May 21, 2020

SoftBank’s $9B Loss Hammers Home Silicon Valley’s Need for a Shift in Focus.

SoftBank’s Vision Fund has been a huge economic and philosophical force in the tech sector over the past 3 years. Since closing its funding round on May 20th, 2017, the fund had poured nearly $100 billion into burgeoning tech startups, including Uber, Slack, Nvidia, Doordash and many others.

But the last year hasn’t been too kind to the Vision Fund. Uber, once a red-hot commodity, has cooled considerably after a suboptimal IPO that made it quite clear that there was no hope of profit anywhere in sight.

Then there was the WeWork disaster: another zombie unicorn that crumpled as soon as investors really began to scrutinize what was under the hood. Once valued at $47 billion, SoftBank invested nearly $19 billion in the company. WeWork’s value today? Just $2.9 billion. 

COVID-19 made matters significantly worse for both investments, and on May 18th, SoftBank reported a $9 billion loss for FY 2019, their first annual loss in 15 years. This number was largely propelled by a $17.7 billion loss from the Vision Fund, and will no doubt have some serious implications moving forward.

For one, the failure of the Vision Fund has sent investors running away at full speed from Vision Fund 2, which we discussed at length in our blog back in August.  Vision Fund 2, which was aimed squarely at pouring massive funding into AI, will now rely on SoftBank money to continue to invest. Between the lessons of Vision Fund 1 and the increased risk of investing their own money, SoftBank likely won’t be so quick to just cut a check to anybody with a good idea this time around.

The second is a major shift in focus for Silicon Valley: profitability.

The troubles of Vision Fund beneficiaries WeWork and Uber were a major wake-up call to tech investors, and this new earnings report has further hammered the point home. Last September and October, as WeWork was cancelling its IPO and SoftBank was pouring a $9.5 billion bailout into the troubled company, a message began resonating loud and clear throughout Silicon Valley: the public wants to invest in companies that can actually make money.

Now that the world’s largest tech fund is no longer doling out free cash, anything left of the start-up hype narrative is pretty much dead and buried. It’s no longer enough to just disrupt. You can’t just “spend to grow.” You actually need to be able turn a profit.

It’s more than likely we’ll be seeing far, far fewer of the “zombie” unicorns that were in vogue in the beginning of 2019. Investors will want a deeper look into the books of these potential darlings and see a clear path to profitability, even if it takes a while to get there.

According to a New York Times article last fall, Eniac Ventures, a venture firm in New York and San Francisco, recently began more closely examining gross margins in their portfolio companies, and ultimately decided that they would begin pushing for more detailed financial models in future meetings with entrepreneurs, even though the companies are still very young.

Even SoftBank CEO Masayoshi Son, who has been called “a one-man bubble maker” for pushing companies to focus their efforts on ambitions over profits, has been telling companies in the portfolio to become more self-sufficient. Vision Fund notables Zume, Wag and Getaround have all scaled back in recent months.

On Monday, one of the Vision Fund’s most well-known companies, Uber, made a large round of cuts as well, closing 45 offices and trimming 3,000 employees from the payroll. CEO Dara Khosrowshahi noted, “We must establish ourselves as a self-sustaining enterprise that no longer relies on new capital or investors to keep growing, expanding and innovating,” a monumental shift from one of the poster children for zombie companies.

The trend has been firmly moving in the direction of profitability-centric operation, and the recent struggles from COVID-19 will only further reinforce the need for sound fundamentals in Silicon Valley.

While SoftBank’s Vision Fund was an exciting prospect, the hemorrhagic bubble it was growing was likely to burst, and burst hard, at some point. Going forward, it will be interesting to see what happens without the $100B Vision Fund in the picture, as competition is wide open once again. The only thing is, this time, the rules of the game are completely different.

What do you think about the future of tech investing? Have you made significant changes in how you evaluate investments over the past year? What does the end of the Vision Fund mean for you? Sound off on social media now and join the conversation.