Is SoftBank Destroying the Successful Tech IPO Through Overvaluation?
SoftBank (TYO:9984) has been coming more into the consciousness of Western tech enthusiasts in recent years. Not long ago a relative unknown in the in the West, it was a Japanese telecoms provider but that all changed with a small investment of $25 million 20 years ago during the formative stages of Alibaba (NYSE:BABA). Fast forward to earlier this year and SoftBank booked an $11 billion profit on its stake in Alibaba by selling some of its holdings in what is undoubtedly one of the biggest success stories of the Chinese tech industry. If you're interested, you may wish to read more of the background about SoftBank's transition from a telco to a structured finance house here.
Since then, Masayoshi Son has pivoted his focus from the telco business to tech investing with the huge Vision Fund, a $100 billion, heavily Middle-East backed investment fund aimed at identifying and investing in the tech industry across a range of sectors. Previous comments from SoftBank have indicated that it is heavily focused on investing in the area of AI (read our coverage here) but that hasn’t stopped its roving eye from investing in everything from WeWork (effectively a serviced office space company) to Uber (NYSE:UBER), Slack (workplace messaging NYSE:WORK) and Wag (a dog walking app).
Masayoshi Son’s stated ambition is to change the face of the planet for humanity through technology and to develop a portfolio of companies which will see technological advancement proceed at a ridiculous pace and guide our future through multiple generations and long after anyone reading this today is no longer around. Audacious in the extreme, he has chosen Rajeev Misra, a former Deutsche Bank (ETR:DBK) investment banking executive to lead this charge.
The history of SoftBank from a tech investing perspective has involved some big swoops with the company outright buying ARM (the company whose chip designs grace most of our phones/tablets) but today we look at a different question. SoftBank, in its attempt to guide the future of human technological development has found itself trying to upend another industry which it probably didn’t consider itself a disruptor in – namely finance.
SoftBank – Bumping Against Public Markets With Obscene Valuations
As the old saying goes, you can be right all day long but if the market thinks you’re wrong, get the &*($& out of the way. SoftBank has the luxury of being able to out-muscle pretty much any other venture capital investor out there if it wants to get a piece of the action from a company that has caught its eye and accusations in the past of behaviour equivalent to a big stack poker bully while vying for investments have been rumoured. The trouble is, as big a pile of money as SoftBank has at its disposal, public markets have more and this is a reality that the firm needs to get to grips with and fast.
Recent IPOs in the shape of Slack and Uber have underwhelmed and are currently sitting underwater (Slack is about 4% down on its IPO placing price having lost about half a billion in market cap while Uber is down over 34% on its IPO price, equating to a loss of over $26 billion).
WeWork effectively collapsed under the weight of public scrutiny in the run up to its disastrous attempt to go public resulting in a significant change in the shape of its CEO Adam Neumann stepping down and accepting a significant curtailing of his voting rights (as we covered pre and post the attempt here and here). SoftBank’s valuation of the company at its last funding round has seemingly collapsed although we obviously can’t particularly easily put a dollar value on the firm today given it didn’t actually float.
Wag, the dog-walking app which SoftBank poured $300 million into putting a cheeky $600 million valuation on the company has been struggling recently in light of competition, layoffs and management reorganisations and there is obviously no talk of an IPO. At the same time, other private companies which have previously stated they are exploring an IPO now seem to be having second thoughts about going public in such market conditions with Palantir a highly anticipated example apparently pushing plans for an IPO which was thought to be on the cards for 2019/2020 now being rumoured to not happen until 2022/2023 at the earliest.
Apparently Palantir is now courting further private funding rounds from… you guessed it, no prizes here: SoftBank, as well as Singapore’s Temasek Holdings investment company, a $300 billion plus fund that focuses on a broader range of industries than the Vision Fund.
What Does This All Mean for the Traditional IPO “Pop”
IPOs are tricky things. Just this week, Benchmark Capital tech investor Bill Gurley was banging the drum against the IPO process on Bloomberg (here) railing against what he sees as a transfer of wealth from companies to investors, often associated with the day one IPO pop, where a stock price jumps immediately after the company goes public. This took place against a backdrop of a Silicon Valley invite only event to discuss direct listings as an alternative to the traditional IPO process. An invite only event that specifically excluded the major IPO underwriting investment banks.
The problem here however is that direct listings themselves generate no new cash for the company itself and since they eschew the banks which attempt to build the IPO book and reconcile everyone’s requirements out of the IPO (company wants to raise cash, investors may want a large holding, company may only want investors it is convinced will hold the majority of the stock long term among other factors), a lot of the soft factors outside of cash are left by the wayside. This isn’t necessarily the end of the world but can also result in greater price volatility and investor caution as putting large orders trying to get a significant stake in a company early on can result in the market moving against you.
It’s also worth keeping in mind that the IPOs Bill Gurley and others speak out against as transferring significant value to the IPO investors (the implication being that the IPO underwriters undervalued the company during the book build and left money on the table which should have gone to the company) has often in high profile IPOs been wiped out:
- Lyft (NASDAQ:LYFT) popped almost 9% on day one and is now over 45% down.
- Slack popped almost 50% on day one but as mentioned earlier is now down 4% on its IPO price.
In addition, besides Uber which has only traded above its IPO price a couple of times since coming to market in May and as mentioned earlier is down by over a third on its IPO price, Peloton (NASDAQ:PTON) has never traded above its IPO price since its IPO a week and a half ago.
Gurley also went on in his interview to say that the private markets are awash in cash and therefore companies should think twice before trying to raise cash via an IPO, which of course makes sense, he’s trying to ensure that the value which is currently regularly captured by investment banks in their fees and their buy side clients in terms of investment return out of an IPO is transferred both to the company’s in question, as well as to the companies which fund them in the private rounds (companies like his). So in a sense, everyone is talking their own book.
SoftBank and other firms like it which are throwing money around in private markets feel like they have definitely been damaging the traditional IPO. Public markets are starting to question the huge valuations they have been throwing around. It also means that major gains in a company are being hugely eaten into long before retail investors have a chance to get in on the action. This is damaging to the longer term faith in the markets, if retail investors can only pile into a stock once it is a late stage company and major early growth trajectory value has all been eaten up by venture capitalists, if all these companies keep going public at huge valuations late on in the economic cycle, it won’t take long for investors to get burned in an economic downturn when they bought at the peak and perhaps exercising greater caution in future late stage IPOs.
Longer term, this could obviously lead to a detrimental affect on the valuations of these companies and the fundraising they can do in private since VC funds can point to numerous IPOs which haven’t looked so great in their conversations with companies trying to put a number value on them before investing.
VC funds and seed funding rounds absolutely have a place in the value chain and path towards start-up companies growing and making their way to publicly traded status. The key however is that all parts of the value chain need to be able to get something out of the overall process. That includes the companies and their employees of course, also VC funds, but also the middle and late stage investors and investment banks that come onboard during an IPO and are looking to also realise some return on investment. SoftBank is at least somewhat culpable in driving valuations so high and making companies come to public markets later, resulting in a drain in value from the later investors although it is certainly not alone in that respect.
We've reached out to several of the companies mentioned (SoftBank, Palantir, Uber, WeWork and Wag) in this article for comment and will update with any response.