In his absorbing book The Everything Store: Jeff Bezos and the Age of Amazon, author Brad Stone, while throwing light on how big the online retailer has become, also talks about how the term Amazon has informally entered the business lexicon, and not in an altogether favourable way.

To quote, he says, to be “Amazoned" means “to watch helplessly as the online retail giant from Seattle vacuums up the customers and profits of your traditional brick and mortar business".

A similar phenomenon is playing out in the venture capital industry, and to borrow a nugget from Stone’s book, an apt descriptor would be “SoftBanked", where other investors have no choice but to watch the rise and rise of SoftBank as an unstoppable force with a disproportionate amount of capital, changing the rules of the game for start-up investing.

Last year, SoftBank led by Masayashi Son, the Japanese telecommunications mogul, floated a $100 billion SoftBank Vision fund, giving shape to the world’s biggest technology investment fund.

Since then, Son has been on an investment spree globally, picking up stakes in a variety of businesses. Last year, SoftBank was involved in more than half of the top 10 biggest investments in VC-backed start-ups. Such influence is having a trickle-down, but rattling, effect on other VCs.

“We will usually not fund any start-up in the space where SoftBank has already invested, unless it is fundamentally unique. In transportation, we have left a lot of start-ups centred around the themes of bike riding and bike sharing. We would look and say it’s a great theme, but is it going where we want it to go? In most cases, we really didn’t see it going our way because of the competitive advantage that existing big players have," Karthik Reddy, co-founder at Blume Ventures, an early stage start-up fund, told me in a Facebook Live interaction.

The term “competitive advantage" or rather “SoftBank advantage" holds the key here.

This column has earlier pointed out how the mammoth fund can create the “SoftBank Advantage" and pretty much that scenario is playing out now.

Often, funding itself can pick winners. For instance, look at what happened in the case of Flipkart versus Snapdeal—the two homegrown e-commerce poster boys with little differentiation. 

While one can argue about the individual track records of these ventures, at the heart of the matter is the fact that SoftBank pretty much decided the fate of these companies—it chose to pull the plug on one and provide a lifeline to the other. Now, with SoftBank emerging as a meaningful shareholder in both Ola and Uber, a looming fear among Ola’s investors is over getting “SoftBanked"—as among Snapdeal’s early backers.

Such fear is not without reason. Imagine five companies working on similar ideas and with similarly capable teams. The one with most funding can spend more on marketing, hire better people, find more channel partners. That is where a SoftBank has an edge over other VC funds since it can back companies right up to writing multi-billion-dollar checks. Now, if an entrepreneur has to choose SoftBank vs. a competing Silicon Valley fund, whom will they choose? What if SoftBank’s valuation is lower? Entrepreneurs would rather go to SoftBank since it is unlikely that other funds will outspend you. Even more importantly, competing funds might hesitate to back competitors if they know that the winner has already been picked. This is creating the “SoftBank Advantage."

Other VC funds are beginning to feel the heat. According to a report in Recode, Sequoia Capital, one of Silicon Valley’s most famous venture capital firms, is now raising a new fund that could be in excess of $6 billion.

Sequoia, which is feeling pressured to raise more capital, will also convince founders to take their money instead of or alongside SoftBank’s, the report added. 

Such trends pose the question—is SoftBank a friend or an enemy? Or a combination of both—the new frenemy? “Depends on which side of the table you are. If you are invested in a company where you are expecting them as the next stage investor, they are a big friend. If you are invested in a company competing with the one where they have invested or are investing, they are a big enemy," Vikram Gupta, founder of IvyCap Ventures, early stage venture fund tells me.

At this juncture, it becomes important to understand the ambitions of SoftBank. A SoftBank deck from June 2010 helps understand how Son sees the world. For one, he has a 300-year view of SoftBank’s growth strategy.

Son is of the view that artificial intelligence combined with data gathered by billions of sensors will bring on an “information revolution" that will benefit people more than the 19th century Industrial Revolution.

In the deck, there’s a slide that outlines the market cap of companies during the Industrial Revolution, including Pennsylvania Railroad, U.S. Steel, and Standard Oil. The next frontier, he believes, is the data revolution. 

SoftBank’s investing prowess is also proving beneficial for its shareholders. SoftBank is silently beating everybody’s expectation in terms of returns, thus appearing as a profitable opportunity for investors.

According to Bocconi Students Capital Markets, citing Chris Lane of Sanford C. Bernstein & Co., who compared SoftBank with Buffett’s Berkshire Hathaway, a 10-year investment in SoftBank would have outperformed both the corresponding market index (the Japanese Nikkei) and Berkshire Hathaway by yielding a return of around 300%.

It becomes important to ask where this exceptional track record comes from. It is clear that Son’s firm leverages the huge cash generated by telecom services and invests in those companies which are going to shape the world of tomorrow, such as AI, e-commerce and robotics. 

This is SoftBank’s business model, whose exact definition is hard, given the diversified activities pursued beyond the telecommunication operations.

But like Berkshire Hathaway, the essence of SoftBank’s strategy seems to be more and more of this: “value investing" or say “tech-focused value investing".

Shrija Agrawal is Mint’s deals editor. Due Diligence will cover issues in India’s venture capital, private equity and deals space.

Close