‘The Most Powerful Investor in The World’: a Tech Fund With a Difference and Grand Vision

The tag of ‘the most powerful investor in the world’ was, according to a recent article in The Economist, assigned by Bill Gurley. Gurley is a general partner at the Silicon Valley venture capital firm Benchmark and made the comment at a recent New York meeting of financiers. He wasn’t referring to Warren Buffet, Carl Icahn, Ron Conway aka ‘the Godfather of Silicon Valley’, one of the big asset management companies or most influential VCs.

So who was the mystery investor that impressed a VC veteran with quite some influence in the tech venture capital world in his own right so much he declared it the world’s most powerful? Gurley was referring to The Vision Fund  - the passion and brainchild of SoftBank CEO and founder Masayoshi Son.

Son is a telecoms and internet entrepreneur and Japan’s richest individual with a net worth estimated at over $20 billion (£15 billion). A grandchild to Korean immigrants, Son was born in the small town of Kyushu on Japan’s southern island. After moving to the USA at the age of 16 and being accepted in Ivy League Berkeley, Son had made over $3 million by the time he graduated through inventing and selling an electronic translator to Sharp and importing second hand arcade games from Japan on credit, installing them in dormitories and diners.

After returning to Japan and establishing SoftBank, initially as a software distributor and publisher of PC magazines before the company moved into internet distribution, Son was an early investor in Yahoo and Alibaba. Despite his numerous successes and vast wealth, Son also holds the record for losing the most money in history - $70 billion during the dotcom crash. His company saw its value decimated by 99%, barely hanging on to survival.

But SoftBank bounced back and is today one of the largest tech-focused conglomerates in the world. Just a handful of the more prominent SoftBank holdings include UK chip maker ARM Holdings, a majority stake in US telecoms giant Sprint, close to 30% of Alibaba (now worth $140 billion), and 42% of Yahoo Japan. However, it is the Vision Fund, Son’s hugely ambitious $100 billion bet on the latest technology advancements, trends and futuristic visions, that many believe holds the key to SoftBank’s future prospects.

The Vision Fund – Structure, Approach and Strategy

“The Vision Fund is a platform where portfolio companies can stimulate and collaborate with one another.” – Masayoshi Son

Softbank is not the sole source of the Vision Fund’s vast war chest, the scale of which’s ambition proved too deep for just Son’s company’s pockets, deep as they are. Saudi Arabia and Qatar’s sovereign wealth funds have contributed $45 billion and $15 billion respectively. Apple and other tech giants including Qualcomm, Foxconn and Sharp $5 billion between them and another $7 billion comes from undisclosed investors. Topped up by the cornerstone $28 billion of Softbank’s own commitment, that takes the total to around $100 billion.

The Vision Fund is both like and unlike larger, conventional tech-focused venture capital and private equity funds. It invests in promising technology start-ups it sees commercial value and the potential for major future profits in, against an equity stake. Hopeful start-up founders visit the fund’s offices in the San Francisco Bay area and London’s Mayfair to pitch for investment. Around 5% are successful, which is slightly more than the average for private equity.

Where it differs is its size, connected vision, horizon and approach. Rather than encouraging the companies it invests in to up their debt levels, the Vision Funds simply gives them more money. This comes through a combination of approving generous valuations and taking larger stakes. Stories abound of founders asking for a level of investment that is then often multiplied by four or five times by Son. Occasionally this is resisted at which point a hard line is often taken that it’s either the much higher sum or nothing. Son has even reputedly threatened to invest the money in rivals instead. During negotiations with Uber it is said that he said the capital would instead go to Lyft if not accepted.

Son and his right hand man Rajeev Misra, the former Deutsche Bank derivatives trader who is the fund’s CEO also in most cases believe in letting the management that has propelled their companies to the point they have attracted investment to get on with it. Standard private equity funds have a reputation for insisting on management shake-ups, bringing in their own board members and upper management.

To date the Vision Fund has invested in around 30 companies and plans to add another 30 to its portfolio over the next 2 years. The total target is to have acquired a majority stake in 100 of the world’s most promising technology companies by the time it has spent its $100 billion investment capital. That’s expected to happen within a maximum of 5 years from now.

