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Masayoshi Son’s Gamble - Vision Fund

Tiffany Li

In November this year, a Japanese giant investment bank reported its first quarterly operating loss in 14 years. Profits plunged by 704 billion yen, or $6.46 billion[1] after the catastrophic collapse of the planned $20 billion WeWork Cos. initial public offering. [2] For more than a decade, Masayoshi Son, the CEO of Softbank, marveled investors around the world through exceptional foresight in picking winners (including Alibaba) and creating an unfathomable amount of profits. However, the underperformance of the two of Softbank’s largest investments-- the immediate failure of WeWork’s IPO and the continuous loss of Uber-- made the world start to question how good the world’s most prominent venture capital fund is at picking winners.

All the ups and downs and the craziest ventures all come down to one man-- Masayoshi Son, the CEO of Softbank. With his $110 billion SoftBank empire and his $100 billion SoftBank Vision Fund, Masayoshi Son is one of the biggest forces in global tech. This man, with the fiercest and most aggressive ideas, to a very large extent shaped the world of disruptive technologies today.

Born in 1957 to a poor Korean immigrant family in rural Japan, Son, facing constant discrimination, grew up a rebellious boy. He moved to San Francisco and majored in economics at UC Berkeley. After moving back to Japan, his interest in technology drove him to work for the Japanese telecom SoftBank, eventually becoming CEO. Son took SoftBank public in 1994, valuing the firm at $3 billion. He first made global headlines in 1999 at the peak of the dot com bubble, putting him among the world's richest people. Just before the crash, his net worth increased by $10 billion each week. Yet the bubble burst, erasing nearly all of his worth and SoftBank almost went bankrupt.

It would not be a saga if Son’s ambition just ended there. He continued to leverage on Softbank's as well as his own expertise in technology by pouring billions of dollars of capital into tech startups, including its $100 billion Vision Fund. Such an approach was unconventional in Silicon Valley. Yet, Softbank had achieved tremendous success - at least for the past 14 years. One of the most prominent cases was the investment into Chinese startup Alibaba. Masayoshi Son bought a substantial stake in Alibaba for just $20 million in 2000. The Chinese startup grew into one of the world’s biggest e-commerce companies has helped burnish Son’s tech investor credentials as Softbank obtained around 1.2 trillion yen ($11.12 billion) in pre-tax profit on the sale of shares in China’s Alibaba Group Holding Ltd when SoftBank sold part of its Alibaba stake via derivatives to fund its acquisition of British chip designer ARM. Softbank’s remaining 26% stake in Alibaba is now worth $101 billion. Such inconceivably risky strategy- by splurging enormous sums of money into the market unicorns with Son’s exceptional vision- proved to be a highly rewarding one, as Softbank achieved unparalleled profits among Venture Capitalists (VCs).

Masayoshi Son’s Vision fund took a completely different approach from the rest of VCs. To further illustrate this point, most VCs today choose to reduce risk by diversifying - putting relatively small sums of money across a relatively large number of firms as the fledgling firms have a high probability of failure. In contrast, Son invested huge sums of money into a few carefully selected firms with high potential for growth. Moreover, the total sum Son invested in these firms is also significantly higher than all other VCs. Softbank’s Vision Fund is worth more than 100 Billion today. To put the fund’s magnitude in perspective, its size is almost double the investments made by all U.S. venture firms combined last year. PitchBook data shows that VC fundraising in the U.S. totaled $53.9 billion last year across more than 200 funds, the largest annual raise in at least a decade. [3]

To illustrate the magnitude of the number, this chart shows that Softbank’s Vision Fund and SoftBank Capital hold a dominant proportion of the global VC market. This share increased from a fraction of a percent in 2009 to more than 10% today.

One of the key rationales behind the megafund is to eradicate potential rivals, thereby obtaining absolute control over the firms to reap the largest yield of returns. To further explain this mechanic, Son’s large checks have inflated valuations in pre-IPO private companies, making other VCs write bigger checks or drop out of deals entirely, completely disrupting the VC market.

Further complicating the situation is the source of funds. The royal family of Saudi Arabia has an intriguing relation with Softbank. Saudi Arabia has been a major investor in SoftBank through its sovereign fund- Public Investment Fund (PIF). It invested $45 billion out of the $100 billion raise that formed SoftBank's first Vision fund in 2016, and Crown Prince Mohammed bin Salman told Bloomberg in October last year that the PIF was looking to invest another $45 billion in the second Vision Fund. [4]

Uber & WeWork

Since last year, however, some of SoftBank's biggest investments have floundered, namely the huge losses of SoftBank’s greatest investment Uber and the collapse of the IPO of WeWork. This raises the prospects of more write-downs in the Vision Fund’s portfolio with its high exposure to businesses that prioritise growth over profitability.

