Softbank’s real estate investments have struggled immensely over the past year, with all of them posting significant losses. The reasons behind this underperformance are unclear – are they due to market conditions or a flawed business model that prioritizes customer experience above all else? In this article, we examine Softbank’s real estate investments and the challenges they face to gain a deeper understanding of the situation.
Softbank’s investments in real estate have experienced considerable difficulties over the last year, resulting in substantial losses across the board. The factors behind this poor performance are ambiguous, leaving uncertainty as to whether it is attributable to market conditions or a faulty business model that puts customer experience first. In this article, we investigate Softbank’s real estate investments and the obstacles they encounter to obtain a more profound comprehension of the predicament. Therefore, the question remains whether this is solely due to market volatility or if there are more significant underlying concerns causing the problem.
THE REAL ESTATE INVESTMENTS
Softbank, a prominent company, had invested in several promising real estate companies. Despite the significant amount of funding provided by Softbank, these companies have encountered substantial difficulties this year. In the following sections, we will review the significant investments Softbank made and the present situation of each of these companies.
Compass
Amount invested: Between USD$850 million to $1 billion over the course of three rounds.
What they do: Compass is a technology-driven real estate brokerage operating in 16 states across the United States. Its aim is to streamline the process of buying and selling real estate by using innovative technology to minimize the time and effort required by realtors, property owners, and buyers.
Issues they are facing: Compass, despite its rapid growth, has been unable to turn a profit this year. This can be attributed to their practice of paying out a significant portion of their revenue as a cost of sale. In addition, the company faces fierce competition from Realogy, which is not only profitable but also publicly traded and valued at a considerably lower amount. Realogy has posted significantly better results than Compass, including 42 times the number of transactions, 11 times the sales volume, and seven times the revenue in 2018.
Katerra
Amount invested: USD$999 million in one round.
What they do: Katerra is a company that specializes in offsite construction using technology-driven solutions, with a focus on prefab projects.
Issues they are facing: Katerra’s recent challenges can be attributed to unstable leadership, characterized by frequent turnover in executive positions. Over the past four years, the company has had three different CEOs and three different CFOs. In 2023 alone, the company has withdrawn from six major construction projects, shut down a factory in Arizona, and terminated over 200 employees.
Opendoor
Amount invested: USD$500 million in two rounds.
What they do: Opendoor operates as an iBuyer, which refers to an internet-based platform that presents offers to property sellers and guarantees to purchase their property in case they cannot sell it through a traditional agent.
Issues they are facing: Earlier this year, Opendoor was compelled to adopt a “culture of frugality” and abandon its planned mass expansion into new markets due to excessive operational costs. CEO Eric Wu implemented several cost-cutting measures and a drive to boost revenue, leading many to believe that the company will substantially increase its fees. Despite continuing to develop their model and striving to revolutionize the way real estate buyers and sellers transact and own property, Opendoor will remain in the red and continue to spend money.
WeWork
Amount invested: The WeCompany organization has raised a total of USD$19.9 billion through three funding rounds.
What they do: WeWork is a major player in the shared workspace industry, offering short-term lease agreements for exquisitely furnished office spaces to small and medium-sized enterprises (SMEs) as well as startups.
Issues they are facing: Following a year-start valuation of USD$47 billion, the latest assessment of the company revealed a sharp drop in value to USD$8 billion. Consequently, the company canceled its initial public offering (IPO), and a significant restructuring occurred from the highest level. As a result of intense media scrutiny, Co-Founder/CEO/Chairman of the Board Adam Neumann relinquished his positions.
THE CUSTOMER EXPERIENCE OBSESSION
Softbank’s $100 Billion Vision Fund invests in 88 companies, including recognizable brands such as Uber, Lyft, Slack, Alibaba, WeWork, Compass, Opendoor, and Katerra. These companies all share similar characteristics: they are founded on technology-enabled services, have brand equity through large-scale marketing campaigns, and prioritize customer experience above all else.
However, this customer-centric approach may be hurting these companies in the real estate space. Softbank-backed businesses have traded technical expertise for an overcapitalization on providing the best possible customer experience, which has informed their corporate strategy and hiring practices. This emphasis on the consumer has made it exceptionally hard for other businesses to compete as they cannot raise the same capital as Softbank and provide the same levels of customer service.
While being customer-centric is positive, too much of a good thing can be a red flag. Employees have posted disturbing reviews on employer review site Glassdoor, with one Katerra employee stating that the business is “trying to run before it can crawl” and that “literally no one knows what they are doing”.
Although this approach has provided a high standard of customer experience, it has taken a significant bite out of revenue and has rocked the profitability of Softbank-backed businesses. Competitors simply can’t compete on the same playing field due to Softbank’s access to capital.
A DANGEROUS MODEL
WeWork serves as a prime example of what can go wrong in business. Their organization’s complete collapse can be attributed to a business model that involved taking out long-term leases at exorbitant rates and equipping their offices with luxurious finishes.
While this approach resulted in attractive and polished shared workspaces and a pleasant customer experience, the short-term leases they offered their members with minimal overhead costs created a mismatch in commercial terms. As a result, WeWork’s planned IPO failed miserably and raised serious doubts about the company’s future viability.
Softbank’s investments have also adopted this approach to varying degrees, resulting in comparable financial, governance, and operational difficulties across all of their investments.
WHAT’S NEXT?
It is intriguing to observe which PropTech firm with substantial funding will be the next to emerge, and whether it will ever reach Australian shores amidst the current turmoil surrounding these large-scale start-ups.
Equally fascinating is the prospect of analyzing the lessons derived from Softbank’s turbulent endeavors in the real estate industry, and how fresh PropTech ventures will manage the competing priorities of delivering a satisfactory customer experience while achieving robust financial returns.
