What is SoftBank?
Contrary to what the name implies, SoftBank is a Japanese Telecommunications, Internet, and Holdings company. They are a multi-national conglomerate with products and services across broadband, fixed-line telecommunications, e-commerce, internet, technology services, finance, media and marketing, energy, trading, and more.
SoftBank was founded, and still run, by Masayoshi Son. He is Japan’s richest man, worth an estimated $21.6 billion.
Son founded the company in 1981 as a software distributor, and throughout the years built it into SoftBank. During the internet bubble SoftBank invested in over 800 companies, vowing to create one of the world’s most valuable digital conglomerates. Son’s networth surged to $68 billion in 2000, making him the world’s richest man. However that tile was short lived, and when the crash hit he lost over $70 billion.
While most of his investments cratered, not all of them did. He bet on Yahoo!, which led to a subsequent investment in Alibaba. His $20 million Alibaba investment is now valued at over $90 billion.
Vision Fund — the origin
Most large corporations have investments arms that invest cash across many asset classes. Think about Apple —you’re surely aware of it holding a treasure chest of cash overseas ($260 billion) that it doesn’t want to bring back into the US and pay Uncle Sam the hefty tax bill. Apple uses some of this cash to invest and make money.
One of these allocations can be a Venture Capital fund, known as a Corporate Venture Capital fund (CVC). CVCs typically share the same strategy as its corporate parent, and invest along that mandate. CVCs typically do not allow outside money into the capital pool, and are funded from the parent sponsor.
This is not the case with the Vision Fund. The fund was announced in October 2016, with a mandate of global investments in the technology sector. Unlike a typical CVC, the Vision Fund has raised money from other partners and investors, with the goal of $100 billion in capital. As of June 2017, the capital sources are:
- $45 billion from Saudi Arabia’s Public Investment Fund
- $15 billion from Abu Dhabi’s Mubadala Investment Company
- $1 billion from Apple
- $1 billion from Sharp
- $3 billion from Qualcomm, Foxconn and Oracle founder Larry Ellison’s family office
- $28 billion of SoftBank’s own capital
That is $93 billion raised so far, with $7 billion remaining before its stated close of November 2017. The lead investor is the country Saudi Arabia, whom Son met with last September to help them seek ways to diversify their economy beyond oil.
The fund’s investment period (time for capital to be deployed) is 5 years from its final closing, and has a 7–9 year maturity (time till exit of investments), giving it a life of 12 years, which it will then distribute assets back to the investors.
Son sees a rare moment in the tech landscape today where technology’s rapid evolution provides opportunities that may never reappear again. Son has grand visions of the future, and believes he can capitalize on them.
Investments will focus on global tech companies, across industries like: IoT, AI, robotics, mobile applications & computing, communications infrastucture & telecoms, computational biology & other data-driven business models, cloud technologies & software, consumer internet businesses, and financial technology.
Investments will be used in both the public and private markets as well as venture capital. This could include purchasing shares of public companies, and even taking public companies private.The fund will have a minimum investment size of $100 million.
The Vision Fund will target a 44% IRR or better, which Son says is the IRR of SoftBank (with some major help from its Alibaba and Yahoo! investments).
In a December visit with President Trump, Son said half of the fund, or $50 billion will go towards investments in the United States.
Vision Fund — Unusual to say the least
The Vision Fund bucks the classic CVC in a few ways.
- Conflicts of Interest — with the majority of the gun powder coming from other limited partners, SoftBank naturally has to answer to them. In a typical CVC, the fund only answers to the parent company, and they both share the same strategy because of that. Further, existing investments by some of their investors (ex. Saudi Arabia’s investment in Uber) will preclude future investments in other companies.
- Key Man Provision — a key man provision is a contractual clause that prohibits the general partner (GP) from making investments if a “key man” fails to contribute a specific amount of time to the partnership. This clause is typically used in smaller or newer funds where the departure of one person can mean the end of the fund itself. If the key man clause is violated, the limited partners (LP) can exercise the clause and halt all future investments and receive their unused capital back. There are typically several people with this designation in a fund, and investment decisions are made from within this committee. For SoftBank’s Vision Fund, Son will be the only key man in the fund. Son will have an unusual amount of influence as he is responsible for all investment decisions, and the fund could be dissolved in his absence.
