Written by David Odusote
If you had $100 billion to spend, how would you do so in the next five to ten years?
That’s the question Masayoshi Son and his Japanese conglomerate holding company, SoftBank, faced when it raised $100 billion for their Vision Fund in 2017. However, in spite of its ambitions, SoftBank’s Vision fund is facing scrutiny over its investment strategy.
The Vision Fund is the largest technology fund in the world – the entire Venture Capital market in 2018 raised half of what SoftBank raised for the Vision fund, $55 Billion. According to the company website, the Vision Fund supports mid to late-stage companies who will enable the next stage of the information revolution. The fund’s investments span three areas.The first encompasses companies designed to bring new technologies to old industries, such as transportation and real estate. The second is media and telecommunications, a sector in which SoftBank has been investing in for 25 years. The third is the “Frontier.” Mr. Son is obsessive over “Singularity” – the scenario when computer intelligence overtakes human kind. Hence, the “Frontier” involves companies backing Mr. Son’s instincts about revolutionary technology, such as, the internet of things, robotics, computational biology, and genomics.
The Vision Fund has a heavy-handed investment approach. It surveils and identifies market leaders in its industries of interest. It invites the companies for conference meetings, and discusses strategic opportunities to help improve their business model. Most importantly, the Fund offers more money than the companies’ representatives suggest – a taboo in Venture Capital funding – threatening to put cash into a rival firm if the companies fail to capitulate. This aggressive investment strategy proved to be a surprising success. It helped Softbank invest in high-profile companies, such as Uber, DoorDash, WeWork, and Didi Chuxing Technology Co. Moreover, its unwitting success incentivized the fund to pour about $85 billion worth of capital into more than seventy companies in less than three years, as opposed to the original plan to invest over a five year period.
The fund’s investment strategy is uniquely predicated on a “power of capital” ethos which causes the fund to oversize its portfolio companies’ valuation and encourages corporate indisciple.
The ethos hypothesizes that removing a company’s constraint to capital can help it scale enough to dominate its respective industry. Hence, the fund injects outsized amount of capital into its portfolio companies. For instance, it invested $2 billion in, WeWork, at the beginning of this year – down from an original $16 billion due to pressure from the fund’s Saudi Arabia and Abu Dhabi investors. In doing so, the fund has more than doubled the valuation of the office space leasing company from $20 billion to $47 billion. In fact, according to the Wall Street Journal, since its initial investment into WeWork in 2017, the Fund has helped to inflate the company’s valuation by 113%.
Company valuation is an important metric in the financial markets. However, an inflated company valuation often doesn’t correlate with healthy unit economics. For instance, WeWork is often compared to International Workplace Group (IWG), a European based office space leasing company. Comparing the two companies, WeWork has less customers, works in less locations, and operates with a smaller square footage. Most importantly, the European based company has higher revenues and is actually profitable. In fact, the only metric in which WeWork overwhelms IWG is company valuation. WeWork is valued at thirteen times that of IWG’s $3.7 Billion market cap.
The Vision Fund’s underlying investment ethos is mischaracterizing the financial success and probably the business potential of some of its portfolio companies. Removing a company’s constraint to capital doesn’t always help it achieve operational efficiency and impressive financial returns. Therefore, some of the fund’s portfolio companies have struggled to make an impression under the scrutiny of public investors. Uber and Slack’s stock has slumped 36% and 40%, respectively, since their IPO, and they are unlikely to recover soon.
The Vision Fund’s investment ethos also pursues a hands-off approach. According to CNBC, the fund is often not proactive in areas such as corporate governance. Start-up companies usually require two things from venture capitalists: money and corporate guidance. However, the fund believes that outsized capital investments would compensate for its role to provide its portfolio companies with a strong corporate structure and operational support. As such, the fund’s investment ethos has indirectly facilitated bad corporate governance among its portfolio companies.
Some of its portfolio companies have suffered harsh critiques from investors over their lack of adequate corporate governance, but none so much as WeWork. Like many tech companies, WeWork has a dual-class stock structure. This ensured that founder and former CEO, Adam Neumann, controlled the destiny of the company. Unfortunately, Neumann often engaged in egregious insider dealing, extracting value out of the company for self benefit. Moreover, he placed several of his relatives in critical parts of the business to further consolidate his control. Masayoshi Son has admitted that in the midst of investing heavily in WeWork, the Vision Fund turned a “blind eye” to WeWork’s misdeeds. Thus, the Vision Fund’s investment ethos is partially the cause of WeWork’s disastrous IPO. Moreover, it contributed to a $8.9 Billion investment loss for SoftBank in Q3.
SoftBank and Masayoshi Son set out with the Vision Fund to influence the next stage of the information revolution. However, they must work to tweak the investment strategy of the fund if they intend to reap success from their investments.