There has arguably been no historical precedence to SoftBank in the global venture capital market. This is not just in terms of its 'Vision' fund, which has been the biggest fund globally, to invest in startups, but also with respect to the vision of its CEO Masayoshi Son. The Japanese tech investor has nearly 300 years plan for SoftBank to become a leader in advanced technologies such as artificial intelligence, robotics etc. In fact, his early bet on Alibaba, which fetched him over $100 billion in return, drove investors to trust and bet on his vision.
This early success along with his investors' trust led Son to later bankroll a number of high-flying technology businesses later in Uber, Slack, WeWork etc. Nonetheless, to have a 300-year vision indicates Son's intent to be a godfather-of-sorts for the world's biggest technology companies in the coming three centuries. And to have that plan, one cannot afford to make small bets.
Critics, however, have often publicly questioned Softbank's 'vision' to give more money than required to founders to chase their 'exponential' growth path — one that may not reinforce a business's ability to tide over testing times smoothly. Son's reputation of being a cash burn advocate wherein his investee companies are questioned of fundamental business model, much to his dismay, gained more strength over the past few months.
His belief of overwhelming entrepreneurs with billions of dollars so that they can grow businesses even faster and bigger finally saw the moment of truth coming. His star startups Uber and Slack, which went public at astronomical valuations of $82.4 billion and over $20 billion, failed to put on great IPO performances. Uber's valuation post IPO plummeted to under $50 billion recently.
This was followed by the great WeWork debacle. The embattled company was unable to pull off a high-profile IPO. WeWork's founder Adam Neumann has raised overall nearly $11 billion from SoftBank and was likely to take the company public at $47-billion valuation but he failed to deliver even at a reported valuation of just $20 billion. The valuation skyrocketed from earlier $20 billion after SoftBank put invested $3 billion and $2 billion in WeWork in November last year and January this year. The science behind this rise is still known mostly to Son and Neumann.
A SoftBank spokesperson declined to comment for this story.
"WeWork is a major issue, besides the write-downs in Uber and Slack. We are afraid that SoftBank Group's minority investors now face heightened risks after such poor reception for the WeWork listing, as other group or the SoftBank Vision Fund investments risk being painted with the same brush," according to Atul Goyal, Equity Analyst, Jefferies.
These string of bets by Softbank Vision Fund that came into the firing line because of risking losses worth billions of dollars left Son "embarrassed and flustered" by his track record, he told Nikkei Business magazine. SoftBank offered bailout package reportedly worth $9.5 billion to WeWork in exchange for 80 per cent stake in the co-working company and valued it at $7.8 billion — a far cry from $47 billion. The valuation was reported by SoftBank in its earnings results for the six-month period ending September 30, 2019.
WeWork and Uber could account for (staggering) $12 billion in mark-downs, according to the Jefferies report on SoftBank Group in September this year. However, this would have little impact on the group. "Given that SoftBank Group's stake in SoftBank Vision Fund equity is closer to 50 per cent, the direct impact on SoftBank Group’s Gross Asset Value will be $6.3 billion or only 3 per cent of Gross Asset Value," according to Goyal even as Alibaba, alone, contributes 49 per cent, which is around $122 billion to SoftBank Group's Gross Asset Value at $249 billion. Nonetheless, the beginning to Son's 300-year plan perhaps hasn't been the way he had expected.
WeWork # OYO
Amid WeWork's implosion and uncertainty in success of SoftBank's other companies ahead, the leftover criticism and scrutiny are targeted at Indian decacorn (a startup valued at $10 billion or more) OYO. There are parallels drawn between Adam Neumann's WeWork and Ritesh Agarwal's OYO business models leveraging existing real estate, financials, and revenue channels and the alleged hype about OYO's growth mirroring that of WeWorks in its heydays.
"They bought Hooters Casino in Las Vegas for $135 million (first purchase in the US as part of expansion) only after it being sold for $53 million four years ago, so they likely overpaid. Also, Lightspeed Ventures and Sequoia on the board decided to sell 50 per cent of their shares. SoftBank and the founder are investing in the business while Sam Zell, probably the best minds in real estate, has sold $8.5 billion in property since 2015 apart from Sequoia, Lightspeed selling shares. Who would you bet on?" Scott Galloway, a marketing professor at NYU Stern School of Business said in a video tweet recently questioning whether OYO is next WeWork in making.
Galloway didn’t reply to the email query. Sequoia too didn’t reply while Lightspeed declined to comment on the part exit.
However, Galloway got rebuttals by industry experts. "OYO's Consolidated revenue grew from $20 million in FY17 to $67 million in FY18. These are their India operations. They are scaling up fast," said S Varadarajan of Venture Intelligence. "They haven't spent that much money for Hooters," Vivek Durai, Founder, Paper.vc told Financial Express Online.
Moreover, the company has been claiming profitability focus. This comes amid Son reportedly looking at changing his strategy to focus on businesses with the streamlined goal to profitability and IPO. OYO claimed profitably at the building level while EBITDA also improved by 50 per cent on a year-on-year (YoY) basis. "This year, the company has seen a 3.8x YoY growth in revenue in Aug 2019 (vs. Aug 2018), with 1.2 million rooms under management across hotels and homes. Over 90 per cent of our revenue is repeat business or through word of mouth. The losses as a percentage of Net Realised Value have been on a steady and significant declining curve," a company spokesperson told Financial Express Online.