- Unique Financial Structure — According to a FT article, the Vision Fund has a very unconventional structure that presents risks. In a typical venture capital or buy-out fund, the fund raises capital in the form of equity from investors. The Vision Fund is asking all outside investors to contribute equity and debt to the fund. Vision Fund investments are structured as such: 62% of an investment is debt in the form of preferred units, and 38% will be equity. The preferred units will receive an annual 7% coupon over the fund’s 12-year life cycle. Leveraging a fund through borrowing debt is not unusual for buy-out funds, but it is typically done through external lenders, not the investors. This unorthodox structure will allow the Vision Fund to lever up (borrow for) its investments in the tech-space. A reason for this structure is that it would be difficult for SoftBank to borrow money from a lender to invest in companies with zero or negative cash flow, which happens to be many companies in the tech space. They have structured the fund to provide a workaround. What this means is that the fund is relying on pre-funded debt to back the deals. A pro of this structure is that it reduces some downside risk for investors as the 7% is a guaranteed return. A con is that the fund has to pay 7% annual coupons on $44 billion, which amounts to $2.8 billion per year. This differs from the strategy of a traditional VC fund that repays investors solely on the performance of their investments. In worst case scenarios, this binding coupon can be problematic — you can find a more detailed analysis of the risks of this structure here.
- Size ($100 billion!) — in 2016, global VC deals totaled $69 billion. Assuming this number is stable for the next 5 years, the Vision Fund would deploy $20 billion per year, making up nearly 30% of yearly VC deals. That is a staggering number, and a massive influx of capital. So how easy is it to invest $100 billion in 5 years? Let me rephrase that: So how easy is it to judicially invest $100 billion in 5 years? We shall see in 2022, but for now many veterans are concerned what this will do to valuations. Some think back to 2014 and 2015, when Hedge Funds and Private Equity shops, eager for returns, began investing in tech startups, pushing up valuations. After a subdued IPO market, and a couple major IPO stumbles, these investors pulled back their cash and valuations dropped down to reasonable levels. The Vision Fund will essentially replace this investment from 2014, so valuations could rise to irrational levels again. Another point of concern is the check sizes. SoftBank is known push start-ups to take more money than they originally a
- sk for, and looks for equity ownerships of 20–40% in investments. So for founders, it’s either get more and give up more equity, or nothing. It’s up for investors to decide if the money will be put to good use, but $100 billion in 5 years is without a doubt a high hurdle.
SoftBank is deploying a grand scheme for the future of mobility thanks to its $100B Vision Fund. The Japanese tech, media, and telecom conglomerate founded 40 years ago by visionary and (now) billionaire Masayoshi Son, launched the fund in 2017, although the company started to invest in mobility in 2014. SoftBank has built significant momentum with massive positions in companies related to shared mobility, autonomous driving and supporting tech, e.g., over $11B in Didi. SoftBank is an active investor which leverages its significant stakes to steer portfolio companies towards an integrated web of global autonomous mobility solutions.
Investments in Complementary and Competing Companies
SoftBank’s Vision Fund has invested in 77 companies so far, of which 17 are dedicated to transportation and logistics. It has committed about $30B in the future of mobility, with a focus on autonomous driving and ride-hailing, according to McKinsey. SoftBank has assembled a portfolio of companies that are geographically or technically complementary, but also sometimes direct competitors — which is very unusual in the venture capital world — as is the case in ride-hailing.
> Shared mobility
SoftBank started to invest in this space in 2014, first putting money in Ola (India) and Grab (Southeast Asia). The company has since participated in multiple rounds which have led to very strong positions in the leading ride-hailing players. Overtime, SoftBank has invested $11B in Didi (20% stake), $8B in Uber (15%), $3B in Grab (25%), $2B Ola (26%) according to Reuters (see diagram). SoftBank also invested $200M in Brazil’s 99, before it was acquired by Didi. The various ride-hailing-related rounds in which SoftBank has participated between 2014 and 2018 are listed here. SoftBank also extended its reach to US-based peer-to-peer carsharing platform Getaround, in which it led a $300M round in 2018.
It must be noted that is very unusual for a VC to invest in competing companies, let alone five of them! In SoftBank’s case, the fund has seats on the boards of Didi, Uber, Ola and Grab, which it uses to be an active investor — more on this later.
Autonomous Mobility as a Service
Back in 2016, SoftBank partnered with Japan’s Advanced Smart Mobility to create SB Drive, a JV aimed at commercializing mobility services that utilize self-driving technologies. The entity has since announced its plans to deploy several of Baidu’s Apollong autonomous shuttles in Japan.
Last year, SoftBank became very ambitious in the autonomous vehicle space. The Vision Fund committed to investing $2.25B ($900M upfront, then the balance once operations start) for a 20% stake in Cruise, which GM bought for about $700M in early 2016. The fund doubled down with a follow-on investment as part of the $1.15B round led by T. Rowe Price in May 2019, which values Cruise at $19B.
> Mobility-related services
Mobility services require a complete ecosystem, including the sharing platform, the autonomous vehicle tech and a series of adjacent services. SoftBank is bringing into its portfolio a number of companies to do just that.
The fund’s largest bet so far in this space is the $1.5B it invested last February in Chehaoduo, a Chinese used car trading platform — the local used car market is booming. Last year, the fund put money in a similar business in Europe, spending 460M€ to acquire 20% of Auto1 Group, a German used car platform. In the US, the fund invested $385M in Fair, which offers short term lease on used vehicles. These three portfolio companies offer the potential to reduce friction between ride-hailing platforms, drivers and their vehicles, this delivering synergies.
