Rajeev Misra, CEO of the SoftBank Investment Advisers.
Rajeev Misra, the head of SoftBank’s $100 billion Vision Fund, has had a rough six months.
It started with WeWork’s aborted IPO in September. That caused SoftBank and the Vision Fund to lose billions of dollars and raised questions about the firm’s once-hyped investment strategy. Then came the downward spiral of other portfolio companies, including Wag, Oyo and the robot pizzeria Zume. That was followed by Misra’s failure to raise new money for Vision Fund 2, a venture that SoftBank founder Masayoshi Son had said would reel in $108 billion.
Add to that a slew of brutal stories detailing workplace problems at the fund that has led some high ranking employees to leave and unflattering stories of Misra’s alleged smears of other high-ranking SoftBank executives — including an alleged attempt to photograph former SoftBank president and current Palo Alto Network CEO Nikesh Arora with a woman or women in a hotel room — and it’s easy to see why the 58-year-old former investment banker feels like he’s under attack.
Misra has been largely silent on the subject — until now. In a phone interview last week with CNBC, Misra said he needs the benefit of time to disprove his critics and vindicate the Vision Fund’s big money bets across the global tech start-up market. He predicts that of the 90-plus companies in the portfolio, there will be dozens of IPOs in the next 18 months and he says that over the next 24 months, “I guarantee you will see the outcome of our investments will change.”
“We’ve made many mistakes, which is normal,” Misra said from the Vision Fund’s London headquarters. “We learn from our mistakes and are incorporating what we learn back into our process as we embark on Vision Fund 2.”
It’s a bold, bet-your-career sort of prophecy from Misra after a three-year stretch where the Vision Fund deployed record amounts of cash into start-ups, inflating valuations into the stratosphere and encouraging founders to think bigger, act crazier and annihilate their competitors. In some cases, the Vision Fund invested in direct rivals — Uber and DoorDash, for example — leading both companies to aggressively burn cash to keep up with the other on customer acquisition, market expansion and recruiting top talent.
“They overpaid for all of their investments,” said Keith Rabois, a partner at venture firm Founders Fund and a co-founder of online home-selling site Opendoor, which is backed by the Vision Fund. In an e-mail, Rabois, a frequent critic of SoftBank, described the portfolio as “subprime” with “most of the few good ones substantially overvalued in their SB financing rounds.”
The timing of Misra’s projection is also curious given the macroeconomic concerns that have roiled global markets over the past two weeks. Fears surrounding the deadly coronavirus have rapidly spread across the globe, sending the S&P 500 into its worst week since the financial crisis. Of the 91 companies in Vision Fund 1, including joint ventures, 33 are based in Asia, including ride-sharing companies Didi Chuxing in China, Grab Holdings in Southeast Asia and Ola Cabs in India. SoftBank has made six investments in Vision Fund 2 for about $2.5 billion, the largest being a $1.35 billion investment in Chinese real estate platform Beike Zhaofang.
That geographic concentration could be particularly problematic as the World Health Organization has said that Korea and Japan are two of the countries where coronavirus is spreading the fastest after starting in China.
“Overall, am I concerned about the business impact in China?” Misra said. “Yes, definitely. I’m worried about what coronavirus will mean for our Chinese investments.”
The Vision Fund’s Jeff Housenbold, who led investments in DoorDash, Wag, Opendoor, Katerra and Brandless, said in an interview that SoftBank has “some Plan Bs” in place in case the recent market slide turns into a protracted downturn.
“If the markets go into a prolonged slump of 12 to 24 months and there’s not access to public markets, we’ll have to look at raising additional capital at the company level,” said Housenbold, who was previously CEO of photo site Shutterfly. “There’s debt, there’s equity players, there’s mergers and acquisitions.” The firm also owns big stakes in public companies including Uber, Guardant Health and Slack, and could sell shares “to provide liquidity as well,” he said.
Misra’s theory: The mistakes come first
The massive potential headwind of a global economic shock aside, Misra has a thesis he wants to get across: His portfolio is filled with winners, and it’s silly to judge the fund’s success after less than three years. Looking past the investments that have gained notoriety for their implosions, he argues, there’s real value being created that public market investors will eventually appreciate.
“Our fund life is 14 years,” said Misra. “When you invest in a company, you live with them for six to eight years on average. When you invest in midstage companies, the life cycle is such that the mistakes come out first. They won’t work out because of the founder or the business model. The successes will take a couple of years more.”
Misra said the Vision Fund may make “three to four times our investment” when Grab goes public, though no time frame has been set for that offering, and he sees a Didi IPO as likely to come in the next 18 months. He also praised companies including Greensill, a profitable London-based financial technology company, which is 40% owned by SoftBank, as well as Indian payments company PayTM and Miami-based parking app ParkJockey, of which the Vision Fund owns 85%. A SoftBank spokesman noted there can be no assurance that any projected results or expected IPOs discussed in this article will be attained within the proposed timing or at all, and actual results may be significantly different from the projections and statements included.
Misra expects that 10 or 15 of the portfolio companies “may wobble over time,” but that the worst outcomes are in the rearview mirror.
