SoftBank adjusts its vision

A high-profile $800 million investment led by SoftBank Group propelled U.K. online payments company Revolut to a $33 billion valuation last year, making it one of the most valuable private fintech companies in the world.

Yet barely a year later, Revolut suffered a significant setback. The Japanese government in September hit its local unit with an administrative disciplinary action -- the first targeted at a holder of a money transfer license in eight years.

The Ministry of Finance highlighted multiple problems, such as "failing to sufficiently establish an appropriate money laundering and terrorism financing risk management system in accordance with the expansion of business scale." Revolut posted an apology on its website and said it would revamp its internal controls.

The growing headwinds facing Revolut mirror those facing SoftBank itself after a turbulent year.  Half a decade since the technology giant led by Masayoshi Son disrupted the venture capital industry with the launch of its nearly $100 billion Vision Fund, it has cut back on the size of its bold solo deals and increasingly turned to ostensibly safer industry practices like co-investing. Its venture capital rivals have evolved too, raising billion-dollar war chests and sometimes outbidding SoftBank for a slice of the hottest startups.

Meanwhile for startups of the type that benefited from SoftBank’s largesse, the environment is no less radically changed. 

Takeshi Ebihara, founding general partner at Rebright Partners, an Asia-focused VC firm, says that "by taking advantage of excess liquidity and the technology boom better than anyone else, SoftBank used financial leverage and took risks to cause the hyperinflation of startup stocks."

"It is a very challenging time for a growth-stage company," said the head of a major tech investment firm in Asia.

"They require a lot of capital now, but the cost of capital is all going up. So everyone is focusing on cash burn, how sustainable you can be. In the past, only growth, growth at all costs [mattered]. I think those days are definitely gone." 

An analysis by Nikkei Asia shows how SoftBank's strategy has evolved over the years. The first Vision Fund raised nearly $100 billion by May 2017 and made concentrated bets on a number of late-stage companies such as ride-hailing companies Uber Technologies and Didi Global. Vision Fund spent about $20 billion on those two companies alone, underscoring its ambitions to dominate the sector.

The second vehicle, launched in 2019, was entirely funded by SoftBank's own capital, after efforts to raise external funding were unsuccessful. Compared to Vision Fund 1, the successor made smaller but more investments -- backing 269 companies as of June -- spread across a wider range of industries and geographies. It ramped up investments in Europe, Asia and the Middle East, such as Revolut, Bangladesh fintech company bKash and Turkish e-commerce company Trendyol.

As the appetite for tech stocks cooled, some of its portfolio has been hit with turbulence. EToro, a financial trading platform, canceled plans to go public in the U.S. via a special purpose acquisition company (SPAC) in July. A U.S. online home financing company, Better, has delayed the deadline for its SPAC merger until March 2023. Layoffs have hit others like Unacademy, an Indian online education company, and U.S. fitness company Whoop.

Son himself has appeared conflicted about what SoftBank should be doing in this new era. His past as a swashbuckling entrepreneur, ready to seize an opportunity to place bigger bets, is at odds with a new pragmatism over the potential fragility of his business empire.

"Some say that now is the time to buy. I, too, feel this way in my heart," Son said last month. "However, if we pursue a big vision or a cause unilaterally, there is a danger of total destruction. That is why we are thoroughly restraining new investments." Vision Fund 2 made just one investment in August and one in September, according to CB Insights.

Meanwhile, the industry that SoftBank disrupted has been catching up.

U.S.-based Insight Partners, known for its investments in software companies, said in February it had raised $20 billion for its 12th flagship fund. U.S.-based Tiger Global closed a $12.7 billion fund in March, only a year after raising a $6.7 billion vehicle, according to data provider Preqin. Similarly, Andreessen Horowitz raised a $4.5 billion cryptocurrency focused fund in May, double the size of a $2.2 billion crypto fund raised last year. These funds have recently outpaced the Vision Fund in new investments.

For companies in search of capital, it is a potentially welcome chance to court different investors, even though the environment is currently challenging.

"There was a time when companies thought they would lose without SoftBank's investment," said Rebright’s Ebihara. "Now there are many players that can cut similar-sized checks. The halo that SoftBank once had is gone."

Supporters of Son say his track record as an entrepreneur and investor gives portfolio companies a unique advantage. After investing more than $1 billion in Indian payments company Paytm in 2017, Son personally asked its CEO to support the development of Japanese peer PayPay, according to people familiar with the matter. Paytm engineers revamped PayPay's software, and it has since become the leader in mobile payments in Japan.

The other side of the coin is that Son's occasional mistakes, such as a large bet on U.S. shared office space company WeWork that went sour, highlight the difference between venture capital firms where multiple partners agree on an investment decision and the Vision Fund’s dominance by a single charismatic figure.

"Investments like WeWork clearly lacked discipline," said Ebihara.

But Son, who owns 29%, is still keeping his personal stamp on the company, saying in an email to employees in July that he will be taking a "more direct leadership role" in managing the second fund.

Rajeev Misra, the head of the first Vision Fund, has stepped back from overseeing new investments. In late September, the fund began cutting about 150 employees, roughly a third of the total.

In previous interviews with Nikkei, Son had said that expanding the Vision Fund is key to realizing his vision of building a company that lasts 300 years. "Once the organization is established to some extent, it can manage itself," he said, adding that he wants to expand its team of investment experts to 2,000 people in 10 years.

Now it seems that as the Vision Fund enters its new era, the links between Son and SoftBank's fortunes are becoming stronger than ever.

"As an investment company, SoftBank does not raise money by setting policies on where it would invest," said Tatsunori Kawai, chief strategist at au Kabu.com Securities. "Son is the most influential person. Whether it is cutting-edge technology or telecoms, the money will flow towards the direction he determines."