WeWork and Uber are giving SoftBank a black eye, but that doesn't mean Vision Fund II is in trouble, experts say (UBER)

masayoshi son

  • SoftBank
    has taken a financial and public relations hit recently from its
    investments in WeWork and
    Uber.
  • Uber’s stock price has dropped markedly since its initial public
    offering
    and WeWork is struggling to line up investors in its
    public offering, even at a valuation that’s less than half what
    SoftBank placed on it in January.
  • Even with these setbacks, SoftBank’s still likely to find
    investors in the successor to its $100 billion Vision
    Fund
    , venture industry experts said.
  • The main reason for that: there’s plenty of capital floating
    around that needs to find a home, they said.

  • Read all of Business Insider’s WeWork coverage here
    .

Uber and WeWork’s well-publicized struggles with public
investors may not be a good look for SoftBank, their deep-pocketed
backer. But for now, the fallout of those disappointments is likely
to be limited, venture capital experts say.

Investors far and wide still have plenty of capital floating
around and are constantly looking for ways to invest it, venture
industry experts told Business Insider. Venture funds in general
still offer an attractive investment, particularly in a time of low
and decreasing interest rates. And for investors sitting on massive
amounts of money, few institutions have the scale to deploy as much
capital as SoftBank has shown with its $100 billion Vision Fund,
the experts said.

At its base, investing is a supply-and-demand game, and right
now, there’s a lot of supply in terms of capital, said Dan Malven,
a managing director at 4490 Ventures.

“These entities that have so much capital to put somewhere, what
are their alternatives?” Malven said. “At that scale, capital is a
commodity. It flows to wherever investor returns are.”

SoftBank’s taken a hit recently on some of its own investments.
Last week, CNBC reported that the Japanese conglomerate’s stake in
Uber
was worth $600 million less than what the company had paid for
it
thanks to
the big drop in the ride-hailing firm’s shares
since its
initial public offering in May. Uber’s stock closed at $32.24 on
Monday, down 28% from its $45 IPO price.

Meanwhile, WeWork is considering taking a massive haircut to its
valuation in an effort to go public. Facing pushback from potential
public investors over its huge losses and questionable governance,
the company is considering accepting a market capitalization of
between $15 billion $20 billion in an initial public offering —
assuming it goes public at all, according
to The Financial Times
. In its last private funding round — a
$4 billion investment by SoftBank in January — the coworking
giant was valued at $47 billion.

Read this:
WeWork’s biggest outside shareholder, SoftBank, is reportedly
asking for the IPO to be put on hold because investors don’t seem
interested

WeWork and Uber may show problems with SoftBank’s strategy

Until recently, SoftBank had a lot to crow about with its Vision
Fund. As of the end of June, SoftBank’s Vision and much smaller
Delta funds
had seen combined unrealized gains of $16 billion on its
investments
, including a $3.8 billion gain in the second
quarter alone.

But that second quarter gain included a $1.8 billion investment
loss that was due in part to the decline of its stake in Uber. The
conglomerate could show a much worse return on its investments in
its third quarter report, given that Uber’s stock plunged last
month after it reported its earnings and WeWork’s re-evaluation has
only happened in recent days. The combination of those two drops
could wipe out a significant portion of SoftBank’s total gains.

SoftBank’s investment thesis has been based on the assumption
that technology is often a winner-take-all or winner-take-most
industry. Its strategy has been to invest huge sums of money in
mature startups that appear to be the leaders in their respective
fields with the idea of helping them cement their dominance without
seeming to worry much about those companies’ near-term losses or
economics.

That strategy isn’t all that different than what the venture
industry in general adopted in the dot-com boom 20 years ago, said
Greg Bohlen, a cofounder of Union Grove Venture Partners.

“The problem is, it just never works,” Bohlen said.

When you have so much money flowing into companies, it’s often
not used efficiently, he said. And the startups’ financial results
often can’t really justify the valuations that have been assigned
to them, thanks to all the money that’s been invested in them. That
disconnect between valuations and financials can be obscured when
companies are private — but not when their results are made
public through the IPO process.

With WeWork and Uber, the “chickens are starting to come home to
roost” for SoftBank’s investment strategy, Bohlen said. When public
investors see the disconnect between the financial results and
valuation, he continued, “the needle comes off the record.”

SoftBank is trying to raise a second Vision Fund

Uber’s poor showing as a public company to date and WeWork’s
struggles to even go public are a black eye for SoftBank, venture
experts said. And they come at a not particularly ideal time for
the company. SoftBank
is raising capital for a second Vision Fund
, this one planned
to be even larger than the first.

SoftBank’s paper losses on Uber and prospective losses on WeWork
could make it more difficult for it to raise money for the new
Vision Fund, venture experts say. Potential investors in the fund
might look for other types of investments or they could demand
better terms from SoftBank, such as lower management fees.

“Those are the types of knobs that get turned,” said Robert
Siegel, a lecturer in management at Stanford Graduate School of
Business. He continued: “He may have to put sweeteners in place to
get the deal closed.”

But it would be a mistake to think that even with the Uber and
WeWork setbacks that the second Vision Fund is now likely in
jeopardy, Siegel and other venture experts said.

For one thing, it’s hard to know right now just how much of a
hit it may have taken on WeWork, if any at all. Venture investors,
particularly late-stage ones, tend to put all kinds of conditions
on their investments that limit their downside if the company’s
valuation falls. They tend to get paid out first in a sale or can
get handed out additional shares in a public offering when they
convert their pre-IPO stock to common shares. Often it’s hard to
say how well a venture investment has actually performed until an
IPO or acquisition.

“I’m not sure that they’re taking a haircut,” said Phil Libin,
cofounder and CEO of technology incubator All Turtles and a former
investor with venture firm General Catalyst.

Investors are likely to stick with SoftBank

Even if its stake in WeWork has dropped in value, that may not
be as harmful for SoftBank as one might think. SoftBank CEO
Masayoshi Son invests for the long term and likely isn’t shaken by
near-term setbacks, Siegel said. The question is going to be
whether his limited partners, or LPs, in the Vision Fund have a
similar perspective.

“It depends on the LPs,” he said. But, he added, “betting
against Masa historically has been a bad idea.”

But there’s reason to think that investors will stick with Son
and the Vision Fund. There’s just a lot of excess capital floating
around looking for a home, the venture investors said. With
interest rates falling, the Vision Fund doesn’t have to offer
super-high returns to be an attractive investment, they said.

“I actually don’t think, even with all the issues that SoftBank
is having with WeWork, that they will have a problem raising their
second Vision Fund for 100 billion,” said Jai Das, president and
managing director of Sapphire Ventures.

Got a tip about SoftBank, WeWork, or Uber?
Contact this reporter via email at twolverton@businessinsider.com,
message him on Twitter @troywolv, or send him a secure
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.

SEE ALSO: WeWork
wants investors to think of it as a tech company. These 5 slides
illustrate how its numbers tell a different story.


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WeWork and Uber are giving SoftBank a black eye, but that doesn't mean Vision Fund II is in trouble, experts say (UBER)