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WeWork, SoftBank-backed flops cast doubt over CloudMinds US IPO

Investors are likely to be wary of the pending U.S. listing of SoftBank Group Corp.-backed CloudMinds Technologies Co. Ltd., following the Japanese company's involvement with troubled coworking startup WeWork Companies Inc. and the poor performances of its other big bets this year, analysts said.

China's robotics company CloudMinds said in July it was looking to raise up to US$500 million via an initial public offering of its American depositary shares on the NYSE. The company completed a US$300 million investment round led by SoftBank Vision Fund, which is a 34.6% shareholder.

In its July 12 prospectus, CloudMinds said it plans to use proceeds of its IPO to research and develop products, build out its ecosystem and strengthen its sales and marketing division. However, a Nikkei report notes that the IPO has been postponed and the company has yet to set terms for its listing.

CloudMinds did not respond when asked for a comment on the status of its IPO.

Analysts said while CloudMinds is an interesting business from a technology standpoint, particularly in the internet of things space, its business model looks worryingly similar to WeWork and therefore could suffer the same issues. Investors will be nervous about buying into another SoftBank-backed IPO based on revenue multiples which do not show a "clear path to profitability," Arun George, IPO, M&A and TMT analyst at Global Equity Research said.

George said CloudMinds' revenue is volatile and could be difficult to predict as it is dependent on the placement of orders and their delivery. In 2018, CloudMinds' total revenue increased significantly to US$121 million from US$19.2 million in 2017. The company's 2019 revenue for the three months ended March 31, however, fell to US$12.4 million from US$32.7 million in the year-ago period. The recent drop in revenue was attributed to the fall in revenue from CloudMinds' artificial intelligence solutions. The fluctuations, coupled with having SoftBank Group as an early backer, could mean potential IPO investors are in for a "bumpy share price ride," George said.

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The IPO of CloudMinds is important for SoftBank, which is linked to a string of lackluster tech IPOs this year, including WeWork, Uber Technologies Inc. and Slack Technologies Inc.

As of Oct. 29 close, Uber and Slack's stocks were down 22% and 41.7%, respectively. The market capitalization of both Uber and Slack also fell dramatically after the companies listed May 9 and June 19, respectively, as previously reported. In both cases, SoftBank's large funding rounds helped boost the companies' pre-IPO valuations. WeWork, which also saw multiple investments from SoftBank and is to receive a US$9.5 billion bailout package from the Japanese company, also saw its valuation plunge to a fraction of the US$47 billion.

Kirk Boodry, Redex Holdings founder and telco and Asia internet analyst also pointed to the latest underwhelming stock performance of another SoftBank-backed company, Vir Biotechnology Inc. The San Francisco-based infectious disease researcher raised US$142.9 million in its U.S. IPO and saw its first-day price drop almost 30%. SoftBank Vision Fund owns 21% of Vir Biotechnology.

CloudMinds' lack of clarity on its business model and monetization strategy could also weigh on its pending IPO, said Zhen Zhou Toh, APAC IPO and placements analyst at Aequitas Research. The company's July 12 prospectus said one of its challenges has been to successfully implement current or future monetization strategies, calling its business model "relatively nascent and still evolving." CloudMinds said that as it continues to build its end-to-end cloud robot system, it will be trialing various monetization plans and therefore cannot guarantee success.

"If our current or future monetization strategies do not succeed as we anticipate, we may not be able to maintain or increase our revenue, profits or operating cash flows," CloudMinds said in the filing.

Boodry said he would not be surprised if the IPO is further delayed, pointing to other factors such as geopolitical trade tensions and the U.S. blacklisting of several Chinese tech companies.

Earlier in October, the U.S. Department of Commerce added a number of Chinese entities to its blacklist, including facial recognition developer Megvii and SenseTime, both of which have delayed their IPOs.

With negative sentiment surrounding Chinese tech companies operating in the U.S. on the rise, Hatem Dhiab, managing partner at wealth and investment management firm Gerber Kawasaki, said CloudMinds will find it difficult to entice U.S.-based investors.

"CloudMinds needs to raise a lot of money. I do not think they will be able to do that successfully at this time and juncture. And, I'm sure SoftBank can do without more negative publicity from one more failed investment. [CloudMinds] will probably shelf its [IPO] for now," he said.