OYO: From Oyo to WeWork, Son’s growth at any cost strategy cost him $17 billion


By Tim Culpan

For a man with a 100-year vision, Masayoshi Son sure seems impatient.

We already know that the SoftBank Group Corp. chairman wasn’t content letting Adam Neumann be slightly crazy in his plan to upend the short-term office rental market; indeed he encouraged the founder of The We Co. to be even crazier.

And when a young Ritesh Agarwal was building out Oyo Hotels & Homes as a purveyor of standardized, quality accommodation in India, it was Son who told him to dream bigger: Challenge the world’s largest hoteliers, he urged. SoftBank’s Vision Fund initially put around $250 million into Oyo, and later led a further $1 billion funding round that pushed its valuation to $5 billion, Bloomberg News reported.

With Agarwal, the SoftBank founder even went a step further. He backed a $2 billion loan to let the 25-year old buy back shares in Oyo, driving the value to $10 billion — with the added effect of boosting the Vision Fund’s paper profits. Son probably preferred that the stake, bought from earlier backers, land in the hands of the Indian entrepreneur than a rival investor.

But now those huge bets are starting to unravel. SoftBank late Monday said it expects to record an investment loss of 1.8 trillion yen at the Vision Fund for the year ended March 31. That translates to about $16.6 billion, and takes a sizable chunk out of the $100 billion fund. The company will take a further 800 billion yen loss on investments outside the fund, including writedowns on WeWork and WorldVu Satellites Ltd., better known as OneWeb.

Oyo is just one victim of this SoftBank-fueled roller-coaster, which accelerated when the Covid-19 pandemic started to spread. The Indian startup has furloughed staff in a bid to save cash, and founder Agarwal’s shares could be in jeopardy if he faces margin calls.

Son’s insistence that startups grow faster than their founders planned, and strong-arm them into taking more money than they might have wanted, has turned into a burden. And that’s become a huge liability to investors in the Vision Fund and SoftBank, too.

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By throwing cash around, dozens of startups became addicted to spending instead of building fiscal discipline into their business models. For years, it seemed like a sound strategy. By having more money than rivals, SoftBank-backed companies could win market share by offering bigger incentives, taking out more ads and luring the best talent.

Today, SoftBank has a major stake in sector leaders like Uber Technologies Inc., WeWork, Grab Holdings Inc. and Oyo. But climbing to number one doesn’t mean being profitable.

It’s easy to blame the venture capital model itself. The whole point of this founding pile of cash is to tide a business over until it finds a working model that’s sustainable. And in starting the Vision Fund with a $100 billion endowment, Son wanted to be the Godfather of venture capitalists.

But a good VC shouldn’t just be a loud cheerleader for its portfolio companies; it’s also the wise old voice of reason when founders’ success gets to their head. Savvy VCs can advise when to pivot, when to kill products and when to sell out to a rival.

Instead, the Vision Fund acts more like the loud soccer mom, intent on letting the world know that her kid is best on field and screaming at the coach when the child gets benched.

Just as Son has been the enabler of fiscally dubious business models, investors in SoftBank and the Vision Fund have been enablers of the founder’s recklessness. For over a decade, Son has been dining out on his winning bet on Alibaba Group Holding Ltd., with few detractors brave enough to poke a stick at the pile of debt he’s built up along the way to buy telcos and internet companies.

It’s perhaps no surprise that after Moody’s Corp. last month downgraded SoftBank’s debt, noting that a sale of assets right now would be challenging, SoftBank threw a tantrum and fired the credit ratings provider.

Son’s lack of contrition to investors for the WeWork debacle indicates that his brash, impatient style can’t be unwound. That bold, fearless vision is at the core of his identity and the foundation of his success. He is who he is, and that’s unlikely to change.

But investors in SoftBank and the Vision Fund can change. They just have to realize that Son’s impatience is not a virtue.


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