If the old saying ‘Bigger the better’ holds true for venture funding, then nothing compares to the SoftBank’s Vision fund. To put things in perspective – Softbank’s $97 billion vision fund is bigger than next big 5 funds combined that includes some marquee names – Blackstone, Apollo, TPG, Goldman Sachs, and KKR. SoftBank has emerged as an unstoppable force with a disproportionate amount of capital, changing the rules of the game for start-up investing.
It was then little surprise when Softbank announced the creation of its Vision Fund II, with a corpus of over $ 108 billion, ripples were sent down the startup-VC landscape. The impact of vision fund on the VC-startup landscape is unprecedented, to say the least.
The short term to medium term impact can be looked at in five different ways:
1) Even bigger cheques – VCs typically have to deploy funds in 3-5 years. It means Softbank will have to deploy upwards of $ 20 billion each year. Prior to the Softbank era, late stage VC funding were in the range of $ 20-70 million. Softbank upped the ante and took it to a different level. For its Vision Fund I, Softbank has set a floor deal size of $ 100 million. It is likely that the floor deal size will continue for the Vision Fund II, if not increase, considering the size of annual deployment target of Softbank.
2) Pressures on valuation – There have been concerns, expressed in circles, that large ticket sizes of Softbank is inflating the pre-IPO valuation. With the ability for sOn one hand, the recent failure of Uber and Lyft in the IPO market, seems to indicate some truth behind this. The valuation of Uber as on yesterday was US$ 75 billion – that is lower than last round of pre-IPO valuation at which Uber secured funding from Toyota Motor Corp. On the other hand, India’s very own Flipkart deal –in which Softbank reportedly made upwards of 60% ROI – may suggest that there is life beyond IPO exits.
3) More money for existing Softbank backed Unicorns - Softbank is unique. Not only in terms the size and valuation of its deals, but the kind of faith it shows in backing its startup promoters. With Vision II in the horizon, one can expect more cheques for existing startups funded by Softbank – Oyos, Olass and Paytms of the world. The interesting thing to see, however, is how the young promoters of these startups manage another tsunami of capital.
One can hope that the new funds in existing unicorns are used to create better technologies, enable growth and further the disruption quotient. A case in point being Oyo where the funds were used to consolidate promoter’s shareholding – not the best use of funds, some feel.
4) Softbank Advantage To Deepen – Softbank has been a trendsetter in size of deals. And any cap table, where Softbank features, attracts more investors. With Softbank investing big money in a startup, its chances of success, or atleast the perception of it, goes up and everyone wants to back such a winner. While this may be good for Softbank and other investors, it may not be the best result for the tech and startup eco-system. The gap between a Softbank backed company and its competitors will widen further. Competition enables innovation, and winners in a tech eco-system should emerge because of innovation and better products, and not necessarily due to access to better capital.
5) Other VCs are forced to change their game: Funds such as Sequoia, CHG, Hillhouse, KKR, Khosla, Catalyst are all raising mega funds. As a result of the big-ticket sizes, VCs will also have to be much more patient with their investment, fundamentally altering their investment models. There is a problem with this scenario – VC typically target 3x return on investments to commensurate for the cost of investment, fees etc..
Watch: Softbank's Second Act - An impact decode
In pre-Softbank era, a $1 billion VC will need to create $ 3 billion to be successful in 7-10 years. Sounds practical and achievable. Now substitute $1 billion with $100 billion, the return expectations goes up to $300 billion. In the last 20 years of tech journey, we have created just 2 companies, valued over $300 billion, Facebook and Alibaba - 1 in 10 years. But may be things have changed and the face of value creation has fastened with funds such as Softbank.
One interesting thing to note in Softbank’s second outing is that there has been a signifiant churn in the limited partners (investors in private equity funds) pool : while some high profile names such as Apple and Microsoft have been added, the absence of any mention of the governments of Saudi Arabia and Abu Dhabi which between them contributed 60 per cent of the first Vision Fund is glaring. Also, there appears to be a further tilt towards participants holding preferred debt, rather than equity.
Lastly, SoftBank’s first $97bn “Vision Fund" was the biggest private pool of money ever raised and turned Masayoshi Son into the most important tech investor in the world. It remains to be seen if his second act will consolidate this position further. Whatever the case maybe, the annals of venture capital will soon be defined by pre-Softbank and post- Softbank era.