We’ve all heard of Warren Buffett—the grandfatherly, American, multibillionaire investor. His claim to investing fame is the pursuit of value—finding great companies with strong management that are trading at a low price (for a variety of reasons), which makes them cheap. He’d buy large blocks of the stock or the entire company itself, wait for other investors to recognize the worth of the company and watch the share prices rise substantially over time.
Most people are unfamiliar with Japanese billionaire Masayoshi Son. His investment style is diametrically opposed to Buffett’s strategy. Son seeks out fast-growing, technology-related companies with charismatic founders—often referred to as unicorns—and makes big investments in them. These companies are not profitable, but offer the chance of huge returns by disrupting their respective industries. Up until recently, Son and his company, SoftBank, were highly lauded for their investment prowess and ability to spot young and up-and-coming companies with larger-than-life CEOs.
This strategy worked amazingly well until it didn’t. SoftBank just reported an $8.9 billion loss, its first quarterly loss in 14 years. The hit was in the company’s $100 billion Vision Fund and related in large part due to the terrible performance of one of its largest portfolio companies, WeWork.
The disaster at WeWork—including allegations of then-CEO Adam Nuemann’s financial self-dealing and burning through copious amounts of cash—pulled back the curtain on Son’s investment strategy of rolling the dice on tech founders who tell a good story.
In addition to the loss of $8.9 billion, SoftBank had to throw a lifeline of $10 billion to WeWork in an effort to save the office-sharing startup from imploding. Acknowledging his mistake, Son said, “My investment judgment was poor in many ways and I am reflecting deeply on that.” Son still believes that WeWork will turn around with a “hockey stick” (meaning it will go straight up) recovery.
WeWork is not the only tech investment that is not working for Son. High-profile investments in
Uber, Slack, Guardant Health, Wag, Plenty and Fair are all performing poorly. Uber, in particular, is hemorrhaging money, burning through its cash and nowhere near profitability. Uber’s stock price is substantially down from its IPO price and inside investors will soon be allowed to sell their holdings, which will likely further put downward pressure on the stock price.
According to The Wall Street Journal, a person familiar with the fund said, “The Vision Fund is barely two years old and we’re confident that our diversified portfolio of 88 companies will produce strong returns over the long term.” To put things into perspective, many of the Fund’s investments have significantly appreciated in value.
The frightening thing is that this is occuring in a very strong economy and job market. There are concerns about what will happen if—and when—we have a recession. WeWork and Uber were previously forced to downsize hundreds of employees in cost-cutting measures. If things get worse for SoftBank’s holdings, as well as other unicorn tech companies unrelated to Son, how many other people will lose their jobs?
If this downward trend continues, many people will be harmed. The early investors and executives at the unicorn companies will own enough stock that appreciated in value so that nobody will have to hold a charity event for them. However, their employees and investors will bear the brunt, as the business cycle turns downward. Job seekers and average, everyday investors were lulled into joining these companies and buying their stock by the mass media fawning all over the never-ending upside opportunities offered by these unicorn companies.
Hopefully, this is only a short-term issue for SoftBank’s portfolio companies and other tech unicorns. Otherwise, many working people will be left without jobs and incur big losses on their investments.
Source: Forbes – Leadership