I have a soft spot for Softbank Group (SFTBY) founder Masayoshi Son. The Korean-Japanese entrepreneur is one of the most dynamic, and charismatic, forces in Japanese business. Monolithic Japan Inc., as mainstream corporate Japan is known, is not known for its innovation or free spirit. Son has both in abundance.
But charisma, as we have discovered with the downfall of WeWork co-founder and CEO Adam Neumann, can't cover up for a flawed business model. Is Son persistently mistaking his trust in character over profit potential, blinkered to see beyond a belief in his own investment nous to the possibility that he may have made some disastrous moves?
Softbank on Wednesday reported its first quarterly loss in 14 years, thanks mainly to a ¥970 billion ($8.9 billion) splash of red ink from its enormous Vision Fund. Writedowns on its investments in WeWork and Uber were largely to blame. Softbank itself swung to an operating loss of ¥704 billion ($6.5 billion) from a ¥706 billion profit in the September quarter last year.
Softbank's shares nevertheless gained 0.4% on Wednesday's trading in Tokyo. The stock is still up 10.9% this year, not far off the 13.4% increase for the broad-market Topix index in Japan.
Which version of the Vision Fund is true? Does it have vision, as the name is surely intended to imply? Or does it invest based on the vision of the early-stage companies and entrepreneurs that it backs? Or is the fund seeing visions, flickerings of realities that may or may not even exist?
In the case of WeWork, Son was not alone in buying into the vision of Neumann only to see it vanish into mist. WeWork sold itself as far more than just a reseller of office space, as much of a tech nexus of vibrant e-ideas than a real-estate play.
That vision evaporated after folks gave a close read to its pre-public-offering prospectus. The document raised as many questions is it answered about WeWork's business model, and its potential to turn a profit for anybody other than Neumann. Maybe it was just a new spin on a model put into action in 1989 by serviced-office specialist Regus, now re-branded as IWG (IWGFF) .
As of October 22, Softbank is bailing WeWork out to the tune of $9.5 billion. Skeptics of the "WeWork model" say that's throwing good money after bad. The Manhattan-based shared-office-space operator has collapsed from a valuation north of $47 billion to a fair value pegged at $7.8 billion in Softbank's latest filing.
Here in Hong Kong, we call it "blowing water" when people are talking something up. It sure looks like Neumann had been blowing a typhoon spout's worth of stormy water in describing the prospects WeWork, which is reportedly granting him a golden handshake of around $1 billion.
Still, we must bear in mind that the Vision Fund is not based on the premise of every one of its investments working out. It only has to find a handful of "unicorns," the fabled startups that grow into $1 billion businesses, for it to make a success.
The $98.6 billion Vision Fund, backed by Saudi Arabian money as well as Goldman Sachs (GS) , has now invested $70.7 billion, with holdings in 92 companies as of the end of October. Those positions are now worth $77.6 billion, including 11 exits, its latest numbers show, meaning it is still holding its own with a 6.9% gain.
The fund likely requires stock-market listings to achieve those exits. The open-market performance of its protégées has not recently been encouraging. Uber (UBER) , Slack Technologies (WORK) and Guardant Health (GH) all lost market value in the last quarter for Softbank. However, a hefty gain from sales of Guardant shares contributed to its increase in asset value.
Softbank in July said it had raised $108 billion for its Vision Fund II. It counts Apple (AAPL) , Microsoft (MSFT) , the Apple supplier Foxconn (FXCNY) , the Kazakhstan sovereign wealth fund and a who's who of Japanese financial institutions, including New York-listed Mizuho Financial Group (MFG) and Sumitomo Mitsui Financial Group (SMFG) , among its investors. The fund is now in the final stages of preparing to launch, Softbank says.
Softbank also listed its Japanese telecom operations in the similarly named Softbank Corp. T:9434. That "boring" mobile-phone business, staid compared with its sexy Internet-enabled holdings, posted a 9% increase in operating profit for the second quarter, better than analysts expected.
The Vision Fund still holds major stakes in promising companies such as the hotel operator Oyo, which revolutionized India's business-hotel sector by branding smaller hotels. Ping An HealthKonnect has the backing of one of China's largest insurers behind its efforts to create a managed-care online clinic. Chinese ride-hailing app Didi will surely yield it a hefty profit.
Son may have miscalculated with WeWork. We will have to see how he attempts to turn that around. Meanwhile Vision Fund investors will surely be turning elsewhere in the portfolio to look for future gains.
