What the failure of a construction startup tells us about SoftBank

SoftBank launched its first, $100 billion Vision Fund in 2017. Just last month, the Japanese conglomerate led by Masayoshi Son said the fund had delivered record profits for the quarter. But there have been some big failures too. The modular-construction startup Katerra filed for bankruptcy protection last week. SoftBank had invested more than $2 billion in the company.

Katerra had borrowed money from Greensill Capital, which also received about $2 billion of SoftBank money. Greensill also collapsed earlier this year. That, of course, followed the WeWork debacle a couple of years ago. I spoke with Sarah Kunst, managing director of the venture firm Cleo Capital. She said SoftBank’s strategy has been to make huge bets on relatively unproven companies. The following is an edited transcript of our conversation.

Sarah Kunst: The risk is that you’re putting a lot of money into companies before you know how good they are. If you say that somebody is a billion-dollar company when historically they maybe would have been seen as worth $100 million, you’re betting that by giving them that money, they’re actually going to turn into a multibillion-dollar company.

Amy Scott: I wonder what to make of the failure, or near failure, of several SoftBank-backed companies. Should we take away from this that maybe SoftBank isn’t actually very good at this?

Kunst: It’s hard to say because if you were writing checks of this size into startups, they were so sort of close to being profitable, their business model was so fully fleshed out, there wasn’t a lot of risk that they would go bankrupt. And so now you are putting money in, and there’s so much more risk. And the kind of founder who’s excited to take that money and to take that risk might be somebody who is, as we’ve kind of famously seen with WeWork, somebody who is a little bit faster to spend that money out, who’s Icarian — they’re flying very close to the sun. But pretty publicly, and famously, [Masayoshi Son], who runs SoftBank, he’s really gravitated towards those types of founders. And so there’s a difference between: Is the strategy wrong for venture capital in general, and is SoftBank choosing the right investments? And are they applying the right lens? When you invest, you expect a lot of things to not work out that well and a few things to work out and be the next Uber or Facebook or Google or Coinbase. And just have such a tremendously huge outcome that it makes up for everything else.

Scott: When you’re talking about bigger dollar amounts, you’re seeing bigger failures, right? But some degrees of failure is expected in this business.

Kunst: I mean, certainly it’s not a bug, it’s a feature. And you’re taking big swings, you’re not playing it safe. And at some point, you’re either going to have a massive success or some level of failure. I think there’s nothing inherently wrong with saying, “Let’s put a lot of dollars into startups a little bit earlier than historically people have put a lot of dollars in.” The question then becomes: How do you pick the right startups? And how do you make sure that they don’t fail? And I think that’s a big question, probably, that SoftBank is having internally right now.

Scott: What are some of the SoftBank success stories? We’ve focused on the failures.

Kunst: A lot of their companies are doing very well. This isn’t something where it’s a 100% failure rate. The other thing that becomes a little bit risky is what if you’re too early? So SoftBank has invested in companies in categories that have gone on to get a ton of tailwinds, but maybe — in venture, we like to say, “If you’re too early, you’re wrong.” So to some extent, this whole model, when they created it, felt a few years too early, and now other people are catching up to them, like the hedge funds. But it was something that when they first started, everybody thought they were wrong. And you also, though, can look at things like their investment into DoorDash, which they put in, I think, like $600 million, $700 million, and then it went public at over $10 billion on the [initial public offering]. And so that is a huge success story. Those sometimes get less attention because that’s what you’re supposed to do. You’re supposed to write a check into a startup and then make money on it. But certainly, it would be wrong to call them an unmitigated success, and it would certainly be wrong to call them an unmitigated failure.

Scott: I mentioned the connection between Greensill and Katerra — both SoftBank-backed companies that have failed recently. Is that common in venture capital, for portfolio companies to work together?

Kunst: It’s pretty common. There should be overlap. It shouldn’t be an arranged marriage, it should be, “Hey, there’s a lot of commonalities here.” And it makes sense. If you are a SoftBank-backed company, and you need office spaces, small office spaces, all over the world, it makes perfect sense a few years ago that you would have turned to, to WeWork, and maybe you met them, maybe the founders met each other at a SoftBank event, or maybe they were connected elsewhere, and say, “Hey, of course we would work with you because we need this space, and this is what you sell.” And so you see a lot of that happening, and it’s generally organic. And it certainly makes the investor happy, and it’s sort of not dissimilar to saying, “Hey, let’s go to my cousin’s restaurant versus the perfectly good restaurant across the street.” And so I think that it’s fine as long as that’s happening in a way that is organic and accretive to both companies.

Scott: How would you describe this moment in venture capital as the economy emerges from the pandemic and things are picking up?

Kunst: It’s been a fascinating moment. There’s more money than ever in venture capital investing. It is kind of wild to say this, given the devastating impacts that COVID-19 had on a lot of low-to-mid-income people. But most people who are high-income have been making a lot more money. And so there’s a lot more capital to deploy into venture capital. There’s not a lot of places to get yield right now. The interest rates are at an all-time low, so it’s very cheap to borrow money, so there’s more money than ever in venture capital. The problem is that most of it is going into later-stage deals. And that’s fine, except for the fact that you need money in earlier-stage deals as well. The next billion-dollar company isn’t going to appear if we don’t have people putting money into the earliest stages of startups because you have to crawl before you walk and walk before you run. And so if SoftBank is putting money into companies to help them run faster, we have to think about: Who’s working at the earliest stages, like we do at my fund, Cleo, to put money into these companies so that they can crawl?

Related links: More insight from Amy Scott

The recent collapse of the Softbank-backed construction company Katerra is a pretty fascinating story, featuring just the sort of “Icarian” CEO that Sarah Kunst talked about, along with some questionable accounting practices. Cory Weinberg has been reporting on it at The Information. Katerra was founded in 2015 to disrupt the, as yet fairly undisrupted, construction industry. It promised to build and renovate apartment buildings faster and for less money, using innovations like mass timber, or engineered wood, and modular components, like roofs and walls built in automated factories.

But co-founder and CEO Michael Marks had no construction experience. The company expanded rapidly, burning through cash by acquiring other firms, and its projects were often delayed and over budget. The company racked up $2.8 billion in losses in the past three years. As one expert told Fast Company: “It’s hard to change construction, and tech can’t go it alone.”

Chris Bryant at Bloomberg has more on the role of Greensill Capital in Katerra’s bankruptcy. The London-based financial-services firm went under in March of this year. Greensill lent more than $400 million to Katerra, packaged those loans into securities and sold them to investors through Credit Suisse. According to the Financial Times, Credit Suisse plans to sue SoftBank to recover that money.

It’s a tangled web, folks. Hats off to the reporters making sense of it.

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