SoftBank’s record-breaking $97 billion (£74bn) Vision Fund 1 was the largest private equity fund ever when it launched in 2017. But its strategy of investing a minimum of $100 million (£76m) to rocket each startup to market dominance meant that in less than three years, the fund burned through more than $80bn (£61bn).
Nevertheless, in July 2019, Softbank founder Masayoshi Son announced plans for a second, even more extravagant investment vehicle worth up to $108bn (£82bn): Vision Fund 2. But to date, the only confirmed investor remains SoftBank itself, with a $38bn (£29bn) pledge.
Saudi Arabia’s Public Investment Fund (PIF) is Vision Fund 1’s biggest backer. It staked $45bn (£34bn) on the success of the fund. But sources close to the funding negotiations claim that PIF has suspended plans to invest in the new venture for now, after Vision Fund 1 posted losses totalling $8.9bn (£6.8bn) at the end of last year.
“The Saudis are quite clear that without Vision 1 succeeding, there will be no more money,” one source says. “MBS [the crown prince of Saudi Arabia Mohammed Bin Salman] told Masa [Son] that until Vision 1 is in good shape, there’s no commitment for Vision Fund 2.”
Another source close to PIF said that there are “adversarial debates” going on within the organisation about the decision to invest in Softbank’s first Vision Fund, and the lack of accountability regarding the deployment of the capital. “I don’t think they knew what they were getting into,” they explain, referring to Son’s style of investing – a “shoot first and ask questions later” approach.
“They’re going to make sure that if they put money into the second fund – and I think that’s a big if – there are going to be controls, accountability, responsibility, and the kinds of things that are necessary if you’re going to deploy that kind of capital with one manager.”
PIF declined to comment and a SoftBank spokesperson said fundraising for Vision Fund 2 is progressing.
Vision Fund 1’s losses followed WeWork’s implosion (that saw the startup’s valuation tumble from $47bn (£35bn) to $10-12bn) and Uber’s underwhelming IPO last year. But these aren’t the only SoftBank companies that are floundering. Several have been rocked by rounds of lay-offs in recent months including Indian hotel startup Oyo, Colombian delivery startup Rappi, peer-to-peer car-sharing service Getaround, and Zume, the formerly-robot-pizza-but-now-plantbased-packaging startup. Since January 2019, Vision Fund firms have made over 10,700 employees redundant, according to New York University professor Scott Galloway.
This was coupled with a drop in value of most of Vision Fund 1’s listed investments between July and September 2019, including Uber, Slack Technologies and Guardant Health, according to a report from CNBC. And a recent summary of the first Vision Fund portfolio shows that its stake in transportation and logistics companies is worth $31.1bn (£23bn) as of September 30 – less than the original cost of those investments. The value of the real estate investments also dropped – the holding is now worth $7.5bn (£5.7bn), down from the $9bn (£6.8bn) that Vision Fund originally invested.
“We would not put, as PIF, another $45bn if we didn’t see huge income in the first year with the first $45bn,” bin Salman told Bloomberg in May 2018. Vision Fund 1 had invested $70.7bn (£54bn) in 88 companies at the end of September. Those investments were worth $77.6bn (£59.4bn) excluding exits, it told Reuters in November 2019. PIF’s lack of commitment to Vision Fund 2 indicates that from its perspective, the desired “huge income” has not yet materialised.
SoftBank initially announced that Microsoft and Apple were among Vision Fund 2’s potential new backers, but neither have publicly committed to investing in the fund. Both companies now declined to comment on whether they will make an investment in the fund at all.
A spokesperson for SoftBank said: “Fundraising is progressing as expected as investors assess potential commitments to Vision Fund 2.” Vision Fund 2’s first close in November 2019 raised a relatively disappointing $2 billion.
Vision Fund 2 is technically operational, but has yet to announce any investments. In early January 2020, it backed out of three deals with startups Honor, Seismic and Creator.
A source knowledgeable about the negotiations said: “My high level take is they are still operating like they have Vision Fund 2, but it would appear that they don’t actually have Vision Fund 2 – at least not yet. Because they’re clearly doing deals, writing term sheets, negotiating term sheets, doing diligence. But then at the last second, they’re walking. It doesn’t make a lot of rational sense because it is very damaging to their reputation. It’s kind of unprecedented really.”
People familiar with the dealings between SoftBank and start-ups Honor, Seismic and Creator told Axios that the firm repeatedly delayed the final sign-off on their investments before finally dropping them altogether – although sources at Creator told Axios that negotiations remain active. A venture capital investor in the technology space called pulling startup investment at the last minute a “cardinal sin”.
There could be a few reasons for this unorthodox behaviour. SoftBank may have wanted to keep the pipeline of deals open. It may have initiated the deals (which take a few months to finalise) when it thought Vision Fund 2 would have the requisite funds, or it may have believed that it could fund the deals through an alternative source that didn’t pan out.
Either way, it has done little to silence serious questions about the future of Vision Fund 2. Many of the sources we spoke to referred to the potential reputational damage that the shaky performances of Vision Fund 1 companies are currently inflicting on SoftBank.
“SoftBank has taken the position that they add significant value by virtue of the fact that they invest with you, and everybody thinks you’re great because SoftBank has invested with you. I can report to you that that’s now changed,” a senior investment professional says. “There’s any number of deals that we’ve had where we would not take money from SoftBank.”
Another VC claims that even if SoftBank manages to regain the trust of investors, it also needs the trust of startups. “Forget about ‘Can they raise the fund?’, it’s going to be very difficult to deploy it in the best deals at this point,” the VC says. “If I was him [Son], I’d do everything I could to raise that fund. It doesn’t have to be a $100bn fund. It could be a $50bn fund. Do something.”
But although Vision Fund 1 – and by extension, SoftBank – is currently plagued by negative news coverage – a turn-off for investors – it’s too early to say whether it will be able to recover or not. Vision Fund 1 still boasts investments that are performing well. Notably, the UK semiconductor and software design company ARM holdings is a triumphant success story.
If the fund does go ahead though, there are signs that the hubristic approach of the first time around will be tempered. Son has admitted to being “embarrassed and flustered” by his recent track record. CNBC reported that Son was considering focusing the investment strategy of Vision Fund 2 on profitability and public offerings, rather than rapid growth alone, according to people familiar with the matter. But whether the fund will ever get off the ground, is another matter.
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