Investors in SoftBank’s $100 billion Vision Fund are said to be expecting big returns, but a new report casts doubt on the mammoth venture capital vehicle’s ability to deliver.
“The sheer amount of capital deployed has left the venture capital world stunned, with many questioning if competitive returns are possible at this massive funding scale,” EquityZen researchers Andrew Zhan and Adam Augusiak-Boro said in their report, “SoftBank: Vision or Delusion,” published Thursday. EquityZen is a private investment marketplace.
The analysis broke down the Japanese telecommunications company’s investments in startups and what investors can reasonably expect from them.
In order to hit at least a 20 percent return on equity, the fund will need to generate $142 billion in lifetime investment gains, according to EquityZen’s analysis. That $142 billion mark took Amazon 16 years to reach, the report noted.
Yet Softbank has a track record of phenomenal performance.In its 18 year history, the company has reported an internal rate of return of 44 percent, according to EquityZen. SoftBank founder Masayoshi Son famously turned a $20 billion stake in Alibaba into $60 billion when the online retailer went public in 2014. Son, who is informally known as Masa, has also invested in companies like Sprint, Yahoo!, and Supercell, the report noted.
“Masa’s ability to raise money is staggering,” said Atish Davda, co-founder and CEO of EquityZen, in a statement. “The real question for Masa now is whether he’ll be able to generate competitive equity returns, especially following the mega rounds SoftBank is leading at seemingly frothy valuations.”
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Son has failed before. He reportedly lost $70 billion in one day after the dot-com bubble burst in 2000, according to EquityZen.
And with SoftBank deploying capital at a massive scale, there is some concern that the firm is pushing high asset valuations even higher, which is driving competition away from investing. For instance, according to the report, venture firms New Enterprise Associates and Kleiner Perkins were set to invest in Wag, a dog-walking startup that works similarly to Uber or Lyft. Then SoftBank stepped in with a $300 million offer, the other two potential investors reportedly had to bow out.
“SoftBank’s checkbook comes as a double-edged sword for these companies,” according to the report. “Yes, these companies are now allowed to dream big and are much less likely to fail due to lack of funding as SoftBank has pushed the cost of capital lower. However, overfunding also creates significant issues of its own.”
Highly valued private companies like Wag now have to justify the large investments, and may overspend or force expansion to get there, which, in the end, could drive down returns.
SoftBank did not return an email seeking comment.