SoftBank’s $100B Vision Fund Has Fallen Ill to COVID-19

In May 2017, Masayoshi Son, founder and CEO of Japanese tech giant SoftBank, announced that his firm raised close to $100 billion for its Vision Fund. The fund amassed investments from high-profile backers including Saudi Arabia’s sovereign wealth fund, the government of Abu Dhabi, Apple, and Qualcomm. Over ten times the size of any Venture Capital fund at that time, Son’s proven track record of successful early-stage bets on today’s tech giants Alibaba and Yahoo made investors eager to commit billions of dollars to his fund.

Since its inception, SoftBank has invested around $80 billion of the fund’s capital to 91 companies. Encouraging founders to prioritize aggressive growth and ideally monopolize “winner-takes-all” industries, Son made late-stage investments of one-hundred million to billions of dollars with little oversight in industry-disruptive tech startups. In an attempt to outpace competition from other established VC funds, Son skipped the complex and lengthy due diligence process, making an investment decision after only a short introductory meeting with the founder. The Vision Fund weaponized its large cash pile, bullying startups into accepting their offers by threatening to invest in their rivals otherwise. A visionary himself, Son always encouraged founders to dream bigger, promising larger capital injections or loans to fuel aggressive growth. The Vision Fund’s deep pockets tempted founders to ignore concerns about profitability and focus solely on growth, even as losses mounted up.

In an effort to start realizing returns for its Limited Partners (LPs), SoftBank took a couple of its portfolio companies public through initial public offerings (IPOs). However, members of SoftBank’s IPO Class of 2019, Uber and Slack, performed poorly at their public market appearances due to the growing disparity between the sky-high private valuations of cash-burning startups and their share prices. WeWork’s plan for an IPO in late 2019 turned into an absolute nightmare after underwriters deemed SoftBank’s last valuation heavily inflated, suggesting cutting it down to a fraction of its peak $47 billion valuation. After canceling its IPO plan and pulling back from its subsequent bailout plan, SoftBank wrote down WeWork’s valuation to a mere $2.9 billion.

Shortly after the WeWork fiasco, investors heavily scrutinized SoftBank’s business model and dubious valuation practices. After each follow-on round in which SoftBank reinvests in the startup alongside other investors at a higher valuation, the value of SoftBank’s prior stake increases significantly. SoftBank records a portion of these as capital gains in its financial statements based on an undisclosed method, while, in reality, these profits only appear on paper. This creates an incentive for SoftBank to balloon the valuation at each investment round, even if the startup is burning through cash with minimal assets and a distant path to profitability. However, when the valuation tanks, either due to dilution in the following investment rounds or dismal public market appearance, the investors who participated in the last round, SoftBank, suffer the most from the fallout. SoftBank then has to reassess the valuation of its portfolio company and make the necessary write-downs. Investors face difficulty in keeping track of the fund’s profits and losses due to this accounting practice. The Vision Fund reported a $17.7 billion loss in the fiscal year 2019 due to massive write-downs in some of its investments like Uber and WeWork.

Already struggling before the pandemic, the unexpected Coronavirus outbreak accelerated the fund’s downfall. SoftBank’s large bets on the sharing economy backfired as people became reluctant to share rides (Uber, Didi Chuxing, Grab), office spaces (WeWork), and rooms (Oyo) due to social distancing measures and stay-at-home orders. Before 2020, SoftBank had invested $27.8 billion, about one-third of its deployed capital, to these five startups. During SoftBank’s latest earnings call, Son tried to plant seeds of hope, sharing his belief that some of his investments will come out even stronger from the COVID-19 outbreak: “Our unicorns have fallen into this sudden coronavirus ravine. But some of them will use this crisis to grow wings.”

Son had already hit rock-bottom once during the Dot-Com Bubble in 2001 when he ended up losing around $70 billion as shares of SoftBank fell an astronomical 99%. However, Son was able to weather the storm as his investment in Alibaba hit the jackpot. Two decades later, Son’s initial $20 million investment in Alibaba is worth around $130 billion.

Son remains determined that his Vision Fund will thrive, and during desperate times, he is taking desperate measures. SoftBank has announced massive share buy-back programs and has decided it will sell a portion of its shares in its crown jewels Alibaba and T-Mobile US to raise more capital. The positive news helped SoftBank Group Corporation’s stock recover almost all of its earlier 50% free-fall, approaching to its record-high level.

With the available capital drying up in its initial Vision Fund, Son had initiated the fundraising for Vision Fund II – an even-larger follow-up fund. However, the disappointing performance of the initial Vision Fund has caused existing investors to hold back their commitments to the new fund. As a result, Son conceded that he has halted this plan for now but remains optimistic for the future. The fate of Vision Fund II will depend on the performance of Vision Fund’s current and future investments in the following years. Though the picture is not looking very bright at the moment, the Vision Fund’s returns will primarily depend on the shape of the economic recovery and changes in consumer behavior in the post-COVID era.