No Mercy / No Malice

Things are Going From Bad to Worse at SoftBank

The Vision Fund is having an OyoMFG moment

Since January 2019, SoftBank Vision Fund firms have laid off over 10,700 employees — more than 2x the workforce of Twitter. And last year will soon be the good old days.

August turned into the mother of all summer bummers for the Vision Fund (let’s stop putting numbers on it, as this is the first and last fund from SoftBank). SoftBank was likely hoping Oyo’s growth would be the antibiotic to what ails the current portfolio. However, Oyo is about to become a heat shield for We as it turns into the new problem child — not smoking pot behind the gym, but crashing dad’s car into a Chick-fil-A.

The destruction of capital won’t be as dramatic, as SoftBank has “only” invested $1.5 billion into the Indian budget hotel chain vs. the $17 billion Masa set on fire at the desk rental firm. But the externalities catalyzed by SoftBank’s unique brand of terrible judgment will be greater. The imminent meltdown of the budget hotel firm could cast a pall across the Indian venture ecosystem, best described as “in its fragile teen years.” Last year, India birthed 7 unicorns, bringing the total to 24, a distant third to 203 in the US and 206 in China.

Thirty years ago there was a legitimate debate about who would be the next superpower, China or India. Both boasted an emerging young workforce the world hadn’t seen before and an appreciation for education and science. China had already established serious chops in manufacturing and was beginning to reap the fruit of coordinated infrastructure investments. India boasted a software boom, a sizeable English-speaking population, and the world’s largest democracy. Only the latter turned out to be a bug, not a feature. China’s autocratic rule, despite what we’ve been taught in civics, lent itself to moving fast, breaking things, and enacting state-sponsored IP theft on a scale best described as (wait for it) Chinese.

India’s innovation ecosystem is fragile, and Oyo is about to take a dump in the reputation pond for other promising Indian firms. Oyo has brought SoftBank’s unique brand of stupid with, according to great reporting from the NYT, corruption posing as naiveté. It’s malfeasance from a firm overseen by a 26-year-old who has been handed $3.2 billion, a mediocre idea, and tremendous pressure to be the next Airbnb. When poor judgment looks for quick fixes, corruption can rear its head.

At Oyo, we’re seeing a category concept (budget hotels) Frankensteined by capital and consensual hallucination between SoftBank and a charismatic 26-year-old.

Bed Bugs

• Layoffs.
• Lightspeed Ventures and Sequoia Capital getting out of Dodge: selling 50% of their stake for $1.5 billion. SoftBank and founder Ritesh Agarwal pumping in more money.
• SoftBank has been smoking its own supply as the lead investor in every round since 2015.
• The firm is accused of using free lodging as bribes to avoid investigation from authorities.
• Agarwal has borrowed against his own shares to lever up, increasing the pressure to win at any cost.
• Oyo exaggerates the number of rooms available internationally.
• Reviews = sh*t.

At WeWork the lines between vision, bullshit, and fraud became increasingly narrow. However, there was no evidence of fraud, just a cult leader who read the situation perfectly and shaped a $2.5 billion commission from a $39 billion loss of other people’s money. It’s worse at Oyo. The pressure to grow, at any cost, coupled with the poor judgment of SoftBank and the (understandable) immaturity of a 26-year-old have thrust Oyo past fraud to bribery. This is the definition of corruption, and could taint the Indian unicorn economy and further damage the Vision Fund — now in palliative care, walking from signed term sheets.

Global Brands

We have, in this blog, covered the Rock & Roll Hall of Fame of catastrophic investinggestalt at SoftBank. Other Oyo mistakes are more pedestrian and violate basic tenets of brand strategy. Oyo aims to create the first truly budget hotel brand. This will not work.

A global brand is a set of intangible associations surrounding a product or service that permeate geographic boundaries. Great brands are hard to create; global brands are a feat of epic proportions that (pre-Google/Facebook) took generations to build. The vast body of global brands herd around a finite number of cohorts who look, feel, and smell the same globally:

• Technology: CTOs wear polo shirts with corporate logos, are out of shape, and buy Salesforce, Huawei, and Microsoft products.
• Media/Fashion: Teens rebel against their parents and society, wear Adidas, and listen to Rihanna.
• Luxury: Wealthy people send their kids to Ivy League schools, avoid taxes, wear Hermés, and vacation in St. Barths.

The only truly global hotel brands are luxury brands (The Four Seasons, Aman, Mandarin Oriental). The cohort purchasing budget hotels is heterogenous and runs counter to the notion that it’s possible to scale a budget hotel brand to achieve venture-like returns. The hospitality business is a mix of 2 kinds of capital: hard (properties) and soft (people). With a workforce that’s quintupled in the last 12 months, managing to any standard other than chaos is near impossible.

As we predicted in January 2019, a SoftBank firm (WeWork) would be in the news for all the wrong reasons. The same is true for 2020. WeWork was more of a spectacle, as the flowing hair and titanic capital destruction will make for great scripted television. But the downfall of Oyo will be historic. Sequoia and Lightspeed (both current investors) selling shares to SoftBank, deceptive practices, and a 26-year-old founder who borrows against his shares all add up to a sell signal for the ages. Trust is the core asset of any financial services firm (bank, hedge fund, VC fund), and SoftBank is becoming Lehman Brothers minus the IQ.

WeWork was an opportunistic infection highlighting the poor judgment of SoftBank. Oyo is the beginning of the end for Vision 1 as its brand moves from incompetent to malefactor.

Blind Eye

Regulators, the media, and investors have turned a blind eye to climate change, teen depression, and the weaponization of elections. Financial losses will reunite them with their conscience. SoftBank is about to become subject to the scrutiny big tech deserves but obfuscates with investor returns.

Life is so rich,
Scott

Originally published on profgalloway.com