SoftBank Group founder, chairman and CEO Masayoshi Son announces his group’s earnings results on May 9, 2019, in Tokyo.
Alessandro Di Ciommo | NurPhoto | Getty Images
Jerry Yang rode out the late 1990s the same as every other tech king brought up in Silicon Valley’s adolescence: shrewdly building the web with millions in venture capital.
As the internet took off, Yang’s fledgling search engine was freshly minted with $100 million from Masayoshi “Masa” Son. Yang quickly became Silicon Valley’s poster child, building one of the biggest internet companies the world had ever seen — Yahoo — worth $125 billion at its height.
Its best days may be gone, but Masa Son, the founder and CEO of Japanese tech and telecom giant SoftBank, remains behind some of the biggest and most lucrative internet bets, including his bet on Yang’s friend and Alibaba co-founder Jack Ma.
In recent years, SoftBank has massively disrupted start-up investment in Silicon Valley and beyond with its $100 billion Vision Fund. Masa Son has become a key force behind all of the fund’s investments, meeting with every founder in person before a deal is signed. To put the fund’s magnitude in perspective, its size is almost double the investments made by U.S. venture firms last year. PitchBook data shows that VC fundraising in the U.S. totaled $53.9 billion last year across more than 200 funds, and that was the largest annual raise in at least a decade.
Today Masa’s $100 million Yahoo infusion is the Vision Fund’s minimum on the checks written to start-ups that have caught his attention. Fourteen of these SoftBank-funded start-ups — Cohesity, Didi Chuxing, DoorDash, Fanatics, Flexport, Grab, InMobi, Kabbage, LanzaTech, Lemonade, Nauto, Opendoor, SoFi, and The We Company (better known as WeWork) made the 2019 CNBC Disruptor 50 list. Of the 184 companies in the list’s seven-year history, SoftBank and its Vision Fund has plowed almost $40 billion into 19 Disruptor 50 companies, according to PitchBook.
Underpinning it all is SoftBank’s winners-take-all strategy that has stirred new discussion about the stratification of power and wealth in Silicon Valley. Son’s large checks have helped inflate valuations in pre-IPO private companies, making other VCs write bigger checks or drop out of deals entirely. Further complicating the matter is the source of capital. The Vision Fund’s biggest outside investor is Saudi Arabia’s sovereign wealth fund, meaning that any company taking its money is tying itself to Saudi Arabia and Crown Prince Mohammad Bin Salman, better known as MBS.
Typically, the SoftBank Vision Fund nod helps pump money into high-profile disruptors like Kabbage — an online lending profile for small businesses that to date has raised a total of $489 million in venture capital since it launched in 2009. That includes an undisclosed Series D investment and a $250 million Series F investment from SoftBank, according to PitchBook.
“Masa has a tremendous vision,” said Kabbage co-founder and CEO Rob Frohwein. For Kabbage, one of few profitable tech companies in SoftBank’s portfolio, the aggressively large investments put them on a fast track to global unicorn status, now worth $1.2 billion, according to PitchBook.
Pulling back the curtain on a global start-up machine
Since its 2016 arrival to the venture capital scene, the Vision Fund has become the world’s largest technology investor, with 82 companies now a part of its global portfolio. Partners at the fund have spent the past three years crowning late-stage companies with long-term capital for anywhere between 20% and 40% ownership in return, according to Jeff Housenbold, one of the fund’s 10 managing partners who refers to the equity range as SoftBank’s “sweet spot” when it comes to closing the fast-paced deals.
Jeff Housenbold, managing partner at SoftBank’s Vision Fund
That early investment in Alibaba made SoftBank one of its biggest shareholders at the time of the Chinese company’s colossal public debut in 2014 — still the largest ever to hit U.S. markets. The value of its 34.1% Alibaba stake allowed Masa to continue taking out debt and finance SoftBank’s growth, which gave life to the Vision Fund and other epic business segments. Housenbold says the success of Masa’s Alibaba bet serves to validate the Vision Fund’s philosophy behind investing “patient capital.”
“Masa’s like, ‘I waited 10 years on Jack (Ma) to get profitable,” emphasizing the time that the venture firm can afford to wait for an exit compared to other VCs.
