When it comes to SoftBank’s $93 billion Vision Fund, the venture industry is of two minds.
The fund has early-stage VCs rejoicing over an abundance of capital for growth companies and for cashing out initial investors. But the largest private-equity fund ever raised could send shockwaves through late-stage dealmaking and upset the game plans of the industry’s biggest firms.
The fear is that such a massive pool of money could over capitalize an industry already awash in cash and erode the price discipline and valuation restraint just now returning to venture.
“We’re running an experiment right now,” said Christopher Douvos, a managing director at Venture Investment Associates. “How much capital can this once-cottage industry absorb and invest profitably?”
And yet, the impact could be far more powerful. The fund is not just large enough to scoop up a significant share of all venture deals worldwide for the rest of the decade and beyond, but could create a path for the industry’s most promising companies to remain private well into the future, stunting returns for years to come.
Already, it has pumped $1.5 billion into WeWork, led a $1 billion round for Fanatics and at press time in late September continued to negotiate a mega deal with Uber.
All this is just a start. Currently at $93 billion, and growing perhaps to $100 billion, it is hard to comprehend the fund’s enormity. With a five-year investment period, it will need to put about $20 billion to work each year, or a just under a third of all venture capital invested in the U.S. last year.
In its entirety, it is:
- Greater than all U.S. later-stage investments in the four years from 2013 to 2016, combined;
- Essentially equal to the proceeds from all venture-backed U.S. IPOs over the past decade; and
- Only slightly less than all capital raised by the U.S. venture industry in the past three years.
Clearly, the Vision Fund is a species all its own. Perhaps for that reason, SoftBank, and its forward-thinking Chief Executive Masayoshi Son, are not shy about describing their ambitions and strategy in grand terms. The company unabashedly bills itself as potentially the world’s biggest technology investor over the next decade and vows to be a key facilitator of the coming information revolution, which it says will be made possible by breakthroughs, such as artificial intelligence.
To do so, it expects to be a major shareholder in companies with stakes of 20 percent to 40 percent and a post-investment desire to influence management. It is not the strategy of a shrinking violet, nor is it the 10 percent stake typical of a late-stage investor. Mergers and buyouts are not the goal, though a majority position in a private or public company is possible.
Transactions meanwhile are to be long term and outlive any three to five-year business alliances with portfolio startups. There are no quick-flip IPOs. The company talks about gathering entrepreneurs in a collective group to address the future.
To carry this out, the fund’s threshold investment is $100 million and its targets are a broad set of technology sectors, including the Internet of Things, artificial intelligence, robotics, mobile applications, mobile computing, communications infrastructure, computational biology, cloud software, the consumer internet and financial technology. SoftBank declined VCJ’s request for an interview about its strategy.
All this should give late-stage investors pause.
The $100 million plus check size and hands-on venture approach, “really gives them an advantage,” said Philip Sanderson, a managing director at IDG Ventures. A lot of companies at that stage still require help with recruiting, business model development and other tasks, even if they are unicorns, he said.
Yet this ability to get deals done could have a negative impact on exit timelines for companies by bringing enough capital to the private market to delay or reduce IPOs, speculates a September blog post from Craig Shapiro and Morgan Housel at the Collaborative Fund.
Despite this, Son’s aim to build synergies within his portfolio has won over numerous supporters, including the Saudi Arabia sovereign wealth fund, a major LP, Apple, Foxconn, Qualcomm, Sharp and the Mubadala Investment Company of the United Arab Emirates. All have put in money, with SoftBank itself contributing $28 billion, partly in the form of about a quarter of its shares from its 2016 purchase of ARM Holdings.
Yet, making money on the fund will be no easy task. The fund will have to generate $279 billion just to achieve a 3x return, a gargantuan task given that venture-back U.S. IPOs have generated proceeds over the past decade of only $107 billion. Sure, M&A could play a role. But this also is no golden road. The universe of buyers large enough to digest a unicorn is small.
What’s clear is SoftBank will need a vibrant economy and M&A market to do well, Sanderson said. “The success of their fund is predicated on the exit environment.”
In its defense, SoftBank likes to boast of a 44 percent return on investments over the past 18 years, and it counters critics who say the return relies heavily on its Alibaba deal by claiming this isn’t so.
