One would be hard pressed to think of a worse investment in recent memory than WeWork, the high-flying office rental start-up that crashed and burned last month after an aborted attempt to go public, leading to the ouster of founder Adam Neumann. But the failed IPO did more than cement WeWork as a cautionary tale about the importance of growth versus profit, undemocratic corporate governance, and the spuriousness of “tech” as a venture category. It has also called into doubt the wisdom of the private markets, in general, and that of Japanese investment firm SoftBank in particular. How could Masayoshi Son, the visionary founder of SoftBank’s $100 billion investment fund, have gotten WeWork so wrong?
“There was a problem with my own judgment,” Son admitted Wednesday as he revealed the magnitude of the financial hit SoftBank took from the WeWork misadventure. “That’s something I have to reflect on.”
The operating loss, per Bloomberg, is indeed seismic: nearly $6.5 billion, of which $4.6 billion can be attributed to WeWork. It was SoftBank’s first quarterly operating loss in 14 years. Son’s own net worth reportedly plummeted some $6 billion amid the fallout, dropping to just under $14 billion. “No excuses,” Son said, absorbing the blame for substantial write-downs in both WeWork and Uber, another SoftBank investment that has continued to hemorrhage money.
Not one year ago, both WeWork and Uber seemed to be promising, if not profitable, businesses. Despite serious questions about its corporate management and its business model, WeWork was valued at $47 billion in January, making it the country’s highest-valued anticipated IPO. Uber, meanwhile, was set to go public, with big talk by CEO Dara Khosrowshahi about how the ride-share giant was basically the next Amazon. But Uber’s public offering flopped big time in May, raising questions about the prospects for other unicorn tech IPOs. Its share price has continued to deflate over the past six months, and slipped again this week as investors await the expiration of the company’s IPO lockup agreement.
Wall Street doubts about Uber likely contributed to heightened scrutiny of WeWork, which began to look worse the closer investors got to the underlying financials. For years, Neumann had relied on private investment to grow his office-sharing empire without concern for profitability. But when WeWork gave public markets a peek at its books in an IPO prospectus, investors blanched. Critics argued that the “space-as-a-service” startup wasn’t really a scalable platform, but merely a real estate company masquerading as a tech company. Wall Street got spooked by reports that Neumann had cashed out at least $700 million through share sales and loans borrowed against his stock. Reports of lavish spending, suspicious investments, drug use, and a dubious scheme to license the trademark “We” to his own company for $6 million, eventually made Neumann radioactive.
At the end of October, seeking to end the nightmare, SoftBank agreed to pay Neumann as much as $1.7 billion as part of a takeover deal that saw the founder resign from the firm’s board. “I shut my eyes to a lot of his negative aspects,” Son said Wednesday, according to the Wall Street Journal.
The SoftBank founder remains defensive about his overall record, but the real test is still to come. “Son’s handling of WeWork raises some fundamental questions about his investment strategy that need to be addressed,” Jefferies Group senior analyst Atul Goyal told Bloomberg. “There will be more failed investments in the future, how does he plan to handle them?”