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Fabernovel study on SoftBank

Kereitsu of modern times, Softbank has pioneered with its Vision Fund an Innovation at scale strategy powered by an agressive venture investments. It has thus opened an alternative way to GAFAM’s model that relied primarily on an organic technology model amplified by some bolt-on M&A. SoftBank’s transformation case is in our view particularly interesting at a time when the European startups and innovation ecosystems need to catch-up with their American and Asian and many Corporates are entering in « coopetition » with Investment funds, launching or reinventing their ventures set-up in order to address their innovation at scale challenge. For sure, like all disruptors Softbank has been somewhat extreme in its approach (especially in terms of risk aversion, fundraising, inflationary valuation) and not always exemplary in its practices (CSR, governance, financial disclosure...). Nevertheless we are witnessing some interesting read-across for European players, especially as vision, risk taking and entrepreneurial approaches are in our view critical success factors in the new economy. Thus one of our wishes for 2020 is that some European Softbank may emerge and create a new way for innovation at scale.

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-
Jean-Christophe Liaubet
Partner
at Fabernovel
ereitsu of modern times, Softbank has pioneered with its Vision Fund an Innovation at scale
strategy powered by an agressive venture investments. It has thus opened an alternative way to
GAFAM’s model that relied primarily on an organic technology model amplified by some bolt-on
M&A.
SoftBank’s transformation case is in our view particularly interesting at a time when the European startups
and innovation ecosystems need to catch-up with their American and Asian and many Corporates are
entering in « coopetition » with Investment funds, launching or reinventing their ventures set-up in order to
address their innovation at scale challenge.
For sure, like all disruptors Softbank has been somewhat extreme in its approach (especially in terms of
risk aversion, fundraising, inflationary valuation) and not always exemplary in its practices (CSR,
governance, financial disclosure...). Nevertheless we are witnessing some interesting read-across for
European players, especially as vision, risk taking and entrepreneurial approaches are in our view critical
success factors in the new economy.
Thus one of our wishes for 2020 is that some European Softbank may emerge and create a new way for
innovation at scale.
K
Foreword
-
4Who’s who ?
Partech
$440M
Blackstone V
$21,6Bn
All VC france
$1,76Bn
A16z (all assets)
$10Bn
5
SoftBank Vision Fund I
$100Bn
SoftBank took
Venture Capital
to another level
Both press & investors are loving the SoftBank hype. 6

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Fabernovel study on SoftBank

  • 2. It is licensed under the Creative Commons BY-NC-SA license to allow for further contributions by experts and users in the coming months. You are free to share and remix / adapt the work. You must cite this document: SoftBank Vision Fund, December 2019, by Fabernovel. You may distribute a modified work under the same or similar license. You may not use this work for commercial purposes. Why do we release this kind of work for free? Our job is to help large organizations think and act like startups. We believe this can only be achieved by encouraging people to innovate and explore new business models. We aim to inspire you by giving you the keys to understanding new markets. This work was made for you to share, reuse, remix, rework… -
