A Good Investor is a Blessing, right?
„We are long-term, patient investors who stand by our founders through both good times and tough times. By removing the constraints of capital, we seek to enable founders to stave off short-term pressures and focus on building companies that last.“
Softbank Website
On Nov 30, 2020, Sinch announced that Softbank would become a new major 10.1% shareholder by investing about $712 million, of which about $151 million went into the company for 1.9% of Sinch ownership as part of a larger funding round and about $561 million went to Sinch founders for about 8.2% of Sinch ownership.
Looking at the stock chart, that was at a time when the Sinch stock had achieved 500% growth in the previous 12 months. And would almost double to its peak in Augst 2021 in the following 9 months. In that context, the Softbank investment made perfect sense and gave more credibility to Sinch, contributing to its rapid growth.
Simple question: Why does such an investment give credibility?
Softbank is an investor that is around since the early days of the Internet in the 90s. The Softbank Vision Fund is the world’s largest technology-focused investment fund with more than $100 billion in capital. Softbank has invested in many of the most successful tech companies in the world.
Does that mean that they know what they do? Not necessarily.
In Q3/2022, they posted a $7.2 billion loss on tech writedowns and laid off 30% of their global staff (although that means just 150 employees compared to 11,000 at Meta).
Coming back to Sinch, Softbank obviously decided in early 2022 to get back as much as possible of their $700+ million investment and sold 5% (minus some dilution from newly issued stock after their entrance) of Sinch stock in 2022. A very rough estimate would be for around $70 million to $100 million.
And on Sep 29, 2022, Sinch announced that their founders bought back the remaining 5% stock from Softbank at an undisclosed price. The closing price on that day was SEK 14.07 and a rough estimate of the purchase cost would be around $60 millon.
That means that Softbank invested more than $700 million in late 2020 and recovered maybe $150 million in 2022. The Sinch founders received about $560 million for (later diluted) 8% of Sinch stock in 2020 and paid about $60m to Softbank in 2022 for (undiluted) 5%. Quite a good trade for them and almost half a billon USD loss for Softbank. And 8 weeks later, the Sinch stock traded at 250% of their low (which coincides with the re-purchase from Softbank), adding another $100 million for the founders.
So, is there anything that can be complained about against the Sinch founders (from the perspective of a shareholder or Sinch employee)?
Not really, anybody would have sold 8% of their stock for $500+ million in 2020 after 10 years of hard startup work. And, on the other hand, the valuation of Sinch in Sep 2022 was absolutely ridiculously low and re-investing some $60 million out of $500 million made perfect sense.
On the other hand, Softbank seems so big that they can write off half a billion USD where just a little patience and support would save them $100s of millions.
Of course, this Softbank behaviour has not much to do with Sinch or the CpaaS market, but is simply a reflection of the chaos inside Softbank with many billions of losses across many portfolio companies, large and small.
The issue for Sinch in 2022 was that the continuous selling of Softbank put additional pressure on the stock. This in combination with a big Bear Raid of many short sellers (shorting up to 15% of Sinch stock, which is really high), an anonymous report full of lies that was picked up and given credibility by media and analysts, and last but not least, operational problems inside Sinch (as visible through a need to correct some financial numbers at the most inconvenient moment) led to a steady decline that was finally stopped with the re-purchase from Softbank in Sep 2022 and a Q3/22 report that was better than anyone expected.
Conclusion: An investor like Softbank is a big „exaggeration“ factor in good and bad times. Their buy-in in 2020 was instrumental in pushing up the Sinch stock price to a value that many today would see as too high. And their panic exit in 2022 accelerated the decline of the stock until it finally hit bottom (or the bottom of the basement) with the final re-purchase by the Sinch founders.
And we can wait a few years and history will repeat itself, not for the first time. And no need to change the quote at the Softbank website shown at the top of this post. People quickly forget…
In case you already forgot 🙂
„We are long-term, patient investors who stand by our founders through both good times and tough times. By removing the constraints of capital, we seek to enable founders to stave off short-term pressures and focus on building companies that last.“
Softbank Website