Softbank has put Latin America on the map.  Will you are taking it off now?

Softbank has put Latin America on the map. Will you are taking it off now?

In just over three years, Masayoshi Son’s Japanese group became the owner of the largest collection of unicorns in the region. Now it’s pulling its foot out of investments amid criticism over inflated valuations and rushed due diligence.

At the party that were venture capital investments in startups in the 2020s and 2021, Softbank was the main host. Masayoshi Son’s fund helped birth Latin America’s top unicorns, as companies worth more than $1 billion are called.

Startups such as Rappi, Kavak, Loggi, QuintoAndar, Mercado Bitcoin, Loggi, unico, Bitso, MadeiraMadeira, Merama, Olist, Creditas, Gympass, among other billionaire assets.

But since Claure’s departure, announced at the end of January this year, questions about the future of Softbank’s investments in Latin America have grown. The doubts only grew with the departure of names that were part of the team that pioneered the region, such as Paulo Passoni and Shu Nyatta.

In recent weeks, the NeoFeed listened to more than a dozen investors, entrepreneurs and people close to Softbank in Latin America to try to understand the current stage of operations in the region and identify the successes and mistakes of the manager in the region.

Rumors about the end of Softbank’s operation in Latin America are just rumors. But do not expect, from now on, the same appetite of the fund in companies in Latin America as in the years 2020 and 2021. The trend is for Softbank to focus on managing the current portfolio, making few and punctual new investments and providing more resources and time in follow-ons of the portfolio itself.

“The pace of investment in new companies has slowed down a lot. I think the bar is different from when we looked at 2020 and 2021: from the point of view of the business, the unit economics and the team”, says Alex Szapiro, Softbank’s managing partner for Latin America, NeoFeed.

To have an idea of ​​what Szapiro says, Softbank’s investments in Latin America went from US$ 4.31 billion in the second half of 2021 to US$ 1.57 billion in the first half of 2022, according to Pitchbook data, in a report entitled “Softbank led Latin America’s rise and fall”.

Since it started investing in Latin America, Softbank has placed Latin America on the world venture capital map, drawing attention to good entrepreneurs and good businesses in the region. As of 2019, the fund has been involved in more than a third of all value deals in Latin America and was the lead investor in 15% of deals, according to PitchBook.

On the other hand, the voracity to invest added to the speed with which the agreements were announced led to a series of distortions, according to multiple sources heard by the NeoFeed. The most cited errors: valuations inflated and hurried and indetailed diligences.

An entrepreneur who received investment from Softbank says that the manager carried out quick and little detailed audit processes. With other investors he dealt with, says this source, the processes sometimes took months and all the details of the deal were discussed. “This created a reputation that they weren’t good at auditing,” he says.

In the case of valuationsaccording to the testimonies heard by the NeoFeed, Softbank always used to stretch the rope upwards, bringing market distortions that are felt today, amid the wave of layoffs that is happening with startups. “They were impulsive,” says one manager who made investments together. “We accepted some because we thought the companies were good, but my earnings will be smaller.”

The Mexican Kavak, which operates in the resale of used cars and was valued at US$ 8.7 billion, and the Colombian Rappi, a delivery business that is worth US$ 5.25 billion, are cited by the sources heard by the NeoFeed as examples of companies in which the valuation it’s unreal. “Kavak is a used car store. They paid dearly”, says a market manager.

About the valuations inflated and the stagecoaches quick, Szapiro tells the NeoFeed that Softbank has a well-established process that analyzes all the details of the business before deciding on an investment. “I feel very confident that we have a very solid process in our investment committee. A company’s presentation to our investment committee is 80 to 100 pages long,” he says.

About the valuations, he adds. “Since I joined here, I hear this, of inflating the market. I’m not going to say that we are perfect, that we don’t make mistakes. Far from it. But I feel very comfortable with the mechanisms we use, with the processes and with the team.”

Why did this happen, according to sources heard by the NeoFeed? “Marcelo (Claure) wanted to give relevance to Latin America”, says a source who knows Softbank’s investment logic. “There was enormous pressure not to lose unicorns and the way to do that is to invest in everyone. And in this case, price doesn’t matter.”

It wasn’t just unicorns that could run away. There was great pressure to announce several investments per month. “The logic was not to lose any deal”, says another source in the venture capital area. “They thought most were ‘fucking’”, he concludes, referring to the belief that most of them would perform well and bring great returns. Currently, the portfolio in Latin America exceeds 70 companies.

But the scenario has changed. Since last year, the correction of tech asset values ​​has brought a headache to Masa’s empire, as the Softbank founder is known among those closest to him. The Vision Fund, Softbank’s global fund, posted a loss of US$26.2 billion in the first quarter of 2022. Losses reached US$23.1 billion in the months of April, May and June. In Latin America, the fund lost US$205 million.

In an interview to comment on these results, Son said he was “depressed” with the situation and admitted that in his aggressive investment strategy, with massive investments in companies, he should have been more selective. “I am ashamed of myself for being so elated by the big profits of the past,” he said.

Because of this, the Japanese group has been getting rid of its participation in several companies. Among the divestments that Softbank is selling is the sale of almost half of its stake in the Chinese e-commerce platform Alibaba, at the beginning of the month, via derivatives. The operations resulted in approximately US$ 22 billion in funds. Softbank also sold its entire stake in Uber.

This scenario, together with the new reality of the venture capital market, are the arguments to justify Softbank’s withdrawal from its investments. This, in fact, is happening in the world and in Latin America because of the bear market that affects all actors in this market.

But sources who take a pessimistic view of Softbank’s next steps in Latin America like to point out that without Claure, Masa should not focus on the region. “This was Marcelo’s project”, says an executive from a venture capital fund.

This perception has caused some funds that co-invested with Softbank to move and sound out Masa’s company to see if he is interested in selling his stakes in some companies in the region. So far nothing has evolved – and a sale of assets is unlikely at this time of low prices.

The region’s structure remains active, currently focused more on operations – one of Szapiro’s areas, an executive with stints at Apple and Amazon, has extensive experience. Currently, there are 53 professionals, almost the same number as a year ago.

According to the NeoFeeda managing partner, with a focus more on investment, is being sought by Softbank in the market with the objective of helping to manage the portfolio and help in the follow-ons. “We have a long-term commitment. And we’re just getting started,” says Juan Franck.

Softbank has undoubtedly put Latin America in the spotlight of global investors. Now that the venture capital party is winding down, will Masa turn off the light he helped turn on?

It is a question that only time will accurately answer. What is certain is that Marcelo Claure, after his period of non-compete, must have its own venture capital fund. And Paulo Passoni and Shu Nyatta will follow the same path.

Source: Neofeed

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