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Breaking the SoftBank: Who’s next on the chopping block?

Breaking the SoftBank: Who’s next on the chopping block?

With the Japanese giant still reeling from the recent crisis, it's the Israeli companies in SoftBank's portfolio who are behind most of the recent local tech layoffs

Sophie Shulman | 17:14  27.06.2022

"Information Revolution — Happiness for Everyone" is still the slogan that adorns most of the official advertisements of the Japanese investment giant SoftBank. This is the business philosophy of Masayoshi (Masa) Son, who made SoftBank, and especially the Vision funds, a main symbol of the recent high years in global tech and the organization that effectively formulated the concept that dominated the industry until the end of 2021 - growth at all costs. While the debate about how much happiness the information revolution has brought to humanity is philosophical and therefore almost endless, the level of happiness that SoftBank instills in its surroundings is much more measurable and is currently not high.

Masayoshi Son - Founder, CEO SoftBank Masayoshi Son - Founder, CEO SoftBank Masayoshi Son - Founder, CEO SoftBank

In recent months, Masa's portfolio companies have been at the top of the list of companies making layoffs. Even among the Israeli companies that have already made a layoff move - companies in which SoftBank is invested are particularly prominent. StreamElements joined the list yesterday with the dismissal of 20% of their workforce, following Trax, which laid off 110 employees last week, and Cybereason, which parted ways with 100 employees at the beginning of the month. Other Israeli companies in SoftBank's portfolio include: RAPIDAPI, Claroty, Redis Labs, eToro and more.

These layoffs, painful as they may be, pale in comparison to the ax of far more violent cuts hoisted over the top unicorns and decacorns overseas - private companies valued at more than $10 billion. The American and European companies in which SoftBank has invested hundreds of millions of dollars in the last two years are laying off many hundreds of employees each. Out of about 20,000 fired high-tech workers in recent months, most of them in the United States, SoftBank companies make up about 20%.

Does SoftBank dictate a more aggressive cutback policy than other funds? The "chicken or the egg" element must not be ignored: SoftBank has been “the” active investor in global high-tech in recent years. In 2021, it invested $35 billion in rounds in which it was the leading fund or co-leader. Tiger Global, which came in second, settled for $30 billion in investments. Insight Partners, which is considered one of the most active funds in Israel, led rounds of $14 billion last year.

While private equity funds also report their returns to their investors, and the reports get leaked to the media, as for example the heavy losses of Tiger Global which wiped out $17 billion from its portfolio, at SoftBank this is done on an ongoing basis. And yet, it is also impossible to ignore the fact that SoftBank, as a particularly aggressive and generous investment body, is also one of the few in its competitive landscape that is a public company, and this dictates different behavior from others.

Although SoftBank also has Israeli operations, which are managed by former Mossad Director Yossi Cohen, the spirit of the cuts is blowing to local startups directly from headquarters far from here. This spirit is derived from the change of direction that Masa announced earlier this year and its essence - much smaller checks and much less investment.

Yossi Cohen - Director of Israel operations, SoftBank Yossi Cohen - Director of Israel operations, SoftBank Yossi Cohen - Director of Israel operations, SoftBank

In the last month, SoftBank's stock went back five years and erased 60% of its value, or about $80 billion, compared to the peak in April 2021. What makes the picture worse for Masa is a debt of $140 billion, one of the largest in the world today of any company. Moody’s has already changed SoftBank's credit rating horizon from "stable" to "negative" and refers to the contraction in the value of its investments, which dramatically raises the group's leverage level.

Against the background of these difficulties, it is not particularly surprising that entrepreneurs in companies that raised capital under the leadership of SoftBank testify that they received a clear message from the fund - do not expect to be rescued through additional cash flows in case you run into difficulties. In other words - make every effort so that the money you currently have will last you until the situation in the markets improves and do not rely on us.

This message contrasts with the message of Insight Partners, which is also very active in Israel. In a special Zoom call, Managing Director Jeff Horing told entrepreneurs that the fund will invest in every company in its portfolio that will need money during the crisis. This is of course a far-reaching announcement, which will be examined with the passage of time, but in principle this is precisely the difference in attitudes between entities such as SoftBank and Tiger Global whose approach is to gain a foothold in as many companies as possible, in hopes that some of them will succeed, compared to the Insight approach, an approach that is more typical of Israeli venture capital funds of performing an in-depth due diligence before investing, investing in fewer companies and building a deeper relationship between the entrepreneur and the fund.

"The reason we are now seeing more layoffs in companies that have raised a lot of money from American funds is because there is less sentimentality there. They simply open the instruction book on the 'Crisis' page and it says that in a crisis, costs and manpower must be cut. This is what is happening now in the high-tech sector in the United States, and therefore the layoffs there are also more massive than in Israel,” a senior partner in one of the local venture capital funds tells Calcalist.

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Tiger Global, by the way, also understood the importance of due diligence and recently approached a number of Israeli venture capital funds asking to join them in early investment rounds in companies that have passed their required checks. Entrepreneurs testify that SoftBank representatives on the boards and company representatives who advise them are also suddenly talking about the concepts of burning cash, recruiting employees and examining the viability of expansion plans and not just humming “growth, growth, growth”. Therefore, anyone who wants to assess who will be the next companies in Israel to lay off employees, should take a look at SoftBank's portfolio. It is possible that the companies themselves are in a good position, it is their investor who is in trouble.

SoftBank preferred not to respond to Calcalist's question as to whether the group is encouraging its entrepreneurs to cut costs as soon as possible and how the matter relates to SoftBank's own situation, but referred to the latest update to entrepreneurs recently sent by Rajeev Misra, CEO of SoftBank Investment Advisers. "There is no uniform formula to overcome the upheaval, but capital is the key. Strive for profitability faster and buy yourself breathing space. There will also be opportunities, staff costs are about to go down and this is an opportunity to upgrade your management team, development teams or get marketing stars. It’s likely that this is also the time for strategic acquisitions and mergers that will bring you closer to being number one in your category or strengthening your position if you are already there."

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