The end of China’s ride-sharing gig

Over the last few years, millions of Chinese workers managed to earn extra money by being ride-hailing drivers. Many picked the gig because of its flexible schedule. For those who could not otherwise afford to own a car in China’s pricy metropolises, driving around is also a status symbol, even if they are paying off car loans every month.

Most drivers on Didi Chuxing — the startup that captured 90 percent of China’s e-hailing trips in 2017 per consulting firm Bain & Company — were part-time. That’s according to a report Didi put out in October 2017, which said half of its drivers worked less than two hours a day.

The report also hailed Didi as the epitome of China’s “sharing economy,” something that Beijing has been keen to promote to spur economic growth. The all-encompassing term, which includes shared platforms from mobility to elderly care services, raked in $764 billion in 2017, shows a report by China’s Sharing Economy Research Center of the State Information Center.

But gig work in China’s fledgling ride-hailing industry is coming to an end as new regulations make part-time driving overly expensive.

No more gigs

On January 1, ride-hailing apps in China start banning drivers who operate without the required “double licenses”: one for drivers and another for the cars they steer. Municipal governments across the country have nuanced stipulations for what these certificates entail, but in general, the fresh rules aim to more closely vet drivers transporting passengers around.

To obtain the ride-hailing driver’s permit in certain cities, drivers must own a local hukou, the residency permit that controls where people can legally work. A lot of ride-hailing drivers don’t have an urban hukou as they are migrant workers from rural parts of China, so they immediately become ineligible for ride-hailing apps.

The car license, on the other hand, requires the vehicle to operate as a commercial one, bringing additional costs to drivers who must absorb the costs of car insurance and maintenance, and scrap their vehicle after 8 years.

didi chuxing

All ride-hailing vehicles in China must possess the required license (circled in red) to be on the roads starting January 1, 2019. Photo credit: TechCrunch

Under the new legal framework, drivers can still work as independent contractors. But in effect, the policy shift is driving out casual workers. “No part-time drivers want to register their private car as a commercial one because of the high costs that come with it,” a Shenzhen-based Didi driver tells TechCrunch. “Being part-time doesn’t pay the bills anymore.”

Didi’s dilemma

Like a lot of China’s nascent industries, ride-hailing took off quickly in part thanks to relatively lax government oversight at the start. The first set of industry laws took effect in 2016 when the country officially legalized apps like Uber, which was later acquired by its local competitor Didi. Since then Chinese authorities have gradually rolled out more rules and the strictest regulations, including the rollout of the double licenses, came following the deaths of two passengers who used Didi last year.

The new policies have put a squeeze on driver and car numbers. In the Tier 2 city of Nanjing alone, Didi claims to have weeded out more than 160,000 illegal vehicles, local media reported. The sharp decline in cars available on the roads inevitably leads to longer wait time and user frustration, and the $56 billion giant will need to think of ways to maintain a constant supply of drivers.

Didi took off on account of generous subsidies for both users and drivers, but its staggering loss — which is said to stand at $585 million in the first half of 2018 — means it may not be offering cash-heavy incentives in the near term. To retain labor, Didi is offering test prep for drivers. It’s also lowered the barriers to entry by letting drivers rent licensed cars it sources from car rental and automaker partners. A catchphrase started to pop up on Didi’s mobile app for drivers in December: “You supply the manpower, we provide the car.”

Aside from regulatory hurdles, Didi also faces new challengers like BMW and Volkswagen’s China partner SAIC Motor, traditional carmakers that are entering the ride-hailing scene.

“Didi has educated China about what is ride-hailing. If it doesn’t react swiftly to changing dynamics, the billions of yuan it’s burned through will suffer from low returns,” Dong Feng, founder of a Chinese car rental startup suggests to TechCrunch.

Alibaba-backed Hellobike bags new funds as it marches into ride-hailing

2018 has been a rough year for China’s bike-sharing giants. Alibaba-backed Ofo pulled out of dozens of international cities as it fought with a severe cash crunch. Tencent-backed Mobike puts a brake on expansion after it was sold to neighborhood services provider Meituan Dianping. But one newcomer is pedaling against the wind.

Hellobike, currently the country’s third-largest bike-sharing app according to Analysys data, announced this week that it raised “billions of yuan” ($1 = 6.88 yuan) in a new round. The company declined to reveal details on the funding amount and use of the proceeds when inquired by TechCrunch.

Leading the round were Ant Financial, the financial affiliate of Alibaba and maker behind digital wallet Alipay, and Primavera Capital, a Chinese investment firm that’s backed other mobility startups including electric automaker Xpeng and car trading platform Souche. The fledgling startup also got SoftBank interested in shelling out an investment, The Information reported in November. The fresh capital arrived about a year after it secured $350 million from investors including Ant Financial.

As China’s bicycle giants burn through billions of dollars to tout subsidized rides, they’ve gotten caught up in financial troubles. Ten months after Ofo raised $866 million, the startup is reportedly mulling bankruptcy. Meanwhile, Mobike is downsizing its fleet to “avoid an oversupply,” a Meituan executive recently said.

It’s interesting to note that while both Ofo and Hellobike fall under the Alibaba camp, they began with different geographic targets. By May, only 5 percent of Hellobike’s users were in China’s Tier 1 cities, while that ratio was over 30 percent for both Mobike and Ofo, a report by Trustdata shows.

