SoftBank launched a whopping new $108 billion fund, and it will only inflate a tech bubble it's creating all on its own
- SoftBank has announced commitments of $108 billion to its second super-massive Vision Fund.
- The company has confirmed that Apple, newcomer Microsoft, Foxconn, and others will invest in the fund. Saudi Arabia has not been named as a limited partner, but could still commit funds.
- The first Vision Fund caused shockwaves by dropping hundreds of billions of dollars into unprofitable or unproven companies.
- It has completely changed how venture capital works and has fostered a trend of companies staying private for much longer.
- There is a risk that SoftBank is creating its own tech bubble, especially given the outcome for many companies backed by the first fund remains unclear.
- Click here for more BI Prime stories.
SoftBank is about to remold the world of tech startups once again.
The company has invested billions into a wide range of fast-growing companies around the world, such as Uber, Slack, DoorDash, hotel franchising firm Oyo, and a number of ride-hailing companies in Asia such as Ola and Grab.
The trend will continue, after the Japanese firm announced investors have committed $108 billion to its second Vision Fund, its investment vehicle for backing promising technology firms.
There is a slight alteration in the makeup of the current backers.
The first $100 billion Vision Fund was made up of sovereign wealth funds from Saudia Arabia and UAE, SoftBank Group, Apple, Qualcomm, and Sharp. According to The Financial Times, Daimler, a number of Japanese banks, Oracle cofounder Larry Ellison, and the sovereign wealth fund of Bahrain later closed out the fund.
The second batch of investors looks a little different. Microsoft has invested for the first time, while Apple and Foxconn have reinvested. Other backers include a number of Japanese banks and insurers and pension funds. You can see the full list of backers here.
Saudia Arabia's Public Investment Fund, a major backer of Vision Fund I, is notably missing amid reports the Kingdom was lukewarm on a second fund. It may yet commit, however, and SoftBank has said it expects the final fund size to increase. One venture capital source believes SoftBank is gunning for a final close of $200 billion.
Read more: Apple and Microsoft are both investing in SoftBank's newest $108 billion mega-fund for startups
Even with SoftBank's refreshed slate of more conservative investors, an additional $108 billion into the tech ecosystem will naturally trigger worries of a bubble.
The Vision Fund's investment strategy is to throw huge amounts of money at a perceived market leader - Uber in ride-hailing, WeWork in office-sharing - in order to scale them up rapidly and scare off the competition.
"Rather than having their capital cannon facing me, I'd rather have their capital cannon behind me, all right?" is how Uber CEO Dara Khosrowshahi explained it last year.
That creates a number of issues.
First, it can encourage startups to scale faster than they can really manage. It takes a disciplined CEO to turn down the offer of millions in funding, especially in these current heady days of easy capital.
Business Insider has spoken to at least one CEO who has turned away SoftBank money because it was more than the startup needed and a condition of the funding was to scale quicker than they were comfortable with.
There is evidence of this friction elsewhere. A report from The Information suggested that SoftBank-backed Brandless hit trouble in June, in part thanks to tensions with its main investor over financial targets.
Another prominent SoftBank portfolio firm, Indian ride-hailing service Ola, is also reportedly trying to keep some distance from its backer. According to Bloomberg, CEO Bhavish Aggarwal turned down an additional $1.1 billion investment from SoftBank earlier this year, in order to retain control of the firm.
The influx of funding to one "category winner" in turn creates problems for competitors who feel pressured into raising funding, even if they don't necessarily need it. The Financial Times reported that ride-hailing firm Go-Jek raised an additional $1 billion in funding even though it didn't need it, just to keep up with SoftBank putting $1.5 billion into rival Grab.
Giving so much money to earlier stage firms may encourage a lack of financial discipline too. These firms have huge amounts of capital at their disposal, potentially leading to reckless decisions.
WeWork, which remains massively unprofitable, has used its cash arsenal to fund or acquire companies that seem to align to its founder's interests, such as wave company Wavegarden. Why is a shared office company putting cash into an indoor wave pool company? The question would have been unthinkable in a pre-SoftBank world.
In SoftBank's defence, the firm said in May that its first fund generated a 29% return, though mostly on paper. Apple has clearly seen enough to return for a second helping. Bullish analysts also say there is now greater visibility on how the fund works. "What they have today is a track record," Bernstein analyst Chris Lane told The New York Times. "You've got a lot more confidence that it's a robust process."
It's not unreasonable to imagine that a second Vision Fund will only exacerbate some of the side-effects of the first fund, all while having wider impacts on the market. Expect unprofitable tech firms to remain private (and thus opaque) for longer, and perhaps for a continued squeeze on traditional venture capital firms, which may themselves raise ever-larger funds to play their role in competitive deals. Valuations will continue to go up, and all the while the SoftBank bubble grows bigger.