the cash-burning shared-office firm into which he’s already poured, or promised, almost $11 billion.

Son’s Japanese tech conglomerate is in talks to increase an agreed investment in the startup more commonly known as WeWork, from $1.5 billion to $2.5 billion, the Financial Times reported. SoftBank would get the right to receive shares in the future at a lower valuation than had been previously agreed.

Since WeWork’s mooted worth has already fallen from $47 billion to one-fifth of that, all this may sound like throwing good money after bad. WeWork burned almost as much cash last year, according to documents filed in conjunction with its failed IPO, as Son is pondering investing. Son perhaps hopes that WeWork will regain its footing with time, and new leadership, after founder Adam Neumann was ousted as chief executive on Tuesday.

There’s some logic to that. An equity injection from SoftBank may unlock another $3 billion to $4 billion of bank loans. And backers can extract favourable terms injecting capital into viable businesses desperate for cash. Venture firm TCV, for example, invested in Netflix in 1999 and led a 2001 recapitalisation of the company after the dot-com crash. Netflix survived, and thrived. The video-streaming firm now has a market capitalisation of $115 billion.

The snag is that SoftBank may have other drivers than financial returns. Walking away from WeWork would dent the reputation on which the Japanese firm depends for attracting new investors and promising firms into its orbit. Other startups might fear SoftBank will back off during hard times.

This is unlikely to be the last difficult decision SoftBank faces over WeWork. The company has shown it can grow, but not that size has any value, or brings profitability in an industry where others already do similar things. Rival IWG is valued at about 3.7 times trailing revenue, and on the same multiple WeWork would be worth a bit more than $8 billion – less than SoftBank has put in. Son, like WeWork’s tenants, has other places he can hang his hat.

First published Sept. 26, 2019

(Image: REUTERS/Thomas Peter)