$108 Billion Up For Grabs: SoftBank-Led Venture Capital Fund Is Looking At New Avenues For Investment

SoftBank, one of the biggest venture capital companies in the world, is in the news again for its new $108 billion investment fund that is set to release capital across Q3 and Q4 of 2019, starting September, according to a report in the Financial Times.

The vision fund has an elaborate history of investments in industries such as enterprise, fintech, consumer-driven, frontier technologies, health technologies, cloud computing, artificial intelligence, real estate, logistics, and transportation, with Uber being one of their most distinguished investments, among several others.

The SoftBank Vision Fund debuted in 2017 with investment backing from the likes of Apple, Foxconn, ARM, Sharp Corporation, and sovereign wealth funds from countries including Saudi Arabia and the United Arab Emirates.

Companies from the first Vision Fund have been hailed as disruptors across the globe. These include Uber, Cohesity, Didi Chuxing, DoorDash, Fanatics, Flexport, Grab, InMobi, Kabbage, LanzaTech, Lemonade, Nauto, Opendoor, SoFi, and The We Company (better known as WeWork). From India, its most notable investments include Paytm, Policy Bazaar, Grofers, Firstcry.com, and Oyo.

As on 30 June 2019, the fund held investments in 81 companies, majority of them being in the transportation, logistics and consumer sectors. As per a report from May 2019, more than 80 per cent of the first Vision Fund’s $100 billion has been deployed in these 81 companies, and have generated over $11 billion in operating profit with an internal rate of return of 29 per cent as of March 2019.

Announced in July earlier this year, the second SoftBank Vision Fund will have $38 billion coming from the SoftBank Group Corp. itself while companies like Apple, Foxconn Technology Group, Microsoft Corporation, Mizuho Bank, Ltd., Sumitomo Mitsui Banking Corporation, MUFG Bank, Ltd.,

The Dai-ichi Life Insurance Company, Limited, Sumitomo Mitsui Trust Bank, SMBC Nikko Securities Inc., Daiwa Securities Group Inc., National Investment Corporation of National Bank of Kazakhstan, Standard Chartered Bank, and other major participants from Taiwan will add to the fund to take it to a staggering total of $108 billion.

The second fund is expected to drive investments in companies that usher tech-enabled growth and fuel the artificial intelligence revolution. As per some analysts, the need of having a second vision fund comes from the need to reduce dependency on Saudi Arabia, especially after the backlash the country received for the kidnapping and murder of journalist Jamal Khashoggi in October 2018. To sponsor its share of the fund, SoftBank may sell its shares in Alibaba and Sprint.

SoftBank’s second Vision Fund will have numerous consequences for the startup world.

Firstly, more investments for the startup world. With a lower limit of $100 million, the second Vision Fund will not only mean more capital for startups but quick capital as well. Given that the group is looking to begin deploying its funds beginning the end of Q3 this year, many entrepreneurs would be hoping to get their startup dreams going.

Two, it does impact the current investments of the group, along with the ones it shall make in terms of valuation. Clearly, a second Vision Fund will be instrumental in ensuring the sustainability of their existing portfolios. However, this may create a valuation bubble as with greater paycheques, investors and markets may overestimate the financial health of these startups.

Three, more unicorns in the making. Already, notable investments from the first Vision Fund have gone to be major disruptors in the realm of transport, logistics, and fintech. With a steady growth of internet users across the world and digital industries driven by a surge in consumer demands, data analytics and AI will have a critical role to play going forward. This is where the fund could be instrumental in creating more unicorns.

Currently, SoftBank tops the charts in India when it comes to investments in unicorns, having made investments in seven of the estimated 18 such firms. Globally, SoftBank has 38 unicorns under its portfolio.

Four, it will alienate competition and low investing venture capital groups. Investors, naturally, tend to park their money in startups that are backed by the likes of SoftBank. While this may amount to greater valuation and capital for these unicorns in the making, it does make it difficult for startups backed by small venture capital groups to gain traction or investments. This, in turn, again poses a risk of the startups backed by SoftBank to be overestimated on the stock market.

Five, the $108 billion promise may not amount to an ideal end for all startups, but will have staggering economic consequences elsewhere. As Uber had an impact on the auto industry, Oyo on the hotel industry, and so forth, startups backed by SoftBank will not only change how people in varying economies go about their consumption but will amount to consequences, both good and bad, for other sectors.

However, one challenge that SoftBank may wish to address going forward is that of mythical unicorns.

A case in study here is Uber, which just reported its quarterly loss of $5.2 billion after a ‘strange’ debut at the stock exchange earlier this year in May. The shares for Uber were sold at $45 each on its opening day. However, the price fell on the very first day of the trading, leading to a loss of more than $600 million for the investors, the biggest first-day IPO loss in 44 years.

If Uber’s losses from Q1 and Q2 of 2019 are put together, they amount to $6.25 billion with a revenue of $6.3 billion. For a company that has been around for almost a decade now, the losses are worrying. In 2018, Uber lost $1.8 billion.

If one were to excuse Uber’s stock-market compensation for Q2 2019 (amounting to $3.9 billion), the company has no formidable business plan for the future.

For Uber, their hope to turn profitable and ensure high returns on the investor money they have burned across years lies on two fronts, self-driven cars that eliminate driver costs and bigger markets like the ones in India; plans where plenty can go wrong.

With SoftBank’s second Vision Fund, Uber will find a new lease of life and new excited investors looking to pour (read burn) their money. However, it will be a race against time for the likes of Uber to showcase profitability and not be another chapter in the history of stock market bubbles, following the dotcom bubble in the early 2000s.

For SoftBank, the objective would be to ensure a better world, for at the end of it all, they wouldn’t want to be the company that triggered the first stock market bubble of the 2020s. The $108 billion promise of a world driven by AI and data is welcoming, but the underlying faultlines must not be ignored.