- SoftBank and its Vision fund have invested more than $ 300 million in Fair Financial, a car rental startup.
- Fair is considering filing for bankruptcy, Bloomberg reported this week.
- Some Fair investors blame SoftBank and say the Japanese giant is trying to take control.
- See more stories on the Insider business page.
Investors in Fair Financial Corp., a struggling car rental startup once valued at over $ 1 billion, are exploring legal options to tackle SoftBank, which they say has deliberately pushed the company in the ground so that it can take full control and eliminate other shareholders.
“There was a calculated effort to drive the company into insolvency so that it could take over the business completely,” an investor told Insider. “SoftBank is guilty of putting the company in a difficult position.” Investors have asked not to be identified to discuss sensitive private matters. The current CEO of Fair and someone familiar with the matter disputed this description of Fair’s problems.
The startup was founded in 2016 by entrepreneur Scott Painter with the ambition to disrupt the $ 120 billion used car industry. SoftBank and its giant Vision fund have invested at least $ 300 million in the company, while other investors have invested around $ 170 million.
The company is now considering a bankruptcy filing that would eliminate shareholders, Bloomberg reported Thursday.
SoftBank has built up a significant position in Fair’s debt in recent years, in part by purchasing assets from lender Greensill, investors said. Greensill, also backed by SoftBank, filed for bankruptcy earlier this year.
SoftBank now hopes to use its senior credit position to come out of a bankruptcy reorganization of Fair as the startup’s new equity owner, investors said. They spoke to Insider in an attempt to thwart this plan by arguing that SoftBank is not looking after Fair’s best interests and is acting more like a lender seeking control rather than a typical shareholder.
Fair had around $ 800 million in assets on the books in 2019, mostly from the more than 50,000 vehicles he owned. In late 2019, investors said SoftBank had started selling those assets and using the cash to run the business and pay off some of the debt it held.
Investors also said that in 2019, SoftBank kicked Painter out and replaced him with its own executive, Adam Hieber. SoftBank also kicked out Painter’s brother, Tyler Painter, and cut 40% of Fair’s staff.
Under SoftBank’s new leadership, Fair appeared to abandon growing the business, investors said. The startup has increased the upfront fees it charged, which is similar to down payments. Those start-up costs went from several hundred dollars to several thousand, and new customers evaporated. Fair also ended its insurance coverage, which infuriated existing customers and led to a wave of vehicle returns, according to investors.
Now, with most of Fair’s vehicles sold, its assets have fallen far below its debt, most of which is owned by SoftBank, investors said.
“SoftBank had a clear objective: to liquidate the fleet to generate revenue,” said one of the investors.
SoftBank declined to comment, but someone familiar with the matter said Painter was responsible for Fair’s mismanagement. Employees told Insider in 2019 that Fair’s unconstrained growth was its downfall, and some criticized Painter’s leadership.
“The Vision Fund does not control its businesses; this is not their model, ”said the person familiar with the matter. “In fact, Scott had total control. He spent recklessly thinking that the Vision Fund would always be there to bail him out. Eventually it became clear that he needed to be replaced, just as he was in his old business. Painter, who is still the chairman of Fair, declined to comment.
Brad Stewart, the current CEO of Fair who joined the company last year after a career in private equity, said any suggestion that SoftBank sabotaged the company is false.
“I saw them working really hard to save and keep the business going even though it cost them substantial capital that they didn’t have to invest,” said Stewart. “The point is, the company had an extremely negative unity economy and poorly developed risk controls that were hidden from the board and investors. These missteps led to a series of credit defaults starting in mid-2019 that forced someone to step in and save the business. “
The aggrieved investors said Stewart was a puppet of SoftBank and, exceptionally, had no capital in the startup he was hired for.
Stewart told Insider he was initially given shares when he took over as CEO, but the board blocked him from getting shares. In any case, he said the shares would have been worthless.
“It doesn’t really matter because the company’s debt was greater than its enterprise value when I started, so any grant was worth zero,” said Stewart.