Just as the literal Trojan Pig needs to be pliant to allow engastration—the stuffing of animals within—SoftBank requires its Trojan Pigs to be equally pliant in terms of giving it non-standard rights.
For instance, in some cases, SoftBank asks for “multiple liquidation preferences” where it can make money even if the value of the company drops.
Typically, this comes at the expense of other investors and founder/employee stock. In addition, the firm often asks for “ratchet rights” which requires the startup to give it additional shares should the value of the company drop. It also has “participation rights”, wherein, should a sale occur, SoftBank would not only get its money back before other investors, but it would also receive a share of the money that is leftover.
Owning an absolute majority
Beyond these financing terms, SoftBank often asks for rights that give it an irrevocable say in terms of future funding rounds or public listings. It can, for instance, block an IPO if the firm doesn’t get a prescribed return. While other VCs typically cap their ownership at 20-30%, SoftBank also has no qualms about owning an absolute majority stake in the company. In OYO, for instance, SoftBank owns nearly 50%.
SoftBank also determines the set of investors from whom a Trojan Pig can raise capital in the future. It leverages the fact that it has multiple anchor investments in key markets all around the world to force a loose cartel of sorts, where one portfolio company invests in another, creating a network of entities with SoftBank itself in the middle. OYO recently raised $100 million from SoftBank-backed Grab, the Southeast Asian ride-hailing company.
Considering the fact that Grab itself is currently raising money to fund its own capital requirements, the investment in OYO might seem incongruous. But there is little doubt who is pulling the strings in the background to facilitate such deals.
There is the odd SoftBank-backed company like ride-hailing company Ola where the founder is strong enough to stand up against such arm-twisting deals and shotgun marriages, but these are rare and far in between.
Indigestion is inevitable
As is inevitable with egregious feasts, devouring a Trojan Pig has consequences ranging from indigestion to diarrhea. But these are far more serious than cutesy metaphors.
By using startups such as OYO as surrogate vehicles for its own ambitions, SoftBank has irrevocably altered funding and competitive dynamics. On the face of it, it might seem that having more money in the system is a plus for everyone around—startups get more money, other VCs get valuation bumps and the market sees more exits. But all these collateral benefits are temporary at best and chimerical at worst.
Startups that do take funding from SoftBank become addicted to capital and prematurely lead their startup into dizzying growth trajectories that upset stakeholder balance in markets. Recently, more than 250 budget hotels across the country signed a petition against OYO as their businesses were suffering due to their dealings with OYO.
Disrupting the market
According to them, OYO was disrupting the market through deep discounting which resulted in lower revenues for the hotels and then arbitrarily charging higher commissions and contract terms related to payment cycles.
Startups that do not take funding from SoftBank find themselves having to fight competitors with seemingly endless pools of capital and the cachet to follow a scorched earth policy that robs them of any chance to achieve market traction.
Ask budget hotel chains Treebo or Fab Hotels. But choosing not to work with such Trojan Pigs is also often not an option. MakeMyTrip had, for instance, earlier delisted OYO from its platform but was forced to let it come back recently. Fighting a big-stack bully like SoftBank is not a battle that startups are likely to win.