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Too Many Unicorns: Declining Valuations, Bankruptcies, and SoftBank's Tech Rollercoaster

From WeWork's Fall to Son's Unwavering Vision: The Ups and Downs of an Ambitious Tech Empire

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WeWork Inc.'s recent bankruptcy filing marks the culmination of a protracted saga that has brought to light profound deficiencies in the investment strategy of Japanese billionaire Masayoshi Son. This turbulent journey has not only resulted in substantial financial losses but has also inflicted severe damage to Son's professional standing.

In a bold move, Son chose to disregard the reservations voiced by his close advisers and funnel billions of dollars from both SoftBank Group Corp. and the Vision Fund into the hands of WeWork's founder, Adam Neumann.

This strategic decision propelled the co-working office space giant's valuation to an astonishing $47 billion in the early months of 2019. However, the euphoria was short-lived, as mere months later, investors were rattled by the significant losses and glaring conflicts of interest that were laid bare in WeWork's IPO filings.

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WeWork's precipitous decline has had far-reaching consequences, and it's not just about the staggering financial losses. For SoftBank, the fallout from WeWork's implosion surpasses the estimated $11.5 billion in equity losses and an additional $2.2 billion in looming debt obligations. The very public unraveling of WeWork, combined with SoftBank Vision Fund's colossal $32 billion loss in the previous year, has cast a shadow on Masayoshi Son's reputation as a savvy investor who once struck gold with an early bet on the Chinese e-commerce giant, Alibaba Group Holding Ltd.

As Aswath Damodaran, a professor at New York University's Stern School of Business, aptly puts it, "You can recover from mistakes, but how do you recover from the perception that you don't know what you're doing?" The decisions made by Son and SoftBank seemed, to some, indicative of overconfidence and arrogance.

Son's past successes, particularly his emergence from the dot-com bubble with a few major wins like Alibaba, might have played a role in clouding his judgment. Damodaran notes, "Before WeWork's debacle, the perception was that SoftBank was an incredibly prudent, astute, and visionary organization under Son's leadership." However, prolonged success can sometimes lead to hubris. The belief that they held a unique insight into the market and a penchant for outbidding rivals may have sown the seeds of their eventual downfall.

Masayoshi Son established SoftBank's Vision Fund in 2017 with the ambition of becoming the world's largest technology investor. He went on to inject over $140 billion into numerous startups. However, his proclivity for inflating valuations and offering founders more funding than they initially sought drew criticism from Silicon Valley peers. These actions, though well-intentioned, may have inadvertently contributed to SoftBank's recent challenges.

Masayoshi Son's decision-making process often leaned on gut instinct, with him attributing his choices to moments where he saw the spark of potential in a founder's eyes, likening it to the mystical Force from the Star Wars universe. However, this unwavering trust in his own intuition might have made Son resistant to acknowledging red flags, disagreements from his advisers, and even concerns raised by WeWork's co-founder, Adam Neumann, as revealed by former officials from both SoftBank and WeWork.

"I fell in love with WeWork," Son candidly confessed to shareholders in June, acknowledging that some members of his board cautioned him about his unwavering faith in the company. Son had been a driving force behind encouraging Neumann to dream bigger and be more ambitious. He went on to admit, "I may be more at fault than Adam, for telling him to be more aggressive."

Even when WeWork's planned initial public offering (IPO) had to be pulled in 2019, SoftBank stepped in with a substantial $9.5 billion rescue package. Son passionately defended this move and presented a "hypothetical" path to profitability for WeWork, determined to make the case for the beleaguered company's turnaround.

The impact of Son's infatuation with WeWork and other startups was amplified by the initial $60 billion investment commitment from Saudi and Abu Dhabi wealth funds to the first Vision Fund. Son's unwavering resolve to rapidly create unicorns by pushing startups to scale up led to inflated valuations worldwide. In the process, rivals such as Tiger Global Management and Sequoia Capital were pressured to match the Vision Fund's substantial investments. However, within a few short years, these lofty valuations came crashing down as the substantial investments failed to translate into substantial sales, profits, and successful IPOs.

Kirk Boodry, an analyst at Astris Advisory, succinctly summarizes the situation, noting, "It is not just the investment losses that are important, but the story behind it. The massive cash infusion drove the artificial high valuation and hubris that preceded the eventual crash."

While SoftBank's Vision Fund segment is projected to have recorded a profit in the September quarter, it's important to note that its overall performance remains lackluster. SoftBank has incurred substantial losses on investments in companies like the Chinese ride-hailing platform, Didi Global Inc. Furthermore, Katerra Inc., OneWeb Ltd., and Zume Pizza Inc. have either filed for bankruptcy or ceased operations, adding to the mounting losses.

The cumulative financial setbacks prompted Masayoshi Son to significantly curtail investment activity in the past year. He took measures such as reducing Vision Fund staff, implementing more rigorous due diligence processes, and stepping back from leading earnings calls. However, this restraint, coupled with the successful $4.9 billion Nasdaq IPO of chip designer unit Arm Holdings Plc in September, has now provided the early proponent of artificial intelligence with the financial means to reinvigorate its investment efforts.

"The bankruptcies serve as a limit on the downside for Vision Fund 1 and Vision Fund 2," remarked Kirk Boodry of Astris Advisory. He emphasized that the focus has now shifted to Son's next investment choices, with reduced concerns about previous portfolio losses.

On the other hand, Aswath Damodaran of NYU remains skeptical about any substantial change in Son's investment style. SoftBank is often characterized as applying a venture capitalist's approach to late-stage investing. However, traditional venture capital involves smaller, more diversified investments. The Vision Fund, as Damodaran puts it, was "SoftBank on steroids," significantly larger and riskier in its scope.

"By having tens of billions, even hundreds of billions of dollars at your disposal, every overreach becomes magnified," Damodaran noted. He suggests that this approach might explain the occurrence of colossal mistakes like the WeWork debacle. The sheer scale of investments and risk-taking led to the challenges SoftBank has faced.

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