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The WeWork Saga: Is this the end of SoftBank's Vision Fund 2?

By Finserv MARKETS - Dec 18,2019
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The WeWork Saga: Is this the end of SoftBank's Vision Fund 2

In 2018, Indian start-ups raised a whopping $13.88 billion in funding. Out of that, the bulk of it, $12.68 billion, came from equity financing, i.e financing raised from investors in exchange for a share of the profits. Debt financing, money borrowed from a lender, also reached $1.14 billion. With investment options by the dozen, Indian start-ups garnered a total of 864 financing deals and as equity funding retained its popularity, debt financing also grew by a large share. For instance, now start-ups can gain a foothold in the market with loans from sites like Finserv MARKETS. In fact, on Finserv MARKETS, business loans specifically designed for smart-ups are handily available. With such a plethora of options shaping up nicely, the future is bright for the Indian start-up space. But, we should make sure we learn from past mistakes and follow a strict set of don’ts. One such example is the SoftBank saga. What can India learn from the SoftBank saga? Let’s find out.

It was reported that SoftBank dealt with one-tenth of all VC dollar volume up until October in 2019. Earlier this year in July, Masayoshi Son, the CEO of SoftBank and serial technology investor, announced that he would be launching a second Vision Fund following the success of the first one. With Apple and Microsoft on board from the get-go, Son’s plan was to raise a total of $108 billion, with SoftBank itself pledging $38 billion.

The first Vision Fund

In June, it was reported that the first Vision Fund earned 62% returns on their investments in a total of 71 ventures, with some companies like Uber and Slack and WeWork slated to do well. Supported by investors such as Apple, Foxconn Technology, Goldman Sachs and the sovereign wealth funds of a few countries, the Vision Fund was doing great.

The WeWork saga

Expected to be one of the most successful IPOs of this year, ironically, it was the filing of papers for the IPO that spelt doom for WeWork. Before filing, the company’s valuation stood at around $47 billion. After the filing of documents, it was revealed that WeWork and CEO Adam Neumann had massive debts, which eroded investor confidence and caused everyone to question the initial $47 billion valuation.

SoftBank, through its investments, owned about 30% of the company. After the papers were filed and the public was made aware of WeWork’s financial standings, the valuation plummeted.

With a total amount of over $13 billion invested in WeWork, the $47 billion valuation looked great to investors and the public. After the filing, however, the valuation dropped to $8 billion, about one sixth of the initial projection. This valuation was arrived at after its largest shareholder, SoftBank, bailed it out by taking over, offering around $10 billion. It is noteworthy that this was SoftBank, the group, and not the Vision Fund that bailed WeWork out. In total, SoftBank invested an amount of around $18.5 billion dollars in WeWork.

The CEO, Adam Neumann was asked to step down and offered an exit-package of $1.7 billion dollars. $970 million for his WeWork shares, a $185 million consulting fee, and around $500 million in credit to repay the loans he took out.

Vision Fund 2

The first Vision Fund’s success prompted SoftBank to launch a second. Even before the WeWork debacle, however, the second Vision Fund was not even early as popular as its predecessor. With Saudi Arabia’s Public Investment Fund and the Canada Pension Plan, which invested heavily in the first Fund, reluctant to invest in the second, things weren’t looking great for Vision Fund 2 from the start.

That being said, SoftBank recently announced that it would be looking to expand its portfolio with Vision Fund 2, up from 86 through the first one to around a hundred through the second, bringing the total number of companies throughout the funds to about 200.

So far, the only confirmed investor in the second Vision Fund is SoftBank itself. Reports indicate that Saudi Arabia is in talks to invest in the fund as well. While it has been a rocky road through the year, and with a few challenges yet to hit, like SoftBank’s plan to write down at least $5 billion, things could get tougher.

With rumours of the fund adopting a more cautious approach moving forward, and the firm’s advice to investees to focus on profitability, we might see the first Vision Fund continue to grow, and the second vision fund follows in its footsteps. 80% of $100 billion from the first Vision Fund has already been spent in this short span. Reports are already doing the rounds about what this second Vision Fund will be investing in – an application that sells medications at discounted rates and a company that is creating plant-based alternatives to meat.

The Future of the Vision Fund in India

Over the years, SoftBank has invested over $10 billion in India across sectors in companies such as Paytm, Oyo, Delhivery, and FirstCry. A few months ago, the Vision Fund was said to be looking to invest $2-4 billion in India, with a special focus on the financial services sector.

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