Still, he acknowledges a big reputational hit from the WeWork collapse after SoftBank pumped $10 billion into the company, ultimately valuing it at $47 billion. Misra said in 2018 it would be “a $100 billion company in the next few years,” according to Business Insider.
SoftBank had more than a passive role in WeWork’s rise and fall. Son famously told ex-CEO Adam Neumann and co-founder Miguel McKelvey in 2017 that they “are not crazy enough,” encouraging unbridled growth without the restraint of corporate governance. SoftBank treated a real estate business that made money by renting desks and office space as if it were a technology company led by an industry visionary, putting few, if any, restraints on Neumann.
Adam Neumann of WeWork and Victor Fung Kwok-king, right, chairman of Fung Group, attend a signing ceremony at WeWork’s Weihai Road location on April 12, 2018 in Shanghai, China.
Jackal Pan | Visual China Group | Getty Images
Ultimately, the board forced Neumann out, with SoftBank paying him up to $1.7 billion for his shares and to help him repay debts. Misra insists that such outcomes are extremely rare.
“We’re only stepping in when there’s either misbehavior or when the CEO’s vision would take the company to the ground,” Misra said. “We will be with [founders] through thick and thin when the chips are down.”
In the wake of the WeWork debacle, Misra said the fund “has done a scrub” of all of its portfolio companies to ensure they have audited financials from a top accounting firm as well as independent board members and audit committees. Misra said he has also ensured that founders can’t borrow money from their companies and can’t hire relatives — two failures of corporate governance that landed Neumann in hot water. The fund’s partners are also taking a more disciplined approach on valuations, which has led to several deals dying at the last minute.
Yet there’s disagreement about whether Misra and Son have held back enough money to capitalize the 88 companies in the portfolio, according to a person familiar with the matter. The fund has spent $80 billion of its $100 billion, saving $20 billion for follow-on investments. But part of the reserve capital also has to pay about $2 billion a year for the next several years to satisfy a 7% yield to some preferred equity investors. That mandatory yield adds even more pressure for the fund to deliver on its investments to satisfy limited partners who are used to venture capital funds delivering annual 20% returns — at a minimum.
Outside of the Vision Fund, SoftBank does have billions of potential cash from T-Mobile’s merger with Sprint, which counts SoftBank as its principal shareholder (the deal still needs final approval from the California Public Utilities Commission), and the company’s stake in Alibaba, which it can liquidate at any time.
With market anxiety picking up along with uncertainty about the future availability of capital, SoftBank has been pushing companies to turn profitable, leading to layoffs at Oyo, Flexport, Fair and others.
Misra and the Saudis
Controversy is nothing new for Misra, who joined SoftBank in 2014 after many years at Deutsche Bank and UBS and a short stint at Fortress Investment Group. Even before WeWork imploded, the Vision Fund was criticized for its reliance on capital from Saudi Arabia, a relationship that became particularly problematic after the 2018 killing of Washington Post journalist Jamal Khashoggi at the Saudi embassy in Istanbul.
While SoftBank briefly considered ways to carve out Saudi money in case tech companies balked at Vision Fund financing, the news eventually passed and Misra and Son kept writing big checks. According to the Financial Times, Misra and Son went so far as to travel to Riyadh to tell Saudi Crown Prince Mohammed bin Salman that they were sticking with him.
This time it’s different. Since WeWork imploded, there’s been a palpable taint to Vision Fund money around Silicon Valley, and more venture capitalists are encouraging portfolio companies to look elsewhere or to avoid large financing rounds altogether. Several founders of companies that have already taken money expressed private angst that they’re now labeled “a Vision Fund company,” even if they’ve actively ignored some of Son’s suggestions to grow at all costs.
Still, Misra said the fund won’t even entertain start-ups that want to put conditions around Vision Fund funding, such as only taking the money if the Vision Fund doesn’t reveal itself as an investor. He likens those conversations to a prenuptial agreement.
“With new companies, if they’re asking for assurances, we won’t invest,” said Misra. “It means something is wrong. Suppose a lady goes to get married with you and asks for assurances you won’t leave her. What are you going to say? If someone asks you I hope you stay married with me for life, I’d say of course I am, why else would I invest in you?”
For Misra, the negative press has also become personal. A recent Wall Street Journal story claimed that Misra, in an effort to consolidate power inside SoftBank, paid $500,000 to an outside Italian businessman, Alessandro Benedetti, to smear former company executives Nikesh Arora and Alok Sama. The story accused Misra of orchestrating a plan to entrap Arora with women in a hotel room to obtain compromising images.
Misra dismissed the story as inaccurate, and a spokesperson said, “these are old allegations which contain a series of falsehoods that have been consistently denied. Mr. Misra did not orchestrate a campaign against his former colleagues.”
Arora didn’t respond to requests for comment. Sama declined to comment as did his lawyer, Mark MacDougall of Akin Gump. A SoftBank spokesperson said an internal review of the allegations is ongoing. A SoftBank special committee of the board found circumstantial evidence when probing the allegations in 2018 but deemed it inconclusive, two of the people said. The new Journal story, published Feb. 26, refers to specific emails that SoftBank hasn’t seen, according to people familiar with the matter.