This small-town strategy gives Hellobike an edge. As the bike-sharing markets in China’s major cities become crowded, operators began turning to lower-tier cities in 2017, a report from the China Academy of Information and Communications Technology points out.

The new contender is still dwarfed by its larger competitors in terms of user number. Ofo and Mobike command 43 million and 38 million unique monthly mobile installs, respectively, while Hellobike stands at 8 million, accroding to iResearch.

Hellobike’s ambition doesn’t stop at two-wheelers. In September, it rebranded its Chinese name to HelloTransTech to signify an extension into other transportation means. Aside from bikes, the startup also offers shared electric bikes, ride-hailing and carpooling, a category that became much contested following high-profile passenger murders on Didi Chuxing .

In May and August, two female customers were killed separately when they used the Hitch service on Didi, China’s biggest ride-hailing platform that took over Uber’s China business. The incidents sparked a huge public and regulatory backlash, forcing Didi to suspend its carpooling service up to this day. But this week, its newly minted rival Hellobike decides to forge ahead with a campaign to recruit carpooling drivers. Time will tell whether the latecomer can grapple with heightened security measures and fading customer confidence in riding with strangers.

The 10 largest US venture rounds of 2018

Three U.S. companies raised more than $1 billion in just one funding round in 2018, a year in which total deal value for U.S. startups is expected to surpass $100 billion for the first time.

For the most part, it was the usual suspects, and yes, SoftBank was an accessory in many of these rounds. Here’s a look at the 10 largest venture rounds of 2018.

Epic Games: $1.25 billion

The video game Fortnite Battle Royale was the star of the year 2018; more than 200 million players worldwide are registered online. (Photo Illustration by Chesnot/Getty Images)

Given the absolute phenomenon Fortnite became in just one year from its original release, it was no surprise private investors wanted to put money into Epic Games, the company behind it. In October, Epic Games announced a whopping $1.25 billion round at $15 billion valuation from KKR, Iconiq Capital, Smash Ventures, Vulcan Capital, Kleiner Perkins and Lightspeed Venture Partners to continue growing its Fortnite empire. That game alone is expected to bring in $2 billion in revenue in 2018 and reports 200 million registered players — not too shabby.

Cary, N.C.-based Epic Games’ monstrous fundraise was a standout in a year when funding for gaming and esports startups really took off. According to Crunchbase, global venture investment in the industry increased nearly 75 percent, to $701 million in the first half of 2018. Given Epic’s round, Discord’s $150 million infusion of capital this week and several others since June, the second half of 2018 undoubtedly set major records in the space.

Uber: $1.2 billion

Travis Kalanick, co-founder and former chief executive officer of Uber Technologies Inc., speaks during the TiE Global Entrepreneurs Summit in New Delhi, India, on Friday, December 16, 2016. Kalanick said the company will introduce Uber Moto across India. Photographer: Udit Kulshrestha/Bloomberg via Getty Images

One of the largest rounds of 2018 was also one of the first big financings of the year. To be fair, the negotiations behind Uber’s $1.2 billion SoftBank investment and much of the press coverage surrounding it came in 2017, but the deal officially closed in January. This deal was monumental for many reasons. First of all, it made Uber founder and former chief executive officer Travis Kalanick a billionaire — not just on paper — and it cemented SoftBank’s position as the ride-hailing giant’s largest shareholder.

The financing brought San Francisco-based Uber’s total raised to date to just over $20 billion at a valuation said to be around $72 billion. Of course, Uber has since privately filed for an initial public offering slated for the first quarter of 2019.

Juul Labs: $1.2 billion

Juul Labs, the maker of the popular e-cigarette brand that has recently come under fire from health officials over its popularity with young adults, plans to introduce a line of lower-nicotine pods. Photographer: Gabby Jones/Bloomberg via Getty Images

Juul, one of the buzziest companies of 2018, raised $1.2 billion from private investors Tiger Global, Fidelity and more in mid-2018. Then, this month, the developer of e-cigarettes popular among teenagers accepted a $12.8 billion investment from the makers of Marlboro that valued it at $38 billion. Not only has Juul created significant controversy surrounding the ethics, or lack thereof, of its core product and its marketing to the younger generation in a short time, but it has also accumulated value at a clip rarely seen before. Juul, for context, surpassed a $10 billion valuation just seven months after its first round of VC backing — that’s four times faster than Facebook.

2019 is poised to be an interesting year for San Francisco-based Juul as it navigates public scrutiny, regulations and the completion of its partnership with Altria Group, which, according to Juul’s CEO Kevin Burns, will “help accelerate [Juul’s] success switching adult smokers.”

Magic Leap: $963M

Magic Leap’s flagship product, the Magic Leap One AR headset, began shipping to consumers this year.

It wouldn’t be an end of the year round-up of the largest VC deals without any mention of Magic Leap, the extremely well-funded virtual reality company. Tucked away in Plantation, Fla., 8-year-old Magic Leap has closed round after round, raising more than $2 billion to develop its hardware and software. The key investors in this year’s big round, which valued the company at $6.3 billion, were Temasek and AT&T, which announced it would become the exclusive “wireless distributor” of Magic Leap products in the U.S. starting this summer. Magic Leap is also backed by Google, Alibaba and Axel Springer.

