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Masayoshi Son, SoftBank and the Vision Fund

By Imperial College Investment Society

The Vision Fund is an investment fund under the SoftBank Group, a major player in Japan’s telecommunications market. Touted as the world’s largest technology fund, it counts sovereign wealth funds and other prominent names as its investors. Under the shrewd acumen of Masayoshi Son; founder, Chairman and CEO of SoftBank, whose investment record includes Vodafone Japan and an early stake in Alibaba, the fund specialises in purchasing stakes in the world’s most innovative and disruptive start-ups.

An article by Xerxes Chong Xian, member of the society. Please note that the below article was not written by a committee member of Imperial College Investment Society, and hence does not necessarily reflect its views.

The fund started off as a unique collaboration in 2016 between Saudi Arabia’s crown prince Mohammad Bin Salman and Son. Seeking to diversify his country’s sources of income away from fossil fuels, the prince committed a staggering $45 bn to the fund within an hour of meeting Son. As Son puts it cheekily in an interview with Bloomberg, “45 minutes, 45 billion dollars”. This move attracted other big names, from Apple Inc to Daimler and even Oracle Corp founder Larry Ellison. By May 2018, Son was sitting on a war-chest of a $100bn, more than double the approximate $78 bn raised by all US venture capital funds in 2017 and 2016 combined.

The fund’s portfolio is as diverse as its investors. It owns stakes in food-delivery company DoorDash, dog walking service Wag, autonomous driving technology company GM Cruise and is currently the largest shareholder of the ubiquitous ride-hailing app, Uber. Guiding the fund’s direction is Son’s core belief in the singularity of AI (Artificial Intelligence), betting on the imminent proliferation of robotics and other disruptive technology in older industries. Son insists on meeting with every founder of every investment. Last-minute trips to Tokyo are typical when founders receive the call, “Masa wants to see you tomorrow”. Speaking about his investment strategy at a conference in Tokyo this year, Son quotes Yoda, the wizened Jedi Master from Star Wars. “Yoda says use the force. Don’t think, just feel it”. Despite running a 200-man investment team, Son feels his initial insights carry more weight than months of due diligence. “You do it so many times, you don’t even need to think”, Son explains, “You can just feel it”.

Vision Fund holdings as of May 2018. Source: recode.net

Son is not afraid of flexing the fund’s financial muscle should he find a suitable investment, acquiring large stakes of between 15 percent to 30 percent. Whilst some founders are uncomfortable with such a position, the sheer size of funding that comes with the stake sets these start-ups apart from their competitors. Michael Marks, founder of construction start-up Katerra, of which the fund’s 15 percent stake amounted to an $865 million funding early this year, gets the big picture. “It’s part of their strategy”, speaking to CNBC, “come in with enough money that the customers, suppliers and competitors will know that this is the best company ̶ that this is the company that will win the industry”.

Ironically, the sheer size of the Vision fund is disrupting the venture capital industry. Its ability to dish out never-before-seen levels of capital has spurred other firms to raise larger funds, all hungry for a piece for the start-up pie. These include Sequoia Capital’s planned $12bn fund, Khosla Ventures $1.4bn fund as well as the state-owned China Merchant Group’s $15bn tech fund. Funds of such size rival the capital more commonly seen in the realm of private equity, which have traditionally invested in more mature industries, with returns that pale in comparison to those reaped by venture capitalists ̶ a minimum of 20% a year. Son is in favour of the latter returns for his fund, describing the recent performance of his fund as “too good”. One of the fund’s earliest investment, a $2.5bn stake in Indian online retailer FlipKart, will yield a 60 percent return after confirming the sale to Walmart in the first quarter of 2018.

Tech venture capital funding has traditionally been dominated by the entrenched tech giants of Silicon Valley, with big players such as Apple, Google and Facebook eager to sink their proverbial teeth into the next game-changing unicorn. Son intends to “create a virtual Silicon Valley in Softbank”, espousing collaboration between portfolio companies, having already supported Uber’s decision to sell its South East Asian business to regional rival Grab earlier this year, of which SoftBank is also the largest shareholder.

The Vision fund’s battles do not merely involve attempts to throw more capital than their competitors at the next start-up, but also in acquiring human capital. From 2017 to early 2018, about 100 people have been hired in the UK, US and Japan to augment the funds operations; deal finding, deal execution and start-up experience. Analyst, associates and venture capitalist have been poached from top investment banks, consultant and venture capital firms. This comes as no surprise given the size of capital being deployed around the world. Venture capital firm Andreessen Horowitz had 130 people managing a fund of $6 bn while the Vision fund was working with 100 people to manage 16 times more capital. While its leadership of mostly former bankers give the fund the deal structuring and execution expertise, its ideal hire is one with both investment and technical experience.

Lucio Di Ciaccio, an Aerospace Engineering graduate from MIT, who holds a MSc in Advanced Computational Methods from Imperial College London, joined SoftBank’s investment team in 2017 after 2 years at The Carlyle Group.
As of June 2018, the fund has already invested nearly half of its capital, but Son has no intention of slowing down. With the appointment of 3 new executive-vice-presidents at SoftBank’s annual general meeting in June, most notably former Global Head at Deutsche and UBS Rajeev Misra, Son can now shift his focus from managing the telecommunications business to investing. This is inline with the shift in SoftBank’s focus, from telecommunications giant to “unicorn hunter”. Plans for a second Vision fund is already in the pipelines. While the timeline for the fund is still unknown, Son expects a return of the original investors in the first Vision fund as well as fresh interest from institutional investors. “Now we are building our track record, so they are showing interest”, he commented.

With SoftBank having just announced record earnings, group net profit more than tripling from last year, it may seem like Son’s wisdom is paying off. However, looking past the game-changing deals and positive results, 2 years may be too small a window to judge the shrewdness of Son’s just-feel-it investments. Naysayers would point to his track record and call it luck, citing his losses in the dot-com bubble as evidence he lacks the know-how for technology investments. Speaking about his early investment in Alibaba, Son says “It was not one lucky hit. Perhaps if you continue with lucky hits then it’s your capability. Maybe I’m smart after all!”. Only time will tell if the Yoda inspired Son will have the last laugh, when SoftBank achieves its vision of an “organisation that keeps growing for 300 years”.

Author: Xerxes Chong Xian

Please note that this article was not written by a committee member of Imperial College Investment Society, and hence does not reflect its views.