Home/ Opinion / Columns/  Sequoia and Tiger Global are leaving SoftBank far behind

If the fiascoes at WeWork and Greensill Bank were not enough, Klarna Bank should serve as another fine reminder that SoftBank Group Corporation is the unluckiest whale in a crowded venture capital world. Its founder Masayoshi Son somehow always manages to hold the worst cards.

Klarna, a Sweden-based fintech company best known for its buy-now-pay-later offerings, is currently in talks to raise about $650 million—mostly from existing investors led by Sequoia Capital. If completed, this deal would reset Klarna’s valuation to $6.5 billion, a fraction of the $45.6 billion it was priced at just a year ago in a $639 million funding round led by SoftBank.

It is a round-down of an epic scale— unless you are SoftBank. Two years ago, the $100 billion Vision Fund manager slashed its WeWork valuation to $2.9 billion from $47 billion in 2019. While the absolute dollar amount involved with Klarna is much smaller, the blow to Son’s reputation for evaluation is nonetheless just as damaging. The second Vision Fund will soon have to write down its Klarna stake, wiping out much of its returns. On 31 March 2022, this $56 billion fund recorded only $0.8 billion investment gains. A SoftBank Vision Fund spokesman declined to comment on the queries sent by us.

Meanwhile, Sequoia’s Michael Moritz, who also serves as chairman of Klarna, appears to have played his cards well. Sequoia was backing Klarna as early as 2010. And since then, it has led a funding round in 2014 with a reported $1.4 billion valuation, and invested again in 2019 at $3.5 billion. As of March, it was Klarna’s largest shareholder.

Unlike SoftBank, this deal will not force Sequoia to record unrealized losses, because it had invested early. But more importantly, with a global recession now looming large and Klarna in need of capital as buffer against fast worsening consumer balance sheets, why should Moritz care if Son’s unicorn valuations are crash landing again?

It is also worth pondering if SoftBank’s Klarna blunder was a panic response to recent seismic changes to the wider world of venture capital, most notably the arrival of New York-based hedge funds. SoftBank started losing access to the hottest startups because the newcomers could write bigger and faster checks.

Last year, Chase Coleman’s Tiger Global Management overtook SoftBank as the world’s busiest venture capitalist. Tiger was a money magnet, raising almost $20 billion in the span of just one year for two new funds. The asset manager had tapped into its banking relationships, reaching investors as wide-ranging as private wealth clients.

Granted, Tiger is a threat to Silicon Valley venture capital funds too. But Sequoia found a solution, overhauling its structure to become an investment advisor just like Tiger, as a way to attract investors who prefer a one-stop shop.

Sequoia is reportedly raising money for two new US-focused funds, valued at up to $2.25 billion. Its Chinese affiliate is about to close $9 billion in fresh capital, the biggest pool of money ever raised by a single venture capital firm to bet on local tech startups.

SoftBank, on the other hand, has no defence against Tiger. The company had to go it alone, self-funding the second Vision Fund. To make matters worse, now that capital is no longer his special edge, Son shifted to a spray-and-pray mode. As of March, his second Vision Fund made 252 investments, versus only 94 for the much larger first.

A second major challenge in the VC world is how to retain talented fund managers, who can simply quit and set up their own businesses. As a result, compensation has been soaring and the new structure deployed by the likes of Sequoia can help minimize pay disputes among partners.

Alas, SoftBank has no solution to that either: It has been suffering from a brain drain. The most high-profile departure, in January, was that of former chief operating officer Marcelo Claure, who had helped turn around the troubled WeWork. Claure had apparently asked for up to $1 billion in compensation; he got $34 million in severance pay instead. In April, two of the three managing partners at the company’s Latin America Fund left to start their own venture business as well. So it is questionable just how good SoftBank’s newest investments are—or will be.

Call it karma, or just life coming full circle. Five years ago, SoftBank disrupted the venture capital world with its eye-popping $100 billion Vision Fund. Now, its value proposition is under attack from almost all corners. A disruptor is getting disrupted, perhaps even crushed.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets.

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Updated: 07 Jul 2022, 10:31 PM IST
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