Leviathan.
If you could think of only one word to describe SoftBank’s Vision Fund, it would be this. At $93 billion, the Vision Fund is by far the largest VC fund ever in history. And like the legendary sea monster of yore, with its immense size and power, it is threatening to upend every aspect of startup investing all over the globe. But particularly so in India.
Masayoshi Son, the charismatic CEO and Founder of SoftBank, has earmarked a whopping $10 billion to invest in India. SoftBank has already invested $4 billion in companies like Flipkart and Paytm* and is said to be doubling down on Ola by buying out Tiger Global’s stake in the company, just as it did so in Flipkart earlier. Speaking of Tiger, it is easy to see SoftBank as the new Tiger—the new sugar daddy in town, blessing startups with huge dollops of capital at valuations that would give nose-bleeds to other Indian VCs. But to say that SoftBank is the new Tiger is not just facile, it is also wrong.
In the last ten years or so, Tiger has backed over a hundred Indian startups investing approximately $2 billion (nearly all of this into just one company, Flipkart). SoftBank, on the other hand, is likely to invest $10 billion in just 10 Indian companies. Five times as much in 1/10th as many companies.
Why so?
The total size of SoftBank’s Vision Fund is purported to be $100 billion (of which $93 billion has already been committed, and the balance will be mopped up by the end of the calendar year). But while the size of this fund is unprecedented in VC history, its structure follows traditional VC norms. A 10-12 year lifecycle, an annual fee of 2% to the managers, a return of 8% per annum to investors and a 20% carry to SoftBank. The only unusual structuring aspect is that investors other than SoftBank (which owns 28% of the fund) have been given both equity and debt instruments while SoftBank itself has only equity. While this slightly alters the risk-reward ratio and affords higher leverage to SoftBank, it doesn’t change the overall goals of the fund.
Like every other fund, SoftBank’s Vision Fund has to deliver a minimum 2X return to its investors, i.e. $100 billion has to grow to $200 billion. Assuming SoftBank’s percentage ownership target is the same as most other investors, this figure of 20% implies that the total exit target is a gargantuan sum of $1 trillion.
Therein lies the rub.
You can’t hope to create an exit value of $1 trillion by investing tens of millions of dollars in a thousand companies—there aren’t that many high-quality deals at the top or at the bottom of the funding funnel. SoftBank’s best bet is to invest a billion dollars each in a hundred companies and hope that the exit arithmetic works out the way it does for smaller traditional funds.
