SoftBank’s investment strategy fails big – but it can still fail well

softbank pepper robot
Image credit: Ned Snowman /

We always hear how digital companies must embrace failure, so should we be freaking out over SoftBank’s investment flops? No … at least not yet.

The business world has gone completely gaga over the news that SoftBank – the poster child for digital innovation investment – announced on Monday that it’s expecting to post a stupefying $24 billion in losses [PDF]. Almost $17 billion of that is attributed to its $100 billion Softbank Vision Fund, while the rest is due to write-offs related to WeWork and OneWeb.

For a couple of decades now, SoftBank founder Masayoshi Son has been heralded as a maverick visionary genius for his company’s telecoms/IT innovations and investments that always seemed ahead of the industry curve. So it’s a shock to many that a number of his recent investments are flopping – or at least that the losses add up to that much.

OneWeb and WeWork are the high-profile examples we already knew about – Barron’s has a good round-up of the others here. Son told Forbes earlier this month that he expects 15 Vision Fund start-ups to go bust this year.

To be sure, that’s 15 out of 88 start-ups Vision Fund has invested in, so it’s not like all of Son’s investments are tanking. I mean, they can’t all be unicorns, can they?

Also, at least some of those failures can be attributed to the COVID-19 pandemic. According to Barron’s, around 40% of the Vision Fund start-ups are in transportation and logistics – two sectors especially vulnerable to the pandemic. So it’s little wonder firms like Oyo Rooms, Klook and Gympass are floundering.

On the other hand, the Barron’s report shows many SoftBank-backed start-ups like Wag (dog-walking service), Brandless (personal care products), Zume (pizza-making robots) and Compass (real-estate brokerage) were in trouble before COVID-19 kicked in. And by any measure, $24 billion is lot of money to be losing.

Still, it occurs to me that the hand-wringing over SoftBank seems to fly in the face of one of the consistent mantras of digital transformation: failure is an option.

Whenever we talk about digital transformation, a constantly cited metric of being truly digitally transformed is the ability and willingness of company management to take risks and treat failure as an evolutionary process rather than grounds for demotions and sackings.

So is the SoftBank backlash a rejection of that mindset?

Not necessarily.

Dot-com 2.0 (sort of)

While digital companies are encouraged to adopt a mindset where failure is a learning experience, it’s also important to define failure realistically and fail well – i.e. in a way that allows you to cut your losses gracefully without taking the whole company down with you. That includes doing what you can to mitigate failure before it endangers the whole company.

Clearly SoftBank’s investment failures won’t sink the company (yet). But those failures may also have been self-inflicted, according to Bloomberg’s Tim Culpan, who blames Masayoshi Son’s impatience and recklessness for the company’s losses by paying too much for its investments, pushing start-ups to grow faster than planned and take more cash than they wanted, which encouraged them to burn through it.

If that sounds familiar, that’s because you’re old enough to remember the Dot-com bubble and subsequent bust of the late-90s.

Certainly there are several common denominators in play: lots of revolutionary “change the world” hype, inflated market valuations, lack of profitability, unrealistic growth expectations, and the temptation to throw lots of money around on the assumption that there will always be more.

That said, there are a couple of key differences. One is that in the late 90s, broadband connectivity and consumer IT weren’t ready or widely distributed enough to support most of those services or make them compelling. That clearly isn’t the case today.

The other difference is that during the Dot-com era, the VCs funding the bubble didn’t care about profitability as long as the market valuation led to a major IPO payday. These days, profitability does matter. That doesn’t mean start-ups have to be profitable right away – but they do need to be able to develop a business model that will eventually lead to the black. It’s in the interest of VCs to help them do that, writes Bloomberg’s Culpan:

[…] a good VC shouldn’t just be a loud cheerleader for its portfolio companies; it’s also the wise old voice of reason when founders’ success gets to their head. Savvy VCs can advise when to pivot, when to kill products and when to sell out to a rival.

Instead, the Vision Fund acts more like the loud soccer mom, intent on letting the world know that her kid is best on field and screaming at the coach when the child gets benched.

Lessons learned, or mischief managed?

Culpan might be overselling the reality of VCs as “the wise old voice of reason”, but his point is that SoftBank’s Vision Fund has not been fulfilling that role, and it’s now coming back to bite them. Hard.

If that’s the case, then the issue with SoftBank isn’t the fact that some its investments have flopped, but that its strategy has made the cost of failure much higher than it ought to be.

Put simply: SoftBank failed poorly, not well.

On the other hand, failing well is also a matter of how you learn from your mistakes and recover from that failure. While $24 billion is a huge hole to refill, SoftBank and its Vision Fund are hardly doomed – its investment in Alibaba alone is expected to help it cover that debt. What matters now is whether Masayoshi Son decides to shift his investment strategy to something more conventional, sensible and sustainable rather than trying to live up to his own maverick-genius mythology. RadioFreeMobile founder and analyst Richard Windsor reckons he probably will, and SoftBank will be stronger for it. Critics like Bloomberg’s Culpan aren’t so sure, citing Son’s lack of contrition over WeWork’s epic devaluation.

Whatever happens next for SoftBank, the lesson for the rest of us is that it’s still okay to embrace failure – just don’t be stupid about it.

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