WeWork Inc.’s bankruptcy filing culminates A years-long saga has exposed startling flaws in Japanese billionaire Masayoshi Son’s investment style, damaging his professional reputation far beyond the money he lost.
Son overcame the objections of his aides and handed WeWork founder Adam Neumann billions of dollars from both SoftBank Group Corp. and Vision Fund, which pushed the valuation of the coworking space to an astronomical $47 billion in early 2019. A few months later, investors balked. WeWork’s IPO filings revealed significant losses and conflicts of interest.
WeWork’s subsequent sharp decline costs SoftBank more than the estimated $11.5 billion in stock losses and another $2.2 billion in debt that remains at stake. WeWork’s highly public decline, combined with its Vision Fund’s record $32 billion loss last year, has damaged Son’s standing as a savvy investor who made one of venture capital’s legendary windfalls with an early bet on leading Chinese e-commerce company Alibaba Group. Holding Ltd.
“You can recover from mistakes, but how do you recover from the perception that you don’t know what you’re doing?” said Aswath Damodaran, a professor at New York University’s Stern School of Business. “His actions say: I am arrogant.”
Damodaran said Son’s experience emerging from the dot-com bust with a few winners like Alibaba may have weakened his judgement.
“Before WeWork, the perception was that SoftBank was an incredibly cautious, nimble and visionary organization under Son’s leadership,” he said. “But I think sometimes success gets to people’s heads. Perhaps the fact of their success has made them somewhat convinced that they know more than anyone else. And therein lie the seeds of their ultimate downfall.”
Son set up the SoftBank Vision Fund in 2017 to be the world’s largest technology investor and proceeded to pump more than $140 billion into hundreds of startups. His tendency to raise valuations and give founders more money than they asked for has earned him recriminations from his Silicon Valley rivals.
Son himself has attributed his decisions to intuition, citing the sparkle in the founder’s eyes or the Force-like inspiration in Star Wars. But that confidence in his gut may have made Son unwilling to respond to red flags, opposition from his advisers, and even concerns raised by Neumann himself, according to former officials from both SoftBank and WeWork.
“I fell in love with WeWork,” Son told shareholders in June, adding that some on his board had warned him that his belief was misguided. He admitted that Son encouraged Newman to think bigger. “I might be more wrong than Adam, because I asked him to be more aggressive.”
Even after WeWork had to pull its planned IPO in 2019, SoftBank stepped forward with a $9.5 billion rescue package. Son defended his decision in a presentation that included a “hypothetical” path to profitability for WeWork.
The impact of Son’s fascination with WeWork and other startups has been exacerbated by the initial $60 billion that the Saudi and Abu Dhabi wealth funds pledged to the first Vision Fund. Son’s determination to mint a unicorn at breakneck speed has propelled startups to inflated valuations around the world, as rivals such as Tiger Global Management and Sequoia Capital have been pressured to match the Vision Fund’s big checks. It only took a few years for these values to collapse when spending failed to translate into sales, profits, and IPOs.
“It’s not just the investment losses that matter, it’s the story behind them,” said Kirk Beaudry, an analyst at Astris Advisory. “The massive cash infusion led to the artificially high valuation and arrogance that preceded the eventual collapse.”
SoftBank’s Vision Fund segment is expected to turn a profit in the September quarter, but performance remains weak. SoftBank lost billions of dollars on bets on companies like Chinese ride-hailing app Didi Global Inc., while Katerra Inc. advanced. and OneWeb Ltd. and Zume Pizza Inc. filed for bankruptcy or suspended its operations.
Mounting losses prompted Son to halt investment activity last year, cut Vision Fund functions and adopt stricter due diligence procedures. The son also stopped making earnings calls.
That restriction, coupled with the $4.9 billion Nasdaq IPO of chip design unit Arm Holdings Plc in September, now gives the early AI backer the funds needed to get back on the offensive.
“The bankruptcy puts a cap on the downside for Vision Fund 1 and Vision Fund 2,” Astris Advisory’s Beaudry said, adding that attention has now turned to what Son will invest in next. “People are less concerned about losses in the wallet.”
Damodaran of New York University is not convinced. He added that only one person calls the shots at SoftBank, of which the billionaire owns roughly 30%, and Son’s investment style is unlikely to change.
SoftBank is often said to apply a venture capitalist mentality to late-stage investing. But venture capital is supposed to consist of small bets, and the Vision Fund was “SoftBank’s tonic,” Damodaran said. “It’s supposed to be small and he made it huge.”
“By having tens of billions and hundreds of billions of dollars behind you, you make every transgression you make bigger,” he said. “This may explain how you make big mistakes like WeWork.”