Not only did Magic Leap land one of the largest VC deals this year, but it also finally began shipping to consumers its flagship product, the Magic Leap One AR headset. That was a long time coming — years, in fact. So long, many doubted whether the buzzy headsets would ever see the light of day. Now, the headsets are available to buyers in 48 states, though it’s worth mentioning they cost more than two grand.

Instacart: $600M

Founder and CEO of Instacart Apoorva Mehta and moderator Megan Rose Dickey speak onstage during TechCrunch Disrupt SF 2016 at Pier 48 on September 14, 2016 in San Francisco, California. (Photo by Steve Jennings/Getty Images for TechCrunch)

Instacart has a lofty goal of delivering groceries to every household in the U.S., and it needs a lot of cash to get there. The company has raised VC every year since it completed the Y Combinator startup accelerator in 2012, and 2018 was no different. In October, the service brought in $600 million at a $7.6 billion valuation in a round led by D1 Capital Partners. Headquartered in San Francisco, the company has raised $1.6 billion to date from Coatue Management, Thrive Capital, Canaan Partners, Andreessen Horowitz and several others.

Instacart CEO Apoorva Mehta told TechCrunch at the time that the startup didn’t really need the capital and that this was more of an “opportunistic” battle. The market is hot, after all, and Instacart has ambitious plans to scale and it has a fierce competitor in Amazon to take on. As for an IPO, Mehta said “it will be on the horizon.”

Katerra: $865M

SoftBank-backed Katerra says it’s brought in more than $1.3 billion in bookings for new construction ranging from residential to hospitality and student housing.

One of SoftBank’s first major bets of 2018 was on construction technology, with an $865 million investment in Katerra at a $3 billion valuation out of its Vision Fund. Katerra, a tech startup based out of Menlo Park, develops, designs and constructs buildings. At the time of its January fundraise, Katerra told TechCrunch it had brought in more than $1.3 billion in bookings for new construction ranging from residential to hospitality and student housing. Founded in 2015 by three former private equity barons, the company has raised a total of $1.1 billion to date from SoftBank, Foxconn, Greenoaks Capital and others.

In June, Katerra announced it would merge with KEF Infra, an offsite manufacturing technology specialist, and would begin operating in India and the Middle East markets.

Opendoor: $725M

Yet another SoftBank investment, San Francisco-based Opendoor is also backed by Fifth Wall Ventures, GV, Andreessen Horowitz and more.

Opendoor’s two big SoftBank-backed investments this year totaled $725 million, valuing the company at $2.5 billion. The deal gave SoftBank a minority stake in Opendoor, an online real estate marketplace, and put one of its five managing directors, Jeff Housenbold, on the company’s board of directors. The round brought Opendoor’s total funding to slightly more than $1 billion — most of which it acquired in 2018, a major year for the company. Founded in 2014, the San Francisco-based startup is also backed by Fifth Wall Ventures, GV, Andreessen Horowitz and more.

According to TechCrunch’s Connie Loizos, Housenbold had hoped to work with Opendoor co-founder and CEO Eric Wu for some time. “The minute he joined [SoftBank] he reached out to me and let me know … saying if there was an opportunity to work together, to reach out to him,” Wu said.

Lyft: $600M

Uber competitor Lyft expanded aggressively in 2018, raised hundreds of millions in additional venture capital funding, and filed confidentially to go public.

Lyft managed to stay quite busy this year. Not only did the ridesharing company raise a $600 million round at a $15.1 billion valuation, it also acquired bike-share operator Motivate and filed confidentially to go public. Founded in 2012 by Logan Green and John Zimmer, the company has long competed with Uber, and will continue to do so as the pair race to the public markets in early-2019. Lyft, much smaller than Uber and only active in the U.S. and Canada, has raised nearly $5 billion in venture backing from KKR, Mayfield, Didi Chuxing, Floodgate and others.

San Francisco-based Lyft has spent much of the last two years expanding rapidly across the U.S. market, as well as pursuing its autonomous vehicle ambitions.

Automation Anywhere: $550M

Automation Anywhere raised a monstrous $550 million Series A in 2018, with support from the SoftBank Vision Fund.

The only surprise to make this list is Automation Anywhere, a 15-year-old provider of robotic process automation. The company raised a total of $550 million in Series A funding, a large chunk of which came from the SoftBank Vision Fund, as well as NEA, General Atlantic and Goldman Sachs. The round valued Automation Anywhere at $2.6 billion. According to PitchBook, this was the first round of institutional backing for the San Jose, Calif.-based company.

In a conversation with TechCrunch, Automation Anywhere CEO Mihir Shukla said they were attracted to SoftBank because of Masayoshi So — the CEO and founder of SoftBank: “[He} has a vision and he is investing in foundational platforms that will change how we work and travel. We share that vision.”

Peloton: $500M

SAN FRANCISCO, CA – SEPTEMBER 06: Peloton Co-Founder/CEO John Foley speaks onstage during Day 2 of TechCrunch Disrupt SF 2018 at Moscone Center on September 6, 2018 in San Francisco, California. (Photo by Kimberly White/Getty Images for TechCrunch)

Peloton’s growth exploded in 2018 as it launched its $4,000 treadmill, doubled down on original fitness streaming content and raised an additional $500 million in equity funding at a $5 billion valuation. The New York-based startup, often referred to as the “Netflix of fitness,” has raised nearly $1 billion in venture capital funding in the six years since it was founded by John Foley. It’s backed by  L Catterton, True Ventures, Tiger Global and others.

