...duh? They just had WeWork blow up in their face and naturally they're going to pump the brakes. There were probably a lot of in-process deals going on.
Coming from someone who worked in a company that received Softbank investment, it's a huge hassle. The ONLY reason to take Softbank money is to get a huge sum of money at a huge valuation and reduce your "cost" of said money. But for me personally, the costs aren't worth it.
First, there's the inflated valuation. It's a great MO for Softbank - they get you by stroking your ego and flashing big (exaggerated) valuations. But does anyone ever think about the next round? No one else after is going to invest at that valuation + extra, unless you really knocked it out of the park, so you are stuck with them for future rounds. Or IPO (Hello Uber). Startups are hard - why are you making it more difficult for yourself to succeed?
Second, the ongoing effort. You don't have one or two guys at a VC firm you are working with, you have a bureaucracy you are working with, in a completely opposite timezone, with a very different working culture.
Maybe it makes sense for a company who is on their last round of funding before IPO, just needs one last cash push to get everything there, and can pay a bunch of people to deal with the BS. But that's not most startups.
I know this is a thought exercise, but those are some very weird numbers there.
If these ever existed as two legitimate offers, we're looking at a 5M cap vs a 50M cap.
Who is offering these numbers? Diligence has to be able to 'back into' the cap with traction or revenue. If the 5M cap feels "real", then the 50M cap is hiding something. Extreme red flags should be going up (outsized voting, extreme terms, weird clawbacks, etc). If the 50M cap is more real for the business, then the 5M cap is a joke and generally should be ignored unless there's a very specific reason to take it (but what could that be?).
Either way, a 10x evaluation difference is so off base something does not make sense.
Depends on how much money you need / how much sensible things you have to spend it on.
If you think you can do something tangible with the 10 million right now sure, if it results in a lot of PR people, over-expensive office space and a bloated workforce then the money can be a resource curse. Doesn't exactly seem to be a popular attitude these days but I've always been a fan of seeing how far you can go with as little as possible. Keeps the bs out.
You need to work out what your valuation is now and what it is predicted to be when you take your next round of investment. If you take the 10M for 20% and then sell the next 20% for less than 10M you are telling your investors that the investment has devalued.
You would think that you want to claw as much money from their hands but that comes back on you if you don't think you can grow or maintain the value your company is currently at.
$10M from someone who built their wealth via blood diamonds is very different from $1M from a well-connected VC that can help your business in a tangible way
If you’re giving a sizeable chunk of your company to an investor you better do your due diligence.
Whether it’s contacting founders who previously received money from the VC, or plain old web research. It’s really dumb to take money from someone who can make life difficult for you down the road
A lot of companies could really use a reality check as to their true valuation, and understand that the market cap shouldn't be sky high, but there's plenty of room to play with in the space that they have.
They're trying to make this a story about SoftBank being bad, but this just sounds like normal business. I have been "shafted" by VCs before, in similar ways, but none of them were SoftBank specifically. This is just an attempt to make a story (and drive clicks) out of the punching bag du jour.
The timeline for the backing out is around the WeWork IPO debacle. This makes a lot of sense --- in reaction to that, maybe they have new standards for investing, maybe they don't even know what the new standards are yet, maybe they don't even know when the new standards will be available, (almost) all the deals in progress are going to be screwed.
This kind of stuff is more common with corporate acquirers than established VC, I would expect, but it's kind of part of the game. If you have leverage as the start up, you demand short timeframes and meaningful deposits to keep the investors on task; if you don't have leverage, you get a bad deal (6-month exclusivity is crazy).
LP stands for Limited Partner. They are the people that actually provided the funding, but they have an arrangement where they have severely limited control (basically none) as to how the money is managed once it's part of the fund. The reason for this is because they are trusting the VC firm to actually invest their money wisely, and the VC firm needs to able to do that without constant interference from the investors.
All true. I suspect in this case Softbank was depending on the Vision Fund LPs to come back for round 2, but the WeWork fiasco scared them off, and now WeWork is in panic mode.
Limited Partner, the people who out up money in VC funds for the General Partner to invest/manage. iirc though LPs cant have an actual say in investment/strategy or else they risk losing the "Limited" status.
Softbank has $100 billion in assets. The 2nd closest VC fund has $17 billion. Proportionally, softbank backing out of 6 deals is like the 2nd VC fund backing out of 1 deal.
That only works if you can actually get that money. If you don't trust a VC to actually give you the money they promised it's wiser to go with one you can.
Nobody is walking away from SoftBank, and they don't have a poor track record.
They're a major upstart, and will be around probably for quite some time. At least until a crash, probably longer.
There are very few players in town willing and able to bankroll what used to be IPO level funding. It's a new category of investing they've created, and they are still the leader.
