A famous investor published notes today concerning its startup investments, detailing where they excelled and where they struggled. To understand why we care about this particular investor’s results, a little context helps.
The investor in question is Japanese telecom giant and startup benefactor SoftBank, which reported its fiscal year’s results this morning. SoftBank’s investments are famous because of its $100 billion Vision Fund effort, which saw it put capital to work in a host of private companies around the world in an aggressive manner. The information it shared this morning included a slide deck detailing the conglomerate’s view of the future of unicorn health, and notes on the conclusion of the SoftBank Vision Fund’s investment into net-new companies. SoftBank’s earnings have made headlines around the financial and technology press, especially regarding the performance its investments into Uber, an American ride-hailing company, and WeWork, an American coworking startup. The former’s post-IPO performance has led to a lackluster outcome for SoftBank, while the implosion of WeWork after its failed IPO has continued; SoftBank’s reporting noted a new, lower value for WeWork. The rest of the information painted a picture of mixed outcomes, with SoftBank recording wins in enterprise-focused deals and “Health Tech” investments. Other invested sectors saw less salubrious results, including the three we’ll focus on today: consumer-focused deals, transit-related investments and real estate-related outlays. Let’s explore what SoftBank had to say about each. Then we’ll see what we can infer about the broader startup market itself.Results
SoftBank’s Vision Fund made big bets into Uber and WeWork, two companies that fit into the sectors we are exploring. To provide investors with clarity of its outcomes outside of those two outsized and troubled bets, the company broke out sector performances less their outcomes. Here’s how SoftBank described those results, first discussing some business wins in the COVID-19 era before getting to the bad news:Following the outbreak of COVID-19 from the beginning of 2020, although the fair values of some portfolio companies in e-commerce, health care and other businesses increased as a result of their strong business performance, many portfolio companies’ fair values decreased because their business activities have been disrupted and outlook for cash flows has deteriorated due to stagnant economic activity and lockdowns implemented globally. In particular, the total fair values of the Consumer sector, the Transportation & Logistics sector (excluding Uber), and the Real Estate & Construction sector (excluding WeWork and its three affiliates) declined by $3,257 million, $2,381 million, and $2,196 million, respectively, and consequently the same amounts were recorded as losses.What are the winners? Guardant Health generated nearly $1.7 billion in wins for the company (its sales were roaring even before it began working on COVID-19 related efforts), Slack (which has recovered from lows thanks to a COVID-19 driven surge in usage), and several other health-related investments. Then there are the firms who saw their “fair values” fall.
Losses
It is not surprising that SoftBank’s diverse and large Vision Fund portfolio had some companies take hits due to COVID-19; many firms large and small are struggling. But the scale of the adjusted sector performance (each would be worse if they included the outsized-losses driven by Uber and WeWork) is notable. Thankfully, the Vision Fund details which companies fall into each group so we can tell what’s up. Starting with consumer, SoftBank has some winners. ByteDance, for example, is a Vision Fund investment and has seen its TikTok app become a global phenom. But SoftBank’s investment in OYO is struggling, and it put money into Klook (a travel-related investment), Fanatics (sports apparel when sports are largely on hold), and GetYourGuide (another travel-related consumer deal). You can start to color in where the SoftBank and the Vision Fund sees weakness. Repeating the same effort for the transport and logistics group, we might anticipate valuation issues at Didi (ride-hailing, similar to Uber), Fair (flexible car ownership), Getaround (flexible car share), Grab (ride-hailing and other services, similar to Uber), among other firms. There are winners in these groups as well, of course, but since we know their net value change was negative we can highlight weaker areas without being rude. Finally, real estate and construction. The firm has investments into Clutter (self-storage), Compass (software for real estate folks), Katerra (prefab construction materials and logistics), OpenDoor (home selling and buying software), View (high-tech glass), and, of course, WeWork. It’s a little harder to point to potential weakness in this group. We’ll leave it to you. But, we know that there are some stragglers in the group, given its non-WeWork losses.So what?
The sectors that SoftBank detailed are the same that we would have guessed might struggle. But the conglomerate’s write-downs show that even the best-funded outfits in those areas are no exception; capital won’t save their business in the short-term, except for perhaps providing more runway than other, less-wealthy startups might have. To some degree this feels counter-narrative. Tech shares have rebounded in recent weeks, rebuilding sentiment in the sector — perhaps the COVID-19 downturn won’t be that bad, the thinking seems to go. The SoftBank Vision Fund’s results paint a more negative picture of the economy: It’s bad in many areas, lots of companies are impacted and the value of many unicorns is too high, even if the scale of write-downs that private investors like venture capitalists will have to endure is not yet clear. The private market can, therefore, expect a host of down-rounds if unicorns need to raise capital in the short-term. And many will. The Vision Fund report card, then, is an indication that enterprise software is doing as well as we might have thought, that there are some winners in the health-tech space and that, aside from those exceptions, the rule appears to be a downturn in startup land.How does it know?
The Vision Fund invests in “high-growth-potential companies that are leveraging AI, particularly in private companies valued at over $1 billion, colloquially known as ‘unicorns,'” SoftBank notes in its earnings report. How did it determine the new value of its equity? After all, if the companies it owns pieces of do not trade, how can it know? Here’s how the company described its technique, first describing what went wrong, and then how it came up with new numbers:The stagnation in economic activity, restrictions on social outings, and stock market disruptions in various countries due to the outbreak of COVID-19, have had, and are expected to continue to have, a significant impact on the business activities and fair value measurement of the portfolio companies of SoftBank Vision Fund. While this has had a positive impact on the operations of some of the portfolio companies in businesses such as e-commerce and health care, it has disrupted the business activities of many of the portfolio companies and caused a deterioration in their results of operations and, ultimately, the fair value measured in the Company’s consolidated financial statements. The fair value measurement of portfolio companies as of March 31, 2020 was based on current expected company-specific COVID-19 impact, liquidity positions of each company, market conditions and comparables, and increased market volatility.We raise this to point out that the valuations presented are generated in a way different than how stocks are valued. You could argue that SoftBank is being either too harsh, or too generous, with its own portfolio companies. Sadly, given that the IPO window appears to be mostly closed, it will take a long time to figure out. Today SoftBank investors were given the results of the parent company’s investments through the first weeks of the COVID-19 era. If SoftBank has to execute more write-downs in the current quarter, that would make it even harder for the Vision Fund to live up to its financial goals. Perhaps Slack can go up a few more points.