The world’s biggest technology investor has, it is fair to say, hit some turbulence. When Masayoshi Son, the Japanese billionaire CEO of SoftBank, launched the $100 billion Vision Fund in 2016, it was labelled by one prominent VC elder as “the most powerful investor in the world”.
It wasn’t hard to see why. The $100 billion war chest, the result of an unforeseen strategic alliance between a flamboyant risk-embracing Japanese businessman and Saudi Arabia’s new, ambitious crown prince Muhammad bin Salman, far exceeded the $64 billion raised by the entire remainder of the VC community the same year. Bin Salman handed Son $45 billion as part of his strategy to diversify his country’s oil-reliant economy, SoftBank itself contributed $28 billion and more investors, from Abu Dhabi to Apple also stumped up billions each.
Source: Nikkei Asian Review
The capital at the disposal of the Vision Fund was more than four times that of the biggest private equity fund to date. Son’s ambition was as big as the Fund’s bank balance. Arguably bigger. His vision was for the Vision Fund to invest in transformational cutting edge technology and disruptive tech-centred business models in a way never seen before. He would provide the most promising tech companies in the world with more venture capital than they could have ever dreamed of.
The Vision Fund’s Investments Would Change The World And Make Money
The idea was that freed from financial restraints and the time and energy suck of constantly looking to the next funding round to keep afloat, these companies would be able to focus on delivering the innovation that would revolutionise the world. And in the process dominate their markets, earning a handsome return for the Vision Fund’s investors.
Billions of dollars were invested in companies such as WeWork, the designed-for-hipsters coworking offices space behemoth on a mission to transform the commercial real estate market by offering free beer on tap and incorporating inspirational quotes into its interior design. Think of a big ‘tech’ brand to have risen to prominence over the last few years, for example Uber and DoorDash, and it is almost guaranteed they have received their share of the Vision Fund’s billions.
Source: Nikkei Asian Review
Across consumer tech, enterprise tech, fintech, transport and logistics tech, health tech, real estate tech and ‘frontier’ tech from virtual reality to artificial intelligence, robotics and the internet of things, the Vision Fund built a vast portfolio. It lavished it riches on the start-ups chosen as worthy of leading the digital economy into the ‘information age’.
Son’s ‘elevator pitch’ for the Vision Fund’s investment strategy is:
“We identify the entrepreneurs who have the greatest vision to solve the unsolvable…And then we provide the cash to fight.”
Despite hiccups, all the bets were never going to work out, things seemed to be going well. Most of the companies the Vision Fund invested in saw their market capitalisations soar. That translated into ‘on paper’ return on investment for the fund and its investors.
Why Is It Starting To Go Wrong For The Vision Fund?
The problem was, much of those returns were not based on the tech start-ups invested in generating any profits. Some didn’t even generate much, or any, revenue. The increase in valuations was largely simply down to the fact that the Vision Fund invested at eye-watering valuations, that encouraged other investors to then also invest at often even higher valuations.
But there are now signs things are not working out quite as planned. WeWork, the Vision Funds single biggest investment, has seen its valuation crash. By late 2018, fuelled by the steroids of over $14 billion of working capital invested by the Vision fund in three tranches, WeWork had overtaken JPMorgan Chase as New York’s largest commercial tenant and controlled more square feet in London than anyone but the UK government.
Within 12 months WeWork would have failed in its bid to go public with a stock market listing due to a lack of investor interest, co-founder and CEO Neumann would be out of a job and WeWork would come within two weeks of running out of money. SoftBank was forced to bail it out or lose every penny of the billions it had already ploughed in and slash the value of its earlier investments.
Source: Nikkei Asian Review
The WeWork car crash has fundamentally altered how financial markets, lenders and VC views loss-making start-ups with grand visions of world domination. It also led to, alongside a drop in the paper value of other Vision Fund investments that meant a $ billion loss registered for the quarter, a 99% collapse in SoftBank’s profits over the last quarter of last year.
