SoftBank Group Corp. is considering launching a third Vision Fund, which could be announced as soon as May 2021. This fund would follow the launch of Vision Funds 1 and 2, which have made histories with their large investments in tech companies.
Before deciding to launch a third Vision Fund, SoftBank must consider its potential challenges. Here, we will discuss what some of those challenges are.
SoftBank Considers Launching a Third Vision Fund
SoftBank Group is a multinational holding company in Japan, founded by Masayoshi Son in 1981. Over the past four decades, the company has become a major global technology player through investments in iconic tech companies such as Alibaba, Sprint, Yahoo!, Uber, NVIDIA and more. Its high-profile investments have earned its founder the Startup Shogun nickname.
SoftBank’s most notable investment program has been its Vision Fund, a $100 billion fund established to invest in companies that are leading next generation technologies such as artificial intelligence (AI), robotics, virtual reality (VR), machine learning (ML) and energy storage. The first Vision Fund was launched in 2016 with $92 billion of investor capital from sovereign funds and other investors from the Middle East and Asia, mainly Saudi Arabia’s Public Investment Fund ($45 billion) and Abu Dhabi’s Mubadala ($15 billion). Results achieved so far by this fund have been highly positive with positive returns since inception.
Given the successful results achieved thus far by SoftBank’s Vision Funds, the company is now considering launching a Third Vision Fund. This article will discuss some potential challenges SoftBank may face while launching a Third Vision Fund.
Challenges of Launching a Third Vision Fund
SoftBank’s Vision Fund is a venture capital fund aiming to invest in technology startups across the globe. With the success of their previous two Vision Funds, SoftBank is considering launching a third one.
However, the process of launching an investment fund is complex and comes with its own challenges. In this article, we’ll be exploring some of those challenges.
Lack of Investable Opportunities
One of the primary challenges that SoftBank’s third Vision Fund faces is a lack of investable opportunities. The first two funds focused heavily on technology-related investments, primarily in established companies. However, in its May IPO, SoftBank noted that there were reduced investment opportunities available for the third fund that fit the Vision Fund’s strategy. This means that SoftBank must spend more time and energy identifying new investments or exploring alternate investment opportunities, which require more resources and diligence than the prior funds.
Another key issue is whether there will be enough investor interest in a third Vision Fund. The current market environment includes considerable anxieties over global economic growth and macroeconomic uncertainty, which makes investors more hesitant to commit capital to large funds such as Softbank’s. Therefore, to attract investors, SoftBank must create a compelling narrative and emphasise the potential returns of Vision Fund III investments and its overall concept of sustainable development through technology investments.
The challenges don’t stop at raising capital through – investors will likely require greater transparency in terms of operations into this fund compared to previous iterations and increased liquidity because of their risk aversion in times of uncertainty. Lastly, ensuring alignment between management fees and investor returns may prove challenging because vision fund investors are unwilling to pay fees from unrealised gains while investing at scale across markets makes it difficult to exit each investment within an acceptable period (5–7 years).
Difficulty in Securing New Investors
SoftBank needs to attract new investors to launch a third Vision Fund. Despite having over $100 billion in the two current Vision Funds, some investors backed out of the second fund. This reality has had SoftBank’s CEO Masayoshi Son reconsidering whether a third Vision Fund is possible.
Reaching out to institutional investors who previously invested in earlier funds may be difficult as some have cooled off on the concept of investing in tech start-ups. Furthermore, those investors may be leery of investing money due to potential issues such as mismanagement in previous investments and the lack of control over where funds are allocated.
In addition, limited partners often have varying perspectives on investing, affecting their decisions about investments for a new fund. For example, some limited partners may want more information about how their money will be used and whether their investment will make them a return before committing any resources to the fund.
Finally, understanding antitrust laws and regulations when operating across multiple countries can add additional complexities when launching the next investment. With countries such as Germany expressing concerns over ceding control over corporate decisions to foreign investors, there could be pushback from governments about committing money for a third Vision Fund. As a result, SoftBank must carefully consider key decision makers before launching additional funds and rely on strategic planning to increase capital contributions from prospective investors worldwide.