  • 3. Jean-Christophe Liaubet Partner at Fabernovel ereitsu of modern times, Softbank has pioneered with its Vision Fund an Innovation at scale strategy powered by an agressive venture investments. It has thus opened an alternative way to GAFAM’s model that relied primarily on an organic technology model amplified by some bolt-on M&A. SoftBank’s transformation case is in our view particularly interesting at a time when the European startups and innovation ecosystems need to catch-up with their American and Asian and many Corporates are entering in « coopetition » with Investment funds, launching or reinventing their ventures set-up in order to address their innovation at scale challenge. For sure, like all disruptors Softbank has been somewhat extreme in its approach (especially in terms of risk aversion, fundraising, inflationary valuation) and not always exemplary in its practices (CSR, governance, financial disclosure...). Nevertheless we are witnessing some interesting read-across for European players, especially as vision, risk taking and entrepreneurial approaches are in our view critical success factors in the new economy. Thus one of our wishes for 2020 is that some European Softbank may emerge and create a new way for innovation at scale. K Foreword -
  • 4. 4Who’s who ? Partech $440M Blackstone V $21,6Bn All VC france $1,76Bn A16z (all assets) $10Bn
  • 5. 5 SoftBank Vision Fund I $100Bn SoftBank took Venture Capital to another level
  • 6. Both press & investors are loving the SoftBank hype. 6
  • 7. Like it or not, SoftBank is worth the deep dive. A bold vision for the world. How SoftBank became the largest fund ever. The Softbank recipe. What is SoftBank’secret sauce(s)? SoftBank broke the VC playbook. Here’s how. What’s next for SoftBank? Should we expect a SoftBank effect? A shift in the Tech Market? 7
  • 8. A bold vision for the world. How Softbank became the largest fund ever. 1
  • 9. Masayoshi Son Aboldvisionfortheworld. It all started with a fervent advocate for the information revolution. I believe the continually advancing Information Revolution will lend us the wisdom and strength to address humanity's previously unsolvable problems and help us make a positive impact on all of society. Masayoshi Son. Looking for opportunities to accelerate the world’s transition towards Singularity. Name Masayoshi Son Nationality Japanese of Korean descent Birth date 1957 Studies UC Berkeley - Computer science Professional experience 1972 Starts translation company - sold patent $1M to Sharp. 1981 Starts SoftBank Corporation. 2000 Becomes the richest man on Earth for one day… then loses $70Bn during the dotcom bubble crash. 2006s Threatens to set himself on fire if he doesn’t get telco licence. 2016 Switches his focus from running SoftBank operations to Vision Fund. 9
  • 10. Aboldvisionfortheworld. Successfully cruising through 4 Information revolutions. From software distribution to artificial intelligence. AI&IoTInternet MobilePC & Software 1981 Creation of SoftBank, a software distribution company 2000 Strategic $20M investment in Alibaba 2013 Acquisition of U.S carrier Sprint Telecom 1993 Establishment of SoftBank holding in the U.S. to invest in Internet companies 2016 Acquisition of ARM 2017 Launch of the Vision Fund I (VF) 2001 Launch of Yahoo!BB broadband service with ADSL lines 2006 Acquisition of Vodafone K.K & strategic distribution of iPhone Sources: SoftBank annual report 2018 10
  • 11. Aboldvisionfortheworld. From an active telco investor... Although SoftBank is primarily a telecom company, it has always been an active technology investor, and the company’s growth and transformations have always heavily relied on mergers and acquisitions. Cumulative Round Size Participation Number of Deals Cumulative VC & PE Round Size Participation by Softbank. Based on Known Round Sizes from Crunchbase Data, Actual figures are higher. Source: Softbank Annual report Outsourcing innovation through M&A. 11
  • 12. Aboldvisionfortheworld. ...to a modern form of Kereitsu? Keiretsu. 系列 - Japanese term. A set of companies with interlocking business relations and shareholdings. In 2018, SoftBank officially transited to a Strategic Holding company, taking SoftBank (Telco) public. Like large japanese Keiretsu (Mitsubishi, Nissan…) it orchestrates a conglomerate of partner companies, in an effort to push synergies between them. 66% (65$Bn) 80% (23$Bn) 100% (31$Bn) 48,3% (10,3$Bn) 26% (476$Bn) + 12
  • 13. Aboldvisionfortheworld. SoftBank, a giant by numbers. 83$Bn Market capitalization as of 16/12/19. 13,9$Bn Profit in 2018. 74 952 Employees across the world. 70+ Portfolio companies of the Vision Fund. 98,6$Bn Size of SoftBank Vision Fund 1, the largest in the world.