It’s likely Peloton will take the public markets plunge in 2019 much like Uber and Lyft. Foley earlier this year told The Wall Street Journal that though he doesn’t have any concrete plans, 2019 “makes a lot of sense” for its stock market debut.

With today’s IPO sinking, a year of highs and lows for SoftBank

If there was a word that dominated startup and tech news coverage this year, it was SoftBank. The Japanese telecom conglomerate’s Vision Fund pushed out a prodigious amount of capital this year — quite literally billions of dollars — into companies as diverse as a molecular manufacturer (Zymergen) and a robotic pizza delivery business (Zume Pizza). It was a year of highs as its Flipkart transaction produced billions in returns, as well as a year of incredible lows, what with the crisis over Saudi Arabia’s murder of Jamal Khashoggi. Saudi Arabia is the largest investor in the Vision Fund.

But the Vision Fund is only part of the SoftBank story this year. The company’s mobile unit started trading today on the Tokyo Stock Exchange (ticker: 9434), the second largest IPO of all time after Alibaba, raising $23.6 billion. But after weeks of pushing the stock to Japanese retail stock investors, those same consumers dumped the stock upon its debut, dropping by 15% from its debut at ¥1,463 to its close at ¥1,282. That’s the second worst IPO performance this decade for a Japanese company.

Highs and lows come with any ambitious project, and certainly for Masayoshi Son, the founder and chairman of SoftBank Group, nothing — not even piles of debt — will stand in his way.

Today, Arman and I wanted to look back at SoftBank’s year, and so we’ve compiled ten areas for analysis around the group’s telco business, its Vision Fund, and its other major investments (Sprint, Nvidia, Arm, and Alibaba).

SoftBank: The Telecom

1. Its IPO did what it had to do (raising money), but bad early performance will be a challenge for 2019

Ken Miyauchi, president and chief executive officer of SoftBank Corp., strikes the trading bell during the company’s listing ceremony at the Tokyo Stock Exchange (TSE) in Tokyo, Japan, on Wednesday, Dec. 19, 2018. Kiyoshi Ota/Bloomberg via Getty Images

At its core, SoftBank Group is fundamentally a telecom, and the third-largest player in the Japanese market. Masayoshi Son has for years wanted to transform SoftBank from a mature telco player into a leading investment house for funding the next-generation of technology companies.

There’s just one problem: SoftBank is sitting on piles of debt. As Arman and I wrote about a few weeks ago:

The bigger number though is sitting on the liabilities side of the company’s balance sheet. As of the end of September, SoftBank had around 18 trillion yen, or about $158.8 billion of current and non-current interest-bearing debt. That’s more than six times the amount the company earns on an operating basis, and just slightly less than the public debt held by Pakistan.

And though SoftBank’s sky-high debt balance tends to be a secondary focus in the company’s media coverage, it’s a figure that SoftBank’s top brass is well aware of, and quite comfortable with. When discussing the company’s financial strategy, Softbank CFO Yoshimitsu Goto stated that the company is in the early stages of a transition from a telco holding company to an investment company, and as a result is “likely to be perceived as a corporate group with significant debt and interest payment burden” with what is “generally considered a high level of debt.”

Those debt loads have made corporate maneuvering quite complicated. And so the company decided to put its mobile telco unit up for public trading as a means of getting a fresh injection of capital and continue its transformation into an investment shop. By raising $23.6 billion today, the company did just that.

The 15% drop in value on its debut though shows that the market has yet to fully buy into Son’s vision for where SoftBank is heading. That lowered price will make the corporate financial math around debt tougher, and will be a key theme for 2019.

2. The Japanese government wants to increase competition in the telco space, putting massive pressure on SoftBank’s financials

Japanese Prime Minister Shinzo Abe. Photo by Matt Roberts/Getty Images

Japan’s telco market is quite dormant, with mature, oligopolistic companies charging some of the highest prices on the planet for mobile service. Japan’s government also doesn’t auction off spectrum, which has saved telcos billions of dollars in direct cash costs, helping them to become reliable profit-generating juggernauts.

That cozy world is being shattered by the policy of Japanese prime minister Shinzo Abe, who has made increasing competition in the industry a major policy initiative. That includes putting 5G spectrum up for what will essentially be a competitive auction, demanding lower prices from telcos, and opening the market to new entrants like Rakuten (see #3 below).

As a result, incumbents like NTT DoCoMo have announced rate cuts of up to 40 percent on mobile services, while warning investors that it may take five years for the company to return to current profitability. Those announcements caused stock traders to dump Japanese telco shares this year, shedding $34 billion in the days following the announcements.

At a time when SoftBank most needs its cash flow to pay off its debt, the world is rapidly moving against it. The company has insisted that it can keep revenues and profits stable and even grow into the competition, but the announcements from its larger competitors dump cold water on its claims. SoftBank’s profits surged in its last quarter, but mostly from its Vision Fund investments rather than its core telco business.