Regulatory Challenges
While SoftBank has successfully raised capital for its Vision Funds, the regulatory environment can complicate launching a third one. To achieve global success and manage scale, firms must meet the regulatory requirements of each country. In some cases this means obtaining approvals from local governments, an often lengthy and expensive process. Additionally, global regulation concerning debt-to-equity ratios and leverage are constantly in flux, making it difficult to practise due diligence.
Moreover, many countries have restricted foreign investments due to economic uncertainty and rising nationalism. For example, India recently announced that it will increase scrutiny of foreign investments in certain industries deemed sensitive from a national security perspective such as defence and finance. This has resulted in delays for transactions proposed by Vision Fund affiliates including the Buyout Firm KKR & Co., Singapore’s Temasek Holdings Pte. Ltd., Abu Dhabi’s Mubadala Investment Company and Saudi Arabia’s Public Investment Fund (PIF).
In light of these challenges, SoftBank may focus on their core competencies while partnering with experienced investors specialising in different geographies with more favourable regulations. While softbank could try to navigate the regulatory hurdles alone for a third fund – it might be better to outsource some tasks to those who have expertise navigating unfamiliar jurisdictions so that they can move quickly when needed.
Risk of Over-Investing
As SoftBank considers launching a third Vision Fund shortly, it faces several hurdles that could significantly impact its success. One of the primary risks is over-investing in the venture capital and private equity markets. The original Vision Fund invested heavily in unproven startups, investing $100 billion across almost 90 companies such as Uber and WeWork, with an average investment of almost $1 billion. This risky investing carries significant risk and resulted in negative returns on several key investments, leading to losses for SoftBank, including a reported $3.3 billion loss on WeWork alone.
Similarly, private equity funds have seen their largest investments struggle due to regulatory hurdles, reliance on IPOs to generate returns and competition within concentrated verticals that has driven down prices and valuations significantly. In addition, investing too much money into illiquid investments will increase SoftBank’s exposure to market volatility which could reduce its potential returns from investments made through its third Vision Fund.
To mitigate these risks, SoftBank must be cautious in its commitment to each deal and limit how much capital it exposes to certain sectors or groups of companies so that other strong performers can absorb any losses within its portfolio. Additionally, diversifying its portfolio among various venture capital strategies such as late-stage growth capital, early stage seed investments and industry specific investments could reduce some risk from the fund’s concentrated focus areas. With careful planning and effective management strategies, SoftBank can reduce some associated risks of launching a third Vision Fund.
Potential Solutions
In late 2020, SoftBank announced that it was considering launching a third Vision Fund. This follows their massive success from the first two funds.
However, SoftBank would have some challenges to face if it went ahead with launching this new fund. In this article, we’ll take a look at some of those challenges and explore potential solutions.
Invest in Different Sectors
SoftBank has experienced rapid growth since they launched their two Vision Funds and has invested heavily in important technology sectors such as AI, robotics, and space exploration. While these sectors represent major potential for future success, increasing profitability requires careful diversification into consistent areas.
Therefore, for SoftBank to consider launching a third Vision Fund, investing in different sectors such as energy, health care, public infrastructure or agriculture would be beneficial. Investing in various established and reliable industries like agriculture would help stabilise any losses from the more volatile technology sector investments should the economy take a downturn. Additionally, diversifying investments could bring greater returns to SoftBank if these new investments were successful.
Investing in different types of businesses could open up opportunities beyond the technology sector and provide more investment options that are less likely to be affected by economic recessions.
Focus on Long-term Investments
SoftBank’s Vision Fund has been partially successful due to its focus on long-term investments, selecting companies it believes will have high growth potential and staying invested for the long haul. To launch a third Vision Fund, SoftBank would need to stay true to this strategy and ensure that the businesses it invests in have concrete plans for future growth. In addition, SoftBank can leverage its experience and track record of successful investments to attract more investors and encourage more people to place their confidence in the fund.
In addition, SoftBank will need to plan ahead for a strategic exit plan going forward. While many tech startups rapidly increase their value soon after being founded, they can also lose momentum quickly. For example, weWork had a rapid increase in valuation after its founding in 2010 but saw a steep decline due to management missteps in 2019. As such, SoftBank needs to take into account the potential for such scenarios when crafting an exit strategy for its investments so as not to be caught off guard when market conditions change.