Having read this, I'd think (as the startup) I'd insist on a clause that the contract isn't binding until at least $X or %Y have been received from the VC (defining "received" as "the money deposited and cleared.") And if we find another investor before you send the money, the contract is dead and we renegotiate a new one.
If you have the leverage for that, it could work. But you probably also wouldn't sign a 6mo exclusivity deal if you had that kind of leverage . . . so?
The negative is that you can't go out and do fundraising with any other parties until that 6 months is up. Depending on how much runway you have, that might be terminal for some startups.
I think 30 days is more typical, but YMMV. If the company is in dire need of funding then the VCs can usually get away with more.
A six month lockup with no guarantee on the other side sounds crazy, but with a cash transfer to compensate and provide runway it looks a lot more reasonable.
(Of course, it depends a lot on the missing detail of what SoftBank took for that money in the absence of a deal. Was it a loan? A smaller investment at the same terms/valuation planned for the big one?)
I'm not saying Softbank is a great fund (I've thought they made shitty investments long before the recent media frenzy in the past year), I just meant Creator isn't exactly a startup starlet that is drowning in funding opportunities. They're ~10 years old, have raised ~25 MM, and I heard their last round was already a downround (pretty bad considering how little they've raised and how long they've been around).
Looking from the outside, Creator was likely desperate for cash and happy to agree to anything - which they did. And unless they ended up with no cash at all after this brouhaha, they are probably still better off than they were initially.
And who knows - maybe Softbank will still give a stupid amount of cash to another terrible robotics startup. They've certainly done dumber things before.
Out of all those stories, I'm most surprised SoftBank walked away on Seismic. Maybe they're scared that all the recent unicorns are going to lose value, but it's a pretty safe/standard company that wasn't depending on Softbank to live, and opening the Japanese market was a Softbank-specific perk.
Funding an already-unicorn at a high valuation isn't likely to get you the usual VC 10x, I guess. But it sounds like a way to help stabilize Softbank's rep with a modest win, not a risky bet to bail out of.
It does suck that it happened, and I've been on a similar receiving end of that - but at the end of the day the founders had to sign and the board approved that "deal".
Term sheet isn’t a deal. Same way an “accepted offer” on a house isn’t a purchase contract until you have an actual contract.
Clearly SoftBanks is having its challenges but this just sounds like normal deals falling apart during pre-closing due diligence. You don’t have a deal till you have a deal.
I think you're missing the point. There are established norms that are accepted by the industry during negotiations.
Another good example of a firm that is notoriously dishonest about term sheets is Global Founders Capital (the rocket internet people). They are known to blow out rival firms offers financially and then after everyone is out, come back and try to renegotiate at more onerous terms.
There seem to be two types of people debating with each other in this thread.
1. Some people that have real-world experience with raising money and term sheets. They understand what the norms and expectations are in addition to understanding the legal aspects.
2. Other people that lack the real-world experience and are just speculating without understanding the norms. They are only referring to the legal aspects.
^ The deal is never actually done until the money is wired and cleared into your account. Everything that happens before that including signed papers and handshakes are just negotiations.
Another way to approach interacting with other humans is to understand that the law only describes minimum expectations and isn't a replacement for ethics or common decency.
You can use all the tools of the law to disadvantage others but word will get around that you're a dirty dealer and it'll be their privilege to not do business with you anymore.
Yes, and the standard among VCs is to follow social and industry norms. Silicon Valley is an iterated game, and very few players are willing to play in a way that destroys future payoffs.
What makes you think the people with opinion #1 have real world experience and the people with opinion #2 don't? Maybe some people here just have a different understanding of what the norms are.
It also stands to be said that there is commonality between these types of "firms."
The two firms are essentially dictatorships masquerading as firms. What you get is a bunch of definitionally impotent lieutenants who go make deals and carry them to the 1 yard line and then the boss (Masayoshi or oliver) decide again as if nothing had happened before whether or not to execute.
Unless the bosses are the ones leading the deal, know that you there is zero good faith and a lot of risk as far as outcome goes.
Exactly. Just because you can walk away from a term sheet doesn't mean doing so doesn't make you a giant jerk. Try doing that regularly and see how long you last in this business.
Yeah, though part of due dill from founders side should reveal this - you ask past portfolio co's what kind of terms the firm leans to + their preferred process, and if their process is playing stupid partner games with stupid terms, you price that in to your negotiations. And yes, it's annoying + common, esp. the bigger and more diverse you go... . In theory you can add stuff like breakup and late fees: that's unusual in startup fundings, but the weird softbank-isms may make that kind of term more aligned.
I now treat VC as a funny form of enterprise sales, and this happens there too. Want a 6/7/8 figure deal? Same thing: has the group bought stuff at that level before, if so, what is the process? And, the more critical the deal, the more imp. you talk to folks who also recently ran the gauntlet.
Eh. It's not about the reneging its about the communication and intent.
