SoftBank’s Asia Fintech investments could still pay off big
SoftBank, like many other funds, has not had the best 2022.
It’s been a tough year for Japan’s SoftBank and its CEO Masayoshi Son. Neither the company nor Son is coping particularly well with the global technology slowdown and the general growing investor skepticism towards growth-first, cash-burning startups. In the third quarter, SoftBank’s core Vision Fund arm lost a whopping $7.2 billion, which only looks acceptable compared to the record $23 billion loss in the April-June period.
Even the indefatigable Son had to admit that he might have placed some big bets without thinking them through. He described himself as becoming “somewhat delirious” during the peak of SoftBank’s seed funding, when the investments paid off big, and says he is now “embarrassed and regretful”.
If there’s one investment Son definitely regrets now, it’s the roughly $100 million — according to Lightstream Research estimates — the Vision Fund sunk into the late FTX. Some analysts believe SoftBank’s exposure to FTX is somewhat higher, although they have not provided any evidence for that claim. SoftBank, for its part, has said it will write down its entire investment in the ill-fated crypto exchange.
Despite its many ailments, the sheer size of SoftBank’s portfolio and Son’s focus on fintech in India — where the low-hanging fruit abounds in digital financial services — bode well for the Vision Fund’s long-term prospects.
Betting on Paytm
The most prominent Asian fintech in SoftBank’s portfolio is India’s Paytm, the subcontinent’s most famous digital financial startup. After selling a small portion of its stake in Paytm following the company’s November 2021 IPO, SoftBank retains a $800 million investment in the firm as of its FY2022 annual report, 42% less than the $1.4 billion it initially invested.
One of the conditions for Paytm to receive the SoftBank investment was to go public within five years. Technically, the Indian fintech giant could wait until 2024. The problem was that Paytm felt clear pressure from investors for a viable exit sooner rather than later. In retrospect, Paytm and its backers probably misjudged the degree of bearish market sentiment.
A year after its IPO, Paytm’s shares are trading at 542 rupees, 66% less than the value at the time of its market debut. Given the stock’s underwhelming performance, Paytm said on December 8 that it was considering buying back its own shares, without specifying details. Paytm’s parent company, One97 Communications, will meet on December 13 to consider the buyback proposal.
“Management believes that given the company’s current liquidity/financial position, a buyback may be beneficial to our shareholders,” One97 said in a statement.
Still, SoftBank’s investment in Paytm may yet prove to be a wise move. Although Paytm lost 644 billion rupees ($81 million) in the first quarter of FY2023, the company says it is on track to reach operating profitability by the second quarter of the fiscal year. It may also be in the hunt for a small finance bank (SFB) license in India that would allow it to offer all the same services traditional lenders do. This license could be a game-changer for Paytm, enabling it to meaningfully move beyond the low-margin payments segment.
Other India fintech investments
In addition to Paytm, SoftBank has invested in a number of other Indian fintechs – with mixed results. Of these, banking and credit technology unicorn Zeta, which is valued at $1.5 billion and raised $280 million from investors, has some strong fundamentals. In March, Zeta entered into an agreement with Mastercard
Zeta posted strong revenue growth in FY2021, with revenue growing more than two-fold to Rs 297 crore from Rs 121.6 crore in FY20. However, Zeta recorded annual losses of Rs 43 crore in FY21, well above the Rs 20.3 crore it lost in FY2021
Online insurance marketplace Policybazaar is another prominent SoftBank India fintech investment. Although shares of parent PB Fintech Ltd rose nearly 23% in the firm’s India Stock Exchange debut in November 2021, which raised around 57 billion rupees ($761 million), the stock has since lost more than 59% of its value. and trades for around 464 rupees. Still, according to SoftBank’s FY2022 report, the investment in PolicyBazaar yielded a cumulative gain of USD 300 million in FY21-22.
More strategic investments
Given changing market conditions, SoftBank no longer has the luxury of throwing bags of cash at any tech startup that piques Masayoshi Son’s interest. FTX’s implosion will ensure that SoftBank approaches cryptocurrency firms cautiously. After all, it could have been much worse if SoftBank had invested more in the company.
One of SoftBank’s biggest recent fintech investments has been in Funding Societies
SoftBank’s recent investment in Singapore-based Funding Societies — it led a US$294 million funding round in February — which it says is Southeast Asia’s largest digital financing platform for small and medium-sized businesses, hints at the Vision Fund’s shifting focus. To be sure, B2B fintech is much less glamorous than retail. It usually doesn’t offer the same ability to build scale quickly. That’s not how dominant fintechs in Asia like Alipay and Tenpay and Kakao Bank became juggernauts.
That said, in this tougher environment for tech startups, SoftBank would be wise to invest in companies that don’t require near-constant customer subsidies and other marketing expenses just to ensure steady user adoption. Fintech must be thought of with sustainable business models.
Funding Societies fit the bill. The company, which also operates in Indonesia, Malaysia, Thailand and Vietnam, has to date disbursed over USD 2 billion in loans to MSMEs. That MSMEs are underserved in all these markets and there is a strong demand for business-centric credit solutions across Southeast Asia bodes well for the financing companies.
