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Softbank and WeWork, What a mess
When banks loan you too much money, it’s their problem
George Pillari
October 17, 2024
Read Time 1m55s
Softbank is one of the world’s largest investment firms and its investments have included Nvidia, DoorDash, Uber, Alibaba, and many others. As Softbank grew over the last 20 years, it needed to make bigger investments to create the necessary returns on all that money.
For example, if you have $1,000 to invest, it’s easy to click a few buttons, buy a few shares of Apple stock, and now your money is invested and earning for you.
But what if you have tens of billions to invest, like Softbank? In this case, capital needs to be deployed billions of dollars at a time. There are not many companies that can spend that kind of money, unless, of course, the company was WeWork.
Co-founder Adam Neumann and WeWork entered into purchases or long-term leases of entire buildings and whole floors of office space, renovated them into smaller suites, and leased them out to individuals and small businesses on a month-to-month basis. Great for the small guy who needs an office and the “community” that WeWork created around its office spaces to “elevate the consciousness of society.”
Adam Neumann, co-founder of WeWork
We can go on about how Neumann and WeWork spent billions of Softbank’s cash, but that’s for another post (or three?). Let’s just say WeWork had an insatiable thirst for cash to pour into its flawed business model – commit huge sums of capital to long-term commercial leases or purchase entire buildings and lease them out on a short-term basis.
Seems like all the risk is on WeWork, which is stuck with the long-term costs of the buildings and renovations irrespective if any tenants show up. Ouch.
Let’s get to the problem faced by Softbank. As Neumann and WeWork spent ever-increasing sums of money, Softbank, as the lead investor, continued to invest in both the equity and debt of the company, billions at a time and other investors and lenders continued to follow suit and put money into the company alongside Softbank.
At some point, Softbank had to realize that WeWork’s business was failing. Losses were $150 million to $200 million per month with no end in sight and the company needed cash to stay in business.
AI image created by author
But could Softbank just say, “Hey, we have done enough and really can’t invest anymore.” A simple answer to the question: No Way.
Once the lead investor in a deal stops supporting the company, its all over.
The lead investor knows the company best and has been with the company the longest. If it pulls support, the other investors will be spooked and now you have an uphill battle to get new money into the company.
Softbank was stuck and it played the only hand it could: it continued to invest in WeWork. When WeWork completed its self-immolation in bankruptcy, Softbank lost more than $15 billion.
Key Takeaways
The Softbank numbers are big, mind-boggling big, but the lessons can be applied to any situation. Have a friend starting a company and wants you to invest $1,000? Great, but remember, that’s only the beginning. Each time the company needs more money, your pal will count on you again, and again.
If you’re the one raising the money, make it clear to your early investors what you expect from them today and in the future. These are your most important investors and will likely help you find new investors.
Milestones are important for any venture-type investment. The company should be able to say it can get from Point A to Point B and how much cash it will take. If it can put up and operationalize 10 lemonade stands for an investment of $1,000, then make sure the milestone is achieved before inking your follow-on investment.
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