This year SoftBank gave Rappi $1 billion (Federico Rios Escobar/NYT)
For five years, Sunil Solankey, a retired captain in the Indian army, had run the 20-room Four Sight Hotel in a New Delhi suburb. Business was steady, but he longed to make the establishment a destination for lucrative business travelers.
Last year, a hospitality startup called Oyo told Solankey that it would turn the Four Sight into a flagship hotel for corporate customers. It guaranteed him monthly payments whether the rooms were booked or not, as long as he rebranded the property with Oyo's name and sold the rooms exclusively through its site.
At Oyo's request, Solankey sank 600,000 rupees, or US$8400, into reupholstering the hotel's furniture and adding new linens. But corporate guests did not materialise, and Oyo stopped making the payments. Now he is on the verge of eviction.
READ MORE:
• Premium - SoftBank's Son admits turning 'blind eye' to WeWork lapses
• Premium - SoftBank leaves huge questions over new $108bn Vision Fund
• Premium - SoftBank/Vision Fund II: billionaire boys' club
• Softbank can no longer afford a price war
Solankey is one of millions of workers and small-business people who worked with startups financed by the biggest venture capital fund in history, the US$100 billion Vision Fund run by the Japanese conglomerate SoftBank. The fund was part of a flood of money that has washed over the world in the past decade — and that has upended people's lives when the startups broke their promises.
Masayoshi Son, SoftBank's chief executive, was hailed as a kingmaker in 2016 when he unveiled the Vision Fund. Using the cash hoard, Son poured money into fledgling companies across the world, many of which have a business model of hiring contractors who deliver their services. Above all, he urged these startups to grow as fast as possible.
Many of the young companies used SoftBank's cash to dangle incentives and other payments to quickly attract as many workers as they could. But when they failed to make a profit and SoftBank changed its tune on growth, the companies often slashed or reneged on those same incentives.
That has now left contractors like Solankey holding the bag. With little power to fight back, many of them have been financially and personally devastated.
The New York Times reviewed contracts and internal company documents, and interviewed more than 50 workers with SoftBank-funded startups like Oyo, the delivery firm Rappi and the real estate brokerage Compass in places such as Chicago, New Delhi, Beijing and Bogotá, Colombia. What emerged was a pattern that repeated across the world: a distinctly modern version of the bait-and-switch.
"These startups try to get workers attracted to them and bring them within the fold," said Uma Rani, a researcher at the International Labor Organization who is surveying startup contractors in emerging economies. "When the workers attach to the whole thing and are highly dependent on it, then you slash it. This is something we are systematically seeing."
SoftBank's Vision Fund is an emblem of a broader phenomenon known as "overcapitalisation" — essentially, too much cash. Venture funds inundated startups with more than US$207b last year, or almost twice the amount invested globally during the dot-com peak in 2000, according to CB Insights, a firm that tracks private companies.
Flush with the cash, entrepreneurs operated with scant oversight and little regard for profit. All the while, SoftBank and other investors have valued these startups at inflated levels, leading to an overheated system filled with unsound businesses. When the companies try to cash out by going public, some have run into hurdles.
At two of SoftBank's biggest investments, WeWork and Uber, some of these issues have become public. Uber, the ride-hailing service, staged an underwhelming initial public offering in May and posted a US$1.2b loss last week. WeWork, the office leasing company, recently ousted its chief executive and accepted a rescue plan from SoftBank as its value was cut. Last week, SoftBank reported a US$4.6b hit from its WeWork investment.
"Since the money started pouring out of SoftBank, they have completely distorted the priorities and focus of young ventures around the world," said Len Sherman, a Columbia Business School professor.
SoftBank backs companies in a variety of industries. The Vision Fund's 88 investments include the e-commerce firm Coupang in Seoul, South Korea, and the messaging company Slack in San Francisco. And SoftBank is far from the only firm to invest in startups that rely on contractors.
But none have invested as widely in these companies as SoftBank. The Vision Fund, which is nearly 10 times larger than the next-biggest venture fund, has 16 of them in its portfolio. Several are among its largest investments.
The model of using contractors, which has defined the last decade of startup investing, has created work opportunities. But among people who are most dependent on these companies, unrest is growing.
Protests against SoftBank-funded startups have erupted in New York, Bogotá, Mumbai and beyond, with many captured on video and posted to YouTube. Some of the videos, which have been viewed thousands of times, showed chanting workers or destruction of property. All displayed a visible frustration.
In China alone, three SoftBank-backed companies — the logistics firm Manbang, the ride-sharing service Didi Chuxing and the food delivery company Ele.me — faced 32 strikes last year, according to data gathered for The Times by the China Labour Bulletin.
Jeff Housenbold, a managing partner at SoftBank's Vision Fund, said, "This is an important, complex issue that predates the Vision Fund and affects many companies we haven't backed in equal measure."
That is of little comfort to contractors like Solankey. "I am in the pit," he said.
In an investor call in 2015, Son said he was embarking on SoftBank's second stage. He called it "the global SoftBank".
Son, now 62, the child of Korean immigrants to Japan, had built the company into a telecom conglomerate. He had also successfully invested in the Chinese e-commerce company Alibaba in the 1990s.
