Vision Fund will struggle to shrug off WeWork flop

[LONDON] Technology investors get it wrong all the time. Venture capital stalwart Marc Andreessen, for example, reckons funds write off half their deals, but can make up for the flops with a few big hits. Will SoftBank Group's US$100 billion Vision Fund similarly glide elegantly past the failed listing of WeWork parent The We Company? Probably not.

SoftBank chief executive Masayoshi Son has invested or committed 85 per cent of the fund's cash to more than 80 companies, he said in August. Just US$2 billion of that went into the office sublessor, according to Bernstein analysts. Even if WeWork goes bust, that would wipe out just 2 per cent of the fund.

The problem is that WeWork was emblematic of Mr Son's investment thesis. This assumed the Vision Fund could anoint industry winners by funnelling copious amounts of capital to talented founders. Including investments from Vision Fund parent SoftBank, Mr Son handed almost US$11 billion to WeWork and its co-founder Adam Neumann, who last month stepped down as the startup's chief executive. Mr Neumann wasted that money on profitless growth, and the company's equity is now probably worth less than the total amount Mr Son put in.

The WeWork debacle also raises doubts over the Vision Fund's punchy portfolio valuations. SoftBank's investment in the company earlier this year valued it at US$47 billion, or 25 times last year's revenue, excluding net cash. Months later, public investors turned their noses up at WeWork's initial public offering at a cut-price US$10 billion. The Vision Fund didn't participate in the last round. But backers like Saudi Arabia might nonetheless question the fund's other valuations, which are largely based on SoftBank's own estimates.

Finally, the episode will make prospective investors wary of future IPOs by Vision Fund-backed companies. Mr Son needs these to crystallise returns and repay his Saudi and Emirati sponsors. Of the six Vision Fund companies which are listed, five have lost value in the past three months. Shares in Uber Technologies and Slack Technologies, two of the fund's most high-profile companies, have dropped about 29 per cent and 35 per cent respectively since going public. Investors burned by that experience might demand a big discount to buy into Mr Son's other money-losing mega-startups, or avoid them altogether. The Vision Fund's biggest risk is that WeWork is not a one-off, but the start of a trend.

CONTEXT NEWS

SoftBank Group is struggling to raise money for its Vision Fund 2, Reuters reported on Oct 4 citing two people familiar with the situation.

Some of Mr Son's top lieutenants have urged a delay, and the fund is likely to be far smaller than the US$108 billion SoftBank said it had lined up through memoranda of understanding.

WeWork parent The We Company on Sept 30 filed to withdraw its initial public offering, a week after the SoftBank-backed office-sharing startup ousted founder Mr Neumann as CEO.

SoftBank shares fell 24 per cent in the six months up to Oct 4.

REUTERS