The Missteps of SoftBank

December 30, 2019

What We Can Learn

Headquartered in Tokyo, SoftBank is a multinational conglomerate holding company with business interests all over the world. SoftBank has been an early investor is some of the biggest names in business today, across an array of industries.

Show Us the Money

Some of SoftBank’s investments include:

  • Slack, the cloud-based instant messaging platform, used by an increasing number of businesses for both in-house and remote employees
  • Alibaba, the Chinese holding company which is the world’s largest retailer and ecommerce company.
  • Uber, the app-based rideshare company, which recently went public to disappointing results when the stock price fell below the initial asking price.
  • WeWork, the New York City-headquartered co-working space company, whose IPO was placed on hold earlier this year, due to concerns over leadership and financial transparency.
  • Wag, the privately held, app-based service that allows dog owners to hire and schedule dog walkers, on demand. Wag has experienced some public relations problems, due to reports of animals going missing and dog walkers misusing the homes of the dog owners.
  • Sprint, the American telecommunications company which serves as the fourth largest mobile network operator in the country.

As with all investors, some of SoftBank’s investments have proven to be more sound and successful than others. Additionally, in some cases, (Sprint, for example), SoftBank became an investor later on in the company’s lifespan, rather than serving as an early contributor.

WeWork

SoftBank has recently taken a big hit, due to the failed IPO of WeWork. WeWork’s lack of financial transparency and questionable leadership (founder and CEO Adam Neumann has stepped down from his role, but not before a billion dollar payday) came under increased scrutiny when the company announced it’s intent to go public. While this is customary, as current and potential investors, as well as consumers, are given a closer look into the operations of the company upon such an announcement, no one predicted the backlash that would ensue or the stories that would emerge. As a result, SoftBank is estimated to have lost over $6 billion in the third quarter of 2019 due to their investment in WeWork.

Despite this, SoftBank was put in the position of putting nearly another $10 billion into the co-working space company, after the failed IPO and ousting of Neumann. The deal is structured in such a way that while SoftBank now owns 80% of WeWork, the investor does not have majority voting rights. This has proved to be a cautionary tale to investors as to what happens when you give the founders of a startup too much control.

It is easy to place the entirety of the blame on Neumann and other C-level employees at WeWork for the mismanagement of the company. However, it would be erroneous to not also look at the role that the investors ultimately played in this. After all, savvy investors want to know where their money is going. They not only want, they expect concise financial reports be provided and they see oversight as being a component of their role as investors. SoftBank acknowledges that they looked the other way when it came to WeWork and governance. The result being a bailout of the co-working giant and a damaged reputation for the investing firm.

Uber

While Uber’s IPO did not fail in the same way that WeWork’s did, it was not the exciting Wall Street moment that many anticipated. When the rideshare company went public, it closed the day trading below the initial asking price, by nearly 8%. This is yet another company that has faced increased scrutiny upon going public.

From allegations of sexual misconduct by both drivers and in-house employees, to reports of poor (even unethical) business practices, it was not surprising that this unicorn didn’t produce at the level investors had hoped. Additionally, Uber, along with other rideshare companies such as Lyft and Via, have faced pushback from transportation commission entities in major cities, such as New York, where traditional taxis are under threat by newer app-based technologies. Many consumers have also been turning away from such companies due to surge pricing during inclement weather and rush hours. Even, “acts of God” did not stop Uber from implementing it’s practice of surge pricing, including during Hurricane Sandy and a July 2019 blackout in New York City which left large areas of the subway system unusable.

In the months since going public, Uber has not been faring any better on Wall Street. In fact, since it’s IPO in May 2019, the company has lost nearly one third of its value. In turn, this means SoftBank has lost nearly $600 million since investing in the rideshare company in 2018.

The Cautionary Tale

Whether it be WeWork, Uber, or Wag (another company that, while still privately-held has experienced some public relations nightmares), there is one thing these differing companies have in common: lack of governance and oversight from its major investors, including SoftBank.

Every company, from startups to those that have been in operation for generations, are going to have hiccups. In fact, it is expected in the world of startups as these new businesses are finding their footing. The startup phase is when it’s perfectly okay to make some mistakes. However, that is where the role of governance and oversight comes in. This is a role that is ideally being played by the board of directors and investors.

Balancing Act

Obviously, no entrepreneur wants to hand over too much control to an investor. After all, it was the entrepreneur, not the investor who has the million dollar idea in the first place. However, the fiasco with WeWork has demonstrated what can happen when founders are given too much control, both financial and operationally.

It also stands to reason that many investors don’t necessarily want to be actively involved in the day-to-day operations of a business. Presumably, they have their own business to run. However, a smart entrepreneur will see the value in having active investors who can provide proper guidance and oversight, and a savvy investor will recognize the importance of keeping a close eye on their business dealings. Lack of doing so, as SoftBank has shown, can result in catastrophic financial dealings, many of which stem from poor public perception. 

When both sides, the entrepreneur and investor can get on the same page and draw up an equally beneficial term sheet, then it can ideally be a win-win for both parties. Furthermore, it serves to then benefit consumers and future investors.

Learn and Grow

SoftBank, while now dealing with bad press of its own, not simply that of some of its investments, can teach other investors a great deal when it comes to issues of looking the other way, putting too much trust in the founders with not enough oversight, and investing too much too quickly. The latter also being an ongoing issue with SoftBank since increasing its venture capital efforts in 2017: the excitement and desire to scale quickly has caused the investor to be put in the position of putting good money after bad in an attempt to save a business. While well-intentioned, it is causing SoftBank to lose more and more money every quarter. Just as it is necessary for a startup to always be taking a good, hard look at their own business practices, SoftBank is showing investors that they need to be doing the same.