SoftBank drops $100-million investment in iPhone rival

Masayoshi Son's decision to scrap deal with creator of Android software reflects unpredictable style

SoftBank Group Corp. scrapped a planned $100 million investment in a smartphone startup founded by the creator of Google’s Android software, partly because of the Japanese investor’s increasingly close relationship with Apple Inc., according to people familiar with the matter.

The planned investment would have valued the startup, Essential Products Inc., at $1 billion, these people say, a lofty amount for a company that has yet to sell a product in one of technology’s most cutthroat industries. It had already been agreed to informally, and final investment contracts were being drawn up, say people familiar with the deal, a stage at which venture deals are rarely abandoned.

The offer banked on the pedigree of Essential founder Andy Rubin, who sold his previous startup, Android, to Google—now a unit of Alphabet Inc.—in 2005, then helped turn its software into the world’s most used smartphone operating system, powering devices rivaling Apple’s iPhone.

The episode is a window into the unpredictable investing style of SoftBank Chief Executive Masayoshi Son, who is set to enhance his position as one of the tech industry’s most powerful investors with his $100 billion tech-focused Vision Fund. That mammoth fund is expected to launch as early as this month, according to a person familiar with the matter.

As part of the proposed deal with Essential, Mr. Son had promised that SoftBank’s telecom subsidiary in Japan would provide a big marketing push for the release of Essential’s high-end smartphone, scheduled for this spring, the people said, ahead of Apple’s expected fall release of its 10th anniversary iPhone.

In January, Apple agreed to commit $1 billion to the Vision Fund. Though Apple didn’t block the Essential deal, according to the people, its investment complicated SoftBank’s interest in a competing smartphone company. In February, after months of negotiations and when final investment contracts were being drawn up, Mr. Son backed out of the deal.

SoftBank in recent years has gobbled up U.S. telecom carrier Sprint for $22 billion and British chip designer ARM Holdings for $32 billion. But Mr. Son and his team study dozens of deals at a time, and sometimes deals fall apart late even after Mr. Son has reached a handshake agreement to invest, said a person familiar with the matter.

Mr. Son has been slow to pull the trigger on other investments, including with WeWork Companies Inc. Deal discussions with the shared-office-space company have been on and off for more than a year. Currently SoftBank is contemplating an investment over $1 billion.

Backing out of deals as late as SoftBank did with Mr. Rubin would typically scar the reputation of a venture-capital investor.

But in addition to his role as an investor, Mr. Son is also a tech executive, and it isn’t unheard of for tech CEOs to scrap deals at a very late stage. In any event, startups may still seek him out for investments considering his enormous financial firepower and the sweetheart terms he sometimes offers.

The Vision Fund, which plans investments in larger tech companies as well as startups, will have a right of first refusal on all SoftBank deals of at least $100 million, according to a person familiar with the matter. Investment funds typically seek to avoid conflicts between their limited-partner investors and recipients of capital, which for Vision Fund could be tricky given its web of backers.

SoftBank has committed $25 billion to the new investment vehicle, and has been waiting for the Saudi Arabian government to complete its $45 billion commitment. Other investors include Qualcomm Inc., which makes chips for smartphones, and Foxconn Technology Group Ltd., the world’s biggest contract manufacturer, which makes the iPhone for Apple.

Essential’s Mr. Rubin is taking aim at Apple and Samsung Electronics Co. with his new high-end smartphone, an Android-based model with sleek styling, intended to anchor a suite of home-automation products and be priced in line with the iPhone and Samsung’s premium S series, according to a person familiar with its plans.

Some details of Mr. Rubin’s plans were previously reported by Bloomberg and The Information.

Mr. Rubin also has hired some of Apple’s employees. Playground Global, his combination incubator and venture-capital firm that is also behind Essential Products, has hired at least seven employees from Apple, including product designers, engineers and a hardware program manager, according to Playground Global’s LinkedIn page. A former lead architect of the iPad, Jason Keats, has also joined as head of product for Mr. Rubin’s “stealth startup,” according to his LinkedIn page.

Mr. Son long has had a tight relationship with Apple, dating to when his telecom carrier introduced the iPhone to Japan in 2008.

He began discussing an investment with Mr. Rubin last fall, according to people briefed on the talks. They outlined the basic structure of a possible deal, including the funding amount and valuation, as well as plans for SoftBank’s mobile subsidiary to put its marketing firepower behind the Japan launch of Essential’s first phone. The deal had proceeded to the stage where final investment contracts were being drawn up, the people said.

SoftBank offered another sweetheart term, declining to take a seat on Essential’s board of directors, leaving Mr. Rubin with more control. Most venture firms putting $100 million into a company would want a board seat, but at a 10th of 1% of the Vision Fund’s proposed assets, it wouldn’t have made sense for SoftBank.

From Mr. Rubin’s perspective, the investment was nearly complete, according to people familiar with his thinking, having progressed to the last steps before such venture deals are typically signed.

But Mr. Son did another gut check on the deal after Apple committed to investing in his new fund, say people familiar with his thinking, deciding to kill it rather than align himself too closely with an Apple rival.

—Tripp Mickle, Mayumi Negishi and Liz Hoffman contributed to this article.

Source: The Wall Street Journal