VC funds hoping to ride out the current inflationary cycle should rely more on their portfolio company’s technology stack, according to Navneet Govil, managing partner and chief financial offer at SoftBank Vision Fund.
His comments were part of a spotlight discussion conducted by parent company PEI Media’s editorial director Rich Melville and Govil at this year’s virtual PEI CFOs & COOs Forum.
“The best predictors of success of our portfolio [during this time] is the quality of the technology stack of that portfolio company, the size of the addressable market and the focus on unit economics and scalability,” Govil said. “Even though inflation is important, if you get any of those other things wrong, the company is going to fail regardless of inflation.”
SoftBank Vision Fund’s investment thesis focuses on “investing in the most disruptive technology companies that leverage AI,” and since the Vision Fund is in its fourth year of a 14-year trajectory, Govil feels the firm can ride out business and inflationary cycles, despite the fact that longer-duration assets are typically more affected by inflation.
US inflation surged the most in 13 years as consumer prices rose 5 percent in May, compared to a year ago.
While SoftBank chalks up recent inflationary concerns as a market headwind stemming from the covid-19 pandemic, larger changes between public and private markets have slightly shifted the firm’s outlook as it prepares its nearly 150 portfolio companies for exit.
“Pre-covid, we were seeing a divergence in private and public market valuations,” Govil said. “Private companies were fundraising from institutional investors at valuations that one could argue were higher than public valuations. Covid has totally reversed that trend.”
“Public markets are constructive, valuations are high and therefore more attractive from a fundraising perspective, but at the same time, public markets are more volatile,” he added.
In recent months, the firm has also set up three separate SPAC vehicles, helping it traverse between its public and private market strategies.
“They’re basically designed to be a complementary bridge between SoftBank’s private and public investment strategies by enabling us to partner with fast-growing IPO-ready technology companies,” Govil said.
“For whatever reason, there may be certain companies that we would have wanted to invest in, but we really didn’t have a vehicle that was ready to partner with them at the time of the IPOs. We thought SPACs would make sense.”
In regards to other post-covid-19 trends that are capturing market attention, the firm also maintains a multi-pronged ESG strategy: two programs providing opportunities to underrepresented founders, which take the form of an eight-week accelerator program – which is in its second year in the US and just launched in Europe – as well as its $100 million SoftBank Opportunity Fund serving underrepresented founders, which has made more than 40 investments thus far.
The firm is also aligned with the Paris Agreement’s One Planet initiative, as well as carbon offsetting through China.
While the firm is on pace to participate in more deals than ever this year (69 as of mid-May) as part of its second Vision Fund, the firm has already returned more than a quarter of the money it received for its first fund.
“In the first fund, having invested about $86 billion, we’ve already returned $22 billion, which is very remarkable,” Govil said.
Vision Fund 2 is also hard up on commitments for the moment, as those LPs hoping to get an allocation may have to wait.
“We never say never,” Govil added. “But at this point, we’re not looking to raise money from outside investors.”