Now he wanted to diversify. In late 2014, SoftBank started by putting hundreds of millions of dollars into three ride-hailing companies that copied Uber: India's Ola, GrabTaxi in Southeast Asia and China's Kuaidi Dache, which later merged with its biggest rival, Didi.
Son made it clear the money was for growth. "We always work toward further growth, and we will sow seeds for the further growth," he said at the time.
When he announced the US$100b Vision Fund, the biggest contributions came from the sovereign wealth funds of Saudi Arabia and Abu Dhabi, with smaller investments from companies like Apple.
Few venture funds had raised even US$1b before. Son said he wanted the money to go to companies pursuing artificial intelligence and the "Singularity", when computers become smarter than humans.
But he was enamored with Uber-like businesses that used contractors. "Uber, using internet, changed the business model," he said in 2016. SoftBank invested in Uber two years later.
Over time, SoftBank and startups with contractors became mutually dependent. SoftBank needed places to deploy its billions, and it often provided US$100 million or more at a time to these companies. The startups needed vast sums to attract workers.
At Ola, where SoftBank was the largest shareholder, 62 per cent of what drivers earned in 2016 came from investor money rather than fares, according to the data firm RedSeer.
When some of the startups cut costs, often prodded by SoftBank, they reduced payments to workers. Many contractors said they wanted to stop working with the startups, but couldn't because of upfront investments they had to pay off.
In response, drivers for Grab smashed the windows of the company's offices in Jakarta, Indonesia, last year. At a 2017 demonstration against Ola in Bangalore, India, one driver set himself on fire and another drank poison.
Last week, when Son discussed SoftBank's earnings, he said: "I learned a lot of lessons, but no change in our strategy. We don't see any rough sea."
SoftBank's money barreled into Solankey's hotel in July 2018.
That month, Oyo told the hotelier it would bring him high-paying corporate travelers if he joined its network and upgraded the property. Under the arrangement, Oyo guaranteed him monthly payments of 700,000 rupees, or around US$10,000, for three years, according to a contract viewed by The Times.
Solankey, now 63, agreed.
But within a year, the payments evaporated. Instead of business customers, unmarried couples looking for private rooms turned up. And Oyo discounted the rooms so much online that Solankey could not offer them to guests at a higher price.
"It is suicidal for me," he said while sitting recently in his hotel's empty restaurant.
Oyo said Solankey had misrepresented the health of his business before signing the contract.
Oyo was founded in 2013 as a website to organise and standardise India's budget hotels. It coaxes small hotels to become Oyo-branded destinations that list exclusively on its site, without its having to own most of the properties.
SoftBank, which began investing in Oyo in 2015 and now owns nearly half the startup, has pushed to add more hotels to the company's network. Last month, it helped the site raise US$1.5b, valuing it at US$10b and making it India's second-most-valuable startup.
"It's completely a new type of hotel, and they are growing so fast," Son said of Oyo last year. "The number of rooms and net growth is going to continue at the pace of more than 10,000."
Oyo now claims to offer more than 1.2 million rooms, including in China and the United States, where it recently bought the Hooters Casino Hotel in Las Vegas.
It has scaled up partly by promising hoteliers monthly payments, made possible by SoftBank's money. The payments, which are an advance on the hotel owner's share of room revenue, were supposed to be paid no matter how many rooms were booked.
In exchange, the hotels added free breakfasts and linens in Oyo's signature red and white. They agreed to book all rooms — even walk-in guests — through Oyo and let it control how the rooms were sold on other sites.
But those payments led to rising losses in India. And over the last year, SoftBank has pushed Oyo on profitability rather than just growth, said current and former employees of the startup, who declined to be named for fear of retaliation.
Several hotel associations said Oyo had now canceled or cut the payments. Some also said Oyo had deeply discounted room rates and increased its commissions and fees.
In June, more than 70 hoteliers in the coastal city of Kochi marched to Oyo's local headquarters before a two-day strike against the site. The unrest spread to Bangalore, New Delhi and other cities. Last month, the Competition Commission of India opened an antitrust investigation into Oyo's practices.
"The situation is so bad, we're looking at it as a scam," said Pradeep Shetty, the honorary joint secretary of the Federation of Hotel and Restaurant Associations of India, which represents around 3,000 hotels and filed the competition complaint.
Ritesh Agarwal, who founded Oyo when he was 19, said in an interview that only a few hotels had been unhappy or tried to leave. He said Oyo had occasionally reduced the guaranteed minimums, but only when hotels had misrepresented their business in contract negotiations.
"Asset owners continue to believe that Oyo is the best option in terms of the value proposition we can provide for them," he said.
Not Solankey. He said he was losing 150,000 rupees, or US$2100, a month. While he plans to quit Oyo, he needs the money the company owes him. Oyo has offered to pay just half the debt — and then only if he signs a new contract with no guaranteed payments, according to correspondence shared with The Times.
Solankey has taken out loans, but fallen behind on rent and electricity payments. In September, his power was temporarily cut off. This month, his landlord asked him to vacate the property.
