SoftBank’s Vision Fund — what is it?

Just hitting my daily news feed are reports of SoftBank leading a $250 million round of funding for Slack, a popular work-place messaging application, valuing the company at a staggering $5.1 billion.

This comes just 3 weeks after SoftBanks last investment of $4.4 billion into WeWork, the on-demand workspace company.

SoftBank has been making headlines with their massive investments, and I am going to dive into the origins of SoftBank and its Vision Fund, and why you’ve been hearing so much about them lately.

What is SoftBank?

Contrary to what the name implies, SoftBank is a Japanese Telecommunications, Internet, and Holdings company. They are a multi-national conglomerate with products and services across broadband, fixed-line telecommunications, e-commerce, internet, technology services, finance, media and marketing, energy, trading, and more.

SoftBank was founded, and still run, by Masayoshi Son. He is Japan’s richest man, worth an estimated $21.6 billion.

Son founded the company in 1981 as a software distributor, and throughout the years built it into SoftBank. During the internet bubble SoftBank invested in over 800 companies, vowing to create one of the world’s most valuable digital conglomerates. Son’s networth surged to $68 billion in 2000, making him the world’s richest man. However that tile was short lived, and when the crash hit he lost over $70 billion.

While most of his investments cratered, not all of them did. He bet on Yahoo!, which led to a subsequent investment in Alibaba. His $20 million Alibaba investment is now valued at over $90 billion.

Vision Fund — the origin

Most large corporations have investments arms that invest cash across many asset classes. Think about Apple —you’re surely aware of it holding a treasure chest of cash overseas ($260 billion) that it doesn’t want to bring back into the US and pay Uncle Sam the hefty tax bill. Apple uses some of this cash to invest and make money.

One of these allocations can be a Venture Capital fund, known as a Corporate Venture Capital fund (CVC). CVCs typically share the same strategy as its corporate parent, and invest along that mandate. CVCs typically do not allow outside money into the capital pool, and are funded from the parent sponsor.

This is not the case with the Vision Fund. The fund was announced in October 2016, with a mandate of global investments in the technology sector. Unlike a typical CVC, the Vision Fund has raised money from other partners and investors, with the goal of $100 billion in capital. As of June 2017, the capital sources are:

• $45 billion from Saudi Arabia’s Public Investment Fund
• $15 billion from Abu Dhabi’s Mubadala Investment Company
• $1 billion from Apple
• $1 billion from Sharp
• $3 billion from Qualcomm, Foxconn and Oracle founder Larry Ellison’s family office
• $28 billion of SoftBank’s own capital

That is $93 billion raised so far, with $7 billion remaining before its stated close of November 2017. The lead investor is the country Saudi Arabia, whom Son met with last September to help them seek ways to diversify their economy beyond oil.

The fund’s investment period (time for capital to be deployed) is 5 years from its final closing, and has a 7–9 year maturity (time till exit of investments), giving it a life of 12 years, which it will then distribute assets back to the investors.

Investment Focus

Son sees a rare moment in the tech landscape today where technology’s rapid evolution provides opportunities that may never reappear again. Son has grand visions of the future, and believes he can capitalize on them.

Investments will focus on global tech companies, across industries like: IoT, AI, robotics, mobile applications & computing, communications infrastucture & telecoms, computational biology & other data-driven business models, cloud technologies & software, consumer internet businesses, and financial technology.

Investments will be used in both the public and private markets as well as venture capital. This could include purchasing shares of public companies, and even taking public companies private.The fund will have a minimum investment size of $100 million.

The Vision Fund will target a 44% IRR or better, which Son says is the IRR of SoftBank (with some major help from its Alibaba and Yahoo! investments).

In a December visit with President Trump, Son said half of the fund, or $50 billion will go towards investments in the United States.

Vision Fund — Unusual to say the least

The Vision Fund bucks the classic CVC in a few ways.

