Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
However many billions of other people’s money your outfit burns, just make sure you walk away a billionaire.
SoftBank – the Japanese conglomerate that is the late-stage investor superstar behind imploded WeWork, bleeding Uber, and others – is planning to take a $5 billion to $7 billion write-down of its investments in these startups, sources told Bloomberg.
From the last round of funding in January this year, when SoftBank invested $2 billion in WeWork, until it imploded, WeWork was “valued” – by SoftBank in a deal decided behind closed doors – at $47 billion. This act inflated the price of all the shares that SoftBank and SoftBank’s Vision fund had acquired in prior rounds to the same level, creating instant paper profits for SoftBank and the Vision Fund.
Between the two, they have fed over $10 billion into this monster with the plan of selling it to the public at an even higher valuation.
Now SoftBank, as part of its throw-good-money-after-bad rescue effort, is buying $3 billion of the shares at a price that values WeWork at $8 billion, a smackdown of 83% from the last valuation – just months after wanting to sell this fiasco to the stupid public in a rip-off IPO for over $47 billion.
The sources told Bloomberg that the amount of the write-down has not been finalized yet and could change. SoftBank plans to announce the write-down on November 6 along with its quarterly earnings, according to the sources.
The primary factors in the write-down are SoftBank’s and the Vision Fund’s holdings of WeWork, of which SoftBank will own 80% after the bailout, and Uber, of which SoftBank owns 13%.
The rotten performance of the ride-share giants Uber and Lyft in the stock market – Uber is down about 25% from its already sharply lowered IPO price and Lyft is down 39% from its IPO price – “has influenced the way SoftBank is thinking about valuing its investments in the sector, the people said,” according to Bloomberg.
The value of SoftBank’s investment in Uber has plunged by about $3.5 billion between June 30 and September 30, according to Bloomberg. The Vision Fund’s investment in the rideshare sector, beyond Uber, include Didi Chuxing and Grab Holdings. Their paper valuations are now being reassessed as well.
SoftBank’s exit strategy with WeWork is to feed some more billions to this monster in the hope of putting some meat on it to allow it to hobble to the nearest IPO window. If the public isn’t stupid enough to go for this program, SoftBank will become the end user of its WeWork shares.
In terms of real estate investments, in addition to WeWork, SoftBank’s Vision Fund is also a big late-stage investor behind real estate brokerage Compass, whose unique business model is to buy other brokerages; and behind real estate non-brokerage Opendoor whose business model is to flip homes. Everyone is doing that now, including Zillow.
While SoftBank is engaged in some navel-gazing to figure out what happened to its billions, WeWork is laying off up to 4,000 of its 15,000 employees, and founder Adam Neumann, after blowing up the company, or rather after blowing up investors’ illusions and hype about the company, is walking away a billionaire.
This will teach all current and future startup founders a valuable lesson that will be taught over and over again in endless case studies in the best business schools around the world: Whatever the heck happens, and however many billions of dollars of other people’s money your outfit burns, just make sure you personally walk away a billionaire.
That’s the exit strategy. Create a cash-burn monster with zero chance of making it, blow it up at an opportune moment after you conspire to give it the maximum possible unicorn “valuation,” and walk away a billionaire, while others get to sort through the debris.
Neumann showed the world how to do it, how to leverage the CEO of a Japanese conglomerate who was blinded by reckless greed and a sense of infallibility after two enormously successful investments – Yahoo Japan and Alibaba – and who, based on this record, was trusted by equally blinded Saudi pension fund managers, and other investors. It’s not easy to pull this off so flawlessly.