  • 14. Aboldvisionfortheworld. A new mission for the achievement of its 300-year vision. SoftBank is a mission-driven company. Its mission roots in its founders fascination for technology, and its ability to transform humanity for the better. Industrial revolution Edison, Ford and Rockefeller were the conductors of economic growth by supporting innovation and technology. Information revolution SoftBank wants to become the conductor of the Information revolution by investing in the world’s best technology companies. We want to be the conductor of the AI Revolution, a maestro of the orchestra comprising the best AI entrepreneurs. Masayoshi Son 14
  • 15. Source: National Retail Association (NRA) The Vision Fund is SoftBank’s chosen spaceship for the mission.Aboldvisionfortheworld. Circles sized by the amount each fund has raised. Softbank Vision Fund $98Bn Blackstone V Fund $21.7B Goldman Sachs VI Fund $20.3B Apollo Fund VII $18.4B TGP VI Fund $19.8B KKR 2006 Fund $17.6B Biggest Funds III III IV V Major Tech Funds Andreessen Horowitz $5.6B Benchmark VII $42.5M Greylock Fund XV $1B KPCB Digital Growth Fund III $1B Playground $300M Sequoia Global Growth Fund II $2B Union Square 2016 Fund $175M 15
  • 16. Aboldvisionfortheworld. A giant in size, small by the number of LPs. Equity Debt 28 17 33 9.3 5.7 Abu Dhabi’s Mubadala $15 Bn Apple, Qualcomm, Foxconn and Sharp $5 Bn SoftBank Group Saudi Arabia Public Investment Fund $45 BnSoftBank Vision Fund To raise the biggest venture capital fund ever, SoftBank relied on a limited number of partners, as more than 90% of the funds come from either Saudi Arabia Public Investment Fund, Mubadala or SoftBank itself. 45 minutes, 45 billion dollars. 1 billion dollar per minute. Masayoshi Son. 16
  • 17. Thanks to a unique ability to raise funds. Reduced risk structure Combined with a complex structure designed to reduce risk for investors and raise more money. / Preferred stock (7% coupon) brings reduced risk for equity investors / High SoftBank stake serves as reassurance for other LP. Track record Masayoshi Sans benefits from his reputation and past performance of the company’s investment. Alibaba stake and Son’s vision enabled him to raise $45Bn in 45 minutes from Saudi Arabia. Being an LP in SVF is a bet on the booming technology sector. Debt leverage High leverage (40% of debt) enabled Softbank to double fund size. SoftBank relied on: / Its stable cashflow as a telco operator. / Alibaba stake serving as a liquidity guarantee. / 20M in employee loans. + + Aboldvisionfortheworld. 17
  • 18. I’m the king of debt. Masayoshi Son
  • 19. The SoftBank recipe What is SoftBank’s secret sauce(s)? 2
  • 20. TheSoftBankrecipe. A cluster of N°1 strategies. We only live once, so I want to think big. I have no intention of making small bets.
  • 21. TheSoftBankrecipe. SoftBank’s investments reveal its long term view of the future. Masa’s bets have always been made with one main rule in mind: invest in long term trends that will define the future of the world. According to SoftBank, in 2030, the world will be more: Connected Automated On-demand Freelance & collaborative 21
  • 22. TheSoftBankrecipe. Identifying category leaders. An ability to outperform the market The Vision Fund especially targets unicorns or soon-to-be unicorns, that already have raised hundreds of millions of dollars. +50% market share potential The Vision Fund looks for companies with a market share potential of 50-80%, especially focusing on markets which have network effects or winner takes all dynamics. A deep fast growing market SoftBank primarily targets fast growing markets with a strong focus on technology sector or as technology as an enabler for efficiency. SoftBank Vision Fund’s investment strategy is to fund only potential category leaders. As a result, 66% of their investments were made on unicorns (post-money valuation). Source: Fabernovel portfolio analysis 22
  • 23. TheSoftBankrecipe. One rule = long term growth over profits. Because it believes in the ability of its portfolio companies to become long-term champions, the Vision Fund invests in companies with strong growth profiles regardless of their current profitability. Short term Scale Network effects Growth Market power Profits/ Investment Long term I’ve got an owner that says, invest, you know, invest like crazy to make sure you capture these waves of growth in the future. Simon Segars, ARM CEO. 23
  • 24. South Am 6% Aboldvisionfortheworld. A vision that knows no frontiers. The same way the information revolution has no border, SoftBank’s investments are spread globally. Source: CBInsights, From 2014 to march 2019 India 11% Europe 9% USA 56% South East Asia 6% China 12% x% share of investments per region 24
  • 25. TheSoftBankrecipe. From picking winners to making them. If money was not a constraint, what would you do differently in the next five to 10 years?