To be sure, OYO's provisional net loss went up by over 6 times in FY19 to Rs 2,384 crore from Rs 360 crore in FY18, according to its valuation report filed with the Registrar of Companies. Its revenues also went up from Rs 1,413 crore to Rs 6,457 crore during the said period. Recently, Reuters reported that the company may not turn profitable in India and China until 2022.
OYO being among the prized possessions for SoftBank can be gauged from the references made to OYO prominently in most of the presentations by SoftBank from around last one year. "If recent reports are to be believed, SoftBank has actively encouraged joint ventures in Japan with both its favourites, OYO and Paytm. To me, it looks like a de-risking exercise to double back on their domestic market in the event SoftBank Vision Fund collapses. Their telecom business hasn’t been doing all that well and I think Masa believes bringing aggressive Indian entrepreneurs into the mix will help Softbank emerge as a stronger player within Japan," said Durai adding that OYO has some advantages over the WeWork model since they appear to pay lease rent. "WeWork’s Achilles heel was taking the lease burden and getting benefit from only the very thin margin between the charges it was getting from its customers and the lease it was paying."
OYO is also likely to go for IPO in the first half of next decade though with no "immediate" plans as of now, according to the company. While investors are currently far more aggressive in their due diligence after having endured Uber, Lyft, and WeWork debacle but the situation may change in around two years. However, in the case of OYO, "I doubt that sophisticated investors will be looking to undo WeWork's wrongs through OYO. It is fundamentally independent of WeWork, operating in a space that has different business model, capital structure, and footprint," Utkarsh Sinha, MD, Bexley Advisors told Financial Express Online.
SoftBank's Real Estate Love
As part of strengthening OYO, SoftBank appears to have a significant internal effort focussed on unlocking value from real assets. "It has set-up the Real Asset Investment unit – a new initiative that we believe is backed by SoftBank Group's Chief Strategy Officer, Katsunori Sago. We’re seeing some exploratory work here including OYO’s efforts to create a new college hostels segment as well as the outright acquisition of hotel properties," according to Durai.
Even as at least some senior executives within Softbank are looking at real estate as a very important play and they believe that while OYO has growth potential, "I think reaching profitability solely on its current architecture will be difficult. Hence, SoftBank is looking at various opportunities from where OYO can earn more revenue and leverage external financing," he added. However, "any such category will need to spend to start with, and will not be adding to the bottom line just after inception," added Sinha.
Growing student intake, especially in institutes in cities and the consequent shortage of on-campus hostel facilities, has caught OYO's attention to offer them as fully managed, long term rental solutions to students. OYO Life — the housing rental service has signed an agreement to provide over 500 beds for students of IIT and Plaksha University in Delhi and Gurgaon "We are confident that our growing presence in the student housing segment will enable us to scale 100K beds by 2019-end," the spokesperson said.
Backlash Back Home
Back home in India, which is also its biggest market, OYO is facing the heat over alleged unfair business practices. In October this year, Competition Commission of India had ordered investigation against OYO apart from MakeMyTrip after a complaint by Federation of Hotel & Restaurant Associations of India, PTI reported. However, OYO refuted the claims. Then there are complaints around room hygiene by users on social media platforms.
"We have introduced strict compliance and performance metrics as a strong determinant of the building owner's and OYO's commitment to meeting standards. Any building which does not maintain the necessary 3C level is churned out of OYO's system," the spokesperson said. However, ensuring each of its property meeting quality standards every day for every customer might be tough given that eventually, it is the hotel, not OYO staff that is present physically. Even if OYO pulls down the miscreant hotel, bad customer experience with word of mouth would add to OYO's problems.
Then comes long-run sustainability — something which WeWork also claimed. "OYO's gross margins are unclear at this point but I’m guessing they’re not that great given the core aggregator nature of their business. Now to boost margins they are looking at higher-end properties because margins in budget properties, even if better than WeWork-style margins, are still pretty low," said Durai.
If the global growth of OYO is going to happen the way they claimed, they would need capital. This means SoftBank would have to back them with billions of dollars which wouldn't come from the public markets while the current and new investors are reportedly not very keen to invest in SoftBank's $108 billion Vision Fund 2. OYO doesn't have a problem with that as of now. "OYO has a strong balance sheet and is not looking at further financing," the spokesperson added. In its latest fundraising move, OYO had recently received its board's approval to raise $1.5 billion from SoftBank and Ritesh Agarwal's RA Hospitality, according to Paper.vc.
Coming back to the Vision Fund 2, Softbank, as reported by Bloomberg last month, raised $2 billion to begin with the fundraising process. The investors for this round weren't disclosed even as Saudi Arabia's Public Investment Fund and Abu Dhabi's Mubadala Investment Co., which had put $45 billion and $15 billion, respectively, to first Vision Fund are still deciding the amount they want to put into the new fund. Nonetheless, if Son is able to raise the entire corpus then he would not just have another shot to build another Uber, WeWork, with a hopeful difference but also, as per his 300-year plan, he will further "look into the far distance...," maybe another 300 years.