Yahoo! 1996: Softbank Asks for a Strategic Stake

Yahoo and Softbank : Immediate Needs vs . Future Investment

In 1996 , Softbank offered a partnership deal to Yahoo , with the intent of both offering operating funds and opening the Japanese market to Yahoo . This offer came when Yahoo was in a vulnerable financial position : with several months to go before its planned IPO , the funds from the second round of venture capital were running low and Yahoo still was not realizing significant revenue from its advertising program . Softbank was already a 5 shareholder in the company , having participated in Yahoo 's second round

of venture capital financing the company 's leader , Masayoshi Son , was familiar with and enthusiastic about Yahoo operations and mission . However , Softbank 's offer wasn 't ideal in all ways . The first issue was simple - how much is a company that has no revenue and is not yet traded on the common market worth and how does one determine that worth ? The second issue was that the founding partners , Sequoia Capital and company founders Jerry Yang and David Filo , would have to give up part of their own stake in the company in to allow Softbank part ownership Softbank 's request for a minimum share of 30-50 of the company- a significant portion of a company that had not yet reached the IPO stage . and a portion which would mean significant loss of control for the founding partners . Who would surrender a portion of their share , and how much would each surrender ? At the heart of this problem was the issue of emotional involvement and personal investment in the incubation period of a business by its founders , the problem of profit versus pride , and control of the company

The problem of determining market value for Yahoo was significant . In general , valuation of a young technology company is difficult . Stuart remarks that young companies in general have short track records and face a high risk of potential failure young technology companies compound the issue because they require high amounts of capital for equipment and development projects which cannot be expected to pay off until some future point the rapid pace of technological development means that a large number of technology startup products are obsolete before they hit the market (1999 , 316

Yahoo was no exception to Stuart 's observations . At the time , the company was dependent on venture capital and operating at a loss according to their 1995 consolidated balance sheet , they suffered a net loss of 634 ,000 . They did not yet have a clear business model in place - the first obvious revenue generating method , the introduction of banner advertising on their home pages , had only gone into place the previous August . At the same time , the Reuters news service also had begun to provide news bulletins to Yahoo . However , competition in the World Wide Web portal market was fierce at that time - Yahoo , a small startup , was in competition with Netscape , Excite , Lycos , Infoseek and the 800 pound gorilla of the Web portal business , AOL...