SoftBank Group Corp
The long-term strategy of dumping mountains of cash on promising young companies to create big winners failed dramatically at WeWork, showing cracks in a number of its other investments.
SoftBanks nearly $ 100 billion vision fund gave companies like the dog-running app Wag and indoor farms a lot more money than they wanted, but the investments failed to ignite growth. After a significant effort at the online car hire fair, the company struggles to stay afloat. Wag is for sale, says people with knowledge of the companies.
Dozens of other companies, such as Chinese ride-hailing giant Didi Chuxing and South Korean e-commerce company Coupang, are known in industries for burning cash and with uncertain avenues for profitability. The Wall Street Journal reported that Didi ̵[ads1]1; the Vision Fund's largest $ 11.8 billion investment – was seeking more money this summer, months after a business executive said it was losing money on every ticket it ordered. Coupang, in which Vision Fund has invested $ 2.7 billion, said last year's operating deficit grew faster than revenue.
Failure in WeWork's initial public offering forced SoftBank to fund a $ 9.5 billion rescue to salvage the $ 9 billion investment and helped to sour the market at large and unprofitable startups. It has also drawn attention to SoftBank's investment strategy, which has had great success lately.
SoftBank will be examined on Wednesday when it releases revenue. Analysts estimate SoftBank and Vision Fund will have to take billions of dollars in losses when they highlight the value of many investments. Investors are closely watching the fund's performance – especially because SoftBank is trying to raise funds for a second Vision Fund even larger than the first.
"All funds have investments that perform at different levels," said a SoftBank spokesman. "Vision Fund is barely two years old, and we are confident that our diversified portfolio of 88 companies will deliver strong returns over the long term." Many of Vision Fund's investments have been valued on several occasions, said a person familiar with the fund.
Some of the gains from SoftBank have come from adding bets on companies to higher valuations. In one of the strongest examples, SoftBank and Vision Fund have led more than $ 2 billion in funding rounds to the fast-growing Indian hotel chain Oyo Hotels & Homes since 2015 – pushing the valuation up to $ 10 billion from under $ 1 billion just two years ago and booking paper gains for the fund along the way.
In the latest round, announced in October, the Vision Fund led a $ 800 million investment that increased its stake in Oyo to 48% from 45%. But Chairman of SoftBank,
The company gave an extra boost by supporting a loan to its 25-year-old founder, who used the money to invest $ 2 billion in Oyo, including the acquisition of $ 1.3 billion in equity from venture capital investors including Sequoia Capital and Lightspeed Venture Partners, according to to people who are familiar with the deal. Representatives of Sequoia and Lightspeed declined to comment. Son has since renounced decisions on future investments in Oyo, says a person familiar with the matter.
Oyo, through a spokesman, declined to comment on Mr. Son's loan guarantee. A spokesman for SoftBank said it is common practice for venture capital firms to lead subsequent rounds in winners.
These games can still provide rich pay days if it goes well. Son has been gambling on promising startups for decades – though mostly with smaller check sizes – and has notched at least one spectacular success: an early investment in Chinese e-commerce goliath
Alibaba Group Holding Ltd.
It is now worth more than $ 100 billion.
Vision Fund has also made some successful efforts. It sold the Indian e-commerce company Flipkart to
for a profit of $ 1.5 billion. And at the end of June it said the companies that had gone public in their portfolio – including
Uber Technologies Inc.
and cancer test company
– Had increased in value 2.6 times from the previous year, although some of these stocks have since fallen.
Wag had only sought $ 75 million in funds before the Vision Fund persuaded it to take $ 300 million in January 2018, said one person familiar with the events. Wag staff believed the money would let them dominate the growing pet industry on demand and defeat rival Rover, a dog-sitting app that was also about to go. Rover soon raised more than $ 100 million himself, eroding Wag's collection lead.
Vision Fund's cash was intended to help the company deliver on its ambitions to expand internationally, and to move beyond dog walking into related pet services, including grooming, boarding, food and veterinary care.
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Wag & # 39; s new CEO,
which was installed at about the same time as the Vision Fund investment, failed to achieve those ambitions. Revenue growth has stopped on her watch, credit card data from research firm Second measure shows. Robber's sales are larger and continue to increase.
Now Wag is trying to sell itself, probably at a price well below the $ 650 million valuation of the Vision Fund investment, say people close to the fund. Rover has already been rejected, said a person familiar with the discussions. Recode previously reported that Wag was exploring a sale.
"Wag was a very exciting growth business that created a new category, but when SoftBank came in, they hired a whole team of management that changed the nature of the business," he said
general partner of venture firm Bullpen Capital, an early Wag investor.
Ms. Schneider has focused on improving Wag's customer experience, building a deeper leadership team and improving profits for each dog walk, according to a statement from Wag's board. "The board and the Wag management have full confidence in the company's direction," the statement says.
In 2017, the Vision Fund similarly gave Plenty, which builds indoor farms, double the $ 100 million it had originally sought. Plenty's management realized it could not grow as fast as the fund wanted, according to a person familiar with the company. About a year ago, management decided it would be better to keep staff lean, focus on technology and postpone their international plans, a spokesman for Plenty said.
Vision Fund led an investment of more than $ 380 million in Fair, the car owner, by the end of 2018. At that time, it was seven times more than the next largest round – and more money than many of its competitors had ever collected . The Santa Monica, California-based company spent most of the money in under a year, according to former employees.
Fair buys cars and rents them out to consumers as well as drivers of ride-hailing company Uber, another of the Vision Fund's largest investments. The money for Fair should support Uber by getting the company more drivers, people close to Fair say.
With the money, Fair added new cars, hired more sales people and offered campaigns that attracted new customers, but made car rental deals unprofitable, former employees say. The company often ended up underwater on cars it rented because they so steeply weakened in value that Fair had to sell them at auction for a discount.
Fair also struggles with logistics. Some cars were shipped in the wrong condition, stolen from the ticket or put for months on a dealership lot or in the driveway of customers who had stopped paying, according to former employees. Fair declined to comment.
Then the Fair founder and former CEO
approached SoftBank a few weeks ago about another round of funding, and responded by sending a team of accountants to Fair Headquarters for a joint review of the economy, according to former employees.
Mr. Painter resigned as CEO last week after the company laid off 40% of the workforce, according to statements by the company and people familiar with the matter, with Fair's board of directors temporarily installing a Vision Fund partner in his place.
Fair has moved to cut costs, including scraping plans for a promotional contract in October, said a person with knowledge of the case. SoftBank also gave Fair another $ 25 million so the company could pay the bills, say people familiar with the matter. Mr. Painter, who is still chairman of the Fair, is pursuing additional funding for the company, the people said.
—Yuliya Chernova and Julie Steinberg contributed to this article.
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