SoftBank remakes venture in its image

Venture capital has entered an era of mega checks, expanding fund sizes, ever larger rounds and delayed exit timelines.

It’s also arrived at the age of the SoftBank Vision Fund, the largest ever fund to target venture investing. At $98.6 billion, the fund is not just a gutsy break with the past, but a powerful force muscling its way into deals and designed to make the most of venture’s frothy environment.

With two years of investing under its belt, the impact of this colossus is becoming amply clear. And venture capitalists better take notice.

In a sense, the Vision Fund is a sign of its times. The world of venture investing has grown. Capital is plentiful and so are new places to deploy it: China, Singapore, Bangkok, Brazil, Eastern Europe.

Demand is growing equally strong in traditional venues, particularly the United States, but also Israel and Western Europe.

All this is in part because innovation is changing. Startups focus more on disrupting established industries slow to move to the internet than on creating the new markets of a generation ago, such as the ones for the microprocessor and personal computer.

As companies try to blow up large established businesses, they can absorb bigger checks. Giving them the money makes sense. They have global aspirations. They accept longer time horizons to exit. They are not simply trying to figure out channel strategies for a single domestic market.

The SoftBank Vision Fund’s modus operandi fits this new world to a T. It has willingly supplied abundant capital to this third era of internet investing, as it has shown with big bets on young companies, such as Uber Technologies, the We Company and Flexport. In the process it hopes to reshape the competitive landscape and earn a say in products and industries of tomorrow.

SoftBank plays into another trend as well. So-called private IPO financings are displacing public ones as young growth companies delay going public and investors prove eager to concentrate their bets on a handful of perceived breakout businesses during their high-growth years.

It is a trend SoftBank did not bring about, but one it is has not fled.

Now with SoftBank talking about raising a second vision fund, and perhaps increasing the capital available for technology investing by as much as 70 percent, its stamp on venture investing seems all the more indelible.

Paul Holland, general partner, Foundation Capital. Photo courtesy of the firm.

When it comes to the SoftBank Vision Fund, “it’s really not been done before,” said Paul Holland, a general partner at Foundation Capital. “It’s, ‘Let’s get in and let you stay private a lot longer and really build a company.’”

The fund has largely stuck to its playbook during its first couple years, showing itself to be a long-term investor and eager to take minority and majority stakes in businesses representing the next age of innovation. It looks for companies with the potential to build multi-billion-dollar businesses and injects them with substantial capital under the assumption they will dominate the markets of tomorrow.

The idea is that big checks not only anoint a market leader but permit faster growth and intimidate competitors.

Menlo Siegel Crossovers
Mark Siegel, managing director, Menlo Ventures. Photo courtesy of the firm.

Quite likely the firm is pleased with its portfolio, said Mark Siegel, a managing director at Menlo Ventures, whose firm worked with SoftBank during its Uber financing. It has been bold and, in the process, changed the competitive landscape, Siegel said.

“I would argue they have done what they set out to do,” he added “It’s been transformative.”

In the process, the SoftBank Vision Fund has not tried to play by the existing rules. It didn’t come into the businesses attempting to one up the company-building skills of existing firms. Instead it attempted to create a competitive advantage for a company in a different way, through the sheer size of its fund.

“They are betting on very long-term trends” and as a result can be less price sensitive, Siegel said.

An example of the strategy is the Menlo investment Getaround, which SoftBank backed in $300 million round in 2018. Building a car-sharing business market by market can be expensive.

With the capital “you create a huge barrier for anyone else to come in,” Siegel said.

But its role goes deeper.

The SoftBank Vision Fund’s biggest bet so far has been on new-age transportation, which includes ride hailing. With 25 out of its 71 investments in this area, according to data collected by VCJ, it has taken a major piece of this new industry.

Driving its interest is the belief transportation is being transformed and a desire to influence that change as the industry’s most important investor. The firm holds 16.3 percent of Uber Technologies, pre-IPO, and has made major bets on Grab, Didi Chuxing, Ola Cabs, GM Cruise, Flexport and Nuro.

The only major riding hailing company not in the portfolio is Lyft. Most recently, in April, it joined a syndicate that included Toyota, to pump $1 billion into Uber’s Advanced Technologies Group, which is developing gear for autonomous vehicles.

Investors who have worked alongside the Vision Fund say the firm’s strategy to become a major shareholder has been a long-term goal. The fund sees Uber as a crown jewel and it worked as a catalyst for management changes at the company.

Behind the strategy is the desire to become vertically integrated into this key sector and use the position to influence the types of vehicles and autonomous technologies automakers produce and rely upon. Discussions are underway, for instance, with Toyota to consider the future of mobility, according to Reuters.

But the firm isn’t just looking at transportation. A second big investment sector is real estate, with 10 investments, including into We Company, View and Katerra.

The consumer sector has attracted another 10 investments, with Flipkart, Coupang and ByteDance, and health has accumulated eight, according to the VCJ analysis.

Enterprise has won eight investments and fintech, another six, with deals in Automation Anywhere and PolicyBazaar. One deal each has shown up in agtech and space tech, and two holdings involve semiconductors, Arm Holdings and Nvidia.

SoftBank did not reply to an email seeking comment on its portfolio and strategy.

Co-investors say the firm for the most part has been easy to work with and undertakes considerable due diligence before writing checks. When considering an investment, it urges entrepreneurs and syndicate members to envision what would be possible for a company if capital constraints were lifted, according to people close to the firm. It uses this same line of reasoning to determine check size.

Post-investment staff then encourages portfolio companies to communicate with one another and cooperate through joint ventures and joint investments.

What’s more, SoftBank has so far shown itself willing to provide ongoing backing for companies, and not simply to write a single check, as many late-stage investors do.

An example of this is April’s Lemonade deal, where the SoftBank Group stepped in to lead a $300 million Series D round for a company it had previously backed.

This policy is likely to be tested in a downturn but has presently caught the attention of some venture investors.

Yet there is a downside to the Vision Fund’s activities, particular for startups competing with a SoftBank-funded company. When a competitor suddenly raises $450 million, it is a life-changing event, Holland noted.

Each Google keyword is suddenly 2x to 3x more expensive and “it becomes an arms race pretty quickly,” Holland said. “What venture capital has to do is anticipate this could happen.”

Exit opportunities also can be restricted for richly funded companies. A startup with a $1.6 billion valuation can find itself out of the reach of an industry incumbent that might have considered a takeout at a lower price.

SoftBank’s stamp on venture capital has become clearer as the fund has operated. Its mark isn’t likely to disappear any time soon.

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Mega Rounds Soar-0519