SoftBank’s Hard Landing Among The Tech Unicorns

Rise by the tech unicorn, sink by the tech unicorn.

The decision by the We Company – the parent firm of office-sharing company WeWork – to shelve the WeWork IPO has led to a bit of boardroom drama. As noted, to begin the week, there are ongoing talks about the future role of Adam Neumann, CEO.

Amid the drama, as reported by the Financial Times and other sites, SoftBank is looking to spur an ouster of Neumann. Beyond the mechanics of how such a move might play out – SoftBank has two board seats, while Neumann has a significant level of power in the form of voting rights – the dispute speaks volumes about where SoftBank’s bets on Big Tech have landed. SoftBank, renowned for early-stage investments in the billions of dollars into marquee names such as Uber and WeWork, has been feeling a pinch.

The pinch comes less as a matter of the fact that the IPO has been delayed than the fact that WeWork’s valuation has been so often, and so drastically, slashed.

Recall that when WeWork was moving ever close to an IPO, the valuation implied in earlier funding rounds stood at $47 billion. Cut and cut again, and the valuation being assigned to the private form was $15 billion, as reported earlier in the month. Part of that cut may be personality-specific, as Neumann had been cited in the press for erratic behaviors. Some of it is company-specific, as analysts and other observers questioned how a business model predicated on long-term liabilities (long-term leases) and short-term, perhaps volatile top line (via tenants’ shorter leases) would play out in a recession.

For SoftBank, the fact that WeWork has taken a haircut of more than 70 percent means write-downs for SoftBank and its Vision Fund (paper losses, to be sure, unless stakes were sold).

But it also speaks to an investment philosophy facing a continued test. As has been noted before, SoftBank/Vision has taken stakes in companies such as WeWork, Uber and Slack that have top-line momentum, but float on seas of red ink.

For SoftBank’s $97 billion Vision Fund – and where the second Vision Fund has more than $100 billion in commitments – write-downs might hurt the ability to attract confidence or capital. It’s more art than science to figure out what the write-downs might be, but they are likely to reach the billions of dollars.

In one example, SoftBank invested $2 billion in January in WeWork, when the company was valued at $47 billion. Shave that down by, say, 60 percent, and just that slug of equity alone gets whittled down by $800 million. It might not be far-fetched to say that earlier rounds get cut by hundreds of millions of dollars, too.

Private company valuations are mirrored by what’s been happening in the public markets. For many investment vehicles, IPOs exist as an exit strategy. But where the company has had a double-digit percentage stake in Uber, and Uber shares are down roughly 25 percent since the IPO, again write-downs loom – at least if trends continue. As reported earlier in the year, SoftBank bought stakes at a bit more than $33 and $48, and the stock closed at $33 on Monday (Sept 23).

In the past, unicorns took flight and saw a trajectory that seemed only upward. Now, headwinds abound – and for those along for the ride, the turbulence is bumpy indeed.