From experience its a very small marketplace (esp with big checks). So there is a very high expectation that people act with longterm consideration of one another and subsequently their reputation. Just disappearing, or changing terms without a material change is dishonest period.
AFAIK, in contract law, an "accepted offer" is an actual contract, even if there's no paper record of it (though it may be a bit hard to prove acceptance without one). However, when someone puts their house up for sale, they're usually not offering it to anyone yet, rather they're inviting others to offer to buy it.
I think a term sheet is also just an invitation, not a binding offer.
It is in the realm of "tortious interference" to outbid others then fail to follow through with it, but it isn't generally a contract when two legally represented groups are agreeing over something which is expected to be defined on paper.
Term sheets do away for the need to speculate about whether there is a binding obligation or not - they always explicitly say that they are not binding, and then both parties sign and agree to that.
Industry standards are though that once the term sheet is signed, the deal is 99% sure to happen, unless there are serious problems discovered in due diligence.
You are generally correct that contracts do not have to have a paper record, however in the United States, it's usually a state law that real estate contracts have to be in writing. It's a legal concept called the statute of frauds.
Likely depends on the country - in England, on a house sale, either party can back out after an offer is accepted, free of consequences, until contracts are exchanged.
My wife's family is selling a house in Italy and it blew my mind that when you say you want to buy the house you have to give a portion of money (in this case I think it was 12000 euro) which you do not get back if the deal falls through and you don't buy the house.
The above not very precise as I am not involved in it and not especially interested. But the detail stuck with me as one of those other cultures are strange things.
In the US you have to put down an "earnest money deposit", which is sort of the same thing. You can get it back, but there are usually very specific rules about what conditions warrant getting it back, and "I didn't like the house" isn't one of them.
In all offers I submitted and both houses I bought, that was the case.
That also allows the buyer to get out for any reason within the financing contingency window (by just not complying with all the ridiculous paperwork demands from the lender, "oops, sorry, mortgage didn't end up coming through")
That would be a "Mortgage Contingency," which is common in California. Yes, you get back your earnest money if there is a mortgage contingency in the contract but you can't get a loan.
Does this work? For house buying, solicitors are often taking on first-time clients, and they don't have a lot of leverage against the client if the client decides to renege on the deal.
Solicitors get paid for work done until that point regardless, and I doubt sellers have that information when deciding whether to accept an offer, and they are who makes the choice to accept.
Sellers also pull out frequently - had that happen to me a few times. It's frustrating but it happens.
If a term sheet isn't a deal, and I kinda agree that it isn't, then what is an exclusive, six-month term sheet? Why would someone sign a six-month exclusive non-deal?
BTW, a term sheet is usually very specific about it being for discussion purposes only.
When term sheets say they are non-binding, they will usually say "except the sections about confidentiality and exclusivity". So those will be the only parts that actually are enforceable promises.
But the exclusivity period is typically 30-45 days. There would have needed to be some particular reason for six months, given how far off-market it is.
Some level of exclusivity isn't necessarily bad. The purchasing company doesn't want you using their deal to shop around. VC's are sheep, and having Softbank interested would generate lots of FOMA (Fear of Missing Out) amongst the herd.
However, 6 months instead of 30-45 days without a useful fee for non-execution sounds like the company wasn't in a good place to begin with.
1) something being legal, is not the same as being a reputational risk. If you get a reputation of quitting your job with no notice, well generally that's totally legal, but it will eventually get harder to get a job, all else being equal. However...
2) I think everyone knows that Softbank just had a very hard time, so I think this is both understandable (if things calm down for them then a year from now no one will hold this against t hem), and also the least of their worries (if I were looking for VC's right now, Softbank would not be at the top of my list regardless of whether I had heard this or not).
"Term sheet isn’t a deal. Same way an “accepted offer” on a house isn’t a purchase contract until you have an actual contract."
It's not a deal until the check clears. I've seen real estate and business deals fail at the very, very last moment. Sometimes people do amazing things at the last second.
Real Estate agents that play cute games between offer and contract like tweaking terms often find their offers at the bottom of the piles, some times lost entirely!
depends on their reputation and mode of operation before. If they always stuck to term sheets and now they are walking away it's news. Legal or not is irrelevant here. A lot of times CEOs shake hands and lawyers work the details...reneging even if it's legal (depending on how /where) it's damaging to your reputation.
Funny that both Honor and Seismic seem like good deals from a quick skim. Both have established their products and markets clearly, pull on decent revenue, have been growing continuously, no scandals, no weird CEOs, nothing illegal, no "break it till you make it" attitude. They are both on sectors which are extremely profitable and whose customers' churn rate is relatively low.
They could be entirely legitimate, potentially profitable companies, and still not be worth half their current alleged valuation. I am not familiar with either, I'm not saying this is the case, just saying they could be entirely legit from one point of view, and still not a good investment.