1. Conflicts of Interest — with the majority of the gun powder coming from other limited partners, SoftBank naturally has to answer to them. In a typical CVC, the fund only answers to the parent company, and they both share the same strategy because of that. Further, existing investments by some of their investors (ex. Saudi Arabia’s investment in Uber) will preclude future investments in other companies.
2. Key Man Provision — a key man provision is a contractual clause that prohibits the general partner (GP) from making investments if a “key man” fails to contribute a specific amount of time to the partnership. This clause is typically used in smaller or newer funds where the departure of one person can mean the end of the fund itself. If the key man clause is violated, the limited partners (LP) can exercise the clause and halt all future investments and receive their unused capital back. There are typically several people with this designation in a fund, and investment decisions are made from within this committee. For SoftBank’s Vision Fund, Son will be the only key man in the fund. Son will have an unusual amount of influence as he is responsible for all investment decisions, and the fund could be dissolved in his absence.
3. Unique Financial Structure — According to a FT article, the Vision Fund has a very unconventional structure that presents risks. In a typical venture capital or buy-out fund, the fund raises capital in the form of equity from investors. The Vision Fund is asking all outside investors to contribute equity and debt to the fund. Vision Fund investments are structured as such: 62% of an investment is debt in the form of preferred units, and 38% will be equity. The preferred units will receive an annual 7% coupon over the fund’s 12-year life cycle. Leveraging a fund through borrowing debt is not unusual for buy-out funds, but it is typically done through external lenders, not the investors. This unorthodox structure will allow the Vision Fund to lever up (borrow for) its investments in the tech-space. A reason for this structure is that it would be difficult for SoftBank to borrow money from a lender to invest in companies with zero or negative cash flow, which happens to be many companies in the tech space. They have structured the fund to provide a workaround. What this means is that the fund is relying on pre-funded debt to back the deals. A pro of this structure is that it reduces some downside risk for investors as the 7% is a guaranteed return. A con is that the fund has to pay 7% annual coupons on $44 billion, which amounts to $2.8 billion per year. This differs from the strategy of a traditional VC fund that repays investors solely on the performance of their investments. In worst case scenarios, this binding coupon can be problematic — you can find a more detailed analysis of the risks of this structure here.
4. Size ($100 billion!) — in 2016, global VC deals totaled $69 billion. Assuming this number is stable for the next 5 years, the Vision Fund would deploy $20 billion per year, making up nearly 30% of yearly VC deals. That is a staggering number, and a massive influx of capital. So how easy is it to invest $100 billion in 5 years? Let me rephrase that: So how easy is it to judicially invest $100 billion in 5 years? We shall see in 2022, but for now many veterans are concerned what this will do to valuations. Some think back to 2014 and 2015, when Hedge Funds and Private Equity shops, eager for returns, began investing in tech startups, pushing up valuations. After a subdued IPO market, and a couple major IPO stumbles, these investors pulled back their cash and valuations dropped down to reasonable levels. The Vision Fund will essentially replace this investment from 2014, so valuations could rise to irrational levels again. Another point of concern is the check sizes. SoftBank is known push start-ups to take more money than they originally ask for, and looks for equity ownerships of 20–40% in investments. So for founders, it’s either get more and give up more equity, or nothing. It’s up for investors to decide if the money will be put to good use, but $100 billion in 5 years is without a doubt a high hurdle.

Investments so Far

There are 2 categories. First is Vision Fund investments, that the fund participates in itself. The second is SoftBank investments, that the parent invests in, and is expected to offer to the Vision Fund at some point. Below is a list of investments so far, that I will keep updated.

SoftBank Vision Fund investments

The investments in this section have come directly from the Vision Fund.

September

Slack: Led a $250 million round for the work-place messaging application.

OYO: Led a $250 million round in the hospitality platform.

August

WeWork: Invested a total of $4.4 billion in the coworking space provider, $3 billion of which will go directly into WeWork and $1.4 billion of which will go to three subsidiaries (WeWork China, WeWork Japan and WeWork Pacific). The funding is coming from the Vision Fund and from SoftBank itself.
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Roivant Sciences: Led a $1.1 billion funding for the healthcare company, which partners with large pharmaceutical companies, small biotech firms and academic institutions to help develop & commercialize drugs.

Flipkart: Invested a reported $2.5 billion in the Indian ecommerce company, with media reports indicating part of the investment is primary and part is secondary.

Fanatics: Led a $1 billion investment in the online retailer, which is focused on licensed sports apparel and merchandise.

Guardant Health: SoftBank led a $360 million funding for the biotech, which is developing a blood test meant to monitor cancer treatment, in May; the investment has been transferred to the Vision Fund.

Nvidia: SoftBank took a $4 billion stake in the graphics chipmaker in May; the stake has been transferred to the Vision Fund.

July

Plenty: Led a $200 million funding for the indoor farming startup.

Brain Corp: Led a $114 million Series C for the AI robotics company.

March

ARM: Reports emerged that the Vision Fund is taking a 25% stake in ARM, the semiconductor company Softbank bought for $32 billion in 2016.

Other SoftBank investments

The investments below are a selection of those that have been made by SoftBank itself since the beginning of the year. Some are expected to eventually be offered to the Vision Fund.

August

Altaeros: Invested $7.5 million in the developer of autonomous aerostats.

Kabbage: Invested $250 million in the online lender for small businesses.

July

Grab: Co-led a round that could total $2.5 billion in the Southeast Asian ridesharing company.

Nauto: Co-led a $159 million Series B for the maker of camera-equipped devices for vehicles.

June

Cybereason: Invested $100 million in the cybersecurity firm.

Boston Dynamics: Acquired the robotics company from Alphabet.

May

Paytm: Invested $1.4 billion in the digital payments provider.

Improbable: Led a $502 million Series B in the company, which allows users to build virtual and simulated worlds.

April

Didi Chuxing: Invested $5 billion of a record $5.5 billion round in the Chinese ridesharing company.

March

WeWork: Invested $300 million in the coworking space provider. The initial funds came from SoftBank; the round is set to total up to $3 billion, with the remainder from the Vision Fund.

OneWeb: Invested $1.7 billion in OneWeb and its fellow satellite company Intelsat to support their merger (reports later emerged that SoftBank is letting the merger fall through).

February

SoFi: Participated in a $500 million funding for the online finance startup.

Ola: Participated in a $330 million round for the ridesharing company.