SoftBank’s Vision Fund has brushed aside concerns about its investment model amid a collapse in tech company valuations that forced WeWork to abandon its planned share offering and continues to hammer other key investments, including Uber.
Rajeev Misra, CEO of Softbank Investment Advisers who leads the Vision Fund, told the Nikkei Asian Review that paying over the odds for tech company investments makes no difference over the long run if they are successful, and denied that the USD 100 billion Vision Fund had created a tech bubble that may now be deflating.
“Whether you buy [at] 10% more or less valuation, does it matter if we’re looking for three times return?” Misra said in a rare interview. “If you think your USD 1 is going to become USD 3, whether you pay USD 1.1 or USD 1 [is less important],” he said.
WeWork formally pulled its IPO (initial public offering) application this week after it failed to drum up investor interest even at a sharply reduced valuation of USD 15 billion. SoftBank had valued the shared-workspace provider at USD 47 billion in January. SoftBank’s break-even valuation for WeWork is estimated at USD 24 billion.
WeWork, which is hemorrhaging cash, is now reportedly in talks to renegotiate a USD 1.5 billion injection from SoftBank potentially raising it to USD 2.5 billion or more.
Last week co-founder Adam Neumann stepped down from his role as WeWork CEO following scrutiny into his leadership and governance of the company.
The fiasco has thrown doubt onto the viability of the SoftBank-led investment model that has largely relied on the stock market flotation of loss-making tech startups. Uber, the U.S. ride-hailing company that went public in May, is trading more than a third below its IPO price. Shares of ride-hailing competitor Lyft, backed by rival Japanese e-commerce and finance company Rakuten, is trading at almost half of its March IPO price.
But Misra, a former investment banker and private equity fund manager who joined SoftBank in 2014, called the Vision Fund “patient investors.” Misra, who spoke to Nikkei in mid-September just as WeWork’s problems were mounting in the public eye, declined to comment on WeWork.
Some of the Vision Fund’s investments have performed well in recent listings, especially in the health sector. Shares in biotechnology company 10x Genomics are trading around a fifth higher than when it floated in September.
“Once a company goes public, we will re-evaluate whether we should keep the stock or not,” Misra said. “And the ones we decide to keep, we may keep for a while, as long as we believe there is potential for good return on the company.”
Misra also voiced confidence in the potential of Vision Fund’s “ecosystem” of over 80 portfolio companies that the second fund will build on. “The extra returns we can add by bringing those companies to work with each other which we are already seeing now, is enormous,” he said. One example of such linking is Fair, a car-leasing service, working with Uber.
Meanwhile, SoftBank-backed companies have continued on their spending splurge: this week, loss-making Indian hotel startup Oyo, which is backed by the Vision Fund, splashed out a reported USD 100 million jointly with SoftBank for an 80% stake in Japanese rental apartment operator MDI.
Misra said Vision Fund 2 will continue SoftBank’s strategy of focusing on “disruptive” AI-driven tech companies.
“We invest in asset light businesses, not asset heavy businesses. So we don’t invest in companies that buy real estate or buy cars. It has to be asset light, it has to be platform software driven, get smarter every day with more data coming in,” he said. “There are lots of industries that will get disrupted, so we will find other disruptive industries, of course. Health care, finance, entertainment, media entertainment, these are large industries that still have massive potential to be disrupted through technology.”
Vision Fund 2, announced in July and scheduled to launch by the end of the year, has secured USD 108 billion of pledges from Apple, Microsoft and Japanese banks, among others, according to SoftBank Group. Mubadala, Abu Dhabi’s sovereign wealth fund, and PIF, the Saudi Arabian sovereign wealth fund — who together invested over USD 50 billion in the first fund — have not yet confirmed their involvement in the second.
The original fund became known for its blockbuster bets on big startups such as Uber and office software company Slack. But there are fewer opportunities for such massive investments in private tech companies these days, meaning the second fund will likely focus on a larger number of smaller investments. Doing so would require more staff but would also avoid the bigger risks that come with bigger bets.
The Vision Fund is also taking steps that could help avoid a repeat of WeWork’s troubles and the disappointing performances of Uber and Slack.
“We are developing a group which is called ‘IPO readiness,’ which will help companies prepare to go public,” Misra said. The group is already working with some companies though it has not been fully deployed yet. The fund also began this year helping portfolio companies “optimize their financial balance sheets.” Both steps suggest the Vision Fund is building up its ability to move portfolio companies toward value generation.
As long as IPOs remain an important exit strategy, bridging the gap between the Vision Fund’s “patience” and the more immediate demands of the market will remain a top priority.