Masayoshi Son, CEO of SoftBank Group Corp. and its $100 billion Vision Fund, has demonstrated a staggering level of financial daring. He has always thought big. Unfortunately, as discussed in previous GuruFocus articles, the spectacular collapse of WeWork over the past month may have changed everything.
Death of an artist
As Thornton McEnery of Dealbreaker commented late last month, Son has proven himself to be a true financial artist:
As we've said many times before, Son's pioneering work in private equity valuation pumping has made him an artist of finance, an abstract expressionist who can turn any balance sheet into a Jeff Koons sculpture: massive, shiny, colorful and illogically priced. Son has spent the better part of a decade fixing broken telecom giants, preparing for The Singularity, reshaping the role of private equity/venture capital, and slowly evolving into a generational financial titan who has fundamentally redrawn the perception of the notion of value.
Everything was going swimmingly for SoftBank until September, when WeWork botched its IPO. The Japanese telecoms giant has been forced to inject billions of dollars into WeWork, which has seen its valuation melt from $47 billion to about $7 billion since January.
SoftBank now controls WeWork, but the company has lost virtually all of its Silicon Valley lustre.
Pivoting away from risk
After receiving a very public and very painful bloody nose courtesy of WeWork, SoftBank has been forced to pivot its venture capital strategy. On Oct. 25, the Wall Street Journal reported that SoftBank’s Vision Fund was moving to enforce greater financial and operational discipline in its portfolio companies:
After suffering billions of dollars of losses on its investment in WeWork, SoftBank Group Corp.'s Vision Fund is scaling back its high-risk investing strategy and focusing more on improving corporate governance at portfolio companies, according to current and former executives at the fund. Masayoshi Son, SoftBank’s chairman and CEO who also runs the Vision Fund, has told staffers at the fund to push the companies in which it owns stakes to generate cash, these people said, a drastic shift from his earlier demands that they spend aggressively to drive sales growth. Under the lower-risk strategy being imposed by Mr. Son, the fund already is being more careful about proposed deals it might otherwise have done quickly, say people familiar with its strategy. Mr. Son has recently asked for more information from his investment team before pulling the trigger on some deals, said one of these people.
Dealbreaker’s McEnery has lamented that Son’s “profligate whimsy” may prove to be the most tragic victim of WeWork’s implosion. Son can no longer afford to make the sort of massively high-risk decisions that have made him a household name among tech and investment professionals. Given SoftBank’s recent efforts to alter its strategic course, it is hard to deny that the fun times are over for Son & Co.
Future in doubt
For all its efforts to pivot toward a more grounded, financially rational strategy, SoftBank and its Vision Fund remain in serious trouble. A hoped-for Vision Fund 2, which was meant to dwarf the Vision Fund’s $100 billion in capital allocations, now appears unlikely to see the light of day, except, perhaps, as a much reduced shadow of its predecessor.
SoftBank’s big problem was that its valuations were unmoored from any financial sense. By acting as the lead investor for several portfolio companies across multiple rounds, SoftBank set its own prices, creating the illusion of increasing value via paper gains.
WeWork was SoftBank’s biggest loser, but it was far from the only one. Big positions in the likes of Slack Technologies Inc. (NYSE:WORK) and Uber Technologies Inc. (NASDAQ:UBER) have lost significant value already.
Too little too late
While fiscal discipline is a welcome change of pace, it is probably too late to save the Vision Fund. It has already suffered catastrophic write-downs on some of its largest holdings. Recovering that value will be an extremely tall order. Indeed, while more rigorous financial controls may help prevent future blow-ups like WeWork, it will also make it that much harder for the Vision Fund to get back above water.
Disclosure: Author is short Uber.
Read more here:
- WeWork: CEO's $1.7 Billion Payout Sets a Dangerous Precedent
- Big Tech Set to Face Margin Compression in Coming Years
- NIO Is Running Out of Time
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
