SoftBank Vision Fund and the raise of Venture Mega-Funds
Venture capital is a form of financing that supports small, emerging firms. They exchange funds for equity in firms with the potential for large growth. Venture capital firms will make investments in various stages (rounds) with hopes of growth and thereby fruitful returns. The returns come in the form of exits. Exits provide the funds means of liquidity. Liquidity is a means by which to convert assets into cash. For VC firms, liquidity usually comes through acquisitions or initial public offering. (HBR, 1998)
Venture capital firms are structured as partnerships. A fund for the firm consists of investments from limited partners (LPs). Examples of limited partners include public pension funds, corporate pensions fund, high net-worth individuals among others. The general partners of the fund then function as the managers of the fund. They search for and assess possible investment opportunities.
Renown venture capital firms include Andreessen Horowitz, Sequoia, and Accel.
In 2017, SoftBank, Billionaire Masayoshi Son’s company, put the finishing touches on a 100 billion dollar fund, the Vision Fund. Purely, by its size, the fund distinguishes itself from other funds. (Crunchbase, 2017)
The size of the firm allows it to make strategic moves that are not available to others. Take for example, the firm’s moves in the riding sharing space. Softbank has made investments in riding-hailing players Uber, Didi Chuxing, Ola, Grab, and 99. (Crunchbase, 2017) While not initially investments as part of the Vision Fund, the intent is to move the investment into the Vision Fund. The scale of the investments allows the firm to meditate “synergies” in the space occurring to Masayoshi Son. (Economist)
The scale of the investments, however, comes with concerns. Concerns that the firms will become overvalued. Venture Capital is largely built on investing small in hopes of large returns. However, given the scale of Softbank’s investments, there is a limited number of ventures that have the potential to provide meaningful returns. As a hopes to diversify its portfolio, the fund may end up giving out investments that are beyond the needs/potents of growing startups.
The Vision Fund is aiming high, but there are questions over whether there are enough superstars for the fund. For example, SoftBank invested 4.4 billion in WeWork. That investment, however, has WeWork now valued at roughly $20bn. Is WeWork, seemingly a property company, worth those numbers? Or is maybe a promising venture being carried by being evaluated as a technology firm and aggressive investing? Only time will tell.
The aspirations of Masayoshi Son have affected not simply the future of startups around the world, but venture capital itself. The Vision Fund’s impact on the North American funds has already started to show itself. Seemingly as a counterbalance to the Vision Fund, there has been a rise in Mega-funds. For example, Sequoia seems to be in the midst of raising a 10+ bn fund. As successful late-stage ventures continue to delay their initial public offerings, the larger funds by prominent firms are likely attempts to not be priced out of late venture investments. (Economist)
The Vision Fund will undoubtedly greatly impact numerous industries, including venture capital itself. Only time will tell if the fund finds enough Alibabas (Alibaba being Son’s most successful investment to date) to meet the astronomical aspirations of the fund.
References:
- https://hbr.org/1998/11/how-venture-capital-works
- https://www.crunchbase.com/fund/softbank-raised-softbank-vision-fund–abf5a098#section-overview
- https://www.economist.com/briefing/2018/05/10/the-impact-of-masayoshi-sons-100bn-tech-fund-will-be-profound
- https://www.economist.com/leaders/2018/05/12/the-meaning-of-the-vision-fund
