SoftBank’s legacy: The private IPO

SoftBank Vision Fund didn’t invent the so-called private IPO, but its deep pockets have helped institutionalize these so-called mega rounds of $100 million, and many times much more.

In the past five years, massive financing rounds have spread like wildfire across U.S. venture capital. Last year, 201 such rounds took place, almost double the total from 2017, according to PitchBook and the National Venture Capital Association.

Few funds symbolize this upsurge more than the gargantuan $98.6 billion SoftBank Vision Fund. In this year’s first quarter, SoftBank or its Vision Fund participated in the quarter’s three largest U.S. deals, massive rounds that added up to almost $4 billion. Their impact is not hard to see.

Rohit Kulkarni.

“They are a mini IPO market,” said Rohit Kulkarni, senior vice president of research at Forge Global.

SoftBank has in fact helped reshape the public IPO market, with companies waiting longer to go public and growing larger. Not only do private company boards find they are less dependent on the public IPO as a fundraising event, they come across better prices and more friendly terms in private financings.

Uber Technologies’ 2018 deal with the Vision Fund was a milestone for this. Not only did the SoftBank-backed round changed the cap table at the company but it led to improvements in the management team and bylaws.

The impact for traditional pre-IPO investors, such as Fidelity and other crossovers, has been enormous.

And yet, the proof isn’t yet available on whether the strategy will work. Finding returns for the Vision Fund’s big horde of capital will be no easy task when the companies eventually do go public, as Uber was preparing to do, as of at press time.

Every indication suggests the SoftBank Vision Fund will be a patient, long-term investor, though the two-year old fund has found some early returns from investments in Nvidia and Flipkart. While this long horizon makes the firm less price sensitive and willing to pay up to be involved in a deal, it doesn’t guarantee a deal multiple.

As it is, prices today are rich, with deal multiples having trended higher for a number of years and round size more than doubling at every stage of investing since the start of the decade.

This round size and valuation inflation create a tall mountain for the Vision Fund to climb.

Take the Uber deal as an example. Most of SoftBank’s investment in the company was made at about a $48 billion post valuation, with about $1 billion of it at a lower valuation, according to public information on the deal.

If Uber ends up getting an 8x to 10x multiple on 2018 revenue, as the market appears to expect, it will have a post-IPO valuation of between $90 billion and $112 billion.

In that case, SoftBank comes away with a roughly 2x return, or slightly greater, after the offering. With a relatively short holding period, it’s a nice mark up, but not one that will return the fund.

Should SoftBank hold the shares, more promising returns are possible.

The general feeling seems to be that SoftBank needs the economy and the financial markets to stay strong to have a good chance at exceptional returns.

Even still, the numbers look daunting. For SoftBank to achieve an IRR of 30 percent to 40 percent it would need to generate $35 billion to $55 billion of cash each year during the second half of the fund, or an entire company the size of Workday each year, according to a 2018 study from EquityZen.

It is a gargantuan task.