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John Engle
John Engle
Articles (406) 

SoftBank’s House of Cards Begins to Fold

The Vision Fund's ambitious startup portfolio is colliding with harsh financial reality

October 09, 2019 | About:

SoftBank Group Corp. (TSE:9984) has had a rough time in recent months. The problems besetting the telecom giant have little to do with its core business, however. Rather, they concern its Vision Fund.

The brainchild of SoftBank CEO Masayoshi Son, the Vision Fund managed to raise - and spend - a staggering $100 billion on a host of venture capital investments. Son clearly cannot be faulted for a lack of ambition. However, an increasing number of commentators and analysts are calling his grandiose vision into question.

Looks good on paper

Son has boasted at length about the Vision Fund’s success, focusing on the growth in the valuations of many of its portfolio companies. However, these are not real gains at all. Until the Vision Fund exits a position, either through private sale or selling stock post-initial public offering, any apparent gain is just a paper return.

WeWork (officially the We Co.) offers a major, and ultimately highly embarrassing, case study in the difference between paper returns and real returns.

Beginning in 2015, Son invested billions of dollars of the Vision Fund’s and SoftBank’s money into WeWork over a succession of funding rounds. Between 2015 and January 2019, WeWork’s valuation rose from a lofty $10 billion to an astonishing $47 billion. On paper, anyway.

Paper burns fast

As it turned out, WeWork was not worth $47 billion, according to the public market.

When WeWork attempted to go public in September, its underwriters found few takers, even after slashing its proposed valuation dramatically. Ultimately, WeWork shelved its IPO plans and canned its mercurial CEO. Now, WeWork is casting about for a financial lifeline.

Evidently, potential IPO investors were not as willing as Son to buy into the idea that the debt-laden and cash-burning co-working business would be able to “elevate the world’s consciousness.”

Of course, WeWork was not SoftBank’s only black eye in recent months. Another big holding, Uber Technologies Inc. (NYSE:UBER), which went public with much fanfare in May, has seen its share price melt down since its IPO. Combined, WeWork and Uber have lost SoftBank an estimated $5 billion.

Papering over the problems

Usually, growing startups’ valuations rise from round to round, with an IPO acting as a final “up round” for late-stage private investors and insiders to book real gains. This has not been the case for a number of SoftBank’s largest investments, such as WeWork and Uber.

Of course, Son and SoftBank might point to the general skepticism that has plagued the post-IPO share prices of many highly valued tech “unicorns” over the past several months. However, there is a key difference where the Vision Fund is concerned. Specifically, it has often served as the lead investor in its portfolio across multiple rounds. As private companies, their valuations are essentially whatever investors say they are. When SoftBank’s Vision Fund is involved, it has always said, “Higher.”

SoftBank has been able to inflate its apparent returns by essentially bidding against itself. WeWork’s explosive valuation growth is the most obvious and egregious example of this behavior, but it is hardly unique.


By dint of its massive scale alone, SoftBank’s Vision Fund was an audacious undertaking from the very beginning. Alas, Son’s grand dream is turning into a nightmare.

The Vision Fund has bid up the values of its portfolio companies with reckless abandon and, consequently, now faces a harsh choice: It can either accept on the valuations of its bloated portfolio companies or it can keep injecting capital by itself. While unpalatable, the former option is preferable, as the latter is simply unsustainable. Kicking the can down the road can save embarrassment for a while, but it will only be that much more costly when reality forces its way in.

The Vision Fund now threatens to drag significantly on SoftBank’s finances. The company has co-invested in a number of companies, including WeWork and Uber, and it has $25 billion tied up in the Vision Fund itself. A lot of that cash looks set to go up in smoke.

Disclosure: Author is short Uber.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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