SoftBank likely had the Vision Fund on its its mind when it decided to rescue WeWork

Masayoshi Son Softbank Adam Neumann WeWork

In deciding to rescue WeWork, SoftBank likely was motivated by more than just the coworking company's potential, business experts told Business Insider.
The Japanese conglomerate was almost certainly also trying to defend its $100 billion Vision Fund — and better its chances to attract investors to its second Vision Fund.
Some of the Vision Fund's biggest investments have been struggling — Uber and Slack have both fallen below their public offering prices.
But WeWork, which has seen its valuation plummet amid a failed initial public offering, has represented the biggest disaster, and SoftBank likely decided it was "too big to fail," one venture capitalist said.
Read all of Business Insider's WeWork coverage here.

SoftBank's decision to bail out WeWork was likely prompted by an impaired Vision.

The Japanese conglomerate will reportedly invest another $10 billion or so in WeWork to help prop up the struggling company, buy out some of its existing shareholders, and usher cofounder Adam Neumann out the door.

SoftBank CEO Masayoshi Son may truly believe that doubling down on the coworking giant — after already sinking more than $9 billion into it — is a good bet. But that's almost certainly not his only motivation for making the investment, business and investment experts told Business Insider.

Instead, the investment is almost certainly Son's attempt to shore up the Vision Fund, his company's audacious $100 billion venture capital vehicle that led SoftBank's investments in WeWork, and to better his company's chances of pulling in investors for its announced second Vision Fund, they said.

"If [WeWork] had imploded, it would have tremendous risk for the Vision Fund and whether or not there could be another one," said Robert Siegel, a lecturer in management at Stanford Graduate School of Business. He continued: "They kind of were in a very difficult situation."

In a press release Tuesday evening announcing the bailout, SoftBank didn't mention the Vision Fund as a motivation. Son said the company remained a believer in WeWork's business and that it is leading a change in the way people work.

"It is not unusual for the world's leading technology disruptors to experience growth challenges as the one WeWork just faced," Son said in the statement. "Since the vision remains unchanged, SoftBank has decided to double down on the company ... We remain committed to WeWork, its employees, its member customers and landlords."

WeWork needed a bailout, and SoftBank is stepping in

WeWork was, by all accounts, in dire need of a rescue. The company was reportedly slated to run out of cash within a month. Money was so tight that its co-CEOs reportedly delayed a planned mass layoff, because WeWork didn't have enough money to pay severance to affected workers.

SoftBank's plan will give the company some breathing space. Under the deal, the conglomerate will loan WeWork $5 billion and speed up the hand over of a planned $1.5 billion investment that it wasn't scheduled to make until next year.

Additionally, its plans to spend another $3 billion buying up shares from other shareholders — including, reportedly, as much as $1 billion from Neumann, the former CEO. On top of that, SoftBank reportedly plans to loan Neumann himself $500 million and pay him a $185 million consulting fee, according to a report from The Wall Street Journal.

At first glance, the investment looks dubious. It will reportedly value WeWork at somewhere between $7 billion and $8 billion. That's at least $2 billion less than the additional money SoftBank is sinking into it, and less than half what it will have invested in WeWork in total. In order for SoftBank to make money on the deal, WeWork will have to go public at a valuation of at least $15 billion, The New York Times estimated.

That may be tough to achieve. IWG, WeWork's closest publicly traded rival, which has about the same number of locations, has a market capitalization of just $3.5 billion. In order to stem the massive losses that turned public investors against its planned initial public offering last month, WeWork is widely expected to scale back its operations. That almost certainly will throttle its previously break-neck growth rate, which is what convinced investors like SoftBank to value it at a premium to IWG in the first place.

SoftBank is likely motivated by more than WeWork's potential

Son and his team at SoftBank may well still be believers in WeWork's potential. But its future is likely not the main thing driving the investment, business experts said.

"You have to evaluate this deal in the shadow of the bigger picture of what SoftBank has been doing with their Vision Fund and their hopes of raising a second Vision Fund," said David Hsu, a professor of management at the University of Pennsylvania's Wharton School of business.

WeWork is one of the biggest stakes held by the Vision Fund, the gigantic venture fund that Son set up three years ago. Son created the fund as a way of making what seemed to be sure bets. The fund takes large stakes in more mature startups, ideally ones that already dominate their particular markets or have the potential to. In theory, those bets will pay off when the companies go public and get premium valuations from public investors.

After making high-profile investments in companies, including Uber, Slack, and Didi Chuxing, Son announced plans this summer to raise a second Vision Fund and seemed to have commitments in place to make it even bigger than the first.

But that second fund is now in doubt. Saudi Arabia and the United Arab Emirates — the two biggest outside backers of the first fund — are reportedly planning to reduce any commitments they make to a second fund. Meanwhile, as of a month ago, the second fund only had one committed backer, according to The Wall Street Journal — SoftBank itself.

The Vision Fund's strategy is coming into question

SoftBank's attempt to lure investors to the second fund came as its strategy for the first Vision Fund started faltering. Uber, another one of the Vision Fund's big bets, went public at a valuation far less than anticipated and has since dropped in value. Slack, another Vision Fund bet, did better in its public offering, but has since seen its stock price fall too.

And then there's WeWork. SoftBank itself valued the company at $47 billion in January, and investment bankers pitched the company on the idea that it could go public at a valuation of $60 billion or more.

Instead, public investors balked at its losses, its corporate governance, and a slew of transactions involving Neumann or his family members. The company reportedly tried to go public with a valuation of as low as $10 billion — and still couldn't attract enough investors. WeWork was counting on raising $9 billion or more in the IPO — $3 billion from selling stock and another $6 billion in loans that were contingent on a successful offering. Without the influx of cash, the company was left teetering.

In theory, SoftBank could have let WeWork fail. Investors do that all the time, deciding not to extend a lifeline to struggling companies, even ones they've backed in the past. Many make the decision that the chances or amount of a potential payoff are not worth additional investment; better to write off the amount already invested than to lose even more.

For SoftBank, WeWork was likely 'too big to fail'

But SoftBank almost certainly dismissed that option, because it was too far invested in WeWork already and didn't want the Vision Fund to take that kind of hit, the experts said. SoftBank likely made the call that it was better to try to get some kind of return from WeWork than to write it off entirely.

"Their position is kind of too big to fail. They kind of have to save it," said one venture capitalist, who asked that his name not be used but whose firm isn't involved in WeWork. He continued: "They can't just let the company fail. They'd just screw their fund and their ability to raise capital."

Read this: WeWork could face a cash crunch as soon as February. Industry watchers think SoftBank, its lenders, and the entire industry has too much at stake to let it go under.

Still, the danger for SoftBank is that in protecting its investment today, it will suffer a bigger loss later on. To prevent that, the company should be focusing on doing what it can to help WeWork, beyond just giving it cash, said Dan Malven, a managing director at 4490 Ventures.

SoftBank ought to be making a public show to WeWork's most important stakeholders — its employees and its customers — of its commitment to the business, Malven said. It should be trying to communicate to customers that its latest investment in WeWork is all about maintaining a high-quality service for them, he said. And it ought to be promising retention bonuses to its top employees to convince them to stay.

Instead, the stories about its bailout have focused largely on the golden parachute it's handing out to Neumann.

The rescue plan for WeWork "feels like it's a short-term decision to prop up a position in their portfolio," said Malven, "because they're not indicating that they care about the actual business at all."

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