3. Rakuten’s entrance into the Japanese mobile service market will scramble the traditional three-way oligopoly

Hiroshi Mikitani, owner of Rakuten. BEHROUZ MEHRI/AFP/Getty Images

One of the big news stories for SoftBank came from ecommerce giant Rakuten, which announced that it will launch a new mobile service in Japan starting as early as next year. As Arman and I wrote about at the time:

Though a new entrant hasn’t been approved to enter the telco market since eAccess in 2007, Rakuten has already gotten the thumbs up to start operations in 2019. The government also instituted regulations that would make the new kid in town more competitive, such as banning telcos from limiting device portability.

Rakuten’s partnerships with key utilities and infrastructure players will also allow it to build out its network quickly, including one with Japan’s second largest mobile service provider, KDDI.

Rakuten has obvious built-in advantages as the second largest ecommerce company in Japan following Amazon, and that will put pressure on other incumbents — including SoftBank — to meet its prices or to compete with more marketing dollars to reach customers. Again, we see a tough road ahead for SoftBank’s telecom business at a very vulnerable time for its balance sheet.

SoftBank: The Vision Fund

4. The Vision Fund actually got bigger this year

Photo by Tomohiro Ohsumi/Getty Images

The Vision Fund’s massive vision got just a bit bigger this year. When the fund announced its first close in May 2017, it set a target final fund size of $93 billion. In 2018 though, the Vision Fund received another $5 billion in commitments. When we add the $6 billion already committed for SoftBank’s Delta Fund, which is a separate vehicle used to alleviate conflicts around the company’s Didi investment, Masayoshi Son now has more than a $100 billion at his disposal.

But that’s not all! The Vision Fund has also been rumored to be raising $4 billion in debt so that it can fund startups faster (picking up on that debt theme yet?). Its LPs, which include Saudi Arabia, Abu Dhabi, and Apple, are given time to fund their commitments to the Vision Fund, and so the fund wants to have cash in the bank so that it can fund its investments faster. Debt structures in the fund are complicated, to say the least.

Masayoshi Son has repeatedly said that he wants to raise a $300 billion Vision Fund II, possibly as soon as next year, eventually ramping to $880 billion in the coming years. Whether the company’s debt load and controversy over Saudi Arabia (see #6 below) will allow that vision to come to pass is going to be a major question for 2019.

5. Seriously: is there any company not getting a multi-hundred million dollar term sheet from SoftBank these days?

Photo by Alessandro Di Ciommo/NurPhoto via Getty Images

SoftBank dominated headlines throughout 2018 with a steady cadence of monster investments across geographies and industries. Based on data from regulatory filings, Pitchbook, and Crunchbase, SoftBank and its Vision Fund led roughly 35 investment rounds, with total round sizes aggregating to roughly $30 billion, or over $40 billion when including investments in Uber and Grab, which were announced in 2017 but didn’t close until early 2018.

Surprisingly, SoftBank’s latest filings indicate that as of the end of September, the Vision Fund had only deployed roughly $33 billion, or about one-third the total fund, though the actual number might be quite a bit larger. SoftBank has led twelve rounds since September, including buying a $3 billion dollar warrant for WeWork and finalizing a large round that included secondary shares into Chinese news aggregator ByteDance.

In addition to investing directly through its Vision Fund, SoftBank also regularly makes and holds investments at the group level, with the intention of selling or transferring shares to the Vision Fund at a later date. As a result, SoftBank currently holds around $27.7 billion in investments that sit outside the Vision Fund, including the company’s stakes in Uber, Grab and Ola which it expects to eventually transfer to the Vision Fund pending LP and regulatory approvals. Assuming it plans to move the majority of these investments to the Vision Fund, SoftBank might have already deployed close to half the fund.

For all of that money flowing out the door though, there are limits even to the Vision Fund’s ambitions. Just today, the Wall Street Journal reported that LPs are pushing back against a plan to buy out a majority of WeWork, which would push the Vision Fund’s investment in the co-working startup to $24 billion. From the article:

Some of the people said that [Saudi Arabia’s] PIF and [Abu Dhabi’s] Mubadala have questioned the wisdom of doubling down on WeWork, and have cast doubt on its rich valuation. The company is on track to lose around $2 billion this year, and the funds have expressed concern that WeWork’s model could leave it exposed if the economy turns, some of the people said.

If the investment went through, WeWork would represent roughly a quarter of the fund’s capital, an astonishing level of concentration for a venture fund. Its a bold, concentrated bet, exactly the kind of model that entices Son.

6. The Vision Fund generated its first massive returns with Flipkart, Guardant and Ping An, with a huge roster to come

Photo by AFP/Getty Images

In just the first full year of operations, the Vision Fund has already begun to see the fruits of its investments with several portfolio company exits.

It made a spectacular return on Indian ecommerce startup Flipkart, where SoftBank realized a $1.5 billion gain on its $2.5 billion investment in just about a year. Walmart, which bought a 77% stake in Flipkart as part of its ambitious overseas strategy, valued the company at $21 billion.

Flipkart may have been the year’s largest highlight for the Vision Fund, but it wasn’t the only liquidity the fund saw. Its pre-IPO investment in Ping An Health & Technology Co, which produces the popular Chinese medical app Good Doctor, debuted on the Hong Kong Stock Exchange, and Guardant Health, which makes blood tests for disease detection, went public in October to rabid investor enthusiasm.

