I have no intention of making small bets, Masayoshi Son declared, when his tech investment group SoftBank launched its $100bn Vision Fund in 2017. The soufflé-collapse of his biggest bet, WeWork, an office-leasing company with a mission to “elevate the world’s consciousness” but no obvious ambition to make a profit, means a humbled SoftBank will inevitably be making smaller bets for the time being. That has numerous implications for wealthy investors interested in venture capital funds and start-up investing.
First, the bad news: weaker returns are on the way. Venture capital has provided portfolios with some of their biggest investment gains in recent years, but it is becoming clear that private market valuations have been illusory in many cases. Son’s enthusiasm for showering more and more money on start-ups with larger and larger losses at higher and higher valuations collided with reality when public-market investors balked at buying WeWork at anything near the $47bn at which SoftBank’s last equity infusion was priced.
The number of “down-round” IPOs, where companies go public below their last private valuation, had already been growing, with Pinterest among those this year joining a list that includes Box, Blue Apron and Square. Uber, another SoftBank-backed company, had fallen to a market value of $55bn at the end of October, six months after its stock market flotation, compared with $74bn in its last private round.
In the public markets are the end-buyers of private companies, and the public market reset will be followed by another in the private market, as night follows day. The WeWork drama has set back SoftBank’s plans for a second Vision Fund. While VC firms from Bessemer to Andreessen Horowitz to Peter Thiel’s Founders Fund are racing to fill the gap with late-stage investing funds of their own, no one will be copying Son’s the-crazier-and-less-profitable-the-better approach to stockpicking. They can hardly ignore what they now know about public market appetite.
That leads to the good news. The end of the SoftBank bubble will provide wealthy investors and family offices with more of what they want: access to long-term, high risk-high reward private market investment opportunities at a reasonable price.
Already there are indications start-ups understand they may find it harder to cover aeons of losses while searching for a profitable business model. Fair, a car subscription app also bankrolled by SoftBank, laid off 40 per cent of its staff in October. Vision Fund investee companies expect to be told to dial back spending.
This would accelerate if the combination of WeWork’s shocking fall and lower VC returns prompts a retreat by institutions such as public pension funds that are among the most significant backers of VCs. The arrangements under which Adam Neumann, WeWork’s peculiar co-founder and chief executive, was able to run WeWork as a private fiefdom ought never have been tolerated, and VCs will have to make sure founders are on a tighter leash, but if VCs also find they have less institutional money to play with, their appeal to founders could be sharply curtailed.
We will see on that score next year. But companies’ advisers are unlikely to wait to build wider networks of potential backers — including those that want to act as “white knight” rescue funders.
That presents a nice opportunity for wealthy individuals of a business background — especially those whose first fortune has been made in tech. They have the advantage of being able to offer mentorship as well as money, and their multigenerational time horizon makes them the ideal “patient capital” to help a company ride out market squalls.
The WeWork debacle ought to give a kick to another trend, which is scepticism of intermediaries. VC fund managers seem to have been complicit in the SoftBank bubble, or at least ineffectual in preventing it. And not for the first time, banks look like they parcelled out private-company shares to clients of their wealth-management arms less out of a duty to those clients, and more with an eye to winning lucrative investment-banking business from those very companies.
The most ambitious wealthy investors have long sought to make private company investments directly, and those that do not have the expertise or network personally are building family offices with staff that do. After WeWork, and the humbling of Son, the price may soon be right to make some big bets.
Stephen is reading . . .
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