Farley Molina was delivering a Papa John's pizza in Medellín, Colombia, last month when a motorcyclist grabbed his cellphone, his cash and the orange bag he uses to carry packages for the startup Rappi.
Molina reported the theft to Rappi. The company told him to pay back the US$35 he had collected from customers and buy a new cellphone himself.
Molina, 21, borrowed money from his mother. "They never support us," he said of Rappi.
Like many SoftBank-funded startups, Rappi not only depends on contractors to deliver its services but also offloads its fixed costs — and the risks of the work — onto them.
The company, established in 2016 by three Colombian entrepreneurs, harnesses bike and motorcycle riders to deliver everything from flowers to cash from the ATM. In Colombia alone, it has 20,000 couriers.
This year, SoftBank gave Rappi US$1b — twice as much as what the company had gotten from all its previous investors combined. In announcing the funding, SoftBank declared that the startup, which it valued at US$2.5b, would be responsible for "improving the lives of millions in the region."
SoftBank's money has helped Rappi expand into nine South American countries. And the company initially offered drivers 3500 pesos, or around US$1, for every delivery — enough to earn more than Colombia's minimum wage of around US$8 a day.
In return, couriers provided their own cellphones, bikes and motorcycles. They had to buy a Rappi delivery bag, which costs around US$25. And they have to shoulder most of the physical risks of delivery.
In August, a judge in Argentina ordered Rappi and two other delivery services there to shut down until they provided workers with insurance and safety equipment like helmets. The judge said 25 couriers had been treated in Buenos Aires public hospitals over the previous month.
Rappi said it would appeal the decision, which it said "puts at risk the continuity of thousands of people's income." It has continued sending riders out on the streets.
In September, a survey of 320 Rappi couriers in Colombia, conducted by the University of Rosario and several nonprofits, found that nearly two-thirds had been involved in an accident on the job. Almost none were covered by insurance.
Simón Borrero, Rappi's chief executive, said in an interview that Rappi had insurance to pay hospital bills for those injured on the job, but that it did not cover stolen personal items like Molina's cellphone.
For couriers, the safety risks have been compounded by wage cuts. Rappi slashed its US$1 basic delivery fee by 45 per cent last year, around the time its annual losses tripled to US$45m, according to government filings.
"I sometimes have to work 17-hour shifts just to get by," said Walter Salazar, 26, who started delivering for Rappi a year ago and now works seven days a week to afford a bed in a six-room dormitory.
Borrero said Rappi was designed for part-time workers, not those seeking a full-time living wage.
In July, around 100 workers protested outside Rappi's headquarters in Bogotá. They made a bonfire out of the orange delivery bags.
In an email last year, Robert Reffkin, the founder and chief executive of Compass, apologised to his company for its bumpy growth.
His New York firm, which received US$1b from SoftBank, had sprouted to 8,000 real estate agents from 2,100 in a year. Reffkin said the company had been unprepared to integrate agencies it had bought and had pushed brokers to use technology that wasn't ready.
"I've learned that moving too fast," Reffkin wrote in the letter, which was obtained by The Times, "can be just as dangerous as moving too slowly."
Compass, which Reffkin founded in 2012 as a tech-enabled real estate firm, has expanded rapidly since SoftBank invested in 2017. Reffkin, a former Goldman Sachs executive, said in a Wired interview that year that the money would let it compress its three-year growth plan into one.
"They are making a great growth," Son said of Compass in 2018. "This company, I believe, is going to be a great unicorn."
Compass, which is valued at US$6.4b, now has 13,000 agents, all contractors, in 238 offices across the United States. It has grown by promising some agents bonuses and 90 per cent of the commissions on future deals, in an industry where 70 per cent to 80 per cent is standard.
The breakneck growth has led to cracks. Several top executives have recently left, as have recently arrived brokers.
One was Tricia Ponicki, 44, who started at a Compass office in Chicago in February. She said she had been drawn by the generous compensation; the company also promised more resources to aid home sales.
But there was so much turnover in Compass' marketing offices that it took three months to produce a brochure for a house. When she requested a For Sale sign, she was told they were back ordered. Her husband made the sign instead.
"Right from the beginning, I was constantly being misled and misled," she said.
Over six months with Compass, Ponicki sold one property, earning US$4,300. A year earlier, she had netted around US$100,000 selling homes at a local agency.
In August, the mother of four applied for food stamps. She also returned to her old agency, At Properties, where her sales have picked up, she said.
Compass employees and agents have generated less revenue per person than other online brokerage firms and, sometimes, even traditional ones, according to research by Mike DelPrete, an independent real estate strategist and visiting scholar at the University of Colorado.
Compass said that by its metrics, it was more efficient than other online firms. It declined to comment further.
Ponicki said she wondered how long Compass' spending could last.
"I realised the illusions you see in the mirror are not what they appear to be," she said.
Karan Deep Singh, Raymond Zhong and Erin Griffith contributed reporting. Additional production by Meg Felling and Jared Miller.
Written by: Nathaniel Popper, Vindu Goel and Arjun Harindranath
Photographs by: Saumya Khandelwal
© 2019 THE NEW YORK TIMES
OPINION: Calls for stricter deadlines to boost competition and benefit consumers.