  • 26. TheSoftBankrecipe. Removing the constraint of capital. 20+ Deals above the 1Bn mark since inception. $100M+ Minimum ticket for SoftBank Vision Fund investment. $910M Average investment per portfolio company (all rounds combined). We’re looking for companies that are growing very quickly and can deploy a lot of capital in a differentiated way. Before we invest, we completely reshape the business plan to invest more capital than they initially asked for. Jeff Housenbold, MD 26
  • 27. Capital as a competitive advantage. TheSoftBankrecipe. From picking winners to making winners. 27 SoftBank’s bets are an all-out play on scale. 1 Because most growth technology markets are characterized by network effects & winner- takes-all, access to capital in itself becomes a competitive advantage. 2 Companies are left with a tough choice: to accept SoftBank’s money or let its competitor get it (Masa Son publicly states that he will do so), and likely lose the battle. In the network economy, capital is the mother of all growth. Large SoftBank check Larger return for SoftBank “Winner takes all” dynamics Annihilating competition growth Ability to attract best companies in SVF Both critics and admirers agree on this point: SoftBank’s strategy relies on access to capital as a competitive advantage. Because it has deeper pockets than competition SoftBank seeks not only to invest in winners but to make winners.
  • 28. TheSoftBankrecipe. SoftBank claims to target winner-takes-all markets. Winner-takes-all markets are reinforced by traditional economies of scales, brand effects and other moats that favor leaders in one specific industry. Network effects Same side network effects (more customers bring more customers) or cross-side network effects (more suppliers bring more customers) tend to bring marginal acquisition costs close to zero. SoftBank believes and targets technology markets characterized by a power law distribution of value, and thus targets winner-takes-all markets & business models, with following characteristics: Customer lock-in Customers find an interest in staying with the same providers because they bring convenience, better experience or better price, as well as important switching costs. Without lock-in, network effects are worthless. Unlimited reach Digital technologies enable an infinite reach and distribution across markets, with little geographical barriers to entry. + 28
  • 29. Indeed, it goes all-in on winner-takes-all companies. SoftBank believes in and targets technology markets characterized by a power law distribution of value, and thus targets winner takes all markets & business models, with following characteristics: Source: FABERNOVEL portfolio analysis TheSoftBankrecipe. 60% Winner takes most market with network effects represent 40% of SVF’s portfolio, but 60% of value invested. +232% On average, SVF invested 232% more in winner-takes-all companies than in other companies. $1,41Bn On average SVF invested 1,41Bn in each company that fits the winner-takes-all definition, across 33 companies, compared to 610M for others. 29
  • 30. Chasing the right champions TheSoftBankrecipe. Push > Pull SoftBank obviously has a lot of inbound calls. Yet most of its investments are push investments from SVF after industry and company screening. 1 Like any investor, SVF wants to have the luxury to hunt the best founders to maximize value, and not only choose among its dealflow. 30 2 SVF is preceded by its reputation, it knows it will have the attention of founders considering the amounts it can invest. 3 There are much fewers companies that have the size and potential fitting SVF criteria, thus making it easier to hunt. This is explained by several reasons:
  • 31. TheSoftBankrecipe. A synergetic ecosystem. We don’t randomly invest in companies. We are focusing on Internet companies with a view to generating synergies with the investment portfolios.
