Softbank & Wag Labs – Dog’s dinner.

No more chasing Alibaba

• Wag Labs Inc. is another write-down in waiting for Softbank which combined with the WeWork meltdown will see it normalise its investment process and stop spraying money around in order to find the next Alibaba.
• Softbank has sold its stake in Wag Inc. back to the company which is likely to mean another write down that I hope will further contribute to a good hard look at its investment process.
• Softbank invested $300m in Wag Labs Inc in January 2018 at a valuation of $650m but it has now sold its stake back to the company which is likely to mean another write-down
• Assuming this was a pre-money valuation, Softbank had a 32% stake in the company.
• Wag Labs is a marketplace where sellers of pet services can transact with pet owners with Wag Labs Inc. taking a small commission.
• As I have written many times (see here), marketplaces like these are subject to brutal competition where one company emerges dominant and makes all the money.
• It then buys up all of the others or they just simply fade away.
• Following the investment, the new CEO cut back on the crazy spending that was fuelling the revenue growth which obviously then promptly collapsed.
• The problem is that Wag Labs has a much bigger and much stronger competitor called Rover which is still growing revenues even as Wag Labs stalls.
• This sounds an awful lot like what I expect to happen to WeWork (see here) once new management takes over.
• Clearly, this restructuring has not gone well because growth has fallen and Rover hasn’t let up meaning that the company is still not making any money.
• This is most likely why the company put itself up for sale at a valuation of less than $300m but there appear to have been no buyers.
• Hence, Softbank has decided to exit by selling its 32% stake back to the company at what I suspect is a tiny fraction of what it invested.
• This is because Wag Labs Inc. obviously has very low cash reserves (if it had plenty of cash it would not have been forced to put itself up for sale) and the fact that there where no buyers at $300m.
• The take-home message here is that this is another blackeye for Softbank and I suspect that there are still a few more skeletons in the closet.
• However, at the same time, it signals a return to normalcy for the world of private investing which in turn should mean fewer over-priced and immature companies coming onto the public market.
• Going forward, I think Softbank will apply a far more rigorous approach to its investing practices which will mean that while it may miss the next Alibaba, it will also miss the next WeWork.
• This is a good sign and means that the Vision Fund II will be a much lower risk and a more solid investment as a result.
• This is something I think Softbank’s partners will welcome and may even attract a few more in.