SoftBank’s Vision Fund is largely similar to all other VC funds

SoftBank made a whopping $1.5 billion in profit from exiting Flipkart, but it makes for a hollow victory at best and a vague defeat at worst in the larger scheme of things

In August 2017, SoftBank had invested $2.5 billion into Flipkart through a combination of primary and secondary purchases

Now, the company is said to have sold the entire stake to Walmart for $4 billion

But SoftBank probably made this decision more out of compulsion rather than of free choice

A $4-billion exit for a $2.5-billion investment would be the VC equivalent of scoring two runs off a ball in cricket, rather than a sixer. Why do it then?

What is cooler than a billion dollars?

Well, for one thing, $1.5 billion. Rs 10,000 crore if you like your numbers well-rounded.

In profit.

If you are an investor in India, a return of this size would take you right off the VC sweepstakes in terms of absolute dollars earned.

It is a lot cooler if you make this enormous sum in just one year.

This is exactly what SoftBank achieved with Flipkart. In August 2017, it had invested $2.5 billion into Flipkart through a combination of primary and secondary purchases. In less than a year, as of last month, the company is said to have sold the entire stake to Walmart for $4 billion. A whopping return of 60% in less than nine months. A wonderful win for an investment from a fund vehicle that promises an overall internal rate of return (IRR) of 8% over its 10-year lifecycle.

Yet, this victory is a hollow one in many ways for SoftBank. In fact, one could actually say that rather than a definitive victory, it represents a vague defeat of sorts for the behemoth.

Why so?

Masayoshi’s Millions

SoftBank’s $100-billion Vision Fund is the most recent “big bet” of a man who is used to betting big and winning in equal measure. From a humble beginning selling PC software in Japan, Masayoshi San, the mercurial founder and CEO of SoftBank, moulded the company into a global conglomerate with interests in hundreds of technology, telecom and internet companies all across the globe. Underpinning this growth was a fortune that was so big that at one point in time, during the heady dot-com days, Son-san was briefly the richest man in the world.

But that was just the first act.

In 2016, Son-san put together the largest VC fund in history. The $100-billion Vision Fund. To understand and appreciate how large this sum is, one only needs to look at the total amount of money raised by the entire American VC industry last year—$33 billion. The Vision Fund is three times as big as this entire corpus, and what’s more, in less than two years, Softbank has already deployed over $33 billion into companies like Flipkart.

Ever since the launch of the Vision Fund, there have been a number of sceptics opining that the fund is too big to work

But a fund of this size and ambition also mandates a return on investment that is of commensurate scale. Which brings us to the point on why exiting Flipkart is more a vague defeat for SoftBank than a definitive victory.

Fund economics and Flipkart

While the size of SoftBank’s Vision Fund is unprecedented, the economics driving the fund is largely similar to all other VC funds.

AUTHOR

Sumanth Raghavendra

Sumanth is a serial entrepreneur with more than eighteen years experience in running startups. He is currently the founder of Deck App Technologies, a Bangalore-based startup attempting to re-imagine productivity software for the Post-PC era. Sumanth’s columns appear regularly in leading publications. He holds MBA degrees from the Indian Institute of Management, Bangalore and Thunderbird, The American Graduate School of International Management, USA.

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