Too much cash makes you crazy. Just look at SoftBank’s Masayoshi Son or a startup that has raised boatloads of money from SoftBank. The Japanese telecom conglomerate and its Vision Fund have drawn a lot of criticism for pouring buckets of money into startups that haven’t even figured out a viable business model yet. Here we take a look at SoftBank’s top 10 worst startup investments.
SoftBank’s fascination with charismatic founders
Back in 2000, Masayoshi Son met with 20 Internet entrepreneurs during a trip to China. He decided to invest $20 million for a 34% stake in only one of them. That startup was Alibaba, which currently has a market value of $530 billion. Even though SoftBank sold off part of its stake three years ago, it still owns more than $100 billion worth of Alibaba shares. It was one of the biggest venture capital bets of all time.
Masayoshi Son has since been looking for the next Alibaba. He is making bigger and bolder bets in futuristic technologies, sectors, and startups. Son’s early investment in Alibaba and the e-commerce giant’s massive success could at least partly be attributed to luck. But Son had hit the jackpot.
Son believes in his ability to see the future and bet on the most ambitious entrepreneurs. He lavishes hundreds of millions of dollars on tiny startups that still haven’t found a footing. The startup’s valuation rises manifold. Flush with massive cash, many entrepreneurs act recklessly and end up burning most of the cash in a short time.
The last couple of years haven’t been particularly good for the Japanese conglomerate. SoftBank and its $100 billion Vision Fund took a multibillion-dollar hit in the fourth quarter of 2019 as its big-ticket investments turned sour. In November 2019, the Vision Fund and one of SoftBank affiliates reported an $8.9 billion hit amid poor performance of its investments.
The WeWork, Uber, Brandless and other debacles have tarnished SoftBank’s reputation. Masayoshi Son is struggling to raise the second $108 billion Vision Fund. Activist hedge fund Elliott Management has picked up a $2.5 billion stake in SoftBank, and is pushing for a management reshuffle.
SoftBank’s worst startup investments
These are some of SoftBank’s worst startup investments. We don’t know how these or other investments will turn out in the future. But it’s worth looking at what has happened with them so far.
10- Slack
Slack is a workplace software company that allows teams to collaborate easily. It has grown rapidly and has carved out a niche for itself. In September 2017, SoftBank invested $250 million in the startup. Slack went public in June 2019 via a direct listing on the New York Stock Exchange. The listing was priced at $38.50, but it has failed to impress investors. The stock has since declined to $25 currently amid concerns that it was overvalued.
SoftBank’s investment in Slack is not in the red. At least not yet. But the biggest cause of concern for Slack is the competition from Microsoft Teams. To beat Slack, all Microsoft had to do was to bundle Teams into its Office suite. Microsoft Teams now has more users than Slack. Microsoft is slowly killing Slack. If the stock continues to decline further, it could become an acquisition target.
9- Katerra
Founded in 2015, Katerra is a Silicon Valley-based construction technology startup. It is optimizing every aspect of the building design, construction, and manufacturing. Katerra has raised about $1.2 billion from investors, according to Crunchbase. Data from CB Insights shows that SoftBank invested $865 million in Katerra in January 2018, and another $134 million in September of the same year.
After the WeWork debacle, Katerra came into spotlight for all the wrong reasons. In December 2019, Katerra announced that it would lay off 200 employees and shut down a factory in Phoenix. The Real Deal found that Katerra has failed to complete more than a dozen projects. Recently, its co-founder Fritz Wolff stepped down as a member of the board.
There has also been a conflict of interest. A private equity firm owned by Wolff has a construction arm, which was Katerra’s sole customer for the first few years.
8- Zume Pizza
If you are confident, charismatic, and brash, you could raise a staggering $375 million from SoftBank. Zume Pizza aimed to disrupt the pizza delivery business by using robots to make pizzas that people would want to eat.
In November 2018, Alex Garden’s robot pizza startup raised $375 million from SoftBank at $1 billion. That’s a significant jump from $218 million valuation in the previous round. As if that wasn’t enough, Masayoshi Son promised to double the investment if Zume showed traction.
Garden used the cash to significantly expand operations. Less than two years later, Zume has laid off more than 50% of its workforce. It has shut down its robotic pizza business. Zume is now focusing on food packaging for other businesses.
7- Wag
It’s one of SoftBank’s worst startup investments. Wag was supposed to be the Uber of dog walking. Just like Uber, the on-demand dog walking service connects independent contractors with clients via its mobile app. The Los Angeles-based dog-walking as a service (if that’s a thing) raised about $300 million from SoftBank. The investment shocked the VC community. Masayoshi Son seemed confident that Wag would become a decacorn.
Wag never really took off. After a series of setbacks including lay-offs and management changes, SoftBank sold its stake back to the company at a massive loss. The company had ambitious plans to expand worldwide, but it hasn’t happened yet.
6- Fair.com
Launched in 2016, Santa Monica-based Fair.com is a car-as-a-service provider. It raised $385 million from SoftBank in December 2018 at a valuation of $1.2 billion. It had also raised over a billion dollars in debt funding to expand its business. Fair.com seemed all set to disrupt the car market. It purchased Uber’s unprofitable leasing business in 2018 and Ford’s Canvas leasing business in 2019.
But things started to change towards the second half of 2019. The company laid off 40% of its workforce. Fair.com also removed its CFO Tyler Painter, brother of the company’s co-founder and CEO Scott Painter. The company started selling its cars instead of scaling up the fleet. Scott Painter stepped down as the CEO. According to Fortune, the toxic ‘bro’ culture, chaotic record-keeping and unprofessional management hurt the company. The company is now trying to figure out how to survive.