Invest in Early-Stage Companies
SoftBank is considering launching a third Vision Fund to invest in early-stage companies. One of the biggest challenges it would face in this endeavour is building its team to identify, analyse, and secure potential investments. SoftBank would need to have a well-staffed team with the experience and knowledge to vet early-stage companies, while ensuring that the technology or service the startup is offering is unique or better than those of competitors.
Furthermore, SoftBank must build its due diligence processes and criteria for evaluating target companies before investing. This involves developing criteria for a company’s overall financial health and stability and performing reviews of past performance and management team qualifications.
In addition, SoftBank will have to carefully consider potential market factors that could influence its investment decisions such as emerging trends, industry changes, macroeconomic hurdles (for example political changes/policy issues), and technological advancements. Staying abreast of these changes can help ensure that SoftBank’s portfolio remains profitable despite any unforeseen business impacts.
Utilise a Diversified Investment Strategy
To maximise returns and mitigate risks associated with potential losses, SoftBank should utilise a diversified investment strategy that focuses on a broad spectrum of companies across various sectors. For example, SoftBank may look toward expanding their portfolio by investing in technology startups, online retail, food delivery, and fintech. By not relying on any one area for success and investing in multiple industries simultaneously, SoftBank will be able to capitalise on the best opportunities for growth.
In addition to diversifying their investments across sectors, SoftBank should strive to construct a portfolio with various types of companies at different stages of development. This approach would allow SoftBank to take advantage of early-stage companies with potential high returns and more established firms with lower risk/reward ratios. Furthermore, investing in startups such as startups in emerging markets (India, Indonesia) may provide lucrative opportunities due to the rapidly growing customer base in these areas and the potential for long-term returns.
SoftBank should also consider forming strategic partnerships with external organisations that can bring fresh ideas and new perspectives that could be beneficial when developing their investment strategy. For example, partnering with venture capitalists (VCs) or investment banks could help identify attractive deals that their internal team could have overlooked. Additionally, gaining insights from VCs and other professional investor groups can assist them in identifying valuable companies earlier than traditional methods usually allow them maintain an edge over their competitors when evaluating investment opportunities.
In conclusion, SoftBank appears determined to launch a third Vision Fund despite the numerous challenges it may face. These challenges include the low profitability of SoftBank’s existing investments, the uncertainty in global markets due to the Coronavirus pandemic, and the limited access to capital. However, SoftBank has the potential to overcome these obstacles and successfully launch a third Vision Fund.
Summary of Challenges and Solutions
SoftBank is considering launching a third Vision Fund, hoping to enhance their current investments in businesses around the world. However, to be successful, they must tackle several potential challenges related to raising funds, investing in different geographies, choosing the right investments and realising returns.
Raising funds: SoftBank would need to identify new funding sources for the third Vision Fund and find investors willing to invest despite the uncertain climate caused by COVID-19. In addition, SoftBank will also have competition as other players are ramping up their own venture capital activity while aiming for higher returns on investment.
Investing Globally: SoftBank may look to invest in different countries and regions beyond its current focus primarily on U.S.-based firms. This could necessitate changes in corporate governance and accounting practices across regions, or require teams with new technical experience and skill sets for due diligence purposes given the variation of markets.
Choosing Investments: This fund’s key challenge will be making selective portfolio decisions. Ensuring that investments fall within approved strategy parameters is vital, as any failing venture can strain future fundraising efforts or lead to losses from previous investors.
The team must also be fully conversant with market trends across sectors before recommending specific investments and have clear processes and controls when reviewing potential deals to ensure they match SoftBank’s objectives while minimising risk.
Realising Returns: Ultimately, SoftBank’s objective is realising returns on their ventures through successful exit strategies such as IPOs or secondary offerings over some time; alternatively they may receive dividends if profits are sufficient across a portfolio of entities within the fund at any given time. Quick exits could also help them receive compensation if immediate profitability isn’t achieved; however this strategy carries more significant risk that needs careful consideration by investors before committing funds.