After the meltdown at WeWork, attention is shifting to the valuation of another SoftBank-backed company, Oyo, the Bangalore-based hotel chain that has been one of the great success stories of the Indian startup scene.
The scrutiny follows a series of transactions in which Oyo founder Ritesh Agarwal bought out the stakes of several early investors, including Lightspeed Venture Partners and Sequoia Capital's Indian and Southeast Asian investment arms, at seemingly high valuations. As it happens, his purchases of these stakes was financed by several Japanese financial institutions that are close to SoftBank.
Only slightly less damaging was the news that Sequoia's Chinese arm had signed an agreement to look at investing in Oyo's China operations -- but ultimately decided not to invest, after concluding the numbers did not add up, according to one person with direct knowledge of the matter.
While it isn't yet clear what the ripple effects of the developments at SoftBank-backed WeWork and Oyo will be, the impact will likely have a sobering effect on young tech startups and their backers on both sides of the Pacific.
SoftBank's approach to tech hitherto has been to eliminate competition by giving its portfolio companies more money than anyone else. This funding would allow the recipients to scale up fast and build near-unbeatable, market-dominant positions -- much as established tech giants such as Amazon, Google or Alibaba have done in their respective markets.
Yet these SoftBank-backed companies may now be losing their aura of invulnerability. That is because the market has lost faith in SoftBank's and the Vision Fund's ability to supply endless capital to their young startups.
SoftBank money has always been seductive for entrepreneurs. Other investors generally do not dole out higher valuations to cash-starved entrepreneurs, especially in India, with its paucity of domestic risk capital. But by taking SoftBank money, "entrepreneurs are on a treadmill," said an Indian venture capitalist located in Singapore. Given general market skepticism about these companies actually being worth what SoftBank values them at, "the valuation becomes a sword hanging over you."
In fact, many entrepreneurs say SoftBank financing has become a negative brand and that a coalition of other investors can be more effective than SoftBank in equipping startups to survive in increasingly competitive environments. These coalitions can enable young startups to keep more control and avoid the dreaded "down rounds," in which the latest valuation is lower than the previous.
A look at a hotel chain competing against Oyo shows how the landscape has changed.
Amit Saberwal is the founder of RedDoorz, a Singapore-based hotel chain, who hopes to be among the beneficiaries of the new and more sober approach to tech finance in the region.
Mr. Saberwal, who was an early staffer at MakeMyTrip, one of the first and largest of India's consumer internet companies, has some formidable investors. His early backers include the World Bank's International Finance Corporation, Susquehanna Investment Group and Asia Partners.
Yet initially "we struggled to raise money at RedDoorz," an early investor based in Singapore said. "Our competition became the investor behind Oyo. We needed to find investors who could compete against SoftBank. Even a month ago, nobody knew how to compete against SoftBank."
But as SoftBank continues to pile funds into some of its loss-making investment targets -- this week it presented WeWork with a $9.5 billion rescue package -- rivals hope that the combination of pressure on SoftBank and its companies, plus greater focus on less ruthlessly competitive markets where SoftBank is less active, will mean a greater chance of survival and prosperity.
For RedDoorz that means not taking on Oyo directly in its home market, but battling it in third markets like Indonesia and elsewhere in Southeast Asia.
Mr. Saberwal is among the entrepreneurs and venture capitalists sitting in Singapore who believe the promise of India will ultimately prove less compelling than opportunities in Indonesia and Southeast Asia, where GDP per capita is higher, the infrastructure is better, protectionism lower and competition less severe.
"India is overcapitalized," Mr. Saberwal declares summarily of Oyo's expansion overseas. "Southeast Asia is underpenetrated both by technology and capital."
It remains to be seen if Mr. Saberwal can succeed as he challenges Oyo. His business model will continue to require skillful, and expensive, execution.
Still, if he struggles because the playing field is becoming more level and less pumped up by the illusory promise of unlimited funds, that has to be healthy for RedDoorz and everyone else.
Indeed, the fact that these are more sobering times for tech should be celebrated rather than lamented. If some of the froth is now blown off the sector, that will make a more violent correction in valuations less likely later, which can only be a good thing.
Henny Sender is the Financial Times' chief correspondent for international finance, based in Hong Kong, and contributes occasional columns to the Nikkei Asian Review.