SoftBank has been silent about potential repercussions for Misra. What’s still unknown is if SoftBank shareholders, such as Paul Singer’s Elliott Management hedge fund, will demand Misra’s removal. An Elliott spokesperson declined to comment.
Misra said playing internal politics didn’t propel him to the top of the Vision Fund.
“The reason I’m here is I raised $100 billion and hired 500 people,” he said.
Lack of trust is a persisting challenge for Misra. Two people close to the Vision Fund told CNBC that they have reason to believe that partners and other employees were being watched or monitored because Misra cracked down to find internal leakers of information. They said they fear that their conversations, whereabouts and e-mails were being tracked by Misra and others who report to him.
Misra denied that he’s ever had phone calls recorded within the Vision Fund or monitored whereabouts or e-mails.
One thing is evident — the pressure is on for Misra to start showing results. The Vision Fund’s performance has become the driving force behind SoftBank’s stock gyrations. Because of an $8.9 billion deficit at the Vision Fund, SoftBank in November reported its first quarterly loss in 14 years. Shares are virtually unchanged over the past year, trailing the S&P 500, which is up about 9%. Elliott Management recently purchased a $2.5 billion stake in the company, pushing it to repurchase up to $20 billion in stock and improve its governance practices. Son told investors at a meeting in New York this week that he’s open to ideas about returning capital to shareholders, according to people familiar with the matter.
“There have been a string of nearly daily negative press reports on Softbank, and most target the Vision Fund, which Misra leads,” said Walt Piecyk, a telecommunications analyst at LightShed partners who covers SoftBank. “The obvious next step is for Misra to go.”
Misra said he’s not leaving.
“I’m a key man,” he said. “I owe it to my stakeholders, my LPs, my employees to be here for the journey.” He’s also quick to point out that the SoftBank has made about $9.5 billion on paper and realized gains as of Dec. 31 on its Vision Fund investments despite its recent quarterly loss.
‘Room for improvement’
But changes are underway. Misra and Housenbold both acknowledge that addressing the culture of a workplace that has caused distrust and confusion is a top priority for 2020. Managing partner Michael Ronen departed the Vision Fund last month and veteran SoftBank executive Ron Fisher is preparing for retirement, according to a person familiar with the matter. Fisher didn’t respond to an e-mail seeking comment. A SoftBank spokesman said Fisher “is a valued member of the SoftBank family and is not going anywhere.”
The fund’s rapid global expansion in the past 24 months, mirroring the unfettered growth of some portfolio companies, brought in a collection of bankers, investment professionals and lawyers working in new jobs without a clear sense of direction. In some cases, partners found out about approved deals at the same time as the public, people familiar with the matter said.
Jeff Housenbold, managing partner at SoftBank’s Vision Fund
Housenbold says the fund needs to take a page from smaller venture firms that coordinate and share knowledge at their Monday partner meetings. At the Vision Fund, decisions are sometimes made on more of an “ad hoc basis” without all the relevant information, he said.
“We haven’t gotten it all right, and there’s absolutely room for improvement,” said Housenbold. “Because we are global in nature at the beginning and you have different types of norms, cultures, backgrounds and people, we haven’t spent enough time getting to know each other as individuals, because of the pace of our growth.”
Misra noted that the fund has quarterly partner offsite gatherings, including a two-day meeting in Miami in 2018 for 300 employees — a figure which has now ballooned to nearly 600. Housenbold said the gatherings were helpful though “not enough.”
Housenbold also said the fund’s various offices around the world can get better at sharing information. While managing partners do most of the diligence on companies, a three-person investment committee of Misra, Son and Saleh Romeih, a former Goldman Sachs executive who leads the Europe, Middle East and Asia region, must approve every deal. Son meets personally with every founder before making a decision, and top partners then hold a series of calls, typically with Son, prior to final investment committee approval.
“We’re going to have to figure out processes and systems and rules and norms to make sure there’s more communication downward in the organization,” Housenbold said.
That hierarchical structure has turned off some employees who came to the vision fund as ex-founders or leaders at their previous firms and who thought they’d have more of a role in dealmaking, according to people familiar with the matter.
It’s all about returns
Misra has paid millions of dollars to external consultants and leadership coaches to improve the culture. The Wall Street Journal reported in October that one consulting firm created a word cloud of terms used by employees in an internal survey. The most frequently used phrases included “rule breaking,” “secrecy” and “lack of trust,” the Journal said.
Misra told CNBC that the word cloud was created just six months into the fund’s life. The consultant, Insight Partners, has surveyed Vision Fund employees quarterly, and the most recent results last year showed that some of the most-cited phrases were “improving” and “collaborative,” a person familiar with the matter said.
Meanwhile, investors including Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala, are undecided on their participation in Vision Fund 2. Fundraising discussions are ongoing and the parties have been negotiating terms and fees, according to people familiar with the matter.
Showing positive returns for Vision Fund 1 in the coming 18 months would undoubtedly help Misra attract investors, though he’s already moved away from his target of raising $108 billion. He declined to comment on specific fundraising discussions.
“I’m so, so positive I’ll prove people wrong,” he said.
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