SoftBank’s week went from bad to worse, after public investors and California lawmakers separately turned down the lights on some of the firm’s shiniest startups.
First, SoftBank urged WeWork to shelve its controversial initial public offering after investors recoiled. WeWork instead elected to make some changes to its corporate governance and proceed with a march to the Nasdaq. On the opposite coast, the California Legislature passed a labour bill that could force gig economy companies to incur substantial new employment costs and dramatically reshape their business models.
SoftBank has put more than $10bn into WeWork and is a key financier of businesses in the gig economy. It’s the biggest investor in Uber Technologies Inc and also holds large stakes in food delivery startup DoorDash Inc and dog-walking app Wag Labs Inc, all of which are built on contract labour.
This week’s events didn’t have a substantial impact on shares of SoftBank Group Corp or Uber, but the implications will play out over the coming months and years. WeWork said Friday that it would abandon a provision that would have put Neumann’s wife, Rebekah, on a committee to select the next CEO and that it would reduce the power of super-voting stock by half, which is still enough, however, to secure Neumann’s effective control. As the listing pushes forward, SoftBank plans to increase its exposure to WeWork, whose parent company is We Co, by purchasing at least $750mn worth of stock in the IPO, people familiar with the matter said.
SoftBank and its three-year-old Vision Fund have a lot riding on the regulatory battles over the gig economy, too. It led a $535mn round in DoorDash and kicked $300mn into Wag last year, investments designed to legitimise the business model Uber helped pioneer. Uber is the largest of the lot and as such, has the most to lose. Analysts expect additional costs would top as much as $500mn a year to cover overtime pay and other entitlements for California drivers. If other states follow California’s lead, that number could quickly increase.
Uber and DoorDash are teaming up to fight California lawmakers with a war chest of $60mn between the two of them and a proposal to put an alternative referendum before voters on next year’s ballot. Tony West, Uber’s chief legal officer, said the company expects to “continue to respond to claims of misclassification in arbitration and in court as necessary, just as we do now.”
The new law says people whose jobs are in the usual course of a company’s business must be considered employees. West contends that drivers aren’t in the usual course of Uber’s business because it’s a technology platform. Uber has warned shareholders in securities filings that a reclassification of workers would adversely affect its business.
SoftBank will need to weigh all of these issues when it reports an estimated value for the Vision Fund to investors for the quarter, which ends this month. SoftBank marked up the fund’s value to $82.2bn in the last reporting period ending in June. It may be difficult to justify continued paper gains. Of the $10.7bn SoftBank has committed to WeWork, about $4bn is from the Vision Fund. SoftBank had been steadily writing up the value of that stake. Now, as part of IPO planning, WeWork’s financial advisers are pegging the company’s valuation at about the same price as the Vision Fund paid in 2017 and half what SoftBank Group paid in January. As for Uber, SoftBank holds about 13% of its stock, which is down 28% since the end of June.
The WeWork IPO and gig economy law are two points of uncertainty at a time when SoftBank needs to show stability. The Japanese conglomerate unveiled plans this summer to raise a second, larger Vision Fund to bankroll technology companies.
The goal is to amass $108bn. Some $38bn will come from SoftBank, and as much as $20bn will arrive in the form of loans from SoftBank to employees taking stakes in the fund. That still leaves $50bn from outsiders, who need to be convinced that SoftBank is a reliable steward of their money.
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