Ask investors from Silicon Valley to Wall Street what’s had the biggest recent impact on tech startup exits and most will answer: Masayoshi Son’s almost $100 billion Vision Fund.
Now Son, the the founder and chief executive officer of SoftBank Group Corp., has a version 2.0 in the works, according to people familiar with the matter. It’s likely to be similar in size to the first — already the world’s biggest tech fund — and it could be coming as soon as next year, the people said, asking not to be identified as the matter is private.
Another mega fund rooting for deals among private tech companies would give founders cash to grow their businesses, and early investors a potential opportunity to sell and get liquidity. But it also could help further inflate already-pumped private valuations, crowding out other investors and delaying the inevitable sale or initial public offering — and the scrutiny of public markets.
“There’s already too much money chasing too few private companies,” said Kathleen Smith, principal at Renaissance Capital, which manages IPO-focused exchange-traded funds. “When there’s too much money, the returns get eroded. That’s what we have here.”
Japanese entrepreneur Son has held preliminary discussions with investors about committing to a second fund, which would likely draw a wider pool of investors than the first one, the people said. For the first Vision Fund, most contributions came from sovereign wealth funds in Saudi Arabia and the United Arab Emirates. No final decisions have been made and the billionaire businessman may also change his plans, they said.
A representative for SoftBank declined to comment.
Though the fund held its first close only a year ago, about $45 billion has already been deployed on investments, the people said. While come of the cash has gone on stakes in publicly traded companies, like chipmaker Nvidia Corp., much has been used to buy into private companies. The Vision Fund was the biggest investor in a $9.3 billion sale of Uber stock; $4.4 billion went toward WeWork.
“I’m not sure where he can find more good investment opportunities,” said Dan Baker, an analyst at Morningstar Investment Management Asia Ltd. in Hong Kong. “That seems like a lot of additional capital.”
Son hasn’t shied away from sharply driving up the valuations of private companies the Vision Fund invests in, even when there’s not a material change in the business itself. At a Wall Street Journal event in Tokyo on Tuesday, the 60-year-old billionaire talked at length about how he makes investments. Son invoked the mindset of Yoda, the Jedi master from the “Star Wars” films.
“Yoda says use the force. Don’t think, just feel it,” he said. “My first insight in the first few minutes is sometimes more meaningful than detailed calculation.”
“You do it so many times, you don’t even need to think,” Son said. “You can just feel it.”
Son’s instincts have led him to stakes in private companies that dwarf all but the biggest IPOs and send companies’ valuations soaring overnight. In the past decade, U.S. IPOs have had an average size of $250 million, according to data compiled by Bloomberg; that’s the typical minimum investment size for the Vision Fund’s private stakes.
In 2015, London-based virtual reality startup Improbable Worlds was valued at about $100 million. After SoftBank led a $502 million investment in the company last year, it was suddenly worth 10 times that.
SoftBank spent $300 million in March 2017 on an initial stake in WeWork Cos. at a valuation of about $17 billion. Just five months later, the firm paid another $4.4 billion for private WeWork shares in a deal that bumped its valuation to $20 billion, a person familiar with the matter said at the time.
The largest U.S. pension fund will also be on the hunt for private technology investments. The $349 billion California Public Employees’ Retirement System plans to pour as much as $13 billion a year into non-public companies, including late-stage and early growth startups, Chief Investment Officer Ted Eliopoulos said in an interview Thursday on Bloomberg TV.
A looming question remains: How is Son going to realize returns on his investments? While the IPO market has come back strong this year, concerns about not living up to lofty private valuations have still slowed the pipeline.
SoftBank hasn’t shown the “fine pencil on valuation that public investors will have,” Renaissance’s Smith said. That could make it difficult to exit some stakes if other investors aren’t willing to match their stunning valuations, she said.
While the Vision Fund — and its potential successor — has the dry powder and leverage to get into the most valuable companies, they will need deep-pocketed buyers to get out.