After Two Spectacular Blowups, SoftBank Hopes To Launch Third “Vision Fund” To Evade High-Water Mark
Three years ago, we asked – rhetorically – if Japan’s cartoonish
venture capital investor money incinerator SoftBank, better defined as “throw a bunch of crap at the wall and pray something magically becomes a 1000x bagger” is the Bubble Era’s “short of the century”, because with slides such as this one, well tells you all you everything about the genius behind it all.
Since then, Softbank stock is unchanged, having more than doubled in the interim then losing all gains as the bubble burst; it would have been far lower had Japan’s richest man (for now) Masa Son not repurchased a substantial percentage of the company’s stock (an epic circular ponzi scheme for the man who is also the biggest investor in SoftBank, which we hope will become obvious to regulators one day). Meanwhile, the pain – in the form of the company’s portfolio investments in various non profitable venture companies – has hit an all time high as the company’s hilariously named Vision Funds have suffered losses of various magnitudes.
So what’s one of the biggest bubble-era circular ponzi schemes to do when the tide flows away? Why hope and pray it can do it all over again and launch yet another venture fund (even if this time there will be no greater fools to market it to).
And that’s precisely what Masa Son is doing: according to the WSJ, SoftBank is considering the launch of a new – third – giant startup investment fund, part of what the WSJ calls is “a plan to turn a new leaf after the poor performance at its two earlier funds” but what it really is, is a way to circumvent the gargantuan high water mark on its previous two funds which ensures that SoftBank (and Masa) won’t collect any money on these for years to come.
This plan is certainly not lost on potential outside investors, which is why unlike its previous funds which it marketed to the ever gullible Mrs Watanabe, the world’s largest startup investor (i.e. money loser) in recent years, will likely use its own cash for what would be the third SoftBank Vision Fund if it moves ahead with the plan, as nobody will even dream of giving Masa Son a penny of their money.
And should this “plan” prove to be a total dead end, the company is also considering putting additional money into Vision Fund 2, its main investment fund for the past few years, instead of starting a new fund. Which is great news for new investors if not so much old ones since the Vision Fund 2 is currently worth less than the investment that went into it; those losses significantly reduce the pay for SoftBank staff working on the fund—a factor in its decision making.
Which is why those pushing the hardest for a new fund are some employees of the Vision Fund. A new fund would be a way to reset their compensation, which is partly based on profits at the fund and its investments. The current fund would require making back large losses before employees – and Masa Son – could get those bonuses. A new fund would put profits closer in reach. The company is also considering restructuring staff incentives for Vision Fund 2.
It’s not just the fund’s employees who are looking to reset the high water mark: Son personally took a hit with Vision Fund 2 in the red because of a $2.6 billion personal commitment he made. Based on the terms of the investment, Son didn’t put up the money himself but owes SoftBank if the fund ends up performing poorly! Yes, this is taking a circular conflict of interest to previously inconceivable levels.
The unusual investment has been criticized by some investors and analysts who say it could skew Son’s motivations given a structure that could make him more focused on Vision Fund 2 than on other investments. Son, who owns over one-fourth of SoftBank, has said the structure better aligns him with the investment fund. SoftBank structured its arrangement in a way that allows the company to get repaid on most of its investment before Son. About $33 billion of its commitment to Vision Fund 2 is in preferred equity.
According to the WSJ, while that structure would have led to outsize profits for Son if Vision Fund 2 did well, today it means particularly large losses because the fund is underwater. Son currently owes $2.1 billion on the investment and is charged a 3% annual interest rate on his unpaid balance to SoftBank.
At the end, however, it’s all about the money…. or rather the lack of it.
SoftBank has been hit particularly hard by the rout in tech valuations that began last fall, posting a record $23 billion loss in the three months ending in June. Much of that red ink is a product of its first two Vision Funds, the startup investment unit that Mr. Son formed in 2017 in a bid to dominate the venture sector. The $100 billion initial Vision Fund, which raised $60 billion from Saudi and Emirati wealth funds, was beset by giant soured bets on companies including WeWork and Didi, leading to catastrophic results (read losses) over five years.
The even funnier-named successor, Vision Fund 2, which was “intended” to be more cautious, is now worth 19% less than the $49 billion it invested, after accelerating its spending just as valuations peaked on companies including fintech Klarna Holdings AB, confirming that Masa Son was never some investing genius but merely a lucky momentum chaser who is suddenly very unlucky.
As the WSJ notes, Son and SoftBank have tried to chart a new path forward after the market turned against unprofitable tech investments. He has also faced a string of departures of top staff. In July, the company said Rajeev Misra, who led the Vision Fund since it was created in 2017, would step back from his role overseeing new investments as he starts his own fund.
Still, in light of the company’s disastrous recent investments, analysts and investors said SoftBank’s options are more limited than in the past. Son has been selling down SoftBank’s stake in its blockbuster investment, Alibaba, and its telecom holdings, and funding a large stock buyback program – Son’s favorite way of monetizing investments and returning cash to himself . The result has been an increasingly concentrated bet on startups, where results have been disappointing.
In August, when the full scale of SoftBank’s implosion was revealed, Son told investors he was “quite embarrassed and remorseful” after having gotten caught up in the frenzy, and he has substantially cut back spending on startups.
One month later he is back, but instead of hoping to make up for his mistakes, he is simply seeking to launch another vehicle that takes advantage of investor stupidity and avoids being saddled with chasing a high water mark which absent another global depression – and central bank liquidity firehose – may never be caught.