  • 32. TheSoftBankrecipe. Helping portfolio companies with strategic advantages using services as a deal sweetener. Like all serious venture capitalist fund, Softbank’s investments comes with benefits. SFV is building a 70-people-strong operating structure dedicated to helping portfolio companies, thus increasing their value for SoftBank. 1 Synergies with the SoftBank ecosystem, including SoftBank, Sprint networks. 2 International expansion (especially Japan). 3 IPO-readiness to help portfolio companies prepare for IPO. 4 Consulting services & strategic advisory. 5 Financial help on structuring deals and debt financing, leveraging SoftBank’s financial expertise. 32
  • 33. TheSoftBankrecipe. The SoftBank mafia. Commercial . relations Partnerships Capital links 33
  • 34. TheSoftBankrecipe. Synergies within the SoftBank ecosystem. x x The SoftBank network SoftBank has one of the largest sales network in Japan (3,500 retail stores). SoftBank has strong relationships with Japanese banks, Alibaba, large corporates like Foxconn. SVF portfolio companies are also encouraged to connect. Customer relations SoftBank pushes its companies to work and contract with each other. Potential customer synergies are taken into account in the due diligence processes. Partnerships SoftBank pushes its companies to create partnerships together, share technology and insights. Potential partnership synergies are taken into account in the due diligence processes. x 34
  • 35. The SoftBank Keiretsu as a differentiator One of SoftBank’s main strengths resides in its portfolio of companies that are smartly linked into a homeostatic ecosystem, while remaining independent in their strategies. SoftBank’s strong M&A expertise has not been transformed into SVF, but rather inspired SVF, as SoftBank continues to invest off its balance sheet. TheSoftBankrecipe. Resilience Greater resilience for the whole ecosystem thanks to shared resources and flexibility. Differentiator The SoftBank keiretsu is differentiator to attract the best companies for SoftBank as an Investor. Synergies Synergies that create value for both SoftBank ecosystem and the NewCo. 2 3 1 35
  • 36. Merging Line and Yahoo Japan to build their own superapp. Value Capture Value Creation Line’s 200M users Yahoo Japan’s 50M users Proprietary services 3rd party services Userbase synergies geographical & demographic synergies will give combined entity the scale of a superapp. Product synergies E-commerce (Yahoo), messaging (Line) and payment (both) synergies will give their combined entity the one-stop-shop potential of a superapp. Revenue and cost synergies Revenue and costs synergies will enable the combined entity to invest in AI and have the financial strength of a regional superapp. TheSoftBankrecipe. 36
  • 37. The ride hailing case. TheSoftBankrecipe. Pushing synergy further to create winners. The SoftBank Vision Fund invested in most leading regional ride-hailing companies in the world. SoftBank has no interest in competitors waging a price war, using their dollars to subsidize rides to the benefit of consumers. Thus, SoftBank pressures them to: +20$Bn Invested in ride hailing. +90+% Of the ridesharing rides in the world are in SVF portfolio companies. SoftBank’s ride hailing giants: 37 Build partnerships with other portfolio companies. Ex: Cambridge Telematics or Light can work with all of SoftBank’s ride hailing portfolio companies on autonomous driving. Merge or cross-investment Uber x Grab deal in 2018 where Grab bought Uber Asia for an undisclosed sum and Uber took a 27,5% in Grab. The biggest winner in this deal? You guessed it: SoftBank!
  • 38. SoftBank broke the VC playbook. Its strengths happen to also be its achilles heel. 3
  • 39. SoftBankbroketheVCplaybook. SoftBank broke the VC playbook. Don’t bite off more than you can chew. Founder friendly doesn’t mean disregarding governance. Bring other investors onboard. Beware of decreasing return of capital. Don’t put all your eggs in the same basket. SoftBank’s cluster of n°1 and all out play on scale come with downside risks and breaks key safeguards of investment, teaching us precious lessons: 39
  • 40. Don’t put all your eggs in the same basket. SoftBankbroketheVCplaybook. Is SoftBank Vision fund over-exposed to a few bets? Very large bets SoftBank is very much exposed to a few very large bets. Among the SVF, Didi, WeWork and Uber are where they put the largest amounts, and they are underwater for at least the two American companies (november 2019). $20+Bn Of invested funds were in ride hailing businesses (Didi, Uber, Grab, Ola). SoftBank’s biggest bets: On a very short timeframe SoftBank invested its money on a 2-year cycle, which is very short, considering the amounts it is investing, weighting a risk on its portfolio diversification. 90% Of ridesharing rides in the world are made by SoftBank owned companies.