While those early wins are positive signs, the proof of the Vision Fund’s thesis will come early next year, when companies like Uber, Slack and Didi are expected to go public. If the returns prove favorable, then the fundraise for Vision Fund II may well come together quickly. But if the markets turn south and complicate the roadshows for these unicorns, it could complicate the story of how the Vision Fund exits out of these high-flying investments.

7. Murder is wrong. That makes the math for SoftBank really hard.

JIM WATSON/AFP/Getty Images

The tech media world went into a frenzy over Saudi Arabia’s horrific and horrifically public killing of dissident journalist Jamal Khashoggi. That put enormous pressure on SoftBank and its Vision Fund, where Saudi Arabia’s Public Investment Fund (PIF) is the largest LP with a $45 billion commitment.

There have been strong calls for Masayoshi Son to avoid Saudi Arabia in future fundraises, but that is complicated for one simple reason: there are just not that many money managers in the world who can a) invest tens of billions of dollars into firms backing risky technology investments, and b) are willing to ignore SoftBank’s massive debt stack and existential risks.

So SoftBank faces a tough choice. It can have its fund, but will need to get money from unsavory people. That might be fine — after all, Saudi Arabia is also the largest investor in Silicon Valley. Or it can walk away and try to find another LP that might replace the Kingdom’s huge fund commitment.

If the Vision Fund’s numbers look good after the early IPOs in 2019, I can imagine it being able to paper around Saudi Arabia’s commitment with a broader set of LPs that might be intrigued with technology investing and trust the numbers a bit more. If the IPOs stall though, whether because of internal company challenges à la pre-Dara Uber or broader market challenges, then expect a next fundraise to feature Saudi Arabia prominently, or for no fundraise to take place at all.

SoftBank: The Other Stuff

8. Good news on SoftBank’s Sprint side with its merger with T-Mobile looking like it will move forward

CEO of T-Mobile US Inc. John Legere and Executive Chairman of Sprint Corporation Marcelo Claure. Photo by Alex Wong/Getty Images

Since SoftBank acquired Sprint for $20 billion back in 2013, Sprint’s heavy debt balance has led to lackluster performance and the downgrade of SoftBank’s credit ratings to junk, where they’ve remained since.

After initial discussions stalled in 2017, SoftBank reinitiated merger discussions with T-Mobile’s German parent, Deutsche Telekom in 2018, eventually reaching an agreement for a Sprint/T-Mobile merger that would see SoftBank’s ownership stake fall from just over 80% of Sprint to just 27% of the combined entity.

Despite the poor track record for telco deal approvals and the increased scrutiny of cross-border M&A from U.S. regulators, SoftBank’s proposed merger recently received key approvals from the Committee on Foreign Investment in the United States (CFIUS), the Department of Justice, the Department of Homeland Security, and the Department of Defense. Part of that agreement came when SoftBank agreed to eliminate Huawei equipment from its infrastructure. While the deal still needs approval from the Federal Communications Commission, the road forward seems to be relatively clear.

If the deal ultimately goes through, SoftBank will no longer have to consolidate Sprint financials with its own and can instead report only its owned share of Sprint financials (and debt expense), improving (at least the optics of) SoftBank’s balance sheet.

9. SoftBank’s massive bet on Nvidia could be a $3 billion winner even as Nvidia faces crash

Justin Sullivan/Getty Images

SoftBank became Nvidia’s fourth largest shareholder in 2017 after building up a roughly $4 billion stake in the company’s shares. As I detailed last week, Nvidia’s stock has gone into free fall over the past two months, as the company faces geopolitical turmoil, the loss of a huge revenue stream with the collapse in crypto, and an increasingly competitive battle in the next-generation application workflow space.

Now, SoftBank is reportedly looking to sell its Nvidia shares for possible profits of around $3 billion. As Bloomberg reported, that’s because the acquisition was built as a “collar trade” that protected SoftBank against a drop in Nvidia’s share price (a good reminder that even when a stock loses half of its value, it is entirely possible for people to still make money).

The opportunity though is that SoftBank almost certainly still wants to continue to play in the next-generation AI chip space, and needs to find another vehicle for it to hitch a ride on.

10. ARM could be the saving grace of chips for SoftBank

Masayoshi Son, CEO of Japanese mobile giant SoftBank, and Stuart Chambers, Chairman of British chip designer company ARM Holdings, are pictured outside 11 Downing street in central London. NIKLAS HALLE’N/AFP/Getty Images

In 2016, SoftBank made its biggest purchase ever when it acquired system-on-a-chip designer ARM Holdings for $32 billion. ARM’s designs were dominant among smartphones, which at the time was seeing rapid adoption and growth worldwide.

The good news hasn’t stopped since, although ARM has had to pivot its strategy in 2018 to adapt to changing market dynamics. Apple, which has seen its next-generation iPhone sales stalling, has been rumored to be moving to using ARM chips for a wider array of its products, including its Mac lineup. Beyond that expansion, ARM is now increasingly designing chips for the data center, and engaging in next-generation markets around artificial intelligence and automotive. ARM’s CEO has said that he sees a path to doubling revenues by 2022, which shows a healthy clip of growth if that pans out.

There are headwinds though. Consolidation in the semiconductor space has been a theme the past two years, and that will allow the surviving companies to be more ferocious competitors against ARM. Up-and-coming startups could also crimp the company’s growth in next-generation workloads, a risk shared with other incumbents like Nvidia.

