It has been a tough year for Japan’s SoftBank and its CEO Masayoshi Son. Neither the company nor Son is weathering the global tech slump and general rising investor skepticism towards growth-first, cash-burning startups especially well. In the third quarter, SoftBank’s core Vision Fund arm lost a whopping US$7.2 billion, which only looks acceptable when compared with the its record US$23 billion loss in the April-June period.
Even the indefatigable Son had to admit that perhaps he had placed some big bets without thinking them through. He described himself as becoming “somewhat delirious” during the apex of SoftBank’s startup funding binge when the investments were paying off big and says he is now “embarrassed and remorseful.”
If there is one investment Son definitely regrets now, it is the approximately US$100 million – by the estimates of Lightstream Research – the Vision Fund sank into the late FTX. Some analysts think SoftBank’s exposure to FTX is somewhat higher, though they have not offered any evidence of that claim. For its part, SoftBank has said it would write down its entire investment in the ill-fated crypto exchange.
Despite its many woes, the sheer size of SoftBank’s portfolio and Son’s focus on fintech in India – where low-hanging fruit abounds in digital financial services – augur well for the Vision Fund’s long-term prospects.
Betting on Paytm
The most prominent Asian fintech in SoftBank’s portfolio is India’s Paytm, the subcontinent’s most celebrated digital financial startup. After selling a small portion of its stake in Paytm after the company’s November 2021 IPO, SoftBank retains an US$800 million investment in the firm according to its FY2022 annual report, 42% less than the US$1.4 billion it originally invested.
One of the conditions for Paytm receiving the SoftBank investment was to go public within five years. Technically, the Indian fintech giant could have waited until 2024. The problem was that Paytm felt clear pressure from investors for a viable exit sooner rather than later. In hindsight, Paytm and its backers probably misjudged the degree of bearish market sentiment.
One year on from its IPO, Paytm’s shares are trading at 542 rupees, 66% less than their value at the time of the market debut. Given the shares’ underwhelming performance, Paytm said on December 8 that it was considering to repurchase its own shares, without specifying details. Paytm’s parent company, One97 Communications will meet on December 13 to consider the buyback proposal.
“The management believes that given the company’s prevailing liquidity/ financial position, a buyback may be beneficial for our shareholders,” One97 said in a statement.
Nevertheless, SoftBank’s investment in Paytm may yet turn out to be a wise move. Though Paytm lost 644 billion rupees (US$81 million) in the first quarter of FY2023, the company says it is on track to reach operating profitability by the second quarter of the fiscal year. It also may be in the running for a small finance bank (SFB) license in India that would allow it to offer all the same services traditional lenders do. This license could be a game-changer for Paytm, allowing to move it beyond the low-margin payments segment in a meaningful way.
Other India fintech investments
In addition to Paytm, SoftBank has invested in a number of other Indian fintechs – with mixed results. Of these, banking and credit technology unicorn Zeta, which has a valuation of US$1.5 billion and has raised US$280 million overall from investors, has some strong fundamentals. In March, Zeta inked a deal with Mastercard
Zeta posted strong revenue growth in FY2021, with revenue growing more than two times to Rs 297 crore from Rs 121.6 crore in FY20. However, Zeta posted annual losses of Rs 43 crore in FY21, well above the Rs 20.3 crore it lost in FY2021
Online insurance marketplace Policybazaar is another prominent SoftBank India fintech investment. Though shares of its parent company company’s PB Fintech Ltd surged almost 23% in the firm’s debut on the India Stock Exchange in November 2021 which raised about 57 billion rupees (US$761 million), the stock has since lost more than 59% of its value and is trading at around 464 rupees. Nevertheless, according to SoftBank’s FY2022 report, its investment in PolicyBazaar saw a cumulative gain of US$300 million in FY21-22.
More strategic investments
Given changing market conditions, SoftBank no longer has the luxury to throw bags of money at any tech startup that piques Masayoshi Son’s interest. FTX’s implosion will ensure that SoftBank approaches cryptocurrency firms cautiously. After all, it could have been a lot worse if SoftBank had invested more in the company.
SoftBank’s recent investment in Singapore-based Funding Societies – it led a US$294 million funding round in February – which says it is Southeast Asia’s biggest digital financing platform for small and medium-sized firms, offers clues about the Vision Fund’s changing focus. To be sure, B2B fintech is a lot less glamorous than retail. It doesn’t usually offer the same opportunity to build scale quickly. It’s not how dominant fintechs in Asia like Alipay and Tenpay and Kakao Bank became juggernauts.
That said, in this tougher environment for tech startups, it would behoove SoftBank to invest in companies that don’t require near-constant customer subsidies and other marketing expenses just to ensure steady user adoption. It needs to be thinking about fintechs with sustainable business models.
Funding Societies fits the bill. The company, which also operates in Indonesia, Malaysia, Thailand and Vietnam, has disbursed over US$2 billion to date in loans to MSMEs. That MSMEs are underserved in all of those markets and there is high demand for business-centric credit solutions across Southeast Asia augur well for Funding Societies.