SoftBank, a Japanese telecommunications conglomerate, has been making the news recently, but for all the wrong reasons. Their financial struggles are well documented and reported, such as earlier this year when NikkeiAsia reported that SoftBank suffered a massive $5.9bn loss in the three months of September to December 2022.
Which is why in this article, we’re going to have a look at lessons you can learn from SoftBank’s mistakes.
SoftBank’s investment failures
SoftBank is a Japanese telecommunications conglomerate that is well known for the SoftBank Vision Fund, a venture capital fund founded in 2017.
At its inception, the SoftBank Vision Fund managed to raise $100 billion, with investors such as Saudi Arabia’s sovereign wealth fund, Public Investment Fund (PIF), Apple, and Mubadala Investment Company – which made the Vision Fund into the world’s biggest technology-focused investment fund.
However, it didn’t take long for it all to go wrong for Vision Fund.
In 2020 the first signs of trouble cropped up as multiple SoftBank funded startups started laying off staff as a cost-cutting measure. This included Oyo, Getaround, and Zume.
Although laying off staff is not necessarily always a sign of troubles plaguing the office, these companies also faced other issues to compound the problems leading to the layoffs. For example, Oyo’s business model had been a point of contention among experts, and Zume was facing production issues that crippled their day-to-day operations.
Since then, it has been all downhill for Vision Fund, with them posting a record $27.4 billion loss for the fiscal year ending March 2022, and another $32 billion for the fiscal year ending in March 2023.
How did this happen?
In order to understand how SoftBank got where they are right now, it’s important to look back at how they got their start.
Back in 2000, Masayoshi Son, the founder of SoftBank went on a trip to China and met with 20 Internet entrepreneurs to discuss possible investments. Out of these possible partners, he decided to only invest in one: Alibaba.
Son invested $20 million for a 34% stake in Alibaba, which turned into one of the biggest companies in the world. Although Son did sell off his stake in Alibaba a few years back, SoftBank still owns more than a $100 billion worth of Alibaba shares. It was considered one of the best venture capital bets of all time.
And since then, Son and SoftBank have been trying to replicate that success by funding various startups. However, the fund has not yet had the fortune of finding its next unicorn.
The following are some examples of what SoftBank has ventured into:
-
Wag
First launched in 2015, Wag is a dog-walking startup that is touted to be the ‘Uber of dog walking’. Wag followed a similar business model to Uber, by connecting dog-walkers to dog-owners who needed their dogs walked. Seeing the potential in Wag, SoftBank’s Vision Fund decided to make an investment of $300 million. However, the company struggled to keep up with its rivals, and after going through management changes and other measures, Softbank pulled out from the company in 2019.
-
Oyo Hotels
SoftBank first invested $100 million in Oyo in 2015, and then poured another $162 million in 2016, $250 million in 2017, and $1 billion in 2018 into the startup. But so far, the $10 billion startup is nowhere near profitable. After being pressured by SoftBank and other investors, Oyo laid off 5000 of their workers worldwide, and its losses skyrocketed from $44 million in fiscal year 2018 to $355 million in FY2019.
However, Oyo has somewhat stabilised thanks to shifting their focus towards the Asian market, and is ready to launch their IPO this coming November. That said, the company is only expected to raise between $400 and $600 million, which is much lower than the original target of $1.2 billion.
-
Uber
Back when Softbank decided to invest in Uber, Uber’s valuation was at an all-time high. In 2018, SoftBank purchased $8 billion worth of Uber’s secondary shares from early investors and employees in January 2018 at a discounted valuation, and also invested another $1.3 billion directly into Uber. At that point, Vision Fund valued Uber at $70 billion. However, Uber was then plagued by many scandals, which included a toxic working environment, and also sexual harassment scandals at the office, which plummeted Uber’s market value. However, there might be light at the end of the Uber tunnel, as reports are saying that Uber is slowly making its way to profitability.
-
WeWork
Perhaps the worst investment Vision Fund has made to date, WeWork is an office space provider founded by Adam Neumann in 2010. Softbank’s Vision Fund really believed in the idea and potential of WeWork, so they invested over $4.4 billion in WeWork in various funding rounds.
However, WeWork’s accounting practices and mismanagement came to light in 2022. The company had around $47 billion in long-term lease obligations and only $3 billion in annual revenue. This was further compounded by heavier scrutiny brought by their IPO attempt, which revealed some key issues such as a questionable leadership style by then CEO Richard Neumann, allegations of creative accounting, and others.
All this led to SoftBank and Vision Fund having to shell out another $9.5 billion to bail out the troubled company, and Masayoshi Son to call his investment in Wework foolish. To date, Vision Fund has invested over a total of $18.5 billion in WeWork, and now control over 80% of the company. And it seems that trouble is still brewing in WeWork even now, as the New York Times recently reported that WeWork’s CEO has stepped down over disagreements with SoftBank.
-
FTX
Another massive misstep from SoftBank and Vision Fund is their investment in disgraced cryptocurrency exchange FTX. Vision Fund invested nearly $100 million in FTX, which was written off after FTX filed for bankruptcy following a massive collapse that took only 10 days.
Softbank’s Chief Operating Officer Marcelo Claure tweeted that SoftBank invested because of FOMO and admitted to not fully understanding what SoftBank was investing in.
What can we learn from this?
So now we have documented how SoftBank and Vision Fund got themselves into the hole they’re currently in. Let’s take some good from the situation, and glean some lessons we can take from SoftBank’s missteps in their journey.
- Know when to cut your losses
One of the hardest things to learn while investing is when to cut your losses, and pull out altogether. Sometimes when you’ve already lost a substantial amount of money, it can be tempting to just hold on with hopes that the investment might bounce back. But more often than not, pulling out is the best option you can take, as evidenced by SoftBank’s pullout from Wag.
- Diversification is key
Although it’s tempting to invest in one industry that you believe in or are passionate about, it’s always safer to diversify your portfolio. Softbank’s Vision Fund is a technology-focused investment fund which has led to an overexposure to risks in that market.
- Do your due diligence
In hindsight, perhaps it’s much easier to see that both WeWork and FTX would make terrible investments as the companies are plagued by issues that are hiding in plain sight. For example, WeWork was called out for creative accounting that made the company look to be in a better financial state than it is, while FTX was just committing fraud before their CEO outright admitted that FTX’s non-U.S. exchange had insufficient funds to meet customer demands.
If SoftBank and Vision Fund did their due diligence and carefully researched these companies, perhaps they would have found out these red flags before deciding to pour money into them.
The latest buzz in the investment grapevine now appears to be about Softbank looking to invest in artificial intelligences, including potentially OpenAi. With AI being on every company’s powerpoint for 2024 initiatives, it appears that Softbank is back in the game but time will tell how this latest venture will pan out.
