Startups | SoftBank’s WeWork misstep is redefining the game in India

For years, to get SoftBank’s money meant a certificate of validation for startups -- not just in India, but globally too.

Once a startup secured a term sheet or even commitment of investment from SoftBank, it became easier for it to raise more capital from other fund houses. SoftBank, through its understanding of global businesses and mentorship to startups over the years became the gold standard. Once SoftBank invests, it also takes up a seat on the board and steers the ship.

More startups started queuing up at SoftBank’s doorstep when its founder and CEO Masayoshi Son launched the $100-billion SoftBank Vision Fund in 2016. SoftBank’s investment meant stepping into the big league. Known for cutting big cheques that allows companies to grow fast by burning tonnes of cash, SoftBank money meant running a company on steroids.

Son poured money into a whole lot of startups -- $10 billion in India -- and urged them to grow as fast as possible until you run out of steam or get more money from investors, including SoftBank, to run even faster. The logic is simple: grow so fast that you either leave competition far behind or just burn out.

When SoftBank invested $627 million in Snapdeal, little did founders Kunal Bahl and Rohit Bansal know that investment from SoftBank comes with its own problems. SoftBank, being the largest stakeholder, forced Snapdeal to compete with Flipkart and Amazon, which were burning $20-30 million a month to provide discounts and promotions. Soon, money started running out, but SoftBank did not give Bahl and Bansal consent to raise money from other investors. Snapdeal was put on the block and Bahl and Bansal fought a boardroom battle to take back control of Snapdeal. The duo run it as a much smaller and economically efficient unit now.

In 2018, SoftBank and Ola’s Bhavish Aggarwal were said to be at loggerheads when the taxi-hailing company’s founders blocked a deal where Tiger Global was selling its stake to SoftBank.

SoftBank, because of its large investments, holds the largest share in the company -- often more than the founders -- and call the shots. In Oyo, Ola and Paytm -- where SoftBank is an investor -- it is the largest shareholder.

However, SoftBank’s investment causes overcapitalisation in the investee company. Founders lose business oversight and have no regard for profit, thanks to loads of cash sitting in the bank waiting to get over, often leading to unsound business models. That impacts all the other investors of the company, making exits difficult when they want to cash out during a public listing.

WeWork, a SoftBank investee company, was one of the hottest startups globally until its IPO prospectus revealed it was burning cash to grow. That didn’t go down with public investors and the valuation crashed from $47 billion to $15 billion. SoftBank reported $4.6 billion of loss on its WeWork investment.

Not just WeWork, SoftBank’s investment in Uber and Slack -- which got listed in 2019 and have not performed well on bourses -- has been impacted. In November, SoftBank reported its first quarterly loss in 14 years, calling into question Son’s decision to invest in startups. The company’s Vision Fund reported a loss of $8.9 billion.

That has led to more caution among investors. Better due-diligence on unit economics, path to profitability, cash generated to be ploughed back into growth of business, and governance are becoming important metrics to make investments. SoftBank, too, is going slow on its investments in India. While its India plans have not taken a hit, the investments did get delayed because of tightening the noose.

The WeWork fiasco has thrown in new dimensions on why and how startups should be valued and what defines success, and it is not just based on number of transacting customers. It’s a lot more than that.

Does that mean that the number of investments in startups will go down? Perhaps not. What might happen is that investors will put in a lot of checks and balances before making investing. Also, investors while making later stage investments will try and understand how the entrepreneurs plan to take the company to public listing, and whether the business metrics are in place to do so.

While the exuberance in the startup ecosystem will be there, better and proper business models will matter the most. Some might call it bringing sanity back to the business, others might just want to be conservative.