The SoftBank Model Is Pushing Proptech Valuations Past Reality

From WeWork to Opendoor to Katerra, the aggressive investment management firm led by CEO Masayoshi Son has seen its share of high-profile collapses and roadkill along the way.

SoftBank, through its Vision Fund, is one of the most influential and disruptive forces in the venture capital and private equity markets, typically using that influence to push companies into hyper-growth mode before attempting to take them public. But some investors say its string of defeats hasn't just cost lots of rich people money, they have left deep fractures across the commercial real estate industry.

Virtually all of its proptech portfolio companies that have gone public have lost value, some in ways so dramatic they've spawned prestige shows for streaming services. For those seeking to invest in proptech companies at least, backing from SoftBank might be a red flag in itself, multiple industry insiders told Bisnow.

“SoftBank invests in all of these grow-fast, grow-hard companies [because] they’re very much looking for super-extraterrestrial home runs,” said Maximillian Diez, venture capitalist and CEO of startup consulting firm Twenty Five Ventures. “And there have been some cases where companies perhaps accelerated too fast and sacrificed culture."

When Compass, a real estate brokerage firm with designs on being a proptech company, debuted on the New York Stock Exchange on April 1 of last year, its initial price range was between $18 and $19 per share. At the beginning of trading on April 25 this year, it was selling at $5.72 per share. Opendoor was among the earliest big-name companies to go public through a special-purpose acquisition company in September of 2020, so its first public price was the SPAC-standard $10 per share. After peaking at $35 per share last February, it opened trading at $6.91 per share on April 25. 

WeWork reached a now-infamous private valuation of $47B on the strength of over $10B of equity and debt from the Vision Fund, but after its first attempt at an IPO nearly sent the company out of business, SoftBank’s bailout valued it at only $8B. At the onset of trading on April 25, WeWork was priced at $6.61 per share with a market capitalization of less than $5B. 

View, a smart glass company that merged with a Cantor Fitzgerald-sponsored SPAC to go public at a $1.6B valuation in November 2020, never traded for more than its initial $10 per share price for any significant stretch of time. Now, it is trading for less than $1.50 per share and is at risk of being delisted with a market cap below $350M. Modular construction firm Katerra went bankrupt and folded in June mere months after a final infusion of $200M from SoftBank; it never went public. 

Other SoftBank startups like hotelier Oyo and ghost kitchen operator REEF Technology remain private but have gained attention for running afoul of the law in their attempts to grow at breakneck speed.

A representative for SoftBank declined to comment on this story when reached by Bisnow, and attempts to contact View, Opendoor and Compass went unreturned.

“I only have great things to say about [SoftBank CEO] Masayoshi Son, but maybe he’s pushing too hard or too fast,” Diez said. “His mindset is sort of inherent to the VC market, but he’s the one with the biggest wallet, writing the biggest checks.”

A SoftBank investment does bring more than just money and pressure to grow. In much of the VC world, startups select investors based on their networks and connections. The bigger a portfolio an investor has, the bigger its network, said Neal Gerber & Eisenberg partner Greg Grove, an attorney who advises startups and investors in the proptech space, among others.

“Whenever one of my clients is looking at investors, they often try to size up what the best group of investors or single investor is that would get the company access to the people and the resources for it to grow as quickly and successfully as possible,” Grove said. “SoftBank is very clearly one of the top few large investors that could do that for a company.”

SoftBank invests in companies at later stages than most venture capitalists, which seek long-term, exponential returns from making early investments in startups. Seed-stage and Series A investment is focused on how a revenue infusion in the short run can lead to profitability in the long run. Many late-stage investors are more motivated to invest as much money as possible into a company at the highest valuation possible before an imminent IPO, regardless of what valuation the company could sustain publicly, Shadow Ventures founder KP Reddy told Bisnow.

“Historically, investors have wanted to see a path to profitability,” Reddy said. “In other words, if something goes wrong or takes longer, you can still rightsize the company to make a profit. You can sacrifice growth to make a profit. That hasn’t been the case in the last several years; people haven’t worried about that.”

Sustaining value is quickly becoming more complicated, as global stock markets continue to be rattled by the ripple effects of the Russian invasion of Ukraine and predictions of a hard economic crash as a result. Though a war in Europe might not feel connected to a real estate software platform in the U.S., wavering faith in the stock market is a signal that experienced investors may be getting more cautious, Grove said.

“If lender money starts to dry up across multiple deals, that’s an indicator that lenders are starting to lose confidence in the near-term upside of the market,” Grove said. “And that can be an indication that valuations across the board are too high.”

Debt sources for equities and venture investing have indeed been lowering their expectations and tightening their standards in the past few weeks, Reddy said. That sentiment was echoed on a March episode of VC-focused podcast All In. With the Federal Reserve growing more hawkish toward inflation by the day, companies that need to keep raising capital to meet growth expectations rather than focus on turning a profit are in a dangerous position.

“Before, it was, ‘How much money can we spend, and how quickly, to create growth,’” tech investor David Sacks said on All In, which he co-hosts. “Now, it’s, ‘Wait a second, is this growth efficient?’ … I think a lot of companies are sharpening their pencils for the first time.” 

“Late-stage venture [investing] is badly mispriced,” Silicon Valley venture capitalist Chamath Palihapitiya, whose SPAC took Opendoor public, said on the All In podcast, which he also co-hosts. “I think you’re going to have to knock these [valuations] back by 50% or 60%.”

A popular phrase in the VC world is the “unfair advantage,” or how an investor’s specific qualities can create the conditions for a startup’s success. SoftBank’s unfair advantage has long been money. In the cases of Uber, Doordash, WeWork, delivery service GoPuff and others, SoftBank has attempted to grow companies so fast that they quickly become household names, Reddy said.

Thanks in part to the Vision Fund's two largest backers — the sovereign wealth funds of Saudi Arabia and the United Arab Emirates — SoftBank may have the financial backing to keep up that strategy, but too many investors with too much capital behind them and too much pressure to put it to work, have attempted to re-create the SoftBank model, the hosts of All In agreed. As the smarter money recalibrates and adjusts to the new geopolitical reality, they said, some will still be left dancing when the music stops.

“We are now in the complicated process of unwinding the distortion that we’ve lived through in the last couple of years,” Palihapitiya said.