WeWork and its collapse is more ‘black swan’ than unicorn
While it could be argued that WeWork’s decline was predictable, few expected it to implode on this scale
SoftBank’s WeWork debacle is unlikely to be repeated. It also means that for the Vision Fund to deliver venture capital-size returns, it’ll need to rely on singles and doubles instead of hitting home runs.
That’s not because Masayoshi Son has learnt his lesson. His defiance at an investor conference on Wednesday, including almost an hour spent justifying the WeWork investment, tells me that SoftBank’s chair hasn’t changed.
But simple mathematics indicates that WeWork won’t happen again. The Vision Fund has $97bn, of which it’s already deployed more than $85bn and has ceased making new investments. It has 88 portfolio members, which means it has doled out about $1bn apiece. Before SoftBank’s non-bailout bailout1, the Vision Fund and SoftBank combined had invested $10.5bn into WeWork with a valuation of $47bn.
Only three investments come close: the Vision Fund has put $5.3bn into ride-hailing company Didi Chuxing2, with a price tag of $56bn; $3.5bn into Grab Holdings, with a valuation of about $14.3bn; and just under $3bn into video platform ByteDance, valued at about $75bn.
Rather than plough the remaining $12bn or so left for follow-on investments into any single mega-unicorn, the Vision Fund would probably get better returns putting the cash into smaller start-ups. Theoretically, there’s a lot more upside to giving $1bn to a nobody than $10bn to a somebody.
This means that by both size (the large amount committed), and scale (its almost 30% stake), WeWork and its collapse are more like a Black Swan than a unicorn representative of the Vision Fund’s broader portfolio. In his 2007 book — The Black Swan: The Impact of the Highly Improbable — Nassim Nicholas Taleb writes about the extreme effects of rare and unpredictable outlier events. While it could be argued that WeWork’s decline was predictable, few expected it to implode on this scale.
The uniqueness of the WeWork mess was on display in SoftBank’s September-quarter earnings. Its $4.6bn writedown on WeWork was a significant contributor to SoftBank’s first loss in 14 years. Rare, yes. Unpredictable, somewhat. Extreme effects, absolutely.
Based on its current investments, only a full write-off on Didi could top the havoc caused by the office-rental company. But if we’re going to see another huge loss in the portfolio, it’d probably be an encore performance by WeWork.
There are two caveats to this analysis: The Vision Fund could well put that $12bn or so back into ByteDance, Didi or Grab, boosting exposure. Or the Vision Fund 2 may come along and invest into existing portfolio companies, and even find new mega-unicorns to prop up. The latter, while possible, seems unlikely because the runway of huge start-ups is quite limited.
The flip side to such lower exposure is that the rest of the companies in the Vision Fund’s portfolio are too small to drive huge returns. I managed to track down the names and valuations of 64 of the fund’s portfolio companies and found that only seven have a valuation of $10bn or more, while 10 are in the $5bn-$9.9bn range, according to data from SoftBank statements and CB Insights’ unicorn list. More than half have price tags of $2bn or less.
I suppose you could argue that this gives the Vision Fund plenty of upside. Yet it’s also true that a large portion of those start-ups will amount to nothing, literally. It’s the nature of venture investing that most of the companies you bet on die before you see a dime in returns. And there’s no evidence to suggest that Son and his team are better at picking start-ups than anyone else (quite the contrary, perhaps).
While swinging for the fences on dazzling start-ups may excite the crowds, a run is a run even if you get there by bunting.
(1) Son insists it wasn’t a bailout. Most everyone else disagrees.
(2) The exact amount isn’t clear. SoftBank filings show that Didi was the only holding in its Delta Fund as of September 30 2018, with SoftBank transferring its stake to that fund for $3.7bn. It is then reported to have invested a further $1.6bn.
• Culpan is a Bloomberg Opinion columnist covering technology.