One of the biggest headaches for Softbank’s cash flow right now is the sustained deficit of Uber’s balance sheet. Uber is the core of Masayoshi Son’s plan to build up a portfolio of next-generation transportation companies (including Didi and Grab) that are all moving towards a future of artificial intelligence and autonomy. Thus, SoftBank backed Uber in early 2018, buying shares from existing investors at $48.77 apiece and purchasing new shares at just under $33, spending US$7.6 Billion in total. However, due to licensing issues and high operating costs, the share price has slumped to two-thirds of its value, at 29.490 per share (27 Nov 2019) since its May IPO. This number is clearly below the lowest point at which SoftBank invested.

Clearly, WeWork could be even more detrimental to SoftBank. Aswath Damodaran, a professor of finance at New York University's Stern School of Business commented, "WeWork is not just a mistake, it is a signal of weakness in the whole model. If you screwed up that valuation so badly, what about all of the other companies in your portfolio?"

WeWork underscores the risks of Son’s winner-take-it-all approach. Intrigued by the novel concept of creating a coworking space, SoftBank first took a 4.4 billion stake in August 2017 with the company valued at $21 billion. It then invested another $3 billion in November 2018 at a $45 billion valuation and later agreed to a $1.5 billion warrant at $47 billion. As Mr. Son reported results this May, he highlighted WeWork as an example of portfolio companies heading for IPOs. Consequently, as the IPO failed, SoftBank suffered from an approximate $5 billion loss[5]. Vision Fund said it did not profit from WeWork by marking it all the way up to $47 billion. It kept the shares on its books at about half that price. It still had to take that down by about 75%, which led to the loss.

Even Son admitted,"I overestimated Adam Neumann's good side. I should have known better.I turned a blind eye to Adam Neumann's bad side on things like corporate governance. I have learned a harsh lesson from my experience with Adam Neumann."

The huge mistake of Son drew criticism towards VCs and PEs. One of the major issues raised is their transparency. VCs and PEs firms are mainly private so they do not have to provide financial statements quarterly to public shareholders, and their limited partners are typically focused on returns when portfolio companies cash out through IPOs or acquisitions. SoftBank doesn't reveal specific valuation changes for each of its portfolio companies in a quarter, typically only naming a few winners or losers. Moreover, startup stakes are often transferred between SoftBank Group and the Vision Fund, which have different shareholders. This implies that the price at which those assets are shifted has implications for profits on either side.

Second Vision Fund & Future of Softbank

In July this year, Son decided to launch a new fund, the Second Vision Fund, with an aim to spur the growth of AI. SoftBank expected to raise fund for about US$108 billion in total after landing potential investors including Apple, Foxconn, and the National Investment Corporation of the National Bank of Kazakhstan. SoftBank itself plans to invest US$38 billion in the fund.[6]

Though the second Vision Fund initially received massive investment, the catastrophic failures of WeWork and Uber have tempered investors’ appetite for investment. According to Bloomberg, Saudi Arabia’s PIF and Abu Dhabi’s Mubadala Investment Co., which contributed US$45 billion and US$15 billion to the First Vision Fund, respectively, are reconsidering the amount of their investment in the new fund. Japanese investment bank Nomura Holdings Inc, which was the lead underwriter for the IPO of SoftBank’s telecom unit, has decided not to put money into the new fund.

To resolve the constraints of the fund, SoftBank is proposing a so-called evergreen component to its Vision Fund 2. Limited partners may have the option to recycle a certain percentage of their profits from exits back into the fund if they want to continue investing. The fund won’t be a traditional evergreen fund and will provide returns directly to limited partners. [7] Son also has to be more flexible in terms of financing. While it took about 2.5 years to deploy the $80 billion of the first Vision Fund, the second Vision Fund′s target will be to deploy its funding in four to five years.

Son is still determined to go ahead with the second Vision Fund even though some lieutenants have urged a delay. This means that Son has to move toward companies with quicker runways to profitability in order to prevent Softbank from sinking deeper into the turmoil. Also, if the market headwinds do change, it could be the time for the SoftBank billionaire to prove himself on being nimble and changing with the environment by changing his strategy.









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