Startups Should Be Wary of SoftBank’s Approach to Venture Capitalism

I’m gonna make him an offer he can’t refuse.”

Don Corleone’s promise to make the head of a film studio an irresistible offer. He did. It came with a horse’s head tucked into the bed of the poor unsuspecting studio exec. Message received.

Venture capitalists write big checks.

It’s not only what they do, it’s how they compete.

Bigger is better.

The bigger the investing fund, the bigger the investment offer.

This trend has been going on for years. It’s now reached its ultimate expression with the arrival of SoftBank’s massive $100 billion VC fund.

It gives green-eared companies $100 million checks – AT MINIMUM.

The idea behind it is pretty simple. More capital allows a company to do everything faster and more aggressively… from developing products to conquering markets.

And I hate it.

It’s just about the most ridiculous idea I’ve come across. Also one of the most dangerous.

Listen, this is not an anti-money diatribe. Money is NOT the root of all evil.

But, like a lot of things, too much of it is not good. It can too easily lead to capital inefficiency while disincentivizing hard work.

I’ve been in the investing business for a long time. The period in which I trust a company’s judgment the most – especially its capital expenditure decisions – is when it’s seen its cash reserves dwindle.

When companies can’t afford to do everything they want to do, they’re forced to choose between option A or option B. They can’t do both.

Companies hate these periods. But it’s when I most often see return on investment (ROI) improve.

Too Rich to Fail

SoftBank takes the opposite approach. It gives companies hundreds of millions of dollars so they can do everything they feel they need to do to succeed.

It’s not quite a blank check, but it’s awfully close.

There’s a whiff of The Godfather to how SoftBank reels in its big catches.

For example, when it trained its sights on the startup Grab, SoftBank’s CEO, Masayoshi Son, told Grab CEO Anthony Tan, “You take my money. It’s good for you. It’s good for me. If you don’t take my money, not so good for you.”

I’m guessing Tan didn’t sleep so well that night!

Tan did take the money. And why not? I’m sure 99% of founders love the idea of no longer having to worry about money.

Even better, they get to use it as a weapon to overwhelm the competition.

“Rather than having [SoftBank’s] capital cannon facing me, I’d rather have its capital cannon behind me,” said Uber CEO Dara Khosrowshahi.

Uber is the poster child of this approach. It has raised $22 billion during its pre-IPO existence with the express purpose of bludgeoning the competition and conquering every large market in sight (SoftBank is Uber’s largest shareholder).

Except for China and a couple of other countries, Uber’s strategy has worked remarkably well.

When talent (or drivers) is in short supply and brand loyalty is up for grabs, it can pay to hit markets with full guns blazing.

But there’s a serious downside to the Uber and SoftBank approach.

It’s no coincidence that Uber has had to contend with serious cultural issues. A virtually unlimited supply of cash can make ambitious, world-conquering CEOs (and their teams) lazy, sloppy, undisciplined and inefficient.

In other words, everything a cash-poor startup simply can’t afford to be.

For bootstrapping companies, every decision counts. They can’t afford vanity projects. They don’t have the luxury of failing.

A shortage of money focuses operational activity on what is most essential to the bottom line. Too much money has the opposite effect.

Elon Musk does a good job of raising VC money… maybe too good. Venture capital totaling $1.9 billion backs SpaceX. Tesla had raised $12.5 billion before going public. The company has yet to encounter a manufacturing schedule it can meet.

Fitness tracker startup Jawbone was for a time valuated at $3 billion. It was a favorite of VC firms for years, having raised $984 million. It still went under.

Theranos raised $1.4 billion. It’s dead in the water.

Beepi took in $149 million of investor money and spent it at a clip of $7 million a month – much of it on large salaries and costly office furniture. The used-car marketplace startup was sold for parts.

Even mature companies like Google struggle with too much cash. From solar-powered drones to robotics to its loony Project Loon, it’s chasing way too many moonshots. Google has too much money on its hands.

Big Money’s Big Lesson

Big money also creates its own unique risks and challenges.

Companies seeded with hundreds of millions of dollars HAVE to go after huge markets and scale quickly. They NEED to turn into unicorns. Anything less than a billion-dollar valuation would be a disappointment to investors.

This places unreasonable expectations on a company and makes a future raise at an even higher valuation extremely problematic.

Big money is one way to grow. But it can also be a highway to disaster. It’s not my first choice.

Anybody can do more with more. Give me a bootstrapping, capital-efficient company that’s doing more with less.

Give me a company with a viral idea or product that is expanding rapidly. Just a little money goes a long way.

Give me a company that doesn’t take the biggest check, but takes the right check. Because the founders want to do it their way.

Granted, big money can make a big difference, allowing deep-pocketed startups to gain separation from the pack.

That’s what SoftBank says it’s doing. I don’t quite buy it.

What it’s really doing is setting itself apart

Come to us – and only us – for the mega-checks,” it’s whispering to startup founders.

It’s a heck of a proposition. But it’s also a siren song. And founders who go this route may come to regret it.

Good investing,

Andy Gordon

Co-Founder, Early Investing