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SoftBank’s Fake Startup “Valuations” Come Unglued

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Via Wolf Street

But those paper gains were fun while they lasted.

By Wolf Richter for WOLF STREET.

The numbers are huge: SoftBank Group said that it would book a loss of $16.7 billion (¥1.8 trillion) at its Vision Fund for its fiscal year ended March 31, stemming “from a decrease in the fair value of investments due to the deteriorating market environment.” Separately, a spokesman of the fund told Barron’s that this loss included $9.9 billion in new losses.

In November, SoftBank had already reported a loss for the quarter (ended September 30) of $9.0 billion (¥970 billion) on its tech funds, including the Vision Fund. Because the “market environment” was already deteriorating, as WeWork and some of its other investments were blowing up. No Covid-19 needed.

But for its first quarter, ended June 30, SoftBank reported that it had been able to finagle an “unrealized valuation gain” of $3.8 billion at its Vision Fund and Delta Fund, “reflecting an increase in the fair values of OYO and its affiliate, Slack, Doordash, and other investments.”

In plain English SoftBank was just inflating valuations as it went to show paper profits. And those companies and valuations have been getting ripped to shreds.

This OYO is of course the Indian company Oyo Hotels & Homes that, with SoftBank’s huge investment, became in no time one of the largest and most chaotic global chains of leased and franchised hotels, homes, and living spaces. Last year, SoftBank inflated Oyo’s valuation to $10 billion. The charade too started blowing up late last year. Now, Oyo is in triage mode, freezing operations and laying off employees across the world.

In addition, Oyo CEO Ritesh Agarwal had borrowed $2 billion to buy shares in OYO as its valuation was being inflated, and SoftBank founder Masayoshi Son personally guaranteed the loans. Tsk, tsk, tsk, what the heck were you thinking!?!

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Oyo is on the list of SoftBank’s strokes of genius that may not survive in their current form. That list includes other SoftBank shining mega-star investments, such as WeWork and real-estate mega-startup Compass, and a bunch of other startups, all of which are experts at burning large amounts of cash, and none of which have figured out yet how to break even. Some have already run aground after having been abandoned by SoftBank.

SoftBank’s tech fund losses in the second quarter (ended Sep. 30) of $9.0 billion and in the fourth quarter (ended March 31) of $9.9 billion blew up the whole charade.

The $97 billion Vision Fund was launched in May 2017 under immense hoopla with big investments from SoftBank, Saudi Arabia, United Arab Emirates, and others. It became the creature that helped turn the startup bubble into the crazy startup mega-bubble. The Vision Fund plowed this huge pile of money into 88 startups, maniacally inflating their “valuations” at every step along the way.

In no time, the “valuation” of WeWork was inflated to $47 billion, creating enormous paper profits while it lasted. WeWork started collapsing last year and has now stopped paying rent at some US locations. It included others such as Uber, that saw their valuations crater even before their IPOs, and then saw their shares crater further after their IPOs. And now comes Covid-19.

SoftBank said in its statement that its net loss for the company overall for the fiscal year would be about $7 billion (¥750 billion) for the fiscal year, its biggest loss since going public in 1994, and the first annual net loss since 2005, the Nikkei reported, citing Capital IQ.

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But this $7 billion loss includes an increase in the accounting income from its stake in Alibaba Group Holdings, where SoftBank is now the largest holder.

“These forecasts are intended to provide investors with prompt information on estimates of financial results in light of the deterioration in the current market environment,” SoftBank said.

SoftBank made two super-successful investments: Alibaba when it was still a startup; and in 1996, it together with Yahoo founded Yahoo Japan (which in 2019 changed its name to Z Holdings Corp).

Last month, in an effort to salvage what there is to salvage and prop up its own shares, SoftBank announced a plan: It would sell about $41 billion of its investment portfolio and use the proceeds to pay down $23 billion of its $100 billion or so in debt at the holding company, which would be good; and it would waste, blow, and incinerated the remaining $18 billion to buy back its own shares.

The plan to incinerate $18 billion on share buybacks caused Moody’s to slash SoftBank’s credit rating by two notches, to Ba3, which is three notches into junk (my cheat sheet for corporate bond credit ratings), and placed it on review “for further downgrade.”

Through the Vision Fund and in separate investment vehicles, SoftBank also has big stakes in Slack [WORK], in cancer medicine company Guardant Health [GH], and in ex-unicorn Zume, which tried to use a food truck with a robot that made the pizza while being delivered. In January, Zume reportedly laid off 80% of its staff. No Covid-19 needed.

SoftBank invested in ecommerce startup Brandless, which announced in early February that it had shut down due a “fiercely competitive” ecommerce market that was “unsustainable” for its business. No Covid-19 needed.

It invested in car-rental unicorn Getaround which announced in early January that it would lay off about a quarter of its staff after SoftBank refused to throw more good money after bad. Other SoftBank funded startups too started laying off people before Covid-19, including logistics unicorn Flexport.

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Tthe entire startup universe had been getting boosted by SoftBank and the Vision Fund. Practically none of these companies had any plans to ever break even. All they knew how to do was burn cash. Uber, which has been at it for a decade, is still burning cash hand over fist. That was the model.

The idea was that an endless stream of investor-money could always be relied upon to feed the cash-burn machines and that there would always be a bigger fool eager to buy them at ludicrous valuations.

But that construct started coming unglued mid-2019, and pieces started falling off later in the year and earlier this year. Now there is Covid-19 and the lockdowns, and everything has changed, and even strong companies are struggling for survival and for bailouts, and who knows what’s even left over from SoftBank’s hyped and inflated startup universe when we come out at the other end of this.

Regular folks need not apply. Read… QE-4 Cut in Half this Week. Fed’s Helicopter Money for Wall Street & the Wealthy Hits $1.8 Trillion in 4 Weeks

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