SoftBank's Vision Fund is already a graveyard of broken tech startups, featuring companies like Uber, WeWork, DoorDash, Fair, Katerra, and Oyo—wholly unprofitable enterprises whose business models rely on using investor capital to subsidize prices, achieve a monopoly, then hike prices up again.
In pursuit of profits for their investors, these companies have either undergone layoffs, implemented steep pay cuts, violated labor laws, or sold off major operating units to try and forge some path to profitability. None are there yet.
Last week, Axios reported that SoftBank had for months been trying a new approach: shafting startups, instead of investors. Three startups, in particular, were each offered hundreds of millions of dollars by SoftBank, but as terms were finalized or signed off on, SoftBank would suddenly kill the deal and walk away.
Things don’t end there, however, as other SoftBank investments have been experiencing trouble these last few months. In December, SoftBank gave back its nearly 50 percent stake in Wag, a dog-walking "tech" startup, along with the two board seats it secured with a $300 million investment in the company that inflated Wag’s valuation to $650 million. This came after the company’s second round of layoffs as part of an attempt to forge a path to profitability.
Also in December, Katerra announced a round of layoffs, closing one factory in Phoenix while opening another in California, all part of its master plan to achieve profitability by the end of 2020. Another SoftBank portfolio company's IPO flopped in December (not a good month for SoftBank), this time a Chinese finance technology company named OneConnect. SoftBank's investments valued OneConnect at around $7.5 billion and hoped to raise as much as $2 billion from IPO, but the company went public at around $3.6 billion and raised just over $300 million.
“The question is identifying markets where you can gain market power by using price as a weapon. That means using loss leading and predatory pricing to drive competitors out of business and then establishing barriers to entry so that you have pricing power on the supplier side or the buyer side or both," Matthew Stoller, a fellow at the Open Markets Institute, told Motherboard.
"It’s not like SoftBank is the first one to notice this,” he added. “They’re just late to the game, and they have way too much capital to deploy, and they overpay, and they don’t have a particularly good analytical framework to understand what markets they can go into.”
Stoller has pegged SoftBank's business model as an attempt "to manipulate private capital markets as a way of drowning out competitors with cash." If this model sounds familiar, it's because it is a financier version of Amazon’s predatory pricing strategy in retail. For these financiers, Stoller says the core aim is to deploy capital until you "kill all competition, with the idea of profiting later on it via the surviving monopoly."
In other words, SoftBank’s Vision Fund companies aren’t surviving because they are potentially profitable, offer innovative products, or can withstand competition, but because they have access to seemingly infinite reserves of capital. Or they used to. With the sudden collapse of multiple start-up deals, the disappointment of multiple IPOs, and negative returns on major investments like Uber and WeWork, it seems the party is coming to a close.
Already, the new year has started out poorly for the Vision Fund. Getaround (another SoftBank car-rental startup) plans to layoff 150 employees—a quarter of its staff—to cut costs. Zume Pizza raised $375 million from SoftBank off its promise to automate pizza delivery, then turned around and announced plans to layoff at least half of its staff. At Uber, former CEO Travis Kalanick has completely cashed out while the daggers have come out for CEO Dara Khorosowhahi as he struggles to turn around a fundamentally unprofitable, unsafe company whose only hope lies in privatizing all of transportation at everyone else’s expense. Oyo, an Indian startup seeking to disrupt the hotel industry, faces a multitude of problems from growing skepticism about its business model, antitrust review, corruption, unlicensed bookings, and sketchy financial practices.
“It looks like a bubble! It smells like a bubble! It feels like a bubble! But the market still goes on,” Kenney said. “Take the Uber and Lyft investors, they all cashed out after the lockup ended. Even if it’s 20 percent, 40 percent, or even 50 percent from IPO, they still made their money. If I buy stock privately at $10 a share, the company goes public at $100, it immediately crashes to $50 and I sell all my shares off. Is that a bad return?”