Beyond WeWork: How A Japanese billionaire VC took $60 billion from the Saudi, Abu Dhabi wealth funds and inflated unicorns worldwide

Son overrode his lieutenants’ objections and handed WeWork founder Adam Neumann billions of dollars from both SoftBank Group Corp. and the Vision Fund, lifting the co-working office space’s valuation to an astronomical $47 billion in early 2019. Just months later, investors balked at the deep losses and conflicts of interest WeWork’s IPO filings revealed.

WeWork’s subsequent nosedive is costing SoftBank more than the estimated $11.5 billion in equity losses and another $2.2 billion in debt still on the line. WeWork’s very public decline, along with the Vision Fund’s record loss of $32 billion last year, battered Son’s standing as a shrewd investor who scored one of venture capital’s legendary wins through an early bet on Chinese e-commerce leader Alibaba Group Holding Ltd.

“You can recover from mistakes, but how do you recover from the perception that you don’t know what you’re doing?” said Aswath Damodaran, a professor at New York University’s Stern School of Business. “His actions say, ‘I am arrogant.’”

Son’s experience of emerging from the dot-com bust with a few winners like Alibaba may have compromised his judgment, Damodaran said.

“Before WeWork, the perception was that SoftBank was an incredibly careful, clever, visionary organization under Son,” he said. “But I think success sometimes goes to people’s heads. The fact that they were successful might’ve made them a little too convinced that they knew more than everybody else. And therein lies the seeds for the eventual fall.”

Son set up SoftBank’s Vision Fund in 2017 to be the world’s biggest technology investor and proceeded to pour more than $140 billion into hundreds of startups. His tendency to bid up valuations and give founders more money than they asked for earned him recriminations from Silicon Valley rivals.

Son himself credited his decisions to gut instinct, citing the sparkle in a founder’s eyes or inspiration akin to the Force in Star Wars. But that trust in his own intuition may have made Son unwilling to heed red flags, opposition from his advisers and even qualms raised by Neumann himself, according to former officials from both SoftBank and WeWork.Play Video

“I fell in love with WeWork,” Son told shareholders in June, adding that some on his board warned him his faith was misguided. Son had encouraged Neumann to think bigger, he acknowledged. “I may be more at fault than Adam, for telling him to be more aggressive.” 

Even after WeWork had to pull its planned IPO in 2019, SoftBank stepped up with a $9.5 billion rescue package. Son defended his decision in a presentation that included a “hypothetical” path to profitability for WeWork.

The impact of Son’s infatuation with WeWork and other startups was magnified by the initial $60 billion committed by the Saudi and Abu Dhabi wealth funds to the first Vision Fund. Son’s determination to mint unicorns at breakneck speed by pushing startups to scale up inflated valuations around the world, as rivals such as Tiger Global Management and Sequoia Capital were pressured to match the Vision Fund’s big checks. It only took a few years for such values to come crashing down when spending failed to translate into sales, profits and IPOs.

“It is not just the investment losses that are important but the story behind it,” said Kirk Boodry, an analyst at Astris Advisory. “The massive cash infusion drove the artificial high valuation and hubris that preceded the eventual crash.” 

SoftBank’s Vision Fund segment is expected to have earned a profit in the September quarter, but performance remains poor. SoftBank has lost billions of dollars on bets on companies such as Chinese ride-hailing app Didi Global Inc., while Katerra Inc., OneWeb Ltd., and Zume Pizza Inc. have filed for bankruptcy or shut down operations.

The mounting losses prompted Son to all but halt investment activity last year, cut Vision Fund jobs and adopt stricter due diligence. Son also stopped leading earnings calls. 

That restraint, along with chip designer unit Arm Holdings Plc’s $4.9 billion Nasdaq IPO in September, now gives the early backer of artificial intelligence the cash to go back on the offensive again.

“The bankruptcy just puts a cap on the downside for Vision Fund 1 and for Vision Fund 2,” Astris Advisory’s Boodry said, adding that interest has now shifted to what Son will invest in next. “People are less worried about the losses in the portfolio.”

NYU’s Damodaran is not convinced. Only one person calls the shots at SoftBank, roughly 30% owned by the billionaire, and Son’s investing style is unlikely to change, he said. 

SoftBank is often said to apply a venture capitalist’s mindset to late-stage investing. But venture capital is supposed to consist of small bets, and the Vision Fund was “SoftBank on steroids,” said Damodaran. “It’s meant to be small and he made it huge.”

“By having tens of billions, hundreds of billions of dollars behind you, you make every overreach you do even bigger,” he said. “That might explain how you make mistakes as big as WeWork.”