  • 41. Beware of decreasing return of capital. SoftBankbroketheVCplaybook. Beware of decreasing return of capital. 1 Not such cool kids on the block anymore. There is not enough dealflow on the market to support the size and number of investments SoftBank wants to make. 2 IPO is the only way out. There is not enough demand for this type of company exit in the IPO market in a short amount of time. 3 Beware of raising spoiled kids. When you pour too much capital into a company, it tends to have higher SG&A costs and sometimes burn too much cash. Wework’s salaries were said to be much higher than its competition. 41 When your ability to deploy several billion $ into a startup company becomes the priority (SoftBank has to invest over $30Bn a year) returns are likely to decrease. 140% SVF’s portfolio of private companies is worth $367Bn, 140% of the global tech IPO market. 5/10 of largest funding rounds globally were led by SoftBank in 2018. Source: crunchbase, Fabernovel analysis
  • 42. Bring other investors onboard. SoftBankbroketheVCplaybook. Bring others investors on board. Sources: Crunchbase Cumulated funds raised in $m (+ known lead investors) SoftBank often invests alone in subsequent funding rounds. It has done so particularly in the Wework and OYO case. Most cautious investors let third party investors chip in on their portfolio companies at subsequent rounds to: 1 provide an external valuation of the firm thus strengthening the credibility of the valuation. 2 show signs of healthier governance to the market. 3 bring new expertises on the board. 42 5 times Number of SoftBank’s consecutive investments in Wework, both in equity and debt. Most of the time as sole investor.
  • 43. SoftBankbroketheVCplaybook. Being founder friendly doesn’t mean disregarding governance. Softbank Vision Fund has demonstrated poor governance standards at portfolio companies, hence the WeWork Fiasco. SoftBank’s former governance mistakes: 43 1 Poor valuation estimate risking the entire company. 2 Letting dual class shares mechanisms with 20/1 ratio voting share for founder. 3 No external shareholder besides SoftBank. 4 Blind trust in visionary founders. 5 Conflict of interest between governance companies. In November 2019 (Q2 earnings report), SoftBank claimed that it would be more careful in terms of governance and freedom given to founders. Basically, it is just bringing its governance level up to market standards. Has SoftBank learnt its lesson? Founder friendly doesn’t mean isregarding ce.
  • 44. SoftBankbroketheVCplaybook. Scaling the largest fund in the world comes with its own growth crisis. Governance Does Masa have infinite power? Masayoshi San is renowned for turning 200M checks into 500M. According to SVF Silicon Valley MD, Masa cannot overlook due diligence process but oversees every large deal with a go/no go decision. Conflict of interest with portfolio companies? With the growing size of companies, SVF invests in competing tech players, raising concerns about its role as an investor. Operations Softbank faced the organizational issues of a fund deploying $100Bn in 2.5 years. / Opening offices in 5 locations. / Recruiting around 300 employees. This reportedly led to poor efficiency in terms of operations and organization. 44 Don’t bite off more than you can chew. 330M funds ratio per SVF employee. 7 times more than Andreessen Horowitz.
  • 45. The future of Vision Fund depends on the strength of the tech ecosystem. 4
  • 46. Is there a “SoftBank effect?”4.1
  • 47. IsthereaSoftBankeffect? Just like a16z in its time, is SoftBank a disruptor? Andreessen Horowitz circa 2010 A16z secret sauce: / Value-added investment more people working on helping companies rather than investing. / Content as marketing to appeal to the best founders. / Efficient network powered by events and CRM tool. / Founder friendly Fund for entrepreneurs by entrepreneurs. SoftBank Vision Fund circa 2017 SVF secret sauce: / Capital as a weapon more people working on helping companies rather than investing; / New stage of investment to appeal to the best founders. / Ecosystem driven Fund for entrepreneurs by entrepreneurs. 47
  • 48. IsthereaSoftBankeffect? SoftBank shook the VC market. With over 10% of invested VC funds in 2019, and a fund 20 times bigger than its counterparts Softbank is likely to have had an impact on the private tech ecosystem. Softbank Vision Fund Softbank Softbank Capital Other Entities 1 Increase in size and share of mega deals. 2 Increase in company valuations. 3 A new exit door for venture capital? Source: crunchbase 48
  • 49. IsthereaSoftBankeffect? Is SoftBank impacting the size of deals & funds? The growth of supergiant deals Requiring superiant funds? To compete with SoftBank and cope with the increase of valuations, especially late stage, several VCs are raising larger funds. $2.75Bn $1.85Bn $8Bn 45% of known venture dollar volume transacted in 2019 comes from “supergiant” VC rounds ($100M+) 66% of total funds raised come from giant funds (500M+), compared to 31% in 2011. Source: crunchbase 49
  • 50. IsthereaSoftBankeffect? Is SoftBank inflating tech valuations? Key reasons contributing to the valuation spike: / If you think capital is a weapon, then mechanically you tend to overvalue companies. / SoftBank, as the top take price setter, sets references for other companies valuations. / The fact that SoftBank is enabling companies to stay private longer inevitably inflates private tech valuation. / But is it just SVF offsetting public markets return potential by keeping companies private longer at high valuation? A ripple effect on valuations? , r A Masa Public Offering is our IPO,it's important for us to remain private for at least two to three more years. Vijay Shekhar Sharma, Paytm founder SVF effect? Public Unicorns Private Unicorns Series B, C Series A Seed 50
  • 51. We are extremely symbiotic with the VC community.
