In August 2018, SoftBank founder Masayoshi Son said he’d found the “next Alibaba.” It was a big statement from a billionaire who’d made his name as a savvy investor by effectively discovering Jack Ma 18 years earlier.
Alas, WeWork has not proven to be the next Alibaba – more like a bad punchline. It has also provided a cautionary tale about the bursting of a unicorn bubble that investors should’ve seen coming.
Why didn’t they?
From gurus to dunces
Partly because Son was a key force furiously pumping oxygen into startups. The US$100 billion Vision Fund that Son established in 2016 was not potent enough to underwrite Silicon Valley in toto, but the positive ripple effects of its largess created a risk-on dynamic for tech founders and investors.
The question is how on earth the so-called “Warren Buffett of Japan” fell for WeWork’s snake oil. And the same could be asked of JPMorgan Chase CEO Jamie Dimon, who lavished WeWork co-founder Adam Neumann with billions of dollars of loans.
Son and Dimon now look like dupes as WeWork’s valuation trickles down toward zero.
It hurts. Son this week announced that SoftBank Group lost roughly $4.7 billion on the US-office sharing company in the July-September period — and $6.4 billion overall.
It was SoftBank’s first quarterly loss in 14 years, and WeWork is only the start of its troubles. Add in losses on bets made on Uber, Slack Technologies and Guardant Health, and Vision Fund’s loss mushroomed to $8.9 billion.
The scale of the loss demonstrates the danger of Son’s strategy of betting huge on cash-burning, untested startups. It not only casts a pall on Son’s effort to create a second $100 billion fund, it asks questions of the entire unicorn boom.
Investor cart before horse
WeWork’s tragicomic arc is a microcosm of how investors, Son included, grew too indulgent of risky business models, opaque management structures and messianic founders believing their own publicity.
It also showed how the markets that fund innovation too often generate magical thinking.
That’s what happened back in 2000 when the dot-com bubble was bursting. At the time, many argued that doomed efforts to merge Yahoo and eBay heralded the end of the Nasdaq index’s multiyear bull run – although others say it was the AOL-Time Warner deal that crashed the market.
The unicorn reckoning isn’t the systemic risk event that the 2000 crash was. The Dow Jones Industrial Average, after all, hit an all-time high this week, amid stable US growth.
Just like that episode, though, today’s judgment day owes much to the excessive liquidity sloshing around the global financial system.
It’s no coincidence that the term “unicorn,” in the corporate startup sense, was coined in 2013 (credited to venture capitalist Aileen Lee). Fueling the phenomenon were the previous five years of zero interest rates from Washington to Frankfurt to Tokyo.
All that cash needed a high-yielding home. Where better to park it than in nascent tech firms destined for valuations of $1 billion and beyond?
In recent years, investors piled into high-profile IPOs despite red flags. Overpriced companies had a knack for outperforming. That was true too of private equity punters, many of whom had more cash than they knew what to do with.
Then SoftBank’s Vision Fund stormed in. Son’s colossus created markets that, combined with ultra-low rates everywhere, meant the globe was awash with more money than productive investment destinations.
The cart found itself before the horse. In years past, entrepreneurs clamored to find seed money. Suddenly, it was venture capitalists competing to find and fund the next big thing.
VC gurus enabled big losses at startups and assigned out-of-whack valuations, pyramid scheme-style. Investors and private-equity outfits began banking on their paper gains and leveraging up.
For whom the bell tolls
WeWork was the market’s epiphany. Investors belatedly realized it was more old-school office-management provider than New Economy disruptor.
In a recent op-ed for CNBC, former Nasdaq CEO Robert Greifeld wrote that WeWork’s spectacular fall “rings many bells.” Just like late-1990s startups, WeWork “similarly put a flashy ‘user interface’ on a mundane activity – sub-leasing office space – and wrapped itself in the jargon of world betterment and community to cover a corporate vision that lacks fundamental credibility.”
There are other reasons to conclude the unicorn bubble euphoria has evaporated.
Among them: the vast amounts of capital VC funds and private-equity investors need to deploy to make any real returns. Every single bet, in other words, becomes a near-existential risk.
Behaviors are shifting. God-like CEOs promising to change humankind are now being met with rolled eyeballs, not proffered checkbooks, as investors have figured out how the unicorn magic trick is done.
In the 1990s, all founders had to do was add a “.com” to the end of their name and valuations soared. Today, it’s generating “next unicorn” buzz in the media – or just getting a meeting with SoftBank.
Alas, “fake it till you make it” is no longer a viable strategy. As Wolf Richter, CEO of Wolf Street Corp, points out, there are now too many “overhyped cash-burn machines with gigantic valuations that crashed and burned sometime after their IPO” to count.
His list of shame includes Peloton, Dynatrace, Slack Technologies, Crowdstrike and Pinterest. Each, Richter argues, means “a massive wealth transfer was stopped in its tracks.”
Unicorns on the retreat
Currently, central banks are pouring yet more liquidity into the public trough. In Washington, the Federal Reserve cut rates three times this year. In Frankfurt, the European Central Bank has the accelerator on the floor, as does the Bank of Japan in Tokyo.
Yet, unicorns are facing something approximating extinction, at least for now. One under-appreciated explanation is that the species wandered too far away from what Lee of Cowboy Ventures, coiner of the term, envisioned.
Back in 2013, she called unicorns the “the lucky/genius few.” That has since morphed into the “lucky/mediocre many.” Then, there were 39. Today there are as many as 414, and counting.
It is all very odd – particularly given that Silicon Valley’s best and brightest have in recent years been spending more time creating ways to sell internet ads than to change the world.
Here comes the fallout
The reckoning is already having a chilling effect in Asia.
Indonesia’s impressive success – four unicorns to date – is being eclipsed by sliding commercial property prices. WeWork’s demise is already generating fallout from Singapore to Hong Kong. Tokyo, too, where Son is confronting a fast-changing habitat more inclined to ask questions than invest blindly.
Son will have to be more careful finding his “next Alibaba” – but then, so will investors everywhere. The first step is to look in the mirror.
As analyst Kia Kokalitcheva of Axios points out, Son is not above playing the blame game. He’s taken seven – seven! – opportunities to bale out WeWork co-founder Adam Neumann for over-expanding, over-extending and over-hyping his company.
And it is not as if Son lacked eyes on WeWork’s inner workings.
“SoftBank had two seats on WeWork’s board and has been involved since 2017 – so it’s hard to believe that SoftBank was as blindsided as Son wants us to believe,” Kokalitcheva says. “Likely more accurate is Son’s admission that, in many cases, he ‘turned a blind eye, especially when it comes to governance.’”
The tech world has already fueled one monster bubble due to this blind-eye problem. Now the unicorn bubble is deflating before the eyes of everyone – not just the “genius” set.