3 Investments Giving SoftBank A Headache
It has not been a stellar year for unicorns, so we look at 3 significant investments by Japanese venture fund SoftBank that has cost it quite a bit of money.
SoftBank Group Corp (TYO: 9984) has a $100 billion investment fund which mainly invests in the tech sector. To date, Vision Fund I has invested in 83 different companies of varying sizes. However, there have been a number of high-profile, poorly performing significant investments from SoftBank, namely Uber Technologies Inc (NYSE: UBER), Slack Technologies Inc (NYSE: WORK) and WeWork.
What is SoftBank?
SoftBank was founded originally in 1981 as a telecommunications firm in Tokyo. Over the years, it expanded into a number of other industries. In recent times, the company’s fund has been spending a lot of money to acquire smaller companies, as well as make significant investments in bigger companies.
For example, SoftBank is a significant shareholder in e-commerce giant Alibaba Group Holding Ltd (NYSE: BABA). It recently made an $11 billion profit after selling off a portion of its Alibaba stake.
The CEO and chairman of the firm is Masayoshi Son. To date, Son has already invested about $80 billion of the fund’s war chest across dozens of companies. His goal is to eventually turn SoftBank into the most valuable company globally.
While some of the SoftBank investments have been shrewd and successful, there have been a number of high-profile failures as of late. Most notable are in startup unicorn companies WeWork, Slack and Uber. The company recorded its first quarterly loss in 14 years in Q3 2019. The loss was $6.5 billion, mainly driven by the $8.9 billion operating loss of the Vision Fund I.
In 2018, SoftBank took a position in Uber worth about $7.6 billion. However, since the Uber IPO in May, the stock price has been dwindling.
SoftBank was also meant to receive two Uber board seats as part of its investment. However, due to an inquiry by the Committee on Foreign Investment in the United States, these seats were not awarded before the IPO, and the right to these seats thereafter expired.
Uber’s stock price is around the $26.70 mark at the time of writing, meaning that SoftBank’s investment is now worth about $5.91 billion, a $1.69 billion drop in value.
There are many potential explanations for Uber’s poor performance. The company is nowhere near profitable, having a net loss of $5.24 billion in Q2 alone. It has also spread itself thin by trying to enter a multitude of different markets and industries, such as Uber Eats.
SoftBank’s Slack investment has been performing better than some of its other ventures, but recent declines are a cause for concern.
Between 2017 and 2018, SoftBank acquired positions in the messaging platform at between $8.70 and $11.91 per share. This investment totaled about $335 million and is currently worth about $778 million at a share price of around $21.30.
In June 2019, Slack’s direct listing on the market took place, opening at $38.50 a share, giving the company an initial valuation of $23 billion. Despite this early success, the stock price began to gradually decline in the intervening months following a post-direct listing sell-off.
Reasons for Slack’s decline include increasing competition and investor confidence dipping after the company was seen as overvalued following its listing. On the opposite side, Slack is seeing significant increases in revenue (58% increase YOY) and the number of paying customers (37% increase YOY). Its retention rate is strong and it is now eking out more spending per customer this year.
However, with increasing competition from the likes of Salesforce and Microsoft, it looks unlikely that Slack can get back to its highs of roughly $38 per share any time soon.
The investment that has blown up the most to date for SoftBank is most definitely WeWork. The office-sharing business has gone through calamity after calamity over the past few months.
Some of the highlights include the cancellation of its IPO, numerous high-profile controversies involving the now ex-CEO Adam Neumann, and the company almost running out of cash.
As part of WeWork’s rescue deal, SoftBank quoted WeWork at just $8 billion, mere months after having a $47 billion valuation. One of the main reasons for the initial inflated valuation was due to SoftBank’s large investment.
As the company’s largest shareholder, SoftBank injected an additional $6.5 billion into the company to keep it liquid in October. In total, SoftBank has invested $18.5 billion into WeWork and it now owns about 80% of the company.
The future looks unclear for WeWork and SoftBank has a massive job on its hands to try and make the company profitable and to recover some of its investment.
What does this mean going forward?
Clearly, a change in investment strategy is needed for SoftBank. Most of the money it has invested has been in tech companies, oftentimes at massively inflated prices. While the likes of Uber and Slack initially had some success, their fortunes have declined ever since.
Other investment firms will be a lot more careful about investing large sums of cash into unprofitable companies, especially those that have poor leadership. This will help to combat overinflated valuations, dampening expectations and taking some pressure off the burgeoning tech companies.
SoftBank is already planning on opening up its Vision Fund II, which amounts to $100 billion. Masayoshi Son appears to have learned the lessons from his recent investment mistakes and plans to target opportunities with clearer routes to profit.
MyWallSt operates a full disclosure policy. MyWallSt currently holds long positions in Slack and Uber. Read our full disclosure policy here.