Since joining the Vision Fund in 2017, Housenbold has led the investment in 12 of its portfolio companies, three of which are on this year’s CNBC Disruptor 50 list: InMobi, ranked 12th; DoorDash, ranked 18th; and Opendoor, ranked 35th.
“When I came onto the scene, we were an anomaly and a disruptor just like any of the start-ups that we’re backing,” Housenbold said. He compares SoftBank’s disruption of late-stage investing to Andreessen Horowitz’s disruption of early stage investing almost 10 years ago. “Late-stage growth once meant, ‘We’ll write $20 million to $75 million checks and we’ll be hands off.’ We came in and said, ‘No, we’ll write $100 million to $1 billion checks and we’ll be hands-on.'”
Deep Nishar, a senior managing partner at the Vision Fund, describes its investment philosophy in near-identical terms. “Many times $10 million to $20 million in capital just isn’t enough,” he said. “Sometimes you need hundreds and millions upon billions of dollars” to achieve the disruptive industry transformation that the Vision Fund expects.
Nishar, who leads investments in enterprise, health and frontier tech for the fund, also added that despite its focus on late-stage companies, not all are “global powerhouses” at the time of the fund’s investment. “What we look for is their potential to be a global powerhouse.”
One such example he cited was Cohesity, ranked 32nd on this year’s Disruptor 50 list and one of 14 portfolio companies Nishar manages for the Vision Fund.
Capital, counsel and connections
“Because we have a lot of capital, we can make investments in the future of the company where other VCs either don’t have that amount of capital or they don’t have that amount of patience. So they’re going to force [start-ups] to have a much smaller business but a more quickly profitable one,” Housenbold said. “I’m not worried about an exit in two to three years. I’m worried about maximizing returns over 7 to 10 to 15 years.”
If it’s appropriate, the Vision Fund has no problem buying out other shareholders who, as Housenbold describes it, “might have been waiting for an exit in two or three years, because they’ve been in the game for three or four.”
Mohit Aron is founder and CEO of Cohesity, a San Jose-based enterprise software company that landed $250 million from the Vision Fund last June. Since then, he’s found that an investment from SoftBank is “phenomenal in both the direct and indirect benefits it provides.” Introductions inside and outside the portfolio, the credibility of its name and worldwide influence, Aron believes, are all part of the fund’s investment in his company’s future.
Mohit Aron, founder and CEO of Cohesity
Specifically, Aron said that SoftBank’s investment has helped to accelerate Cohesity’s international expansion and enabled the company to help more organizations around the world solve mass data fragmentation. “They are creating new opportunities to interface with other portfolio companies who are also disrupting their industries,” he added.
Housenbold packages these benefits of their investment as the “capital, counsel and connections” SoftBank is capable of offering. Today the company has raised $410 million in total venture capital funding and has a valuation of $1.1 billion, according to PitchBook.
Start-ups with high valuations
Some start-up founders remain skeptical that a fund capable of creating such rich valuations and global influence can package its complexities so cleanly. One of them is Keith Rabois, co-founder and executive chairman of real-estate company Opendoor. The five-year-old company helps homeowners sell their house more quickly by offering to buy it from them. Sellers pay a fee of 7.7% of the selling price to Opendoor and can schedule a closing in as little as 10 days.
The company says it purchases about $2.5 billion worth of homes annually and has worked with more than 30,000 buyers and sellers. Right now it operates in 20 cities across the U.S. but projects to be in 50 cities by next year. No doubt it is a business model that requires huge sums of capital, which could be one of the reasons that Opendoor accepted a $400 million investment from the Vision Fund last year despite Rabois’ previous comments that SoftBank’s investment strategy “doesn’t work.”
“SoftBank money will have nothing to do with Opendoor’s success. Opendoor was already going to beat Zillow regardless of whether SoftBank invested or not. DoorDash was clearly going to win the market. They were absolutely going to beat Grubhub and Uber Eats. SoftBank didn’t make that possible,” Rabois said. “They were just correctly choosing the best founders and the best companies. As investors, I give them a lot of credit for picking these companies, but the companies were already succeeding massively before.”
