SoftBank Group has hit a wall in its transformation into an investment company, after having thrown vast amounts of money at startups around the globe. It is time for the Japanese conglomerate to reconsider its growth-oriented strategy and pay more attention to retail investors.
After a wrong-way bet on office sharing startup WeWork, Chairman and CEO Masayoshi Son's SoftBank reported a roughly 700 billion yen ($6.4 billion) loss for the July-September quarter, its worst-ever result for a three-month period.
The winds of fortune have turned against the nearly $100 billion SoftBank Vision Fund, which for a while enjoyed smooth sailing in its search for fast-growing "unicorns" -- unlisted companies valued in the billions of dollars.
The WeWork setback follows losses on investments in ride-hailing company Uber Technologies and work chat app Slack Technologies.
Speaking at an earnings conference, Son said SoftBank had paid too much for WeWork. Unlisted startups have fewer investors than publicly traded companies, so their valuation tends to be swayed by how much a single big backer thinks they are worth -- especially in a world of easy money.
In WeWork's case, this distortion collided with the reality of the stock market. WeWork's parent company, The We Company, shelved a planned initial public offering after the estimated share price proved too rich for a broad range of investors to stomach, and the cash-starved business soon ran into trouble.
SoftBank was willing to tolerate losses at its investments in exchange for accelerating their pursuit of scale, but this strategy has backfired. Its renewed focus on profitability represents a natural correction to past excesses.
But Son also needs to rethink SoftBank's light-touch approach to managing companies in its portfolio. Governance problems need to be met with intervention even at the risk of raising some hackles. Before We's recent governance overhaul, SoftBank had only one director on the nine-member board and was unable to rein in co-founder Adam Neumann's excesses.
SoftBank draws on two sources of capital for its tech bets: its own earnings and the Vision Fund. The Tokyo-listed group, which relies on its core wireless carrier business, has a roughly 9 trillion-yen market capitalization and over 3 trillion yen in outstanding bonds held by retail investors. This broad base of individual share- and bondholders deserves a thorough disclosure of the financial standing of the group's far-flung investments.
Son says the experience has made him "reflect," but not "curl up." That is a worthy sentiment. To achieve his grand vision of a global "artificial intelligence revolution," SoftBank the investor needs to temper dynamism with discipline.