That said, ARM seems to be in a much more strategic position than Nvidia these days, as ARM has managed to maintain its linchpin role, and that should ultimately roll up to a valuation that SoftBank will be excited about.

11. Alibaba is putting heavy pressure on SoftBank’s balance sheet

Jack Ma, businessman and founder of Alibaba, at the 40th Anniversary of Reform and Opening Up at The Great Hall Of The People on December 18, 2018 in Beijing, China. (Photo by Andrea Verdelli/Getty Images)

While SoftBank has slowly been cashing in after winning big on its early backing of Alibaba, the company’s ownership stake still sits at roughly 29%.

SoftBank’s Alibaba ties have helped the company fuel its incessant appetite for leverage, with SoftBank using its stake in Alibaba as collateral for an $8 billion off-balance sheet loan, which prevented additional downgrades of Softbank’s credit. But a tougher macro backdrop and slowing sales growth have caused Alibaba to follow the precipitous decline of other Chinese tech stocks in 2018, falling nearly 20% year-to-date and 30% in the last 6 months.

That decline means tens of billions of dollars of losses for SoftBank’s already overstretched balance sheet, and as with many of these stories, will make financing its vision challenging in 2019.

And so we get back to the core theme of 2018 for SoftBank: debt, leverage, and financial wizardry in pursuit of a bold transformation into a technology investment firm. That transformation has certainly not been smooth, but it has moved forward bit by bit. If SoftBank can navigate the changes in the Japanese telco market, exit some major investments in its Vision Fund, and manage its big commitments in Sprint and Alibaba, it will reach its destination, with a few ultimately superficial bruises along the way.

Careem launches delivery service as it nears closing a massive round

The ride-hailing giant Careem is now in the delivery business as the company seeks new verticals in its ever-increasing fight against other services in the Middle East including Uber. Starting with food delivery in Dhabi and Jeddah, the company sees the delivery service expanding to pharmaceuticals according to a report by Reuters. Careem is investing over $150m into the service.

“We believe the opportunity for deliveries in the region is even bigger than ride-hailing,” Chief Executive and Co-Founder Mudassir Sheikha told Reuters. “It is going to become a very significant part of Careem over time.”

Called Careem Now, the service will operate independently from its ride-hailing business. It will have its own app and Careem is building the service a dedicated call center.

This comes as the company is trying to close a $500m funding round. Back in October, the company announced it had already raised $200m from existing investors. Prior to this announcement, rumors were swirling around the company that several companies including Didi Chuxing could acquire the company.

 

BMW’s premium ride-hailing service is now live in China

BMW has joined a handful of automakers to compete with transportation upstart Didi Chuxing, which bought Uber’s Chinese business in 2016. Last Friday, the German luxury carmaker launched a premium ride-hailing service in Chengdu, the capital of China’s Sichuan Province with over 14 million people.

The new offer is part of BMW’s ReachNow carsharing brand that kicked off an electric vehicle rental business with a local partner last December. The new ride-hailing venture manages a crew of trained drivers to chauffer riders in a fleet of 200 BMW 5 Series, out of which half are plug-in-hybrid, according to the company.

“We are excited to offer our new premium ride-hailing service in Chengdu, one of the largest ride-hailing hubs in the world embracing mobility solutions for a sustainable urban future,” said Peter Schwarzenbauer, member of BMW AG’s board of management, in a statement.

ReachNow trips appear to be pricier than those on Didi’s “luxury” feature — which is currently only available in China’s top-tier cities of Beijing, Shanghai, Shenzhen, and Guangzhou — that also deploys BMW Series 5 and the likes of Mercedes-Benz E-Class and Audi A6. A 23-kilometer ride in Chengdu, for instance, costs 468 yuan or $68 at 3 p.m. on Monday. That’s about $3 per kilometer.

bmw ride hailing china

By comparison, a trip of similar distance in Shenzhen via Didi Luxury costs 210 yuan, or $30, at a rate of $1.3 per kilometer on a Monday afternoon.

didi compared to bmw

BMW’s new move comes shortly after it became the first global carmaker to nab China’s ride-hailing operating license in late November and at a time when the country’s biggest player Didi faces public and government backlashes following two passenger murders.

Following the Didi incidents, Chinese authorities have applied deeper controls over the verification process in both drivers and their vehicles to step up safety for riders, leading to a shortage in both drivers and vehicles for Didi and its ride-hailing peers.

China’s transportation rules stipulate that drivers must hold two certificates — one for themselves and one for their vehicles — to be eligible to take passenger requests on ride-hailing apps. That turned a lot of part-time drivers away as they either don’t want to invest the time and money preparing for exams or scrap their passenger cars after eight years.

To cope with regulatory changes, Didi has introduced training programs to help drivers obtain the desired licenses. The mobility giant has also partnered with carmakers to make “purpose-built” vehicles for on-demand rides, although that process had started before the passenger deaths.

Like BMW, China’s oldfashioned carmakers also have their sights set on the car-hailing market. Among them are Volkswagen’s local partner SAIC Motor and Geely, which is partnering with Daimler to roll out a new ride-hailing venture.

Update: The headline has been corrected.

China’s Didi restructures key units to improve safety following passenger deaths

China’s largest ride-hailing operator Didi Chuxing announced on Wednesday a major restructuring, which trails a series of tweaks to its core businesses following two separate passenger murders that happened in May and September.

