WeWork and Uber are giving SoftBank a black eye, but that doesn't mean Vision Fund II is in trouble, experts say (UBER)

masayoshi son

SoftBank has taken a financial and public relations hit recently from its investments in WeWork and Uber.
Uber's stock price has dropped markedly since its initial public offering and WeWork is struggling to line up investors in its public offering, even at a valuation that's less than half what SoftBank placed on it in January.
Even with these setbacks, SoftBank's still likely to find investors in the successor to its $100 billion Vision Fund, venture industry experts said.
The main reason for that: there's plenty of capital floating around that needs to find a home, they said.
Read all of Business Insider's WeWork coverage here.

Uber and WeWork's well-publicized struggles with public investors may not be a good look for SoftBank, their deep-pocketed backer. But for now, the fallout of those disappointments is likely to be limited, venture capital experts say.

Investors far and wide still have plenty of capital floating around and are constantly looking for ways to invest it, venture industry experts told Business Insider. Venture funds in general still offer an attractive investment, particularly in a time of low and decreasing interest rates. And for investors sitting on massive amounts of money, few institutions have the scale to deploy as much capital as SoftBank has shown with its $100 billion Vision Fund, the experts said.

At its base, investing is a supply-and-demand game, and right now, there's a lot of supply in terms of capital, said Dan Malven, a managing director at 4490 Ventures.

"These entities that have so much capital to put somewhere, what are their alternatives?" Malven said. "At that scale, capital is a commodity. It flows to wherever investor returns are."

SoftBank's taken a hit recently on some of its own investments. Last week, CNBC reported that the Japanese conglomerate's stake in Uber was worth $600 million less than what the company had paid for it thanks to the big drop in the ride-hailing firm's shares since its initial public offering in May. Uber's stock closed at $32.24 on Monday, down 28% from its $45 IPO price.

Meanwhile, WeWork is considering taking a massive haircut to its valuation in an effort to go public. Facing pushback from potential public investors over its huge losses and questionable governance, the company is considering accepting a market capitalization of between $15 billion $20 billion in an initial public offering — assuming it goes public at all, according to The Financial Times. In its last private funding round — a $4 billion investment by SoftBank in January — the coworking giant was valued at $47 billion.

Read this: WeWork's biggest outside shareholder, SoftBank, is reportedly asking for the IPO to be put on hold because investors don't seem interested

WeWork and Uber may show problems with SoftBank's strategy

Until recently, SoftBank had a lot to crow about with its Vision Fund. As of the end of June, SoftBank's Vision and much smaller Delta funds had seen combined unrealized gains of $16 billion on its investments, including a $3.8 billion gain in the second quarter alone.

But that second quarter gain included a $1.8 billion investment loss that was due in part to the decline of its stake in Uber. The conglomerate could show a much worse return on its investments in its third quarter report, given that Uber's stock plunged last month after it reported its earnings and WeWork's re-evaluation has only happened in recent days. The combination of those two drops could wipe out a significant portion of SoftBank's total gains.

SoftBank's investment thesis has been based on the assumption that technology is often a winner-take-all or winner-take-most industry. Its strategy has been to invest huge sums of money in mature startups that appear to be the leaders in their respective fields with the idea of helping them cement their dominance without seeming to worry much about those companies' near-term losses or economics.

That strategy isn't all that different than what the venture industry in general adopted in the dot-com boom 20 years ago, said Greg Bohlen, a cofounder of Union Grove Venture Partners.

"The problem is, it just never works," Bohlen said.

When you have so much money flowing into companies, it's often not used efficiently, he said. And the startups' financial results often can't really justify the valuations that have been assigned to them, thanks to all the money that's been invested in them. That disconnect between valuations and financials can be obscured when companies are private — but not when their results are made public through the IPO process.

With WeWork and Uber, the "chickens are starting to come home to roost" for SoftBank's investment strategy, Bohlen said. When public investors see the disconnect between the financial results and valuation, he continued, "the needle comes off the record."

SoftBank is trying to raise a second Vision Fund

Uber's poor showing as a public company to date and WeWork's struggles to even go public are a black eye for SoftBank, venture experts said. And they come at a not particularly ideal time for the company. SoftBank is raising capital for a second Vision Fund, this one planned to be even larger than the first.

SoftBank's paper losses on Uber and prospective losses on WeWork could make it more difficult for it to raise money for the new Vision Fund, venture experts say. Potential investors in the fund might look for other types of investments or they could demand better terms from SoftBank, such as lower management fees.

"Those are the types of knobs that get turned," said Robert Siegel, a lecturer in management at Stanford Graduate School of Business. He continued: "He may have to put sweeteners in place to get the deal closed."

But it would be a mistake to think that even with the Uber and WeWork setbacks that the second Vision Fund is now likely in jeopardy, Siegel and other venture experts said.

For one thing, it's hard to know right now just how much of a hit it may have taken on WeWork, if any at all. Venture investors, particularly late-stage ones, tend to put all kinds of conditions on their investments that limit their downside if the company's valuation falls. They tend to get paid out first in a sale or can get handed out additional shares in a public offering when they convert their pre-IPO stock to common shares. Often it's hard to say how well a venture investment has actually performed until an IPO or acquisition.

"I'm not sure that they're taking a haircut," said Phil Libin, cofounder and CEO of technology incubator All Turtles and a former investor with venture firm General Catalyst.

Investors are likely to stick with SoftBank

Even if its stake in WeWork has dropped in value, that may not be as harmful for SoftBank as one might think. SoftBank CEO Masayoshi Son invests for the long term and likely isn't shaken by near-term setbacks, Siegel said. The question is going to be whether his limited partners, or LPs, in the Vision Fund have a similar perspective.

"It depends on the LPs," he said. But, he added, "betting against Masa historically has been a bad idea."

But there's reason to think that investors will stick with Son and the Vision Fund. There's just a lot of excess capital floating around looking for a home, the venture investors said. With interest rates falling, the Vision Fund doesn't have to offer super-high returns to be an attractive investment, they said.

"I actually don't think, even with all the issues that SoftBank is having with WeWork, that they will have a problem raising their second Vision Fund for 100 billion," said Jai Das, president and managing director of Sapphire Ventures.

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