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Softbank's Vision Fund: A 300-year vision with a case of myopia

By Kevin Kelleher , written on March 22, 2018

From The Money Desk

For decades, Silicon Valley venture capital has operated on the principle that bigger is not always better.

The dot-com bust left seasoned VCs with scars that still serve as a reminder that simply throwing money into emerging technologies isn't enough – it's identifying, and nurturing, the promising startups that works in the long run.

One battle-scarred veteran of the dot-com years has taken to flouting that lesson: Masayoshi Son, the founder and CEO of Softbank, a software distributor that turned into a telecom holding company and which now operates the largest technology fund in the world: the $92 billion Vision Fund.

Since it was announced in October 2016, Son's Vision Fund has become something of a juggernaut in the world of tech finance, wielding the mega-bulk of an outsize private-equity firm while aspiring to think like a venture capital firm. Most notably, the company owns a 15% stake in Uber, as well as similarly sized stakes in Didi Chuxing and Ola. It also owns at least 5% of WeWork, Nvidia, Slack, Flipkart, and others.

Many of the Vision Fund's investments are unicorns and decacorns that are lukewarm to hot at the moment, a portfolio loosely bound by Son's vision that Bloomberg summarized as investments in a future “where satellite networks cover every inch of the Earth and a trillion devices connected to the internet disgorge data into the cloud where it is analyzed by artificial intelligence.”

This is not a particularly radical or groundbreaking vision, or even a particularly deep one. It's not unlike what you would expect from a lay investor who follows the financial headlines. What the Vision Fund is really about is investing by brute force. The effects of this approach are being felt in a number of ways.

First, the Vision Fund will often supersize a round to raise more than a company was seeking: Wag wanted $100 million but Softbank invested three times more in January. DoorDash sought $200 million but a Softbank-led round this month raised $535 million. Such large rounds are good for increasing Softbank's ownership – and influence – in a company, but having more money than needed is not always in a startup's best interest.

Softbank's war chest, as IAC chariman Barry Diller and others point out, have stalled tech IPOs. Beyond that, in an IPO market where public investors are often demanding haircuts from private valuations, Son is often willing to pay a premium price to jump to the front of the line. And while many startups may prefer to remain private, the premium prices Softbank pays maintain or inflate a company's private valuation. Like the stock market or hate it, but it's a crowdsourced way to value companies more efficiently than Softbank does.

In addition to delaying IPOs, this approach is prompting VC firms to adapt. Sequoia is raising $8 billion for a global growth fund, along with another $4 billion in smaller funds, to compete against the Vision Fund. Battery Ventures, General Catalyst, Khosla Ventures and others are making similar moves, according to Fortune. As Polina Marinova noted, Softbank and the mega-funds it's inspiring could create a gap between “haves” - the lucky startups that receive more than enough capital – and the “have-nots,” that is, everyone else.

While the Vision Fund is making waves in Silicon Valley, they're not necessarily the kinds of waves that are welcome. Small investors who only have access to the public markets are shut out of these favored startups, which are awarded high valuations that may come back to haunt them later on. Other startups that could offer competition and innovation may languish. This is especially dangerous in a tech industry increasingly dominated by four or five giants.

Softbank may not be investing in innovation as much as its stifling it by anointing winners while the game is still in early innings. This is the brute-force effect in action. Softbank's Vision Fund is so big that, as Uber CEO Dara Khosrowshahi maintains, it's better to have Softbank as an ally than as a competitor. And while some CEOs like Khosrowshahi may label Son a visionary, there is evidence that Son has historically suffered from myopia - sharp on short-term opportunities, blurry on longer-term risks.

In the 1990s, Softbank made a smart bet by securing a majority stake in Yahoo Japan, which rocketed during the dot-com boom. Son followed with similar deals for other dot-com stars like E*Trade, E-Loan and Exodus Communications, which floundered or went bust in the early 2000s. Softbank shares lost 90% of their value in a single year.

After that, Softbank turned to telecom, buying Japan Telecom in 2004, the Japanese unit of Vodafone in 2006 and Sprint in 2012. In 2016, offered to pay $32 billion for ARM Holgings, designer of chips that power most smartphones, at a 42% premium to its stock price at the time.

In 2010, in the middle of this dealmaking, Son unveiled his 300-year vision for the company: “To contribute to people's happiness through the Information Revolution.” While Softbank's effect on happiness remains impossible to measure, its telecom portfolio has been struggling.

According to Softbank's most recent earnings, mobile communications revenue at its domestic telecommunications unit fell 5% in the last nine months while operating profit at the unit fell 6%. Sprint revenue fell 2% although aggressive cost cutting pushed its operating profit up 91%. ARM profit swing to a loss of $208 million as it hired more engineers. 

Last year, the Economist estimated that 95% of Softbank's market value last year came not from these properties, but – like its early partner Yahoo – from an early investment in Alibaba. Meanwhile, Softbank's mobile properties are in industries seeing saturation in both smartphones and wireless subscribers. And Softbank is growing eager to dispense of its holdings in them now that they are underperforming well before his 300-year vision has even begun to play out. Softbank is planning to list a 30% stake of its Japanese mobile businesses in a Tokyo IPO, while reportedly seeking a buyer for a quarter of ARM Holdings.

Softbank's overall operating profit would have declined in the last nine months if not for Vision Fund, which contributed $2.2 billion to its profit. As with the Alibaba investment a decade ago, the bulk of the gains came from a single investment, Nvidia, which has been on a tear in the past year. In its first year, the fund can boast about delivering successful returns.

Future success is far from sure. ARM CEO Simon Segars told the Wall Street Journal that the common thread he sees in the Vision Fund investments is personal data – tracking how people live, work and move. And yet Son is making this push during a year when a backlash to data collecting is growing, with users increasingly concerned about how it's being used and regulators in Europe and possibly the US discussing its use by tech companies.

And that's just a near-term uncertainty. The idea of investing according a 300-year vision is ambitious at best, given how unpredictable (if not prediction-defying) technology evolution has been in Silicon Valley. When Son presented his 300-year vision last fall, he drew notice for some if its loopier claims – not so much the singularity or chips inside brains, but slides hinting at telepathy with pets, the eradication death and despair, and junior-high-school level insights like “people long for love, and get hurt by love.”

That such a pitch could justify, let alone inspire, a $92 billion investment fund is itself crazy. While Apple, Qualcomm and Larry Ellison have invested in the Vision Fund, 95% of the money comes from Softbank and two sovereign funds from Saudi Arabia and Abu Dhabi. (Bahrain's sovereign fund may also invest soon.)

Beyond the talk of human happiness and information revolutions, Softbank's Vision Fund may be little more than a company-friendly interface for sovereign wealth funds. Meanwhile, the company is reportedly mulling a second mega-fund. Given Softbank's mixed track record to date, the fund's legacy may not be so much in 300-year returns, but in the short-term turbulence it's inflicting on Silicon Valley finance.