Ensuring that the companies in its portfolio have a clear path to profitability is the strategy that the regional arm of the Japanese fund soft bank is following, in an environment of high inflation and the consequent increase in central bank interest rates, according to Juan Franck, managing partner of SoftBank in Mexico.
SoftBank’s recommendation to 80 Latin American startups in which it has invested to weather the waters of the global economic storm is that they focus on the unit profitability of the business in order to have a clear path to consolidated profitability.
Frank explains the unit profitability as the value that the acquisition of a new user brings to the company in relation to the cost of acquiring that new user. The greater the value generated by a new user in relation to its cost of acquisition, scalability allows the fixed costs of the business to be diluted.
“Investors have less and less patience to achieve profitability and also to grow at all costs without having a path to profitability. cost effectiveness of course”, says Franck in an interview.
Many of the companies in which SoftBank has invested, not only in Latin America but globally, are not profitable. Perhaps one of the cases that best exemplifies this phenomenon is Ubera digital giant that operates in more than 70 countries and that, however, still fails to generate profits for its investors.
macroeconomic cycles
The fall of the main technological indices at a global level, it has affected the valuations of the companies in SoftBank’s portfolio, which has led it to record heavy losses in its most recent financial reports for the fiscal year that has just ended.
For Franck, this situation is natural within the macroeconomic cycles, since after a growing cycle of almost 13 years in the stock markets, what is happening now is a rising inflation and of future inflation expectations, which leads to a rise in interest rates around the world.
“In the end, the valuations of the companies are a discount of the projection of flows of a company forward and that discount is made using an interest rate that, as that denominator goes up, the valuations of the companies go down. and that is something natural that we will continue to see in the coming decades,” he says.
SoftBank’s investment strategy in the region is long-term: five, 10 or even 20 years. This insulates the fund and its companies, according to Franck, from macroeconomic problemswhich allows them to focus on solving the problems that startups seek to solve with their business models.
“We are going to continue supporting these entrepreneurs. We have the capital to do it and we are going to continue doing it because we believe in the transformation mission that these companies are carrying out,” he says.
Softbank in data
- SoftBank arrived in the region in 2019. First, with a capital commitment of 5,000 million dollars from the Latin America Fund, which later expanded another 3,000 million dollars, in the Latin America Fund II. The fund plans to grow its resources in Latin America in the short and medium term.
- In total, SoftBank has committed 8,000 million dollars in the Latin American region, of which it has invested 6,500 million in 80 regional startups such as the Colombian rappithe Argentine Ualá, the Brazilian vtex and the Mexican unicorns KavakBitso, Incode, Merama and Konfío.
- SoftBank disclosed on May 12 that its Vision Fundits global mutual fund, posted losses of around $27 billion in the fiscal year ending March 2022. Shares of the company have also plunged to half their peak reached in February 2021.
investment thesis
Just a few weeks ago, the departure of Shu Nyatta and Paulo Passoni, two of SoftBank’s managing partners in the region, who decided to found their own business, was announced. Months ago, the fund also announced the exit of Marcelo Claurewho was considered the architect of many of SoftBank’s investments in Latin America.
Franck was part of the team that set up the SoftBank office in Mexico when the fund arrived in the region. He has been investing in startups in the Latin American market for 10 years and now directs, together with Alex Szapiro, Brazilthe operation of the fund in Mexico and Latin America.
SoftBank’s thesis to enter Latin America was to complete the pillars of creating large companies with access to capital: entrepreneurial talent and big problems to solve, as is the case of financial inclusion.
“What there was was no access to capital. Before 2019, venture investment in the region was between $1 billion and $2 billion and in 2021, it reached $17 billion,” he says.
third wave
The regional director of the fund founded by Masayoshi Son ensures that Mexico is the epicenter of the third wave of growth of startups in Latin America. The first was located in Argentina and produced great unicorns that are now public companies, such as Mercado Libre, Globant, Despegar and OLX.
The second wave was led by Brazil, from which companies such as Nubank, Vtex and Créditas, many of which are already listed on the stock market. Mexico is the scene of the third wave, in which unicorns have already been generated, such as Kavak, Bitso and Konfío.
Due to the size that the companies in which it invests may have, SoftBank believes that its exit strategy in the medium and long term will be in the stock market and according to Juan Franck, the Mexican market is fertile ground to start seeing this type of outlet. However, the manager does not rule out opportunities for global consolidation through strategic sales to third parties.
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