Credibility of SoftBank called into question

SoftBank has been known for being a big money player. Their investment fund, the Vision Fund, worth of $100 billion is made of mostly money from the Middle Eastern governments. They have poured money into startups around the world, including big names such as ByteDance, WeWork, Uber, Slack, Flipkart and Brandless, as well as established companies such as Sprint in the US.

By all means, being able to the tune of $100 billion is a massive undertaking. It shows the trust of investors in Son, the founder and CEO of SoftBank, and his team. However, three years after the money was raised, there have been concerning signs of SoftBank’s investment strategy and execution.

SoftBank’s most infamous flop is WeWork. After pouring $9 billion into the startup, the Japanese firm had to see WeWork’s IPO scrapped, its CEO and founder ousted and to plan another $10 billion bailout at a valuation that is significantly lower than what Son and his team expected (per WSJ). It’s mind-blowing that billions of dollars were invested with what seemed to be insufficient scrutiny and due diligence

SoftBank executives were alarmed by what they found looking deeper into the company’s financials, people familiar with the matter said.

Source: WSJ

In addition to WeWork, other high profile investments such as Uber and Slack haven’t met expectation either. Uber had to scale back its valudation upon going public and since being on the stock market, neither Uber nor Slack has been trading above its initial price

Source: Financial Times

Six years ago, SoftBank bought a controlling stake in Sprint. This paragraph below from CNBC summarized how the move is six years later

SoftBank successfully engineered a sale of Sprint for $6.62 per share to T-Mobile in 2018. (State attorneys general are in court attempting to quash the deal on grounds that it will unacceptably decrease competition.) But SoftBank acquired its majority stake in Sprint for $7.65 a share in 2013. When SoftBank bought Sprint, it was the third-largest U.S. wireless carrier by subscribers. When SoftBank sold, Sprint was a distant fourth behind VerizonAT&T and T-Mobile.

But Sprint’s annual revenue has shrunk since SoftBank took over, from $35.3 billion in 2012 to $33.6 billion in the latest fiscal year. Recently, subscriber numbers have been dropping, and the company recorded a $1.9 billion loss last year. Still, Claure made over $40 million in compensation from 2015 through 2017, primarily because of stock awards that resulted from keeping the shares above $8 per share, which was only marginally higher than the price SoftBank paid in 2013.

Sprint even acknowledged in April it didn’t have a sustainable path forward in a filing to the Federal Communications Commission, asking for the regulator to approve its sale.

“Sprint is in a very difficult situation that is only getting worse,” the company said in the letter. “Sprint is losing customers — which then reduces revenues and cash flow — further limiting its ability to invest in its network and service its debt. Simply put, Sprint is not on a sustainable competitive path.”

Source: CNBC

Furthermore, troubles have surfaced at other startups that SoftBank invested in. Fair, an online car-leasing startup, announced that it would lay off 40% of its workforce this week. Wag, an on-demand dog walking firm, laid off more than 50 employees this year already. Brandless saw declining revenue by 54% compared to the same period last year and planned to cut marketing budget.

On the other side of all the problems that hit SoftBank lately, the Japanese firm does have success in the form of its investments in Alibaba and Flipkart. Plus, its capital allowed ideas and founders to come into life. Nonetheless, the struggles at companies listed above do call into question its hype, strategy, execution and credibility. When you want to raise an unprecedented amount of money and invest in an unprecedented fashion, you are put under unprecedented scrutiny and expectations.

Weekly readings – 5th October 2019

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Retailer Adoption of Apple Pay Quickens. Since I was able to use Apple Pay on my phone, I have been using it as the first payment method, even in a city as small as Omaha. I have been a pretty happy user ever since.

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Dog-walking startup Wag raised $300 million to unleash growth. Then things got messy. SoftBank doesn’t seem to be the Midas that some hyped it to be with its massive checkbook, does it?

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Importance of governance/checks and balance

Business schools should use WeWork as a useful case study for multiple reasons. Once revered and valued at $120 billion, the startup pulled the plug on its own IPO after backlash from the market knocked its monstrous valuation down to around $15 billion. Today, its CEO resigned from his position while still remaining as the non-executive chairman.

There are several reasons that can contribute to the spectacular fall of WeWork. One of them is the severe lack of governance. The CEO controlled too much power, including leasing his buildings back to the company, charging the company $6 million for the trademark of WE brand, giving his wife power and buying companies that don’t seem to align with WeWork’s business. You can read more about WeWork in its tremendous take-down.

If there were proper checks and balance of his power, the litany of scandals and problems that contributed to the incredible stumble of the startup wouldn’t have existed. Only after its attempt to go public did the market, analysts and investors put pressure on the company and did things start to change.

The WeWork saga is very much similar to the story about Uber that I read in Super Pumped: The Battle for Uber. Uber’s founder and former CEO was ousted because of his abuse of power and behavior detrimental to the health of the company. Kalanick was removed because the Board and investors decided to put check and balance into Uber after years of keeping blind eyes.

I am actually glad to see this kind of developments take place. It means that the market and investors are doing their job to keep the founders and CEOs in check. As I grow up, I tend to believe that humans are prone to being power drunk and greed. We cannot be trusted with power without governance and checks and balance. That’s why the three-branched government was designed the way it is now. The sad thing is; however, that when you look at what is happening in politics, I really doubt the checks and balance is properly working as it should.

Weekly readings – 24th August 2019

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Starbucks, monetary superpower. Let me give you a notable quote to get an idea of what this article is about

Starbucks has around $1.6 billion in stored value card liabilities outstanding. This represents the sum of all physical gift cards held in customer’s wallets as well as the digital value of electronic balances held in the Starbucks Mobile App.* It amounts to ~6% of all of the company’s liabilities. 

This is a pretty incredible number. Stored value card liabilities are the money that you, oh loyal Starbucks customer, use to buy coffee. What you might not realize is that these balances  simultaneously function as a loan to Starbucks. Starbucks doesn’t pay any interest on balances held in the Starbucks app or gift cards. You, the loyal customer, are providing the company with free debt. 

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