"
Seismic ia San Diego-based maker of B2B sales software that's raised over $180 million in VC funding, most recently at a $1 billion valuation, from firms like General Atlantic, Jackson Square Ventures, Lightspeed Venture Partners, and JMI Equity.,
"
Who would be shafted if that deal went through ? Those valuations are just not credible anymore - it's more likely that SoftBank recent experience has made them shaft-averse.
That is a different Honor than the one stated in TFA:
Honor is a San Francisco home care company for older adults that's raised over $100 million from firms like Andreessen Horowitz, Naspers, and Thrive Capital.
> Both have established their products and markets clearly, pull on decent revenue, have been growing continuously, no scandals, no weird CEOs, nothing illegal, no "break it till you make it" attitude.
I assume any VC getting into a business with that requires lots of human labor is just trying to find a bigger fool. I don’t see what the play is if a business can’t drive down marginal costs, which surely nursing home labor can’t unless they’ve developed a machine to change bedpans.
Term sheets are not binding. An expectation of a term sheet is more tenuous still. Little described in this article approaches "shafting". (Creator's 6-month exclusive term sheet being the exception. But, like, hamburger robots.)
> Given we’re a fiduciary and investing very large amounts of capital, our investment process is more rigorous than unregulated investors and typical VCs.
Hilarious. Rigorous process? SoftBank?
Also, who regulates the Vision Fund? Do they think they’re unique in having a fiduciary duty to their LPs?
Even worse, SB now casts shade on the startups by claiming they do more rigorous diligence with the implication that if a deal doesn’t close it was because something was wrong with the startup.
That term sheets are not binding is technically correct (the best kind of correct, I'm told). But it should be so reputationally bad that it should only happen among third tier players and wannabes who don't have reliable limiteds.
I've had a VC walk out on a signed terms sheet due to 9/11. I didn't like it but totally understood their motivations and it's hard to enforce a terms sheet. Still, it was less than classy and I would not attempt to do business with them again.
They really need to share more details of these term sheets that fell through so we can confirm they were either binding or signed.
"Term sheets are non-binding, and even though they should signify a VC has conviction in investing in you and is ready to move towards closing, they fall through more often than most founders may expect." - https://techcrunch.com/2015/05/22/three-reasons-your-term-sh...
If these were signed term sheets and the investor has done a few weeks of legal / financial due diligence - then yes - not common. If these are deal or talking point term sheets with no definitive agreement and little formal due diligence - then those do fall away more often.
I’m a sample of one and this is anecdata, but in my experience with VCs, there is due diligence and then due diligence after that firm has a major disaster.
I don't read anything here that isn't par for the course when it comes to fundraising. This is how it works with all VCs. Money isn't in the bank until it's in the bank. I get the frustration that it wastes time, but for better or worst, that's the game today. It might be a problem worth discussing, but if so, it's a venture capital problem, not a Softbank problem.
Ok lets start the countdown for the "How softbank turned around" headline. VC investments are just that some go bad and some go well. Wework could eventually end up fine still. They go big or go home, for now its home and then there's dusk.
This looks more like a bad painting of softbank, though deals can go either way and at best softbank should do better at their own due diligence before making interest/commitment by way of term sheet and All tha
Honor is trying to enter an established industry full of complex legal entanglements and where there are already tons of players. They aren't revolutionizing this space at all. I mean, it's fine as a traditional business goes as far as I can tell. Why is VC involved?
Creator is going the wrong direction for food imo. Fast food has been on the decline for several years. Assuming we have more good economy to come than bad, this will only continue. People want high quality products, healthier products, and customized products. And sometimes a human experience. What will happen to this machine and the food when the novelty wears off? They'll get neglected like vending machines, or start breaking down due to cut corners in maintenance. The burgers look pretty bad and the reviews seem to agree. Maybe I'm wrong about this one and this is the golden fast food standard of the future, but I'd want to see more of those problems handled.
Coming from someone who worked in a company that received Softbank investment, it's a huge hassle. The ONLY reason to take Softbank money is to get a huge sum of money at a huge valuation and reduce your "cost" of said money. But for me personally, the costs aren't worth it.
First, there's the inflated valuation. It's a great MO for Softbank - they get you by stroking your ego and flashing big (exaggerated) valuations. But does anyone ever think about the next round? No one else after is going to invest at that valuation + extra, unless you really knocked it out of the park, so you are stuck with them for future rounds. Or IPO (Hello Uber). Startups are hard - why are you making it more difficult for yourself to succeed?
Second, the ongoing effort. You don't have one or two guys at a VC firm you are working with, you have a bureaucracy you are working with, in a completely opposite timezone, with a very different working culture.
Maybe it makes sense for a company who is on their last round of funding before IPO, just needs one last cash push to get everything there, and can pay a bunch of people to deal with the BS. But that's not most startups.