Disruption of the Softbank Vision Fund

Softbank Vision Fund cash-intensive investment strategies are flawed. Here is why.

(Note: This editorial is written for curiosity and informational reasons only. You should not construe my personal opinions expressed as legal, investment, financial, or other advice. I don’t have any personal short or long financial interests in companies mentioned, or any financial dealings with Softbank Vision Fund. The views expressed herein are my personal opinions and do not reflect onto others.)

The true adventurer goes forth aimless to meet and greet unknown fate.

The only way to beat Softbank is to innovate. By Softbank, of course, I mean a mega-funded conglomerate that funds startups hoping to disrupt old markets and to develop new opportunities with the use of Internet technology and cold hard cash. Massive amounts of cash offered by Softbank buy startups excellent network effects, regardless of the genuine quality of the product, user experience, the cost to consumers, and viability of the product financially in the long run.

Such cash-intensive strategy for disruption is flawed. A startup has 1 in 15,000 chance of on average to deliver real mega-ROI success. This success rate doesn’t change regardless if Softbank has or hasn’t placed a mega-round on it. It is hard to believe, but the actual success rate of the startup remains the same. Startups are incredibly risky and mega-rounds do not reduce the risk startups face. Only, only, and only the superior user experience, scalability, usability, and innovative mission-driven teams allow startups to develop from stand-alone ideas into massive marketplaces.

When a startup accepts billions as funding, this action requires said company to deliver trillions in profits as mega-ROI. Such returns are impossible in highly competitive markets (real estate and construction) because if such opportunity truly exists new and existing companies will quickly see it and move in on the market with much lower margins. Proptech companies are not Technology companies. Investing in technology companies such as Slack is where Softbank actually has it right.

It is what’s inside of us that makes us turn out the way we do.

By this logic, WeWork, Uber, Opendoor, Compass, Katerra, Clutter, etc. all operate under an immense pressure to deliver massive revenue while competing with 15,000 other startups and well-entrenched incumbents looking to disrupt them organically with superior and cheaper products on daily basis.

For example, while Compass is forced to burn mega cash to acquire new brokerages, eXp Realty does that same thing much cheaper via organic agent acquisition. Compass is forced to compete on thin margins while suffering from a high burn rate.

Built on mega-rounds, iBuyers process a mere 0.2% of all US real estate transactions with a nearly 20% equity loss to homeowners subject to a dismal success rate. An Opendoor program buys itself bad user experience every day because the only way it is able to recuperate the burden of their mega-rounds is to actively tax each real estate transaction with high fees.

WeWork has grown into a balloon of questionable business practices instead of being forced to focus on sustainable and organic growth in line with the co-working industry.

Uber is about to hit the bottom, either facing an antitrust action for price-fixing rates of independent drivers or having to hire drivers directly and suddenly losing the advantage of a cheap gig economy labor pool. Either way, Uber will be unable to place a 30%-40% rake onto price-fixed services of others for much longer, yet it has only been trading in public markets for less than six months.

Until a startup has a consistent history of profit, has proven to be able to scale organically, and has resolved all potential legal objections to their basic existence (federal antitrust, State and local rules and regulations) said startup should not be allowed to approach an IPO. As a financial asset, any startup, mega-funded or not, is a very dangerous investment for the public to make because it may be worth 1/15,000 of its present value just a day later.

We may achieve climate, but the weather is thrust upon us.

WeWork, Opendoor, Compass, Katerra, Clutter — all experiments in highly competitive markets with a high cost of doing business as major disadvantages. Most importantly, mega-rounds prevent these products from delivering mega-ROI to investors, while suffering from the same exigent risk of failure as any other startup.

Granted, not every Softbank investment will fail. Companies such as WeWork, Compass, and Katerra have value-added elements to them as well, but these investments are not built to deliver mega-ROI. Every single one of the Big Five enterprises today has raised mega-rounds only after they have organically scaled. To disrupt Softbank means to innovate. It means to deliver quality and sustainable products to the market fast and cheap. A mere few million in funding was enough to set off some of the most profitable companies in the technology industry — the Big Five. A sustainable Series A or Series B rounds are enough to bring an excellent product to market organically and is the reason why these rounds will always deliver the best returns. Masayoshi Son investments in Yahoo! and Alibaba were early investments, not mega-rounds.

It was beautiful and simple, as truly great swindles are.

The innovation cycle of a mega-funded startup actually stalls — it is no longer able to develop network effects into savings, instead, it is forced to rake the experience that alienates users and reduces trust. Opendoor, for example, had to entice Yelp! to remove hundreds of negative reviews earlier this year. Startups faced with massive expectations for revenue begin to make questionable choices and abuse their users, eventually leading into a stall.

Consumers in the United States are some of the savviest in the World. Startups can’t afford to take shortcuts to enter and disrupt markets — we have to work hard, fail often, and aim to deliver mega-returns as a true measure of success. Picking the winners with mega-rounds does nothing but to place an immense amount of cash into an exigent risk.

Startups must develop into the next “Google” organically. Companies that grow into Big Tech enterprises are great ideas that work pretty much from day one — these just need a little push to start working more efficiently. Fueling startups that otherwise might thrive on efficiency with mega-rounds may actually harm them more than Softbank is willing to admit.

Author: Litesand

Antitrust, real estate, e-commerce, fintech, proptech, bigtech

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