November 12, 2019
When Innovation Efforts Go Wrong
by Paul Carroll
While I generally emphasize the need to innovate, it’s worth stepping back from time to time and realizing that every project is a bet, and that not every bet pays off, no matter who you are.
The point about the inevitability of at least occasional failure has been driven home by the recent troubles for the Vision Fund at Softbank, run by the legendary tech investor Masayoshi Son. The fund was the biggest investor in WeWork, which had hoped for an IPO at a capitalization north of $47 billion, the last valuation at which money had been put into the company. WeWork positioned itself as a high-tech company building a new sort of community, a la Airbnb and Uber, rather than, ya know, an owner and renter of office space. But investors thought otherwise: They put a valuation more like $10 billion on the company, and WeWork pulled the IPO. The Vision Fund took a writedown of more than $9 billion on its roughly $10 billion investment in WeWork and invested a further $9 billion to make sure that WeWork could simply remain a going concern.
Another huge investment by the Vision Fund, in Uber, has tumbled in value as the stock has crashed more than 40% this year. Other big investments by the fund are also raising eyebrows. Wag, an on-demand dog-walking service, hasn’t separated from the competition despite a $300 million investment from the Vision Fund. Nor has Fair, a car lessor for which the fund led a $380 million round, or Plenty, a vertical-farming startup in which the fund invested $200 million. (The old headline writer in me imagines my erstwhile colleagues sharpening their proverbial pencils and preparing to go with lines like, “Fair Is Lousy,” “Progress at Plenty Is Scarce” or “Problems Dog the Wag.”)
The Vision Fund may face even deeper problems than some (really big) bad investments. Because Son was raising an audacious $100 billion for the fund and, seemingly, believed his own PR, he guaranteed investors (largely Saudi) a 7% annual return through bonds he issued them. So far, the fund has paid $1.6 billion to the investors on those bonds, but only $400 million has come from returns on the fund’s investments. The rest has come from the capital in the fund—essentially, investor money is being used to pay the guaranteed return to the investors.
The returns at the fund will have to improve greatly, or it will face a capital call totaling billions of dollars that could force Softbank to bail out its fund.
The Vision Fund laughs off the idea of capital problems, pointing to unrealized gains at portfolio companies such as Slack, a popular messaging platform. And Son certainly has a track record, going back to his very early investments in Yahoo and, in particular, in Alibaba, the Chinese e-commerce giant where Softbank’s stake is valued at some $150 billion.
In any case, veterans in an old-line industry like insurance are far more likely to underinvest in innovation than overinvest, so I’m not trying to dampen the collective enthusiasm for the insurtech movement, in particular, or for innovation, in general. I’ve just seen a lot of silly bets over the years and want to make sure we all realize that even the greats, like Son, need to keep their eyes open and their wits about them.