After WeWork, SoftBank Group's start-up Bookkeeping draws scrutiny

In early 2018, the founders of Chinese artificial intelligence startup SenseTime Group flew to Tokyo to see billionaire investor Masayoshi Son. As they entered the offices, Chief Executive Officer Xu Li was hoping to persuade the head of SoftBank Group to invest $200 million in his three-year-old start-up.

A third of the way into the presentation, Son interrupted to say he wanted to put in $1 billion. A few minutes later, Son suggested $2 billion. Turning to the roomful of SoftBank managers, Son said this was the kind of AI company he’d been looking for. 

“Why are you only telling me about them now?’’ he asked, according to one person in the room.

In the end, SoftBank invested $1.2 billion, helping to transform SenseTime into the world’s most valuable AI startup. The young company’s valuation hit $7.5 billion this year.

That investment model is now under fire after Son, 62, boosted the equity in office-sharing startup WeWork only to see it plummet as investors balked at enormous losses and troublesome governance.

Today’s accounting rules may be ill-suited to an era of unprecedented speculation on unicorns. Under the International Financial Reporting Standards (IFRS) that SoftBank uses, companies have wide latitude to determine how much they think portfolio companies are worth — and therefore how much profit they report to investors. It’s unclear whether any company has tried to determine paper profits for tech start-ups on the scale SoftBank is now using. 

“I don’t believe we’ve ever seen an attempt to record this magnitude of income with respect to unquoted equity investments,’’ said Robert Willens, a tax expert in New York.

Son’s bookkeeping has allowed him to claim his average internal rate of return far outpaces those of other investors. This month, as SoftBank took a hit from WeWork, Son defended his investment approach. “There are 5,000 venture capitals globally and average IRR is 13 per cent,’’ he said. “Our return is about twice as big as this.’’