In June of 2010 SoftBank Founder & CEO Masayoshi Son announced a futuristic 30 and 300 year vision for the conglomerate; ideas and concepts seemingly far fetched back in 2010 for which he believed would come to shape our existence in the coming future. In May of 2018, Masa (as he’s most commonly referred to) closed a $100B fund named the SoftBank Vision Fund, which aimed at being a vehicle for which he could fund these very far-fetched, sci-fi-like predictions. Investors in the gargantuan fund include, Apple, Foxconn, Saudi Arabia’s Public Investment Fund, Sharp, Daimler, and Mubadala Investment Company. The Wall Street Journal did a great 4.5 minute overview of SoftBank’s difficulties, which I highly suggest watching prior to reading this articel. For reference, Son’s predictions include: Brain Computing, Cloning, New forms of Communication, VERY Smart Machines, and Augmented Reality (AR) that allows for physical touch.
Recently, the Vision Fund has come under a bounty of criticism, specifically Masa himself for his lack of sufficient/proper investment decision-making with the recent decline of WeWork, loss-heavy Uber, faulty IPO of DoorDash, and the departure of nearly all of Compass’ C-Suite (just to name a few woes). Similarly, checkout Andy Chan’s article on why Oyo (another SoftBank portfolio company) may very well be the next WeWork. In another article by the New York Times, the Times spoke with current and former employees (of Oyo), and examined court documents and financial filings; the company reportedly listed unavailable rooms to inflate numbers, failed to pay partner hotels due fees, worked with unlicensed hotels, and more. Similarly, the company just announced a couple thousand layoffs in both India and China.
Will Masa be able to raise a successful follow-on fund (deemed Vision Fund 2), which supposedly SoftBank is already planning to invest $38B of it’s own capital within? It’s unclear what the target raise for Fund 2 is, but Masa has said, he would prefer to deploy the capital within Fund 2 over the course of 4–5 years, relative to the 2.5 year span it took to deploy $80B of Fund 1.
There seems to be a major lack of clarity in regards to Fund 2 at the moment, with that being said, let’s take it back to Fund 1…
The Problem(s) with the Vision Fund 1 Strategy
Traditional venture funds (ones that are not $100B) typically invest in new companies over the course of 2–3 years. Funds will not invest the entirety of their fund initially, so they can invest in subsequent rounds of the given companies they initially invested in. That being said, funds will normally deploy all of their capital within 5 years, with the assumption that they will return all capital to their LP’s within 10 years. So, with all of that on the table, let’s go back to Vision Fund 1. As we mentioned prior, they essentially deployed the majority of their capital ($80B) over the course of 2.5 years, while leaving additional capital in the fund ($20B) for follow-on rounds. You may think, “while that checks out in regards to how a traditional fund deploys it’s capital,” let’s hold up now and break this down.
SoftBank has publicly stated that the minimum check size they will write is $100M. With that being said, one must then go back to the prior assumption that, “traditional VC funds typically invest in new companies over the course of 2–3 years.” Having a fund that’s $100B and deploying, for the sake of math 80% of your fund over the course of 2–3 years, makes out to deploying an average of $833,333,333.33 in the 96 companies SoftBank has invested in, according to Crunchbase. Given the context, this is absolutely absurd. Furthermore, the number of companies that ACTUALLY needs that kind of capital without deliriously inflating valuations is minuscule in size. This makes for a very small pool of companies that Masa can and should make bets on. But, what has Masa done? Pushed inexperienced Founders/CEO’s to take-on ridiculously absurd amounts of capital within their respective companies that is just not necessary for their current stage.
The outcome is just what we stated, egregious valuations, while inherently taking these companies down a path that leads to massive workforce layoffs as well as hesitancy from retail investors (as seen by WeWork, DoorDash, Oyo, etc.), therefore leading to delayed IPO’s (or no IPO whatsoever). Masa has also strangely invested in similarly high-valued competitors of many of his current portfolio companies. For example a major stake in Uber, therefore UberEats, is a direct competitor to DoorDash. I can understand not placing all your eggs in once basket even in the same category, but what I cannot understand is the stage at which it is done in this context. For example, assuming clear legal jurisdiction and board understandings, I see no issue investing initially say, $1M into two companies within the same category, but at an assumed later round and again, $100M minimum check size, I just don’t see the logic.