But Rabois has another problem with SoftBank, and that’s the Saudi connection. While he described the Vision Fund’s investors as “smart and insightful” in how they evaluate deals, “the sourcing of the capital is questionable,” said Rabois, who for years has criticized U.S. businesses that take money from a country that criminalizes homosexuality and attacks Jews and women.
OpenDoor is disrupting the real estate market with its new model. It buys homes and sells them on its platform.
So how does Rabois reconcile his political views with the fact that his company is now heavily backed by SoftBank and the Saudis?
“Unfortunately, I’m not the sole decision maker in terms of where Opendoor or any company I invest in raises capital from,” said Rabois, who’s a venture capitalist in addition to his role at Opendoor. “I wished we raised money from other sources, but it’s not up to me.”
The brave new world of private equity
To some founders, SoftBank and its Vision Fund have become an equal alternative to going public, offering all the benefits of their global influence with the luxuries of remaining a privately-backed company. But Rabois, who recently left Khosla Ventures to join Peter Thiel’s Founders Fund, isn’t the only VC with longstanding concerns about SoftBank’s influence on the IPO market.
In 2017, not long after the Vision Fund invested its first billions in Uber, Oaktree’s Howard Marks told CNBC that the “willingness of investors to invest in a shockingly large fund for leveraged tech investing with a questionable structure is a further indication of an exuberant, unquestioning market,” adding that SoftBank’s record of success relied heavily on Alibaba and questioned its ability to successfully invest $100 billion.
To date, 80% of the Vision Fund’s $100 billion checkbook has been deployed into its portfolio companies. According to Masa, those checks have already generated $11 billion in operating profit and a 29% internal rate of return as of March. Though the gains are primarily on paper, it hasn’t stopped him from scaling up SoftBank’s investing efforts: The fund has recently confirmed plans to raise a second $100 billion fund, the Vision Fund II, in the coming months.
Between the talk of a Vision Fund IPO, the raise of Vision Fund II and Uber’s more than doubling of losses since last Friday’s poorly received IPO, there are plenty of challenges ahead for Masa. Answering for his competitive investing tactics may rank equally challenging if not more so in the coming months.
Some venture capitalists, who asked not to be named, were critical of SoftBank’s tendency to threaten start-ups with the prospect of throwing money at their top competitor if they refuse an investment from the Vision Fund. The strategy doesn’t sit well with other dealmakers around Silicon Valley and isn’t that effective anyway, they say, now that Sequoia is raising its own $8 billion growth fund and Insight Venture Partners pulled in $6.3 billion. Entrepreneurs have options.
Steering global influence
There have been several instances in which Masa has gone knocking on rival doors, checkbook in hand, to influence key business decisions in SoftBank’s wider portfolio.
Questions have been raised about SoftBank’s global strategy throughout the broader tech ecosystem, as well as its motivations in consolidation of regional investments, particularly in SoftBank’s dominance of the global ride-sharing industry. Vision Fund investments into major ride-sharing companies have totaled over $20 billion to date and include heavy stakes in high-ranking Disruptor 50 companies Didi Chuxing, Southeast Asia’s Grab, and former six-year Disruptor 50 giant, Uber.
One example of the tensions can be seen through SoftBank’s vested interest in the growth of UberEats, despite its multiple investments into rival DoorDash. A second is its role in Uber’s decision to sell its China business to DiDi Chuxing in 2016. But perhaps most notable was Ola co-founder Bhavish Aggarwal’s fight against Masa after SoftBank took a stake in rival Uber, which has now become its largest shareholder. It has been reported that the conflict came as a result of Aggarwal’s growing concern over SoftBank’s influence, later encouraging the two ride-sharing rivaled forces to merge.
“When we look at making investments [in competitors], if it’s your core business within the same geography, we generally won’t do it; If it’s your core business in a different geography, then we’ll likely do it,” Housenbold said.
“Some companies can move into adjacent markets more easily than others,” he said, adding that investments made to rivals in adjacent geographies is case-by-case. “We think that’s part of the power of partnering with SoftBank, our ability to take you global and allow you to become a bigger company overnight than you might have with other sources of capital.”
—Additional reporting by Ari Levy