The reshuffle will see Didi — which owns Uber’s China business — knit three key platforms into a new overarching Ride-hailing Business Group (RBG). The merger of Express, Premier, and Luxe, its car-hailing offerings in ascending order of quality and rates, comes just a few months after Didi rebranded and upgraded Premium, one of its fastest-growing segments.

Meanwhile, Didi is facing regulatory pressure to enhance safety measures and striving to regain trust from consumers.

“With safety as its top priority, RBG will invest resources to meet compliance standards, continuously create user value and strengthen our ride-hailing ecosystem,” Didi says in a statement.

The plan includes an upgrade in customer services, driver safety, and emergency responses. Defects in the last area have led to one of the passenger incidents, in which a female passenger failed to contact Didi for help.

As part of the change, Didi is appointing a new chief safety executive and chief security executive (in the sense of information security) who will directly report to the company’s chief executive officer Cheng Wei and chief technology officer Zhang Bo, respectively.

Chinese authorities have stepped up scrutiny on the country’s fledgling car-hailing industry following Didi’s passenger murders, including stricter verification processes for drivers and their vehicles. The controls have prompted a sharp decline in the number of rides available, urging Didi to help drivers attain new licenses.

Aside from addressing safety concerns, Didi is adding fresh growth engines through the reshuffle. The Automobile Solutions Platform will launch consisting of Didi’s Asset Management Center and Xiaoju Automobile Solutions. The newly minted group is set to explore retail opportunities and sells a flurry of existing services, including car sales, loans, car maintenance, and refueling, to Didi’s 31 million drivers.

“Didi automobile solutions will continue to develop customized for-share vehicles and incubate new auto-related businesses to become the new engine for Didi’s long-term growth,” the company says of its driver-centric platform.

Didi declined to comment when asked by TechCrunch about the potential impact its restructuring brings to revenues.

Lastly, Didi is upping the ante in cabs and bringing shared bicycles, electric bikes, and other public transportation solutions under one umbrella in a bid to serve China’s mass. The car-hailing titan will also smoothen internal coordination by forming two new units – the Finance and Operations department, and the Legal department.

Europe’s ride-hailing companies aren’t scared of Uber

Uber is speeding toward a historic IPO next year that could value it as high as $120 billion, but that doesn’t scare its rivals that operate across Europe.

Speaking on stage at TechCrunch Disrupt Berlin, Markus Villig — the CEO of $1 billion-valued Taxify — and Via CEO Daniel Ramot, whose company has expanded from Israel into Europe, North America and beyond, said they are not fazed by battling the U.S. ride-hailing goliath.

Having raised over $170 million from investors including Didi Chuxing, which defeated Uber in China, Taxify operates in 26 markets predominantly in Europe and Africa. That means that Villig is very familiar with going toe-to-toe with Uber .

“We compete with them in every country and city we’re in so we’ve always been accustomed to having quite fierce competition,” Vilig said. “But what’s already clear from multiple mergers around the world, whether we look at Russia, China and now Southeast Asia [where Uber has sold to local rivals] it’s clear that the local operating model is the one that’s going to win out over the long-term.”

“If you need to actually localize, then the U.S. companies aren’t typically best suited to do it. We see this happening city by city,” he added.

While Grab in Southeast Asia and Didi in China managed to outmaneuver Uber by doubling down on local factors like regional payment plans, Villig explained that, in Europe, he sees Taxify’s local advantage as its ability to mix up its strategy. So it can get fierce in open markets that bring significant competition for drivers and riders, or work collaboratively with local government in places where a challenging regulatory landscapes  requires a more nuanced approach.

“We are more focused on treating drivers better, which is something that’s quite unique to Europe because the regulations are so high that you have a lot less drivers who you can actually work with you in every city. So treating them well is a much bigger factor than it might be in a market where the supply of drivers is multiple times bigger,” the Taxify CEO said.

Taxify’s Markus Villig is one of the youngest founders of a unicorn startup

Via, which has raised some $390 million to date, specializes in shuttle vans both in collaboration with local transport authorities and as a standalone consumer-facing service, is also standing up to Uber’s significant ride-hailing chops.

“Where we are operating our own consumer service [such as New York, Chicago and London] we are facing this quite fierce competitor, but often times we are fighting that first shared ride which is our core product,” Ramot said.

“I think we have a pretty good advantage in the technology that we’ve developed because it was built from the ground up to allow people to share and the way the drivers are being compensated on the Via platform all fits together very well. So we usually find we have good success launching our own service even when Uber is competing,” he added.

Far from resting on those laurels, Ramot revealed that Via — which, like Taxify, counts Daimler as an investor — has floated an idea with Daimler to develop bespoke vans designed as the ideal shuttle to ferry passengers. The collaboration is in its early stages, but someday we might see the fruits of this partnership out on public roads, he said.

Daniel Ramot (center) co-founded Via in 2012

Also on the future, but back on the Uber battle track, Villig — one of the world’s youngest founders of a unicorn thanks to an investment earlier this year — voiced his optimism that, in spite of Uber’s enormous war chest and imminent public listing, he believes that the future of on-demand transportation is truly local.

“We see that, country-by-country, we are actually overtaking them. Now fast forwarding a couple of years, we think we’ll see a similar future in Europe and Africa as we have seen in other parts of the world,” he said.