The Softbank Vision Fund vs. Reality


The venture capitalists following the traditional model of California Capitalism have a thesis that there are billion dollar business opportunities, there are business models able to capture those opportunities, and teams which can create those businesses if sufficiently funded.

Softbank’s Vision Fund takes that model to a new level. A Tokyo-Riyadh Capitalism model. But a model that seems to be failing. The billion dollar opportunity is still key, as is the team. The missing piece is the viable business model.

Poster child #1 is Uber. At first glance this business seems simple. Match riders with drivers, buying no cars, paying no salaries, but keeping 20% of the fees. Plenty of marketplaces make money with such models. But in reality, what is often forgotten is the cost of acquiring customers, the costs associated with competition, and in Uber’s case, the cost of dealing with city-by-city regulations around taxis and car sharing. Add to that a lack of focus with bikes and electric scooters and billions spent on automated driving, and investors are reaonsbly questioning whether Uber will ever earn a profit.

Poster child #2 is WeWork. Rent real estate and resell it in small chunks. This is a model that others have tried before. Most fail to make money doing it. It’s thus not a surprise that WeWork never calls itself a real estate company in its S-1 filing. It instead tries (and fails) to make itself sound like a technology company. If it were honest, it would report key statistics for its business, like occupancy rate. But no, that is never mentioned. Neither is profitability of even the oldest of the spaces. All that before we even try and understand how Softbank allowed the founder (CEO or not) to own buildings rented by WeWork, own the brand, and own a special class of shares.

The core of Tokyo-Riyadh Capitalism seems to be the concept that dumping too much capital into a business will overcome flawed business models and non-viable business plans. That too much capital lets any company, no matter how badly run, show year-over-year growth so impressive that investors will ignore the basics of due diligence.

Softbank certainly proves that valuation of startups has nothing to do with the company itself, but only with the size of the investment. That’s the only explanation for Uber’s $50B+ valuation and WeWork’s $47B.

Luckily there was a limited amount of sovereign wealth believing Softbank in their vision, and thus this didn’t turn into Dom Com Bubble 2.0, but none of the losses that Softbank and Riyadh and the UAE will suffer from these mistakes will do anything to help the multitude of startups who can’t find funding, and yet which are (or will soon be) profitable companies.

WeWork illustrates everything that’s wrong with the economy and with our capitalist system — and shows just how far that system has gone off the rails.

By "Luni"


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