SoftBank's Vision Fund: visionary or blindly speculative?

By Connor Pattison | 29th March 2020

SoftBank, a Japanese conglomerate with a focus on technology, launched its Vision Fund in 2017. Ballooning to $97 billion(bn), this slightly unorthodox venture capital fund is the largest of its kind, making huge waves in the industry.

Sustaining the heritage of its creator, the fund hones in on unicorns, private companies with valuations above $1bn, that integrate technology into their business models. Its profits are realised either when they are privately sold at a higher price, or through a lucrative initial public offering (IPO). 

However, particularly when adopting the latter method, Masayoshi Son, SoftBank’s CEO and founder of the Vision Fund, has, to say the least, struggled to deliver. A couple of the funds fledgling unicorns have been attracting headlines for all the wrong reasons, leading many to question whether or not it has lost its way. 

The earliest beneficiary from the fund was Uber. Not only has the service become a noun, but it has also drastically changed the way we get around, from an app perspective at least. Although launched in a blaze of hype and publicity in May 2019, with an IPO of $45 per share, the company has subsequently declared an annual loss of $8.6bn last year. 

Despite its claim to worldwide fame and popularity, would you invest knowing that it has yet to break even? 

Indeed, Uber continues to rely heavily on external financing to cover its costs and, after every quarterly loss announcement, investors are losing their patience. At its lowest point this month, albeit considering the impact of COVID-19, the company’s shares were lower than half the price they were initially offered at (see graph below). 

Uber's share price since IPO (source: Yahoo Finance)

As 2019 unravelled, the disaster of WeWork, another investee of the Vision Fund, further dented Mr Son’s credibility. Much like Uber, the unicorn largely incorporates technology into its business model, providing funky and innovative office space that appeals to modern-day managers and entrepreneurs.

Unfortunately, there is further commonality between the two, as WeWork is also an unprofitable business. This fact contributed to even more volatility and uncertainty in setting their IPO share price. Top-tier investment banks such as J.P Morgan, Morgan Stanley and Goldman Sachs quoted large ranges that varied significantly based on their analysis.

Based on Uber, investor sentiment for these business models wasn’t favourable. They needed some serious convincing if they were to risk it with WeWork. But, much to the company’s demise, joint founder Adam Neumann didn’t live up to the task. 

Concerns over corporate governance heightened when it was announced that he withdrew an unusually large amount of $700 million from WeWork, through multiple unconventional personal loans, real estate leases and stock sales before its scheduled IPO. The entrepreneur also owned: “at least four buildings that he rents to WeWork”, according to the Guardian, meaning that he collected rent from his own company.

Given these factors, investor confidence took a real knock. SoftBank stepped in to manage WeWork in October last year, after persuading Adam Neumann to step down. The IPO is on hold indefinitely.  

If these instances haven’t proved challenging enough, many have pointed out that the fund itself has a structure that is proving difficult to turn into a profit. Significant investors such as Saudi Arabia’s Public Investment Fund own preferred shares as opposed to equity. These function much like debt, requiring SoftBank to commit to: “up to $2.8bn in interest payments each year,” according to the Financial Times. Unlike a typical venture capital fund, that has no guaranteed return for investors, Mr Son is obligated to fulfil these payment requirements, increasing the pressure to deliver.

No one can argue that SoftBank lacks the resources as it contributed $28bn to its ‘Vision’. But this has not come without detrimental consequences. As reported by Bloomberg: “SoftBank reveals $6.5bn loss” in November last year. 

Mr Son has been planning a second Vision Fund since mid-2019. However, understandably, previous sovereign investors such as Saudi Arabia and Abu Dhabi are not enthusiastic about providing more capital. Additionally, the announced departure of its top US executive, Michael Ronen, last month hasn’t helped. 

With COVID-19 drastically slowing all market activity, SoftBank has announced, at the start of this week, plans to sell $41bn of its own assets, freeing up extra cash to support its Vision Fund investments if needed. 

The tech conglomerate has always believed in the long term, as their continued backing of WeWork demonstrates, and it does have as good a track record as anyone in the sector. Perhaps after the markets stabilise, the fund could be sitting on a fortune and Mr Son may have found his next Alibaba. Nevertheless, certainly given current market conditions and the performance of the Vision Fund, this is hard to believe, in the short term at least.