SoftBank’s Woes Are Not a Victory for Rival VCs

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(Bloomberg Businessweek) -- Venture capitalists may have breathed a sigh of relief in February when the activists came calling for SoftBank Group Corp. founder Masayoshi Son. The Japanese company’s $100 billion Vision Fund upended technology investing when it began making outsize bets on startups in 2017. Being the biggest venture fund in history meant its portfolio companies didn’t have to worry about profit anytime soon, while making it harder for rival investors to get in.

Paul Singer may have put an end to all that. Elliott Management Corp., the billionaire’s activist vehicle, has built a stake of almost $3 billion in SoftBank and is demanding that Son refocus attention on its existing business. The Vision Fund accounts for just 10% of SoftBank’s overall managed assets, runs the argument, yet consumes 100% of investor attention.

Son’s plan to raise a larger second fund was already proving difficult after last year’s ditched initial public offering of WeWork parent We Co. The fiasco highlighted major defects in the way the fund, and by implication SoftBank itself, is run. But VC firms would be wrong to think pressure on SoftBank and the Vision Fund makes their lives easier. Even if Son fails to raise the new capital, the Vision Fund has fundamentally changed the landscape.

Venture capital is hard not just because it’s tough to find the best investments, but also because the most promising startups often have the luxury of choosing whose money to accept. Storied firms like Sequoia Capital, an early investor in Apple, Google, and LinkedIn, have a significant edge over the arrivistes. To get over that hurdle, the Vision Fund weaponized its cash pile, bullying companies into acceptance by threatening to invest in rivals. “Rather than having their capital cannon facing me, I’d rather have their capital cannon behind me,” Uber Technologies Inc. Chief Executive Officer Dara Khosrowshahi said in 2018.

To compete, rival funds have gathered their own vast stacks of money, helped by the dearth of good returns elsewhere. More money poured into venture in both 2018 and 2019—the two years the Vision Fund started investing—than had in any previous year, as Sequoia, Andreessen Horowitz, and other firms raised their biggest funds yet. And the average size of new funds grew to the biggest in more than a decade, according to data from PitchBook Data Inc.

These monster funds, while smaller than SoftBank, still have to compete with one another. And they won’t have the option of exiting by selling their stake to the deep-pocketed Japanese firm. Son has also inadvertently changed public investors’ expectation of startups. In addition to WeWork, the disappointing market debuts of SoftBank stablemates Uber and Slack Technologies Inc. have refocused attention on old-fashioned metrics such as, dare I say it, free cash flow. Somehow the Vision Fund has managed to make it harder for venture capitalists to both invest and then find an exit. —Webb is a columnist for Bloomberg Opinion.

To contact the editor responsible for this story: Eric Gelman at egelman3@bloomberg.net

©2020 Bloomberg L.P.

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