- SoftBank's Vision Fund had a terrible year last year, thanks in large part to the collapse of WeWork.
- To a large degree, though, its overall performance since it was established in 2017 is in the eye of the beholder.
- Despite last year, the fund was in the black overall at the end of last year, and its performance has improved since then.
- But its returns to date have been subpar for the venture industry, and the struggles of WeWork and many of its other investments are a worrying sign, venture experts said.
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SoftBank's $100 billion Vision Fund is the biggest venture capital vehicle ever created. Whether it's succeeding in its mission, though, is open to interpretation.
The past six months have undoubtedly been awful. WeWork, at one time its crown jewel, nearly went bankrupt after failing to go public and is now worth about a sixth of what it was a year ago. WeWork and numerous other Vision Fund-backed companies have cut staff to try to staunch ongoing losses. Brandless shut down, Zume is a husk of its former self, and the fund sold back the shares it owned in Wag, reportedly at a loss.
But despite all that, the fund is still up overall and its performance has actually improved in recent months, as the Japanese conglomerate revealed this week.
"One thing we do know is [2019] was a bad year [for the fund]. It was absolutely a bad year," said Rob Siegel, a lecturer in management at Stanford Graduate School of Business.
"But," he continued, "that doesn't mean it won't be long-term successful."
The Vision Fund is in the black, but underperforming
SoftBank gave an update on the Vision Fund this week when it released its quarterly report. By the end of last year, the fund had invested $80.5 billion since its inception in 2017 and had seen a return of $9.5 billion in the form of both realized and unrealized gains. By contrast, one year earlier, at the end of 2018, the fund had invested $46.7 billion and had seen a $12.9 billion gain.
In other words, the fund lost about 10% of the $34 billion it invested last year. While the firm remains in the black, its gain over the last two years amounts to about a 5.7% annual return. Over that same time period, the S&P 500 posted a 9.8% annual return. Meanwhile, the best venture capital firms post annual gains north of 20%.
"A 5% return on a venture fund would be considered mediocre at best," Siegel said.
And there are reasons to worry that the fund isn't going to become a big winner in the future.
It's not unusual for the returns of venture funds to fluctuate over time and even to be negative in the early years, Siegel and other venture experts said. By its, nature venture investing involves a lot of risk; startups often fail.
But the Vision Fund isn't like other venture funds, either in size or in strategy. A big part of SoftBank's master plan with the fund was to invest in very late stage companies not long before they were ready to go public. In that way, it resembles private equity (PE) funds, which tend to bet on surer things, than a typical venture fund, said Sean Foote, a member of the professional faculty at the Haas School of Business at the University of California, Berkeley.
"It is hard for any private-equity firm to absorb too many losses," Foote said, continuing, "You can't lose too much money in any one deal."
Investors are concerned, with good reason
What also potentially worrisome is the nature of the Vision Fund's struggles, venture experts said. Many venture funds have poor returns in their early years because the companies they've invested in are still immature and few have gone public or been acquired. That kind of underperformance is fundamentally different from a fund seeing bad early returns because it's having to write off or write down its investments soon after making them, said Robert Hendershott, an associate finance professor at Santa Clara University's Leavey School of Business.
"I think it's reasonable to be concerned," Hendershott said. "If you think that you can extrapolate forward, then it's going be a disaster."
That seems to be the attitude of many investors. SoftBank has a market capitalization of around $105 billion. But its investment in Alibaba alone is worth more than that, and the Japanese conglomerate owns much more than that including chip design company ARM and a controlling stake in wireless carrier Sprint, which is close to being acquired by T-Mobile in a deal that was originally pegged at nearly $27 billion.
The fact that SoftBank trades at a steep discount to the actual value of its assets is testament to the lack of faith investors have in its investment strategy and their worry that it will continue to burn through cash with its investments, said Hendershott.
"Investors are concerned that they're going to burn literally tens of billions of dollars in value," he said. SoftBank just did burn billions of dollars in cash on its investments last year, he noted, continuing, "that they would continue doing that is not a crazy hypothesis."
The fund took a licking, but kept on ticking
Still, the Vision Fund's performance can be seen from a different, more positive perspective. That the fund took such a huge write down on WeWork and still managed to be in the black overall is impressive, said Foote.
"They've taken a big hit," he said. "They've absorbed it."
And given the Vision Fund's penchant for betting on later-stage companies, it shouldn't be expected to post super-high, venture capital-like returns, said Siegel.
What's more, the fund has dozens of investments. Some of those have already paid off, including Guardant Health. Others, such as DoorDash, still could.
"There's still a lot of companies left in that portfolio," Foote said.
Despite everything that's gone on lately, the fund's performance has actually improved in recent months, according to SoftBank. Thanks largely to a recovery in Uber's share price, the Vision Fund's overall return has improved by about $3 billion since the end of the year, it said.
And there's another reason to be hopeful, the experts said. Masayoshi Son, SoftBank's chairman, has had some huge hits in the past, most notably Alibaba. That's reason enough to give him some benefit of the doubt, Siegel said.
Son "deserves respect for those successes - successes greater than you and I will ever have," he said.
Ultimately, though, it's probably too soon to evaluate the Vision Fund and much too soon to know if it will pay off for SoftBank and its investors, the experts said.
"I'm still in wait-and-see mode," Foote said.
Got a tip about SoftBank? Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
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