The fund also injected a reported $800M in US-based parking booking platform ParkJockey, with the plan to acquire two parking operators in the US and Canada. This could be both a short term play, leveraging new booking services, and a long term play, for the future value real estate. Indeed, parking spaces in downtown areas will be less in demand with the drop in car ownership.
Driving data and telematics have gained a lot of attention lately, for their impact on safety as well as on operating and insurance costs. This explains SoftBank’s $500M investment in Cambridge Mobile Telematics, a US-based company offering mobile telematics targeting insurance and safety. In a similar vein, the fund led a $159M round in US-based driving safety-focused startup Nauto.
Transportation is heavily disrupted not just for passengers but also for goods, e.g., cargo space sharing, last mile delivery or autonomous cargo vehicles. Last year, SoftBank participated in a $1.9B round in Full Truck Alliance, a Chinese cargo brokerage company. This February, the fund invested $940M for a 30% stake in Nuro, a last mile delivery company that is designing, building and operating its own, small, automated delivery vehicle. SoftBank also led a $1B round in Flexport, a US-based freight forwarding platform, and a $413M round in Indian e-commerce focused logistics operator Dehlivery. In the food delivery business, the fund invested led a $535M round in US-based DoorDash.
Three other SoftBank portfolio companies are relevant for the future of mobility. First up, ARM, the UK-based chip designer SoftBank acquired for $32B in 2016, is making significant efforts to boost its traction in the automotive space. Second, data sharing between vehicles and the rest of the ecosystem is going to grow many folds, creating a potentially significant market for 80%-owned US telco Sprint. Last, the fund led a $121M round in Light, which now is trying to gain traction in the autonomous driving space with its multi camera vision system.
SoftBank the Rainmaker
With stakes seemingly in the 15-30% range, SoftBank is a position to play an active role in the direction its portfolio companies take, bringing about synergies or reducing competitive pressure in certain geographies. The conglomerate has the ability — and the apparent intention — to restructure the global competitive landscape. This is likely what happened when Uber sold its Southeast Asian operations to local ride-hailing leader Grab against a 27.5% stake in the Singapore-based platform, just a few months after SoftBank’s first investment in Uber.
Another example of this directed consolidation is Didi’s acquisition of Brazil’s 99, both having received significant funds from SoftBank. This was shortly before the fund’s first bet on Uber, the local market leader. For memory, Uber had sold its Chinese operations to Didiin 2016 against a 15-20% stake in the Chinese company — which in turn invested $1B in the American platform.
SoftBank also drives synergies among portfolio companies. Fair acquired Uber’s own fleet of 30k vehicles in 2018, allowing each party to focus on their core businesses. As part of the deal, Fair became the ride-hailing platform’s exclusive leasing partner for US drivers looking for a car to drive. In a similar fashion, it was recently reported that Uber and Nuro are discussing the use of the latter’s autonomous vehicles to deliver Uber Eats meals.
Partnerships with incumbent Japanese mobility players
Even though SoftBank is investing around the globe, they have not forgotten their Japanese roots, collaborating with Toyota and Honda. Toyota first put money in Uber in 2016 — i.e., before SoftBank did — and just injected anther $1B in Uber ATG (the R&D division) jointly with SoftBank and auto supplier Denso. The OEM has also invested in Grab ($1B) and GetAround ($300M), like SoftBank.
The partnership with Toyota runs deeper. Last year, the two companies founded Monet Technologies, a 50.25% /49.75% JV focused on ride-sharing and self-driving car tech. The JV aims to launch mobility services using the OEM’s e-Palette vehicles by the second half of the 2020s. Honda and Hino recently joined the pair. Together, they will first collect mobility data.
Similarly, Honda invested in Grab shortly after SoftBank did in 2016, and committed $2.75B in Cruise, again shortly after the fund did.
Investors and Investments
SoftBank’s Vision Fund was established two years ago with $100B, $45B of which provided by Saudi Arabia’s Public Investment Fund. Other investors include: Abu Dhabi’s sovereign fund Mubadala ($15B), Apple, Foxconn, Daimler, Qualcomm and Sharp. Thanks to its deep pockets, the fund can sometimes pump more money into a company than its founders initially expected to raise — the minimum check size is apparently $100M per deal. The fund has been reported to have threatened startup execs to invest in a competitor if they don’t accept SoftBank’s money and demanding conditions. Founders are pushed to pursue international expansion and growth at any cost.
It seems hard to resist to SoftBank’s money. However, this is just what Ola reportedly did, turning down $1.1B for fear that the largest investment may lead to a forced sale of the Indian platform to Uber. SoftBank is probably the most powerful and controversial tech investor. But it is designed to serve Masayoshi Son’s long term goal, “We will create a company that can grow, 300 years down the road.”