How SoftBank’s bet on US mortgage lender Better backfired

In April 2021, SoftBank was so eager to back US mortgage lender Better Home & Finance that it wrote a $500mn cheque and was prepared to hand its newly acquired voting rights to Vishal Garg, the start-up’s founder and chief executive. 

The investment followed months of talks between Better and SoftBank’s Vision Fund, led by Rajeev Misra, a top lieutenant of the Japanese group’s founder and chief executive Masayoshi Son, according to people familiar with the matter.

At the suggestion of SoftBank executives, Better soon after cut a deal to go public via a special purpose acquisition company, choosing one set up by Icelandic billionaire Thor Björgólfsson. As part of the transaction, which valued Better at $7bn, SoftBank said it would invest a further $1.3bn.

Now, with Better battling to survive in a mortgage market hit by higher interest rates, the investment is shaping up to be a fresh blow to SoftBank’s reputation as one of the world’s savviest investors weeks after the office-sharing group WeWork, another of its bets, filed for bankruptcy.

While Better has avoided WeWork’s fate, its shares have collapsed by 95 per cent since the group finally went public in August after a two-year delay as the Securities and Exchange Commission investigated claims from a former employee that it had misrepresented the health of the business. Since SoftBank’s investment, Garg has become such a polarising figure that Better lists him as a risk factor in regulatory filings.

“When [Son] is investing in companies, he’s investing in the founder,” said a person who was involved in SoftBank’s investments, adding that the approach — and a willingness to write big cheques quickly — brought risks.

SoftBank has struggled to contain losses on some of the investments made during the era of low interest rates, when the valuation of fast-growing companies was driven to unsustainable heights. The Japanese company was forced to wire $1.5bn to a number of WeWork’s lenders days before the group filed for bankruptcy.

It was not the only blue-chip investor dazzled by Garg’s promise to “digitally disrupt” America’s $15tn mortgage market. Goldman Sachs and venture capital firm Kleiner Perkins both invested before SoftBank did. 

The 45-year-old Garg has said he was inspired to start Better in 2015 with money saved for a downpayment on a house that he claims he lost to an all-cash buyer because of the mortgage industry’s archaic processes. Better promises a quicker and cheaper approvals process.

Riding the US house price boom, Better’s valuation hit $4bn in November 2020, shot up to $6bn six months later when SoftBank injected $500mn, before peaking at $7bn in the Spac deal announced in May 2021.

Under the terms of the Spac, SoftBank promised to invest another $1.3bn through SB Northstar, the division that managed its investments in public equities and was run by Akshay Naheta until his departure in early 2022.

SoftBank made the investment knowing that its voting rights could not exceed 9.4 per cent for regulatory reasons.

Its initial gung-ho backing of Better has left SoftBank a key player, owning a stake of almost 20 per cent, as the mortgage group’s struggles have deepened. Since 2021, Better has axed over 90 per cent of its staff and racked up losses of almost $1.65bn over the period.

In June, two months before finally completing its Spac deal, Better warned it could go out of business without a final $550mn SoftBank had promised when the transaction closed.

“Without this cash we would be having a different conversation,” said a person with direct knowledge of Better’s operations.

In August, the SEC opted not to recommend enforcement action after investigating the former employee’s claims. Better had denied the allegations.

“We had a duty to all shareholders to raise capital on the best terms we could achieve,” Kevin Ryan, Better’s president and chief financial officer, said of the Spac deal. “We worked tirelessly with counsel, the SEC and others over two and a half years to close the most attractive deal that was available,” he told the Financial Times.

SoftBank’s willingness to bankroll Better was emblematic of a period in which start-up founders held unusually large sway as investors vied to back companies that often put grandiose ambitions before profits.

“There was a lot of capital available to invest,” said Jill Fisch, a professor at the University of Pennsylvania Law School. “Investors were competing with each other,” for a slice of the best deals.

As SoftBank sought to deploy its $100bn Vision Fund, a technology investment fund backed by Saudi Arabia, it sometimes meant writing large cheques to outdo rivals. Son last year acknowledged that he should have been more selective in his investments and questioned the Vision Fund’s strategy of allowing the start-ups it had backed to expand aggressively.

In the autumn of 2021, as the Spac market cooled and higher inflation raised expectations that the Federal Reserve would raise interest rates, SoftBank sought to row back from the terms of its deal with Better, according to two people familiar with the matter.

SoftBank offered to continue funding Better if it agreed to stay private and wait for conditions in the mortgage industry to improve, the people said, but the US company declined because it would have had to stomach significantly worse terms. The offer was one of several options SoftBank assessed, they added.

SoftBank declined to comment.

Faced with a continued deterioration in Better’s finances, the terms of the Spac were overhauled at the end of November 2021. Under the new agreement, SoftBank agreed to immediately inject $650mn into the company, which would convert into Better shares once the Spac deal happened. It also promised to provide at least $550mn through a convertible debt deal on completion.

Within weeks of receiving the $650mn, Garg attracted widespread criticism after firing 900 staff via Zoom shortly before Christmas. He was put on leave to “reflect and refocus” over the holiday period but returned a few weeks later.

In early 2022, Better disclosed that a number of senior employees had “openly questioned” the CEO’s role. Once it became clear Garg would stay, several executives left, prompting Better to take the unusual step of listing its CEO’s leadership as a risk factor in its filings with regulators.

Garg remains one of Better’s risk factors, with a filing earlier this month stating that he “detrimentally affected our productivity and financial results and has disrupted certain third party relationships”.

A spokesperson for Better said the business “has not experienced any leadership issues in over two years”. In August, Garg told that FT that: “Over the past two years, I’ve spent a lot of time getting leadership training, learning to become a more empathetic leader.” He declined to be interviewed for this article.

Charles Elson, a corporate governance expert at the University of Delaware, said that continuing to describe the CEO as a risk raised questions.

“That is one of the most amusing risk factors I’ve ever seen,” he said. “To warn you about the challenges that he presents in such a negative way makes you wonder why he remains CEO.” 

Better has said the public storm that followed the Zoom sackings prompted some institutions to cut ties with it. In multiple securities filings, Better has said that Garg’s “leadership style” and “continuing leadership” were a factor in a decision by Barclays to wind down a $500mn credit line it had provided to the group.

People familiar with Barclays dispute this account, saying that Better cancelled the facility because it was no longer originating enough mortgage loans. Better declined to comment further and Barclays declined to comment.

Having in the end received a further $525mn from SoftBank in August after going public, Better is hoping that the prospect of the Federal Reserve cutting interest rates next year reignites the once-booming mortgage market.

Shortly after the Spac deal closed, Better also disclosed that several senior executives had been awarded multimillion-dollar bonuses for completing the transaction.

Garg was given almost $10mn, with half paid upfront and the rest dependent on the company hitting certain profitability targets. The award came after the Better founder was given a $25mn cash bonus in 2021. He also repaid a loan of more than $40mn to Better using shares he owns in the company.

With the shares trading at just over 60 cents, Better’s most pressing challenge is to lift the price to the $1 threshold required to retain its Nasdaq listing.

In August, WeWork embarked on a reverse stock split to comply with a similar requirement at the New York Stock Exchange. According to people familiar with the matter, Better is considering a similar move.