After licking his wounds from WeWork’s swift and spectacular fall from grace, SoftBank CEO Masayoshi Son has shifted the goalpost for his Vision Fund companies, according to a report published by Barron’s on Monday.
At a two-day SoftBank conference in Half Moon Bay, Calif., Son said Vision Fund companies must focus on generating steady and sustainable cash flow and SoftBank will be evaluating them based on their ability to do so.
“We have to prepare a strong enough foundation for each of our companies so that investors can have confidence that the company will do very well,” Son said. “No multiples of [gross merchandise value], or revenue, or subscribers. Those are difficult to justify. A multiple of free cash flow, nothing else. Forget about the hype.”
“I have learned a lot, a lot of lessons from the recent instance that I don’t need to repeat,” Son added as a reference to WeWork. “What is the valuation of the company? It’s a cash-flow multiple at the steady state.”
The shift in priority comes after criticism from some of SoftBank’s biggest shareholders, who are growing antsy after significant stock market declines for Slack and Uber, and a $4.6 billion loss in SoftBank’s WeWork stock value after the company’s valuation shrunk from $47 billion to $20 billion ahead of a failed IPO.
Shareholders say SoftBank’s recent string of losses are due to Son’s focus on explosive growth by any means necessary, which includes infusing companies with massive amounts of cash to overpower the competition.
“In our industry, winner takes all,” Son has said. “By probability, the No. 2 company’s [chance of] succeeding is very low. We only live once, so I want to think big. I have no intention of making small bets.”
By those standards, it’s no surprise that Compass and Opendoor became two of SoftBank’s most prized investments, with both companies receiving more than $850 million in Vision Fund funding combined.
Since 2017, Compass and Opendoor have razored their way through the real estate market with Compass acquiring longstanding brands and aggressively recruiting agents through sizable signing bonuses and attractive commission splits. Meanwhile, Opendoor has been aiming to keep its top dog status through acquisitions and the addition of new services, such as home loans.
SoftBank has touted both companies’ potential for profitability, with a SoftBank source telling Inman in September that Compass “has a clear visibility to profitability,” although the company declined to provide a specific timeline.
Opendoor CEO Eric Wu has been mum on any plans for an IPO, while Compass CEO Robert Reffkin said an IPO is likely, but is more than 18 months away.
However, it seems Compass and Opendoor may need to adjust their strategies as explosive growth and multi-billion dollar valuations are no longer the proof SoftBank shareholders are looking for as they struggle to justify placing their chips on a second Vision Fund filled with unprofitable companies.
Compass, Opendoor and Vision Fund were all unavailable for comment about SoftBank’s shift in strategy, but real estate strategist Mike DelPrete offered his insight on what Compass and Opendoor might need to do to control cash flow and reach profitability sooner.
“If the pressure from the public markets continues to push for profitability, it may accelerate (or force) a change in the operating economics at Compass and Opendoor, which up until now have fueled their massive growth with massive expenditures,” DelPrete explained in a Forbes article published in September.
“A drive to increase revenue could lead Opendoor to raise its fees, or Compass to reduce its generous commission splits with agents; either move would severely limit growth,” he added. “Reducing expenses would come in the form of office consolidation (Compass has over 250 offices across the U.S.), ratcheting down employee perks, or even staff layoffs.”