Another difference in the Vision Fund’s approach is its holistic strategy to creating connections, partnerships and, in some cases, consolidation between its companies. Each company is viewed as a node in a wider, mutually pollinating tech ecosystem spanning the globe and the cutting edge of different fields of research and development, many of which have significant cross-over or lessons which can be learned from each other. They are also intended to be each other’s customers where natural supply and demand meets.

Not everyone believes that the Vision Fund’s approach will either succeed nor is necessarily positive for the tech sector. Comments are being made that the fund’s approach provides often unproven start-ups with more capital than they need, or have so far earned the right to by dint of what they have actually achieved to date. There are fears its investments are inflating valuations across the sector.

The Investments

The Vision Fund’s investments are broken down into three main categories:

Frontier: these are companies working on brand new technologies in fields from VR, AI and robotics to IoT, biotech and genomics. Son has well publicised faith in the future dominance of IoT devices and connectivity. SoftBank purchased Cambridgeshire chip-maker ARM to that end, believing it can design the chips for what the CEO believes will be a trillion connected devices around the world by 2035.

A stake in NVIDIA, the US chip and processor maker is also one the Vision Fund’s larger holdings. NVIDIA is also heavily involved in driverless car technology, building test simulators that are becoming the standard for virtual road testing and education of the machine learning algorithms autonomous vehicles will use. A $2.3 billion investment in GM’s autonomous vehicles unit announced in late May 2018 is another example of the fund pursuing investments with synergies.

Another example of a ‘frontier’ investment is the $500 million ploughed into UK VR company Improbable. Improbable is creating virtual worlds it is hoped will become so real millions will live part of their lives there interacting with each other’s virtual selves, AI-powered digital robots and even potentially earn their income.

Disruptive Tech: the fund’s second category of investments is in tech-disruptors of traditional industries and business models. The Vision Fund’s stake in ride-hailing company Uber falls into this category as does real estate technology company Compass. On-demand dog-walking app Wag! fall into this category.

Media and Telecoms: the sector that SoftBank was built on is also an investment category of the Vision Fund. Several e-commerce ventures, including sports-focused Fanatics come under this umbrella as does OneWeb, the satellite internet provider.

There are also outliers which don’t neatly fit into the three main investment categories. One of the fund’s largest holdings is in WeWork, an upmarket manager of co-working spaces for start-ups. While nominally a property management and real estate company, WeWork fits into the portfolio’s strategy as offering proximity and access to promising tech start-ups.

Will the Vision Fund Make Money?

In the end, regardless of long term vision, lofty philosophies of improving the world and humanity’s standard of living through tech and bets on often high risk endeavours, the Vision Fund’s end game is to make money. The $100 billion invested is not a philanthropic donation.

The fund’s approach is high risk. Some would say speculative, including many analysts. SoftBank trades at an over 30% discount on the value of its assets mainly due to the concerns analysts have over the future value of many of the Vision Fund’s holdings.

In May, SoftBank reported a 60% rise in its quarterly operating profit. Son attributed this as mainly due to the success of Vision Fund investments. The biggest success was the sale of Flipkart, India’s largest online retailer, to Walmart for $4 billion. $2.5 billion had been invested in the company just last August. Nvidia’s soaring share price is also providing a major boost. However, other holding are feared to be overvalued. WeWork’s value is more like a tech multiple than a commercial property company and many analysts argue there is no real reason why that should be the case. There are also complaints over a lack of disclosure around the Vision Fund’s structure and investment targets. Goldman Sachs analyst Ikuo Matsuhashi recently wrote in a report:

 “There are some concerns that the SoftBank Vision Fund could potentially turn into a large black box.”

Long term the fund needs some big winners. It would normally be expected that 40% of its investments will fail, 40% will deliver reasonable returns and a sprinkling will generate huge returns. The size of the Vision Fund’s investments mean it is playing a high risk game. To really generate good returns, it needs its big winners to return big. That would mean a $5 billion investment bringing back over $100 billion, Such outcomes are very rare in the VC world. Also, the bigger a fund gets the harder it usually becomes for it to generate strong returns.

Even success could provide its own dangers. The Vision Fund holds big stakes in so many companies that if several of them become dominant, it may attract the attention of competition regulators. It will certainly be a delicate balance.

Like most of Son’s endeavours to date, whichever way the Vision Fund goes it looks set to be towards one extreme or another. It will either make a killing or lose a hell of a lot of money. Son has already lost $70 billion in tech investments almost overnight. The Vision Fund’s investors will be hoping he has learnt lessons from that.