No More Money Moat: SoftBank CFO On Vision Fund Turnaround And How It's Investing Its $40B Second Fund

When the SoftBank Group announced its $100 billion Vision Fund in 2017, it stunned the venture industry. This single fund was 50 times the size of the largest venture funds at the time, and far larger than most private equity funds.

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At the core of SoftBank’s startup investment approach was betting huge amounts on its portfolio companies to help them become market leaders, creating a so-called “money moat” against competitors.

But fast-forward three years and the Vision Fund had racked up a long list of flameouts and lost billions in market value.

WeWork parent The We Company, in which Tokyo-based SoftBank had invested a reported $18.5 billion, pulled its planned IPO in late 2019 amid pointed questions about its path to profitability and possible self-dealing by founder Adam Neumann.

A few months later, Brandless, an e-commerce company in which the Vision Fund led a $240 million Series C funding, shut down in February 2020. Zume Pizza, which aimed to revolutionize fast food, raised $375 million in November 2018 but closed down its pizza business just over a year later in January 2020. Budget hotel site Oyo from India reported layoffs in early 2020, before the pandemic impacted the travel industry.

All told, Vision Fund 1 (SVF1) had $8 billion wiped off its fair value 1between December 2019 and March 2020, going from $90 billion to $81.9 billion, according to SoftBank earnings reports.

While SoftBank and its Vision Fund have continued to hit bumps this year— including the collapse of two high-profile unicorn portfolio companies, construction tech Katerra and finance firm Greensill Capital—company leaders say there’s also a behind-the-scenes turnaround in the works. Despite its high-profile misses, SVF1 has seen its value improve significantly in the past year as the result of successful exits including Coupang and DoorDash. And SoftBank is now taking a very different approach with its second fund, shunning the “capital as a weapon” approach of its first fund in favor of smaller and earlier-stage investments in startups.

Take 2

While SoftBank is still investing heavily in startups—including $14.2 billion just last quarter largely via its second fund—the Japanese conglomerate has undergone a fundamental shift in its approach to venture funding.

Navneet Govil, SoftBank Vision Fund’s managing partner and CFO

“The biggest change in Fund 2 is not to be concentrated,” Navneet Govil, the Vision Fund’s managing partner and CFO, said in an interview with Crunchbase News, speaking on the strategy behind its second fund. “The differences are that we’re doing a lot smaller ticket sizes. It’s not the large multi-billion dollar ticket size.”

SoftBank announced its second investment vehicle, Vision Fund 2 (SVF2), in July 2019. After many limited partner commitments evaporated due to the WeWork debacle, the fund now totals $40 billion—all raised from SoftBank itself, with no external LPs.

SVF2 has significantly increased its investment pace in the last quarter and led some heady funding rounds including a $775 million Series A in Perch, a $676 million Series D in SambaNova Systems, and a $640 million Series E in Trax.

It also led a $639 million round in Klarna. The Stockholm-based “buy now, pay later” unicorn is the most highly valued of Vision Fund 2’s companies, at $45.5 billion.

But while the second fund has made a total of 91 investments—a similar count to SVF1—it’s invested just $19.5 billion to date as those deals tend to be smaller.

“The other change is to come in at earlier stages, and then get to participate in follow-on rounds as a company does well,” Govil said.

In the past quarter alone, the Vision Fund has increased its investment count to 47 new companies with $14.2 billion invested.

Fund 1 turnaround

Along with a new investment thesis for SVF2, SoftBank has also worked on turning around its fortunes with its first fund.

The value of the portfolio for Vision Fund 1 has improved significantly in the past year to $146.5 billion.

“On the first fund we’re really focused on two things, which is helping our companies go public and on monetizing our positions and returning capital to our limited partners,” Govil said.

As of March 31 of this year, SVF1 has substantially upgraded its outlook with an investment gain of more than $57.1 billion, per SoftBank’s earnings report. The most recent quarter is up by $60.3 billion.

SVF1 investments tally up to $86.2 billion, with a portfolio worth $146.5 billion per the company’s most recent earnings report.

The investment window for new company investments from the first fund closed in September 2019, but the fund has a life of 12-14 years in which to provide liquidity to its limited partners.

The majority—69 percent—of value in SVF1 is represented by portfolio companies that have exited, or in public companies where the Vision Fund still holds stock. Private companies in the first fund’s portfolio, including Bytedance, Grab, Ola and other highly valued unicorns, are valued at $45.5 billion collectively, according to its earnings report.

The standout exit from SVF1’s portfolio in 2021 is Coupang. The Seoul-based e-commerce platform was valued at $60 billion in its IPO, with the Vision Fund’s multiple at 8.7x as of SoftBank’s most recent earnings report. SoftBank invested $1 billion in Coupang in 2015, prior to the Vision Fund, and another $2 billion in the company in 2018 via SVF1.

Another large exit for the Vision Fund this year was from Didi, which went public at a $73 billion valuation, which has trended down since its debut and is valued around $42 billion as of August 24, 2021, below its private valuation of $56 billion in 2017. The Vision Fund’s multiple on Didi stands at 1.1x as of SoftBank’s June 30 earnings report.

Funding competitors

The fund has looked at close to 3,300 companies, to date, and invested in 183 of them, Govil said.

It does invest in competing companies, as it did with Uber and Didi, but creates firewalls between rivals, according to the firm. “The markets are large enough that there’s a place for more than one,” said Govil.

The Vision Fund’s current private portfolio includes 94 unicorn companies worth $655 billion based on the companies’ last private valuations. It also includes 14 companies that are emerging unicorns—valued between $500 million and less than $1 billion—and collectively valued at $8.3 billion.

“We want to see companies that have meaningful revenues, and either have positive unit economics, and are profitable or have a path to profitability in the near term,” said Govil, underscoring further a significant departure from the first fund’s investment approach.

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