Will The Vision Fund’s Investments Come Good?
SoftBank and Son were, until very recently, bullish on the Vision Fund’s progress towards longer term success, in the form of returns. But outside investors are now less confident, to the point the launch of the Vision Fund II, which targeted an even bigger $108 billion capital raise, was recently delayed. Investors are cautious about putting more money into Son’s vision, concerned at how wisely the first $100 billion was spent.
The second fund pushed ahead to launch earlier this week but the $2.5 billion handed out to a new cohort of start-ups came from SoftBank itself. The company has committed $38 billion of its own funds to the $108 billion total target but it now looks like the second fund could be half the size of the first, with most of the capital coming from SoftBank.
But can the original Vision Fund still come good? Son lost $70 billion during the dotcom crash almost twenty years ago before recovering through some stellar investments, such as a stake in Chinese ecommerce giant Alibaba. Is he heading down the same road to ruin again?
He is a visionary. On launching the Vision Fund he spoke of his “300-year vision” to catalyse a revolution. He sees humans living to be 200 years old, artificial intelligence chips augmenting the brain and telepathy supplant speech. And he sees his investments as going a long way to funding that revolution.
But has he been to bold and gone too big too soon? SoftBank calculates the net asset value of its businesses at $228bn. The market is more conservative. On Friday February 14th 2020, SoftBank’s share price closed on Friday at $24.85, valuing it at $103bn.
The Vision Fund’s holdings are the main reason for the discrepancy, ravaged by the collapse in the valuation of WeWork, its single biggest investment, now valued at $8 billion from over $40 billion just several months ago.
Indian hotels giant Oyo is also struggling to justify its valuation, with some suspecting it is heading in a similar direction to WeWork. It has pulled out of 200 cities in recent months and attracted accusations it faked listings and offered unlicensed guesthouses to boost the figures needed to keep investors convinced its pace of growth justified its huge valuation.
This month, one Vision Fund investment, Brandless, an e-commerce start-up from San Francisco Mr Son invested $100 million in two years ago, became the first in the portfolio to shut up shop. It almost certainly won’t be the last but Son would never have claimed he expected all of the fund’s investments to work out. That is the fate of private equity. It’s a numbers game. But it another black mark at a time little seems to be going right.
SoftBank’s VisionFund troubles have attracted Elliott Management, the New York-based activist investor run by billionaire Paul Singer. Bloomberg News has labelled 75-year-old Singer “the world’s most feared investor”. Elliott once seized a ship from the Argentine navy in a dispute over bond payment and habitually turns to the courts to force companies to toe the line.
Singer has taken a $3 billion stake in SoftBank. He is convinced that the company has become undervalued as a result of the Vision Fund mess and equally convinced he can turn the ship around if he can force Son into listening to him and restructuring the fund’s investment. He wants, among other things, for SoftBank to launch a $20 billion share buyback and to shake up its all-male board. Elliot considers only two of its 11 current members to be ‘independent’.
Son has called Singer’s input so far “constructive”, but he is also not used to be told what to do. Clashes seem inevitable. The question is will Elliott manage to put enough pressure on the right spots to perhaps balance out some of Son’s excess in a way that will ultimately benefit both parties?
The strategy for the Vision Fund II has already announced a change of direction with Son telling potential investors it will target companies that can reach profitability more quickly. And it will only take a handful of big wins for perceptions of the original fund to quickly turn around. Many of its bets are on companies developing technologies that it will take another several years to bring to market at scale.
But until some of those horses cross the line, the level of scepticism now around Son’s approach to his ‘300-year vision’, will mean he and SoftBank will have a harder job raising fresh, outside capital. In the meanwhile, more failures of the scale of the WeWork debacle could plunge the fund, and SoftBank itself into serious trouble.
A tightrope is now being walked. But at least Elliott Management seem ready to bet on it being far from game over for the Vision Fund, as long as some major tweaks are made to the way it is run.