Plummeting evaluation of WeWork IPO causes major stress to its biggest investor

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While WeWork plans to quote on public markets with a much lower valuation than previously expected, its main support (SoftBank Group Group Corp. in Japan) is preparing for a potentially dizzying loss, a brutal reminder of the risks of a strategy. investment that has inflated start-ups assessments across Silicon Valley.

SoftBank holds approximately 29% stake in WeWork's parent company, WeWork's parent company said Wednesday in a phone interview with analysts after the company invested a total of $ 10.65 billion . The massive participation of the Tokyo conglomerate is a vote of confidence in this unprofitable society, which lost about $ 1.61 billion last year.

More than any other start-up, WeWork has become the symbol of the brazen investment style of SoftBank and its $ 100 billion Vision Fund, known for investing heavily in promising but untested companies, and encouraged other players in the sector to do the same. The success or failure of WeWork's initial public offering is likely to be interpreted as a statement about the overall position of SoftBank, the judgment of its executives and its ability to raise funds for future projects.

Now, SoftBank's big gamble may already be going badly, as WeWork is considering an IPO that would be less than half of its $ 47 billion value when SoftBank invested earlier in the year. year. The New York-based company is now considering investing $ 20 billion to $ 30 billion in the market, fueling tensions between SoftBank's employees.

WeWork's IPO comes at a critical time for SoftBank, which is currently trying to convince investors to fund a second iteration of its $ 108 billion Vision fund. The company is already eliminating the fallout of another poor IPO. SoftBank invested $ 7.7 billion in Uber, whose market value fell rapidly after the public listing of the shares at $ 45 in May. Since then, the price has dropped to around $ 35, which is well below the price SoftBank pays for part of its stake.

Some Vision Fund staff now fear that WeWork's valuation will fall to less than $ 20 billion – the valuation of SoftBank's initial investment by the Vision Fund, according to people close to the company who have asked not to be identified to discuss private matters. Because the Vision Fund is highly exposed to WeWork, it will play an important role in the compensation of fund employees. Vision Fund employees are not paid transaction by transaction, unlike other venture capital firms. Vision Fund employees, including bankers and high-level investors, receive base salaries and bonuses, but only receive payments when earnings are recognized. They are also looking for potential losses, with recoveries of 20% and above for some executives and 7% for less experienced employees.

It is also possible that WeWork is delaying its IPO. Adam Neumann, CEO and co-founder of WeWork, pledged earlier this year to SoftBank's managing director, Masayoshi Son, that WeWork has an investment value of less than $ 47 billion, according to sources close to the file. A spokeswoman for SoftBank declined to comment on this story. Neumann also met with Son in Tokyo last week to discuss a possible capital injection, the the Wall Street newspaper reported, citing unidentified people familiar with the subject. The possibility that SoftBank will invest money to allow WeWork to delay the IPO in 2020 was also mentioned during the discussions, the document says.

The massive SoftBank bet in WeWork is emblematic of Son's global approach. "Why do not we do the big bang?", He told Bloomberg during a talk last year, when asked about his investment style. , adding that other venture capitalists tended to think too small. Its goal of changing the course of history by supporting companies likely to change the world requires that they invest considerable sums in areas ranging from acquiring clients to hiring talent , going through research and development, a spending tactic that sometimes puts it in conflict with other investors.

"The other shareholders are trying to create clean and well-managed small businesses," said Son. "And I say," Let's be rough. We do not need to polish. We do not need efficiency at the moment. Let's do a big fight. Let's make a big success, a big victory. ""

Sometimes, however, the other investors with whom he comes into conflict are his own. The founders of Vision Fund, including the Saudi public investment fund and Mubadala Investment Co. in Abu Dhabi, canceled a $ 16 billion investment earlier this year in WeWork that Son had defended, which Son had alluded to in an interview with CNBC in March. SoftBank ended up investing only $ 2 billion separately from the Vision Fund.

SoftBank's huge gamble on WeWork also caused friction among members of the Tokyo society itself. While Son has the last word on the investments, WeWork is seen internally as the bet of Ron Fisher, a Boston-based SoftBank executive and a long-time supporter of Son, officials said. Fisher, who grew up in South Africa, is the highest paid executive of SoftBank with a payout of $ 31 million in the last fiscal year, 62% more than the previous year.

Before SoftBank invested for the first time in WeWork in 2017, Mr. Fisher had met with IWG Plc, a European competitor whose valuation was much lower and, at the time, 10 times more sites, said people knowing the subject directly. Some Vision Fund employees were surprised when, instead of convincing Fisher not to invest in WeWork, there were indications that he was not favored, leaving him with the impression that the young company was going to experience phenomenal growth. The son accepted. A month later, the Vision Fund led a series of investments of $ 4.4 billion in WeWork with a valuation of $ 20 billion. Fisher and Mark Schwartz, former Chairman of the Board of Goldman Sachs Group Inc., a member of SoftBank's Board of Directors that year, joined WeWork's Board of Directors.

WeWork, by far the largest of SoftBank's real estate investments, is the backbone of Son's broader real estate strategy. In all the sectors where SoftBank bets, such as financial services, transport, healthcare, etc., too many small companies with obsolete technologies are holding back the sector and creating opportunities for greater iterations. SoftBank also supported start-ups such as Compass, brokerage services provider, mortgage lender Social Finance Inc., and Katerra Inc., a construction technology company, who believe that these companies could join together and drive growth in the industry. in general.

However, Fisher and Son's plans were not shared wholeheartedly by Vision Fund investors. It is partly for this reason that SoftBank's stake in WeWork is split between SoftBank and its giant technology fund. According to financial reports, out of the 114 million SoftBank WeWork shares, around 64 million are held by the Vision Fund, with the remainder belonging to the SoftBank group. Once SoftBank has finalized a contract that will allow it to buy more shares next year, the SoftBank Group's stake will increase to about the same amount as Vision Fund, according to reports. A spokeswoman for SoftBank declined to comment on the reasons for the split.

SoftBank indicated in its results for the quarter ended June that the fair value of the Vision Fund was $ 82.2 billion. The cost of investing in the latest results was $ 66.3 billion, up from $ 60.1 billion in the prior quarter, and the fair value does not reflect the few abandoned Vision Fund investments, such as the 146.68 billion yen that the Vision Fund realized during the sale. his participation in Indian retailer Flipkart at Walmart last year.

For the most part, fair value includes portfolio companies that have made IPOs because Vision Fund generally holds most of its shares instead of selling them at the time of the IPO, as this was the case with Uber. This means that as the price of these listed shares declines, the fall will reach the fair value of the Vision Fund in the next published results. The Vision Fund will be able to record increases through successes such as Guardant Health, a listed holding company last year. with a steady rise in share prices, but this is still far from offsetting the expected declines in other assets. Similarly, any decline in this valuation upon the registration of WeWork will have a negative impact on the fair value of Vision Fund.

His son, a famous long-time thinker who sketched plans for humanity over 30 and 300 years, might well imagine a bad performance for WeWork as a hindrance on the long road to world change. It is not obvious that Vision Fund can do the same thing.

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