The Public Market Has Taken Note
On Wednesday Nov. 6th of 2019 SoftBank reported it’s first quarterly loss in 14 years, largely due to the whopping $8.9B hit against the Vision Fund. Similarly, the values of most of the funds public companies have fallen over the quarter including Uber, Slack, and Guardant Health. Uber has continued to plummet due to a combination of uncertainty towards or when profitability might occur, along with a post-IPO share lockup that recently ended.
Whether the Vision Fund will actually return significant monetary value to its initial LP’s is entirely unbeknownst to me. Something we did not cover that should be included in this overview is the pile of debt SoftBank has accrued over time. The reason I did not talk about it is that I’m not educated on the topic to touch on it appropriately. That being said, some things to note in-regards to it’s debt is that has more than $51B in outstanding bonds and another $36B in bank loans. Among all companies on the Nikkei Stock Average, SoftBank ranks 7th highest in its weighted average cost of debt (3.7%). Moody’s and S&P have rated its debt as sh*t.
Masa has publicly held himself accountable for the poor investment decision-making and is dedicated to improving his investment strategy moving forward. For someone who is not known to be demonstrative in any capacity, this shocked many people that Masa made this statement public. That being said, I’ve a very logical and rational person. Show me your plan for improvement. This comment does not change anything and surely doesn't strengthen my confidence in the longevity of the Vision Fund. While the WeWork situation deserves an entire article in itself, just look at this graph for what Masa (and Masa-appointed WeWork chairmen Marcelo Claure) are predicting WeWork’s adjusted EBITDA to be by 2021. They also stated that WeWork would be cashflow positive by 2023. Yes, you read that right…
This kind of competency (or lack thereof) in relation to just one of SoftBank’s portfolio companies does not prove to be a confidence booster in-regards to the entirety of the fund itself and it’s core management. Time will tell.
It’s no secret that Masa made an early bet in Alibaba that will likely be deemed one of the greatest investment of all time (turning $20M into roughly $100B, or 29.5% of Alibaba), but let’s remember that one big win in the investment space doesn’t mean you’re untouchable. You will have companies that go down the drain. That’s just how it is. With the amount of capital being deployed into these companies (and even their similarly large competitors) makes for a heck of a large potential loss.
Masa has essentially created a (potential) shift that seems iminent. Rather than investors seeing growth as a catalyst for significant returns down the road, investors may pivot investment strategies to seek companies with legitimate plans for profitability, rather than companies with growth curves up and to the right, but with no tangible plans to monetize this growth in a sustainable/long-term way.
Albeit, I do not know the intricacies (nor do I expect them to be public by any means) of the statues within the LP agreements in relation to being an LP in the Vision Fund. For the sake of this article let’s assume that despite the copious amounts of capital Masa has access to, maybe his overarching intrinsic goal isn’t to return insane amounts of money to the LP’s of the fund and that the LP’s are more or less on the same page. I mean let’s consider the LP’s just briefly as outlined in the intro. Apple has roughly $245B in cash sitting in a back account. Foxconn has had fairly consistent YoY net income of $10B-$12B, while sitting on a market cap of nearly $100B. The Sovereign Wealth Fund of Saudi Arabia invests on behalf of the government of Saudi Arabia amassing an estimated asset valuation of over $320B. Expected to grow to $400B by 2020.
Basically what I’m getting at is that money may not necessarily be the focus of returns for these LP’s in the Vision Fund or for Masa himself. Maybe it’s much larger than money. Going back to his sci-fi-like, very far-fetched predictions maybe it’s more centered around the growth of humanity and pursuit of new technology that can change the course of how we live our day-to-day lives. In my opinion, improving human life by making a dent in history is much more fulfilling than any amount of wealth and it’s clear that those mentioned above have plenty of money. Just an alternative thought to consider despite all the recent individuals joining the “bash-SoftBank-train” due to all recent public criticism merely centered around numbers/returns.
Again, despite all of the cynicism, Masa has amassed a net worth of over $23B and is one of the richest men in Japan. Me, I’m an undergraduate student from a non-target liberal arts school that struggles not to get sorted out by the A.I. that syphons through your firms’ influx of applications simply because I’m not Ivy League and therefore am entirely incompetent in all facets of business, so who’s really winning. Then again, maybe the above run-on sentence is why I get syphoned out.
P.S. Please don’t take this last paragraph (too) seriously… :)