India: Will SoftBank kill the Venture Capital star?

SoftBank chief Masa Son
Billionaire Masayoshi Son, chairman and chief executive officer of SoftBank Group Corp. Photographer: Akio Kon/Bloomberg

Picture it. A start-up founder is in conversation with an investor. The entrepreneur says, “I want to raise $100 million.” The investor asks, “ Why not $300 million? What if you went bigger, quicker, faster? What if we bought your competitor and move quickly in doing that? What if capital wasn’t a restriction?” There is a pause. In a few minutes, the deal terms change because of that more expansive worldview. The deal gets done, with more money than needed, and at a higher valuation. The scene is not necessarily staged in Silicon Valley.

More and more Indian founders and investors are getting used to this new playbook. At the heart of it is SoftBank, and its founder and CEO Masayoshi Son, the world’s most powerful investor with his $100 billion Vision Fund. He is known for taking investment decisions relying on his gut—and his “gut” draws inspiration from Yoda, the Jedi master from Star Wars.

“Yoda says use the force. Don’t think, just feel it,” Son has said. Son is reportedly considering a second fund, and plans to create $100 billion every two-three years. Such Masa-Yoda (if you will) like instincts have meant that his stakes in private companies dwarf all but the biggest IPOs and send valuations soaring. He has invested in ride-hailing companies Uber Technologies and Didi Chuxing, office-sharing giant WeWork, dog-walking app Wag and dozens of other tech companies.

SoftBank reported a 60% rise in its quarterly operating profit in May, bolstered by the Vision fund. This was mainly due to a valuation gain from the planned sale of Flipkart. With a meaningful exit like this, there is a strong likelihood that India would be key to Son’s second fund. SoftBank has invested $10 billion in India till now and his latest is $1 billion check for the affordable hospitality company Oyo Rooms for its global rollout. To be sure, concerns are also being raised on Son’s high use of leverage is his funds.

The concept of a ‘SoftBank IPO’ is born. Wealthy financiers, primarily led by Softank, have helped startups raise more money, stay private longer, even as they become larger than many public companies. Raising capital by going public becomes unnecessary.

As the investment landscape is set for disruption, some observations emerge:

* Access to capital no more a differentiator: The dry powder available with PE funds is already high. Throw in some SoftBank’s love for India and you are essentially dealing with superabundant capital. “Indian private equity traditionally has been about too much capital chasing too few good investment ideas for many years. It now requires a fundamental shift in how private equity funds will implement their business strategy and manage capital,” said a fund manager.

SoftBank makes even the biggest funds look puny. Not including SoftBank, VC funds in the US and Europe collectively raised $42 billion in 2017. Sequoia Capital is reportedly raising $12 billion. This column has earlier argued if VCs are ready to be ‘SoftBanked’, pretty much the way retailers got ‘Amazoned’.

* Saying ‘No’ to SoftBank: VCs now have to consider — what if SoftBank backs a competitor? Entrepreneurs would rather go to SoftBank since it is unlikely that other funds will outspend you. Even more importantly, rival funds might hesitate to back competitors if they know the winner has already been picked, creating the “SoftBank Advantage.” “While every company wishes to have a deep pocketed investor like SoftBank on it’s cap table, it also makes it imperative for them to then drive hyper-growth for a long period of time to justify the valuation. In other words, one has to go for boundaries, and singles don’t matter any more,” said Ashish Sharma, managing director and India head of InnoVenCapital.

* Unicorn hunter or Unicorn Creator: Son likes to call himself “unicorn hunter” focused on tech startups around the world. “The question is that with this kind of capital, you are not necessarily a unicorn hunter but a unicorn creator,” posits an investor turned entrepreneur.

“While SoftBank’s thesis is to back leaders in large categories, it gets interesting when there are no clear leaders. In these situations, deep-pocketed investors have a potential to change the market balance and propel one of the companies towards leadership. In the B2C space, a company that has raised 2X capital will beat someone with 25% better execution, more often than not,” added Sharma.

That means tech finance will have to get used to this Yoda-like disruption.

This article was first published on livemint.com