5- Brandless
Founded in 2016, Brandless was an e-commerce platform that sold simply branded products at low cost. The startup raised $240 million from SoftBank in Series C funding round in July 2018. Last year, Brandless co-founder and CEO Tina Sharkey resigned from her job.
Evan Price and then John Rittenhouse were named the CEO as SoftBank kept pushing the startup to turn profitable. SoftBank was desperate to see some positive outcomes as WeWork and Uber turned out to be disappointments. That’s one of the reasons Brandless became one of its worst startup investments.
Last month, Brandless announced that it was shutting down operations while it still had some money left to cover the severance packages of employees.
4- Snapdeal
Founded in 2010, Snapdeal was a rapidly growing e-commerce startup in the world’s second most populous country. In October 2014, SoftBank invested $627 million in the e-commerce platform. It poured another $500 million in the Indian startup in August 2015. SoftBank invested a total of $1.2 billion in Snapdeal.
Snapdeal tried hard to compete with Flipkart (now owned by Walmart) and Amazon India, but couldn’t. It continued to suffer heavy losses in 2017 and 2018. SoftBank then diversified its bets by investing in Flipkart. The Japanese company sold its Flipkart stake when Walmart purchased Flipkart. Meanwhile, Snapdeal’s valuation has declined to around $100 million.
3- Oyo Rooms
If there is one company that draws constant criticism from customers, hotel partners as well as employees, it has to be Oyo Rooms. SoftBank invested $100 million in Oyo’s Series B round in 2015. It has been the lead investor in every round since then. SoftBank poured another $162 million in 2016, $250 million in 2017, and $1 billion in 2018. Oyo currently has a valuation of above $10 billion, and SoftBank owns 42% of the startup.
Other investors such as Sequoia Capital and Lightspeed Ventures have sold roughly 50% of their stake in Oyo. It’s a red flag when long-time investors with inside information dramatically cut their stakes. The company’s founder Ritesh Agarwal borrowed against his existing shares to buy new shares in the company in the latest funding round.
The $10 billion startup is nowhere near profitable. Amid pressure from SoftBank and other investors, it’s cutting 5,000 jobs. The company has warned of more lay offs in the future. Its losses skyrocketed from $44 million in fiscal year 2018 to $355 million in FY2019. Oyo has now shifted its focus to proving that it has a viable business model.
Oyo currently faces an antitrust probe in India over its exclusive partnership with MakeMyTrip. Its hotel partners have also accused Oyo of reneging on promises and delaying payments. Oyo has also exaggerated the number of rooms available internationally. It has also been accused of bribing government officials to avoid investigation. Oyo’s ‘bro’ culture is as toxic as that of Uber and WeWork.
2- Uber
Uber’s valuation was touching new all-time highs when SoftBank decided to invest billions of dollars in the world’s most valuable startup. The Japanese conglomerate purchased $8 billion worth of Uber’s secondary shares from early investors and employees in January 2018 at a discounted valuation. It also invested another $1.3 billion directly into Uber. SoftBank’s investment valued Uber at roughly $70 billion.
Uber was criticized for its toxic culture. There were numerous cases of sexual harassment. Uber had spread itself too thin to become a global ride-hailing giant. Dara Khosrowshahi, who became Uber’s CEO in August 2017, has tried to address a lot of issues. Uber has exited several markets including China. It also sold the Indian Uber Eats operations to Zomato.
Uber went public in May 2019, and its stock price has declined dramatically since then. More than two years after SoftBank’s $9.3 billion investment, Uber’s market value is around $47 billion, down from the peak of $74 billion. The ride-hailing company is still struggling to become profitable. Certainly one of SoftBank’s worst startup investments.
1- WeWork
WeWork is by far SoftBank’s worst startup investment. It cost SoftBank billions of dollars and tarnished the Japanese company’s reputation. All because Masayoshi Son fell for a confident, brash, and charismatic founder and his lofty vision. WeWork is an office space provider founded by Adam Neumann in 2010.
SoftBank had invested over $4.4 billion in WeWork in various funding rounds. It was valued at a staggering $47 billion in the Series H funding round in January 2019. SoftBank was the sole investor in that round. As WeWork prepared for its high-profile IPO, JP Morgan estimated its IPO valuation between $40 billion to $60 billion. Goldman Sachs went even further, saying WeWork could be valued at as much as $90 billion!
As the planned IPO inched closer, WeWork’s accounting practices, toxic culture, and steep losses came to light. The valuations seemed too high for an office space provider, especially considering the company had almost run out of money. WeWork had around $47 billion in long-term lease obligations and only $3 billion in annual revenue.
Eventually, WeWork was forced to cancel its IPO. Adam Neumann was given $1.7 billion to leave the company. Having already thrown billions of dollars into WeWork, SoftBank threw a few billion dollars more to take control of the company as part of a rescue plan. It was throwing good money after bad money.
SoftBank’s rescue deal valued WeWork at just $8 billion. The Japanese conglomerate infused another $10 billion to give it a new lease of life. SoftBank has invested a total of $18.5 billion in WeWork. It controls 80% of the company. The future still looks dark for WeWork as well as SoftBank’s investment in WeWork.
Conclusion
In almost all of his worst startup investments, Masayoshi Son was pouring big money at inflated valuations. He was so obsessed with identifying the next Alibaba early that he happily wrote hefty checks to startups with no viable business model. He might be secretly regretting the fact that he missed investing $20 billion in Tesla at $900 per share last month.
