Masayoshi Son, the founder of SoftBank Group Corp, has joined the new religion for technology investing. Son disclosed SoftBank’s third-quarter investment losses from bets on WeWork, Uber Technologies Inc and other stakes.
He also talked about his fealty to corporate cash flow and putting appropriate guardrails on young companies. Son displayed something that seemed like humility — in actuality his typical bravado with some humble words mixed in.
Son also said the strategy for SoftBank’s giant tech investment fund has not changed fundamentally, and he disputed the characterisation of its recent financial rescue of WeWork as a bailout. It most definitely was a bailout.
This was quite a change for a man who wanted companies to be more “crazy” and more than anyone else is responsible for the recent hyperinflation of start-up valuations and founders’ egos. And it shows the pressure Son is under to deliver financial returns for Vision Fund investors and get cash for another one.
But Son’s pivot and the circumstances around it also call into question the very foundation of company-building in the last decade.
Uber executives started their third-quarter earnings call by discussing the company’s efforts to balance revenue growth with a move toward profitability. If someone had told me at the beginning of the year that Uber would be talking about temperance, I don’t think I would have believed it. Temperance at Uber is relative, to be sure. This year, Uber has bled 25 cents in cash for each dollar of revenue.
Contrast Uber’s tone with that of Peloton Interactive Inc, the maker of an indoor bicycle and virtual fitness classes, which has defiantly stuck with a strategy of pouring money into international expansion, heavy marketing to land new customers and other projects to grow faster. It could work, but it’s an approach that has fallen out of fashion.
Investors don’t truly buy either company’s strategy. Peloton’s stock price has fallen 22 per cent from its September initial public offering. Uber shares have declined 40 per cent from their IPO price in May and hit a record low last Wednesday as restrictions lifted on the ability of private investors and employees to sell their shares. Most other highly valued start-ups haven’t done much better as public companies. I suspect share declines for Uber and rival Lyft Inc would be worse if they hadn’t responded to stock investors’ sudden zeal for financial prudence from young companies. Still, investors’ and companies’ shift to worshipping at the altar of profits might not last. It was only a few years ago that investors started to become anxious about the vast sums of money flying into unprofitable start-ups.
The bubble didn’t burst, but air deflated a bit from the balloon.
Investments in start-ups pulled back for a while, and some young companies died or still haven’t recovered their valuation from those pre-2016 heady times. But then SoftBank unveiled its nearly $100 billion tech investment fund, and it was off to the races again at a speed that made the earlier mania seem sober.
The latest turn against fast-growing but possibly unsustainable young companies isn’t only about the specific struggles of WeWork and Uber or SoftBank’s bazooka of start-up cash. Stresses on those companies call into question the entire model of funnelling oodles of cash into a company to help it grow very big very fast.
Of the more than $23 billion in stock that Uber has sold during its lifetime, more than 90 per cent traded at share prices higher than the current one. And for a good chunk of the rest, investors could have done nearly as well in a plain-vanilla equity index fund.
This is the most successful company of the uber-unicorn era, and it’s been a poor investment for nearly everyone.
A Facebook analogy
This could all turn around, of course. As every young tech company with a sagging stock price likes to say, Facebook Inc’s share price stumbled in its first 15 months as a public company before a rebound turned the company into one of the best stock investments of this decade.
The problem with Uber and other growth companies is they couldn’t exist without the tidal wave of cash available for ambitious start-ups in the last decade. And yet it’s still not clear how much is a mirage.
It’s possible that the natural state of Uber and other highflying unicorns is a healthy business whose economics don’t look fundamentally different from the incumbent industries they’re trying to bust up. That’s hardly the ambitious vision behind the Vision Fund.