Japanese telco giant SoftBank Group Corporations move to shut down its venture capital arm, which has been the lifeline of several startups across the continent – from Indonesia to China and India – is set to impact the startup ecosystems across the Asia Pacific (APAC).
The company had announced that it was winding down SoftBank Capital and altering its investment strategy. Rather than having a portfolio consisting of investments in a host of early-stage ventures, its new chief executive Nikesh Arora, SoftBank is pivoting towards larger investments in a selection of smaller but more mature businesses, moving away from being a multi-stage venture capital fund.
A recent Re/code interaction saw Arora explain the strategic shift, saying Softbank would be making a “…bunch of small bets on early-stage companies toward bigger investments in fewer, but more mature, businesses.”
“As we look at the future for the next tens of years, we believe that the way to preserve the long-term sustainability of SoftBank is to be large, minority shareholders of many assets. We believe that it’s less crowded in the large-check marketplace…… and it’s a smaller universe of companies we have to understand and support” he had told Re/code.
In essence, Arora is altering SoftBank’s investment strategy towards acquiring large minority stakes in breakout privately-held businesses. This indicates a more conservative attitude to investment, with a shift towards de-risked investments in entrepreneurial ventures that are market-validated and growing. This strategic shift is also part of a leadership transition in Softbank.
This shift in strategy implies that the SoftBank Capital investment arm will not raise any new funds aimed at early-stage ventures. SoftBank Capital generally provides venture funding and strategic support to entrepreneurial ventures, as well as building enduring businesses across a company’s lifecycle, from early to growth stages.
How this will impact Softbank’s ties to large mobile, internet and technology corporations, including strategic partners like Yahoo! Japan, Alibaba Group, Criteo, Gilt Groupe, OMGPOP (Zynga), BuzzFeed, Buddy Media (Salesforce.com), Huffington Post (AOL) and Associated Content (Yahoo!), is uncertain. Future SoftBank investments are likely to be funded by SoftBank Group, rather than the venture capital arm.
Aurora is seemingly pivoting Softbank towards backing the sale or initial public offering (IPO), rather than investing in a host of early-stage ventures, as well as a broad array of more mature ventures. A reflection of this shift lies in SoftBank’s recent $1 billion investment in Korean mobile commerce company Coupang.
In addition to the Coupang investment, Softbank has invested considerable capital in Indian e-commerce ventures Snapdeal, as well as Uber competitor, Ola Cabs. According to Crunchbase data, Softbank has made 195 investments across 130 ventures, across from seed stage to Series D, venture funding and private equity rounds.
Investments in early-stage ventures will likely remain possibilities, but on a case-by-case basis. Moreover, new funds will not be raised by the investment team. This follows a trend of companies staying private longer in the modern market and raising more capital prior to conducting an IPO, due to a number of factors.
According to Nino Marakovic, CEO of Sapphire Ventures, in a blog post, he observed that this trends was due to “lower public capital market appetite for small-cap IPOs and stronger private market appetite for late-stage quality firms”.
Marakovic also observed that with more early-stage VCs interested in investing in their valuable portfolio ventures for longer, more funds were being raised by VC’s, particularly what Marakovic termed ‘opportunity funds’, in order to capture value throughout the growth stages of portfolio ventures. This was in addition to funds for follow-on investment.
Fund management shift
According to Softbank Capital partner Joe Medved, new investments are likely to be made into more mature ventures out of its 2014 US$100 million fund, with follow-on investments in Softbank portfolio firms raising new rounds. Softbank partners will also continue to serve as directors on the boards of portfolio companies of Softbank.
A second SoftBank Capital fund has reserved its current $250 million to focus on later-stage investments and follow-on investments in portfolio firms. Meanwhile, a third and separate fund focused on investing in New York-based startup ventures will be rebranded to a non-SoftBank trade name. It will continue to make both new and follow-on investments and is managed by Jordy Levy and Josh Guttman,
What differed about this New York-specific Softbank Capital fund was that its limited partners (LPs) contributed the capital of that fund independent of SoftBank, allowing them to dictate the investment thesis or theme. This fund will continue to make new investments on behalf of Softbank, while the broader $100 million early-stage fund will not make early-stage investments.
SoftBank Capital will also transfer management and administration of its early-stage funds to Lerer Hippeau Ventures, which is familiar with Softbank Capital’s and has also co-invested on several deals. The managing partner of Lerer Hippeau Ventures, Eric Hippeau, was previously a managing partner at SoftBank Capital.
The current investment landscape in Asia is booming, with a high volume of deal flow and capital across many major markets like China, India and South Korea. Many Asian corporations are increasing their investment in technology ecosystems globally, in addition to strategic investments in US firms like Snapchat and Lyft. Some notable corporate investors are Tencent, Samsung Ventures, Alibaba Group, Singtel Innov8 and Rakuten.
These Asia-based corporate investors are primarily focused on making early-stage investments. Nearly half of all investments are being made at the Seed and Series A level, while mid-stage investments account for more than 25 percent of technology venture deals.
This shift by Softbank Capital towards more mature ventures and away for early-stage ventures is unlikely to affect the Asian investment ecosystem as a whole, due to the amount of liquidity and capital in Asian capital markets. For entrepreneurs, there is sufficient capital to fund their ventures at the early stage and growth stages.
With large emerging markets like China and India generating significant volumes of deal flow, Chinese deals are still more valuable on average than Indian deals. The Asian ecosystem as a whole is unlikely to be negatively impacted by Softbank Capital shifting away from early stage ventures. There are several investment majors present in the Asian investment space, and Softbank is not counted amongst them.
Asia-based technology firms also raised in excess of US$18 billion in 2014, and US VCs continued to pile into the region. Specifically, 123 US-based VCs made an investment in an Asian tech company in 2014, more than the 106 that made an investment in European tech companies that year. Any gap that will emerge from Softbank Capital’s exit will more than likely be filled by investment firms and majors from the US.
As of 1H 2015, 63 unique US venture capital (VC) firms have made at least one equity investment in Asian technology firms. 1H 2015 investments by US firms in Asian ventures include multi-million dollar rounds in Asia-based firms like Olacabs and the Apus Group. With this in mind, Softbank Capital’s exit from the the early-stage venture investment space is unlikely to have a major impact on the investment ecosystem,