  • 52. Creating a new stage of investments. As some tech companies wish to stay private longer, SoftBank provides a new stage of funding before IPO. Thanks to its large tickets, SVF is investing between series E and IPO, sometimes replacing IPO, offering new exit opportunity for late stage VC. Who’s investing after SoftBank Vision Fund? 28% 25% 18% 10% 20% IsthereaSoftBankeffect? Debt Pension / Sovereign Large corporates Private Equity / Asset management IPO We provide liquidity for a lot of VCs to exit, whether it was in WeWork, whether it’s in Katerra, or Compass. Rajeev Misra 52
  • 53. IsthereaSoftBankeffect? Fueling unsustainable growth models? , r 53 When SoftBank pours money into supposedly winner-takes-all markets, using capital as a weapon into businesses that hemorrhage cash, it can have unwanted implications, as platforms are easier to scale than to sustain. Competition distortion Capital difference becomes so important that small and old players fail to compete with new champions. Price wars The capital raised to fuel the network effects leads to price wars for customer acquisitions, making companies focus on price over value creation and innovation. Unsustainable growth models Theses companies that change the competitive landscape are often unsustainable because they don’t have customer lock-in and network effects often fall as fast as they scale. Anyway, do we want monopolies ? 2 3 1
  • 54. A shift in the tech market. Can SoftBank cope with it? 4.2
  • 55. Patricia Nakache, partner Trinity Ventures A lot of these highly valued companies have run into the buzz saw of Wall Street, where they’re questioning or reminding us that profitability matters.
  • 56. Ashiftinthetechmarket. The failed IPO of the “most hyped startup in the world”.* Aug. 14th Aug. 15th Sept. 5th Sept. 9th Sept. 13rd Sept. 16th Sept. 24th Oct. 23rd WeWork releases S-1. Morgan Stanley withdraws from WeWork’s IPO. WeWork is ready to cut its valuation by 2. SoftBank, WeWork's largest shareholder, requests the suspension of the IPO. WeWork’s board members announce major governance changes. IPO is officially postponed. As a result, WeWork's bonds fall at record pace (7cts per $). Adam Neumann steps down as CEO of WeWork. He is named non-executive chairman. SoftBank injects $5bn in WeWork at a valuation of $7.5-8bn & takes the control. Adam Neumann exits the Board. *How WeWork became the most hyped startup in the world, Wired (June 2018) Source: Business Insider, CNBC 56
  • 57. Source: Factset, as of 31 October 2019 Ashiftinthetechmarket. Despite very promising starts and some satisfying earnings, the latest Tech IPOs were mostly avoided by investors. Share price performance during Q3 Share price performance between IPO and end Q2 Opening price vs IPO price IPO Valuation (before market opening) +1% -22% +19% +54% -13% -6% +8% +26% +83% +48% $82.4Bn $24.3Bn $12.7Bn $9.2Bn $16.0Bn -26% -29% -28% -26% -34% -33%+83%$9.2Bn -61% -36%+24%$600M -13% +54%+87%$6.6Bn -45% Recent Tech IPOs faced a very difficult Q3 2019. 83% Last year, a record of US tech companies went public without making a profit. 57
  • 58. Ashiftinthetechmarket. From the growth to the margin story? Unicorns starting to shift their strategy. And SoftBank seems to have learnt its lesson. According to people close to SoftBank, Masa has decided to shift focus of Vision Fund II to companies that can achieve profitability more quickly. Wework shifts to profits as part of SoftBank’s rescue plan. The company will stop new openings and focus on occupation ratio. Uber Lyft plans to reach profitability in 2021, claiming that the market has become increasingly “rational”. Lyft Postmates delays its IPO, judging public markets too cold with “growth companies”. Postmates 58
