Why Softbank’s Masayoshi Son Is Not A VC Position Mannequin

Even if you’ve never heard of Softbank and its CEO Masayoshi Son, you probably know one of its most famous investment disasters: WeWork. As the New Yorker wrote last month, Son took what most venture capitalists do – especially in the case of WeWork – to an absurd extreme.

As the New Yorker shows, Son’s promise to make all members of the WeWork board much richer has undermined their willingness to temper the persistently outrageous business strategies and professional demeanor of WeWork CEO Adam Neumann.

This raises four questions in my head. What follows are my thoughts on each and what the answers mean to you.

What are Venture Capitalists (VCs) doing and why?

VCs invest money on behalf of their limited partners – usually insurance companies, pension funds, trusts, and trusts. VCs are personally liable partners who are paid a percentage of the funds they manage – usually two percent – plus approximately 20 percent of all investment gains over the fund’s typical ten-year term.

VCs aim to achieve very high returns on investments by providing capital to companies that are growing very quickly and going public with high valuations. The typical VC portfolio consists of one or at best two in ten companies that multiply their investment by a factor of 20 to 100. Those winners make up for the other eight companies that either fail completely or barely make enough to repay the VC’s investment.

In my book Hungry Start-Up Strategy, I pointed out that VC is the worst form of financing for a startup – preferably the profits from sales to customers. However, there comes a time when increasing VC is a smart move – when your company is sprinting to an IPO (the third tier of scaling according to my book, Scaling Your Startup). As we’ll see below, taking on VC comes with difficulty and risk – most importantly, hiring a boss who could fire you without notice.

What was so outrageous about what Son did at WeWork?

All VCs want their portfolio companies to grow. What Son did at WeWork was give Neumann enough capital that he could grow much faster than his competitors based on a business model – with prices well below the cost of competitors and WeWorks – that would collapse as soon as WeWork ran out of capital.

Additionally, Son made it clear that Neumann’s sales skills were so critical to this investment strategy that Son was willing to tolerate Neumann’s outrageous behavior in the workplace in order to keep him happy. Son’s idea was that Softbank’s capital would fuel WeWork’s driving growth into an IPO – rewarding investors and justifying their decision not to harm Neumann’s unprofessional behavior.

Everything seemed to be going well until WeWork went public last fall. Potential investors ran into the mountains after reviewing the WeWork prospectus, which revealed the company’s mission to “raise awareness of the world,” and the details of a business model that would never be profitable.

What role should the VC play?

In the ideal world, the VC should partner with a CEO so that the company can offer its customers a product with a competitively superior value proposition – as venture capitalist Fred Wilson wrote. I also think VCs should support business models that generate positive cash flow.

In this partnership, the VC offers capital and value-added services such as customer acquisition assistance, talent recruitment, search for companies to be acquired, and anticipation and resolution of problems that could block the company’s growth goals.

What should leaders do to find a VC who can take on this role for them?

If you haven’t previously enriched a VC company, don’t start looking for VC until your company is well established. By that, I mean it has $ 40 million to $ 50 million in revenue and is growing at least 40 percent annually.

At this point, it doesn’t take too much foresight to realize that your company could have magical $ 100 million in sales over the next three to five years and then be able to go public.

When you get to this stage, you can make it clear to a VC that their capital can help you realize your vision for growth – for example, by opening a business in new geographic areas. This way, your company and the VC will be amply rewarded in an IPO.

Before accepting capital from a VC, speak to the CEOs of companies that have taken money from every VC you are considering. Find out if the partner who will serve on your board will help CEOs who get into trouble or replace them quickly.

Don’t end up like Neumann – kicked out of your own company.

The opinions expressed by Inc.com columnists here are their own, not those of Inc.com.

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