In any event, returns challenges don’t seem to a slowing its investment pace. Summer dealmaking was active and venture investors are paying attention.
“We’re closely monitoring the development of the fund and its investment activity,” noted Steven Yang, an executive director at Adveq.
Yang said both positive and negative impacts are possible, and he views the fund as part of the growing appetite for venture from Asian sovereign wealth funds and corporate investors.
For many early-stage VCs, there indeed is reason to celebrate. The fund could provide a substantial source of capital for companies and for early backers to find liquidity through secondary transactions.
“I feel there is more opportunity that needs attention and funding” in the venture ecosystem, said Tim Guleri, a managing director at Sierra Ventures. “The fact that you have a very thoughtful investor entering the market is great for early stage and late stage funds.”
Any trickle-down effect on early-stage pricing is likely to be minimal, though the fund could lead to a greater bifurcation in pricing between smaller deals that stay under SoftBank’s radar and larger, later rounds where the firm will likely focus its attention. But this is somewhat the case already.
“We still have the view there will be minimal impact on early stage,” Yang said.
The same can’t be said of later-stage dealmaking. That is because it is hard to know whether a sum as large as $100 billion can be invested wisely in technology, especially by an investor unfamiliar with managing third-party money. History is not encouraging. A decade and a half ago, the industry found itself in hot water for precisely the same sin of over funding, when tens of billions of dollars washed into dot-com funds.
Some VCs seem more sanguine this time.
“I don’t think this changes the economics or dynamics of the later stage market to any degree,” Guleri said. “They are considered a savvy buyer.”
And to the extent that SoftBank uses some of its money for takeovers or buyouts, potentially becoming a large suitor for portfolio companies, it is positive.
“I have a lot of respect for Masayoshi Son as one of the forward thinking business people on the planet,” said Joe Horowitz, a managing general partner at Icon Ventures. “There aren’t many people on the planet who have multi-decade bold visions.”
But such enormous resources have never been put to work before, and the size of the fund makes restraint difficult. GPs express fears about heightened late-stage competition, over-valued assets and aggressive pricing reminiscent of 2015 and 2016.
Already, concerns have begun to show up in the excitement entrepreneurs display to open conversations with this new investor. Many previously worried about the possibility of a down round. Now valuation expectations appear on the rise again.
“The presence of the fund is lifting spirits across the land,” Douvos noted. “They have a big hammer to swing.”
With so much cash, overfunding may be inevitable in certain sectors, such as self-driven cars and perhaps fintech, predicted Maha Ibrahim, a general partner at Canaan Partners.
“These guys have the dollars to disrupt the game,” she said. “The companies they back they will back in a big way.”
This money will allow companies to try new things and to scale at a massive pace, which should be good for the ecosystem. However, it comes with the danger of wasteful spending, higher burn rates and overly competitive technology markets.
“I’m guessing they are going to put that money in a bunch of mega deals, like WeWork,” Ibrahim said.
More important is the potential change to company strategy. The end result may well be startups that remain private far longer.
If a company can raise $1.5 billion and use the money to turn profitable, the need to go public lessens considerably. Vision Fund deals start to look like private IPOs with valuations that matter less than if a company had to return to the private or public markets for money.
In this sense, the fund is something the industry hasn’t seen before, Sanderson said. “It is like a new vehicle, like a new animal.”
It’s an observation others buy into.
“It’s foreseeable some companies will stay private longer,” Yang said. “They may stay private longer and get to a larger scale.”
The result could be fewer IPOs, with an obvious downside to venture returns.
In such an environment, growth-stage investing likely becomes harder, said Collaborative Partner Housel.
The fund is “big enough to move the needle for the entire industry,” Housel said. “It is so large and can write such big checks that it’s fishing in a pool that, in a different era, would be represented by public companies.”
All this could put new pressure on late-stage investors, who may find they can’t to go toe-to-toe and write $200 million or $300 million checks.
For many unicorns, that may make SoftBank the best game in town.
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Feature image design by Allison Brown for VCJ, based on erhui1979/iStock/Getty Image; Suat Gürsözlü/iStock/Getty Image
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