  • 60. SoftBank is still on tracks, but performance is shrinking 7 public listings since inception $11.4Bn cumulative Investment gains ...But it’s mostly paper gains since SoftBank often sets the valuations on a successive basis, and investment gains include unrealized gains.. 60 There are 5,000 VC globally and average IRR is 13%. Our return is about twice as big”
  • 61. Financial markets don’t yet reward SoftBank’s synergy strategy. As a conglomerate, SoftBank faces a traditional discount between the total value of its holdings and its market capitalization. Yet, in SoftBank’s case, the discount has been on average much bigger than market standards, as investors tend to be very careful with the japanese giant. ¥21tn Value of SoftBank’s net equity holdings ¥10.5tn SoftBank group market cap 50% SoftBank is valued at a 30 to 50% discount compared to the sum of its parts. 61
  • 62. A domino downfall of the SoftBank kereitsu? What’snextforSoftBank? How do synergetic companies perform in a bear market? Though SoftBank is not a keirestu per se it’s relentless focus on creating synergies with portfolio companies, can turn out to be risky in the case of a bad economic context. SoftBank’s biggest risk comes from the ride hailing industry, where its portfolio companies (Didi, Uber, Grab, Careem) have strong equity and partnership links. Could SoftBank survive an on-demand transportation collapse? 62
  • 63. Amount of losses Increasing marketing costs Decreasing ARPU Lease commitments ... Tech-like multiples Lack of comparables No outside investor ... CEO’s firepower Trademark compensation Lack of diversity at the Board …. What’snextforSoftBank? Can SoftBank afford another Wework? Business model Valuation Governance Increasing losses high CAC (minimum revenue guarantee) But huge growth 15x annually scale economies Tech-like multiples No outside investor Lack of comparables Business model Valuation Governance CEO’s equity $2bn loan Collusion probe with marketplace Almost SoftBank owned 63
  • 64. What’snextforSoftBank? Will SVF be able to raise Vision Fund II? 1 LPs are waiting for results before chipping in with more cash. Saudi Arabia PIF & Mubadala may be reluctant to rebid a large amount of money before they see the performance of the fund at least for the next 6 months. 2 Questioning the strategy and investment thesis. SVF seems to be shifting towards a more diversified strategy and smaller tickets. Questioning SVF governance are being tackled by SoftBank in its latests earnings. 3 Stuck in a vicious media storm. The Wework fiasco has put SoftBank at the core of a media storm that doesn’t seem close to stopping. Will it alter its strong relationship with LPs? Vision Fund 2 28/11/2019 Vision Fund 1 $98Bn 64
  • 65. What’snextforSoftBank? Success or failure, one question remains: Do we really want this to be the future of Venture Capital? Dirty funding SoftBank’s checks are largely financed with petro dollars coming from dictatorship regimes. Should entrepreneurs take this into account? 60% of SVF funds coming from PIF & Mubadala. Poor Governance SVF’s governance can be questioned in several ways: / creating synergies between portfolio companies at their benefit / pushing employee debt to invest in SVF. / Poor gender diversity in the organization. 0/12 of SVF partners are women. Technological messianism SVF’s investments follow a pure financial logic, with poor consideration of second order consequences (job creation, environmental impact). Moreover, most of SVF’s investment are driven by a techno-centric vision of the future that seems to put economic efficiency before any other value. 65
  • 66. Research Joachim Renaudin Agathe Martin Guillaume Gombert Art direction Mathilde Benoît Elodie Da Silva Costa Communication Joachim Martin Marina Dislich
  • 67. Thank you Jean Christophe LIAUBET Partner +33 6 08 86 24 88 jean-christophe.liaubet@fabernovel.com