SoftBank Gives Startups Billions of Reasons to Hold Off IPOs

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The potential willingness of SoftBank and its CEO, Masayoshi Son, to take majority stakes would greatly extend the runway for startups to remain private.

The potential willingness of SoftBank and its CEO, Masayoshi Son, to take majority stakes would greatly extend the runway for startups to remain private.


Photo:

issei kato/Reuters

WeWork Cos. co-founder Miguel McKelvey a few years year ago brushed off the idea of an initial public offering, telling a small gathering in Napa Valley that the shared office-space company is “thinking about how to prolong that eventuality to a distant point in the future.”

Enter

SoftBank Group
Corp.

, which is increasingly poised to help WeWork and numerous other multibillion-dollar startups in Silicon Valley stave off IPOs.

In what would be by far SoftBank’s most ambitious startup investment, the Japanese company is in discussions to take a majority stake in WeWork with a $15 billion to $20 billion investment, people familiar with the talks said this week. Such a massive investment would represent about a quarter of SoftBank’s $92 billion Vision Fund—if it comes entirely from that pool of money—and would roughly double the largest-ever bet on a private, venture-backed company.

The negotiations are continuing and other scenarios are on the table, some of the people said. But if SoftBank were to secure a majority stake through the Vision Fund, the move would almost certainly keep eight-year-old WeWork private for years to come.

Ever since it started up its tech-focused Vision Fund last year, SoftBank has shaken up the venture capital industry by rushing hundreds of millions, if not billions, into startups and taking the place of funds typically raised in an IPO. But its potential willingness to take majority stakes would greatly extend the runway for companies to remain private.

SoftBank is discussing a $15 billion to $20 billion investment in WeWork.  WeWork’s main Manhattan office.

SoftBank is discussing a $15 billion to $20 billion investment in WeWork. WeWork’s main Manhattan office.


Photo:

Steve Remich for The Wall Street Journal

The Vision Fund, backed mostly by SoftBank as well as Saudi Arabia and Abu Dhabi wealth funds, typically comes in at a startup’s late stage—when it would ordinarily be preparing to go public—and often buys shares from early investors who would typically sell in an IPO.

That has led Silicon Valley investors to quip that “SoftBank is the new IPO,” while some have dubbed a SoftBank investment the “Masa-PO,” named after SoftBank founder and CEO Masayoshi Son.

Startups receiving SoftBank’s money “will go public when they feel they’re ready—not when they have to,” said Rett Wallace, chief executive of tech company analysis firm Triton Research.

Few companies can even absorb $1 billion or more. Only 22 U.S. venture capital-backed companies that are private today have raised more than $1 billion from SoftBank or other investors, according to researcher PitchBook.

Outside of WeWork, SoftBank has largely stuck to taking 20% to 30% stakes in private companies, giving it some influence but not control.

Mr. Son is known for encouraging companies to “think bigger” and to accept hundreds of millions of dollars more than they initially request to spur growth. In January 2016, before investing in WeWork, Mr. Son scolded CEO Adam Neumann for moving too slowly.

A majority investment, like the one being discussed for WeWork, could give SoftBank more influence over the company. Early investors could presumably cash out some of their shares, and WeWork would gain a stable funding source, giving the company even less reason to enter the public markets.

Spokespeople for WeWork and SoftBank declined to comment.

“We are seeing real structural shifts” in enabling companies to stay private for a long time, said Paul Hsiao, a partner at venture-capital firm Canvas Ventures. Mr. Son takes a long-term view in which he “doesn’t think about an exit, so it’s really a holding-company philosophy,” Mr. Hsaio said.

The strategy of prolonging startups’ private lives carries risks. SoftBank typically urges its companies to spend heavily on marketing and sales in a bid to gain market share, according to executives at companies that have taken its money. That also tends to mean bigger losses for companies that already aren’t profitable, and many have yet to prove their business models will even work as they hope.

Eric Wu, CEO of home-selling marketplace Opendoor Labs Inc., said SoftBank’s recent investment of $400 million will let the company hit the gas on growth. Opendoor is now opening in a new city every month, instead of every two, which requires heavy investment.

When online lending startup Social Finance Inc. raised $1 billion from SoftBank and other investors in 2015, then-CEO Mike Cagney said the funding would allow the company to put off an IPO indefinitely. “It takes the pressing need of an IPO off the table,” he said then. SoFi’s new CEO, Anthony Noto, said at a June conference that an IPO is “definitely not a priority for SoFi.”

While the flood of money from SoftBank and other late-stage investors has heightened concerns about a tech bubble, it also means that these are “risks that the SoftBanks of the world are taking as opposed to public market investors,” Mr. Wallace said, a contrast with the dot-com boom-and-bust days.

The pending WeWork deal could also face scrutiny amid a growing diplomatic row between the West and Saudi Arabia, whose investment fund backs SoftBank’s Vision Fund. Numerous businesses and investors have been distancing themselves in recent days from Saudi Arabia following the disappearance and possible killing of a dissident Saudi journalist in Turkey. If the deal with SoftBank happens through the Vision Fund, it would mean Saudi Arabia indirectly would be the largest investor of WeWork, which has recently established principled corporate initiatives like banning meat and a refugee hiring program.

Mr. Son, 61 years old, has said he wants to create Vision Funds 2, 3, and 4 and that he is conscious he has yet to cement his legacy. “I could have done more. I have so much regret,” he said, giving himself a score of 28 out of 100 at a quarterly earnings conference on the eve of his 60th birthday last year.

Write to Eliot Brown at eliot.brown@wsj.com and Mayumi Negishi at mayumi.negishi@wsj.com