SoftBank’s losses signal the end of a VC era


In recent years, SoftBank has been something of a totem for venture capital largesse. The Japanese investment juggernaut headed by Masayoshi Son has been, by some margin, VC’s most prolific investor, backing iconic startup success stories—and some of the biggest failures.

Now, things are turning sour indeed. On Thursday, we learned that SoftBank’s Vision Fund posted a record investment loss of 3.5 trillion yen (about $27 billion) for its latest fiscal year. The overall loss for the company totaled 2.1 trillion yen. Its stock price, meanwhile, has plummeted, losing around half of its value since March.

Yet these results are not all that surprising. SoftBank had a brutal start to the year, its holdings ravaged by a toxic combination of falling tech stocks, rising inflation, interest rate hikes, a ruthless crackdown on the tech sector by Beijing authorities, and war in Europe.

SoftBank can survive this latest humbling episode, but it certainly feels like we are at the end of an era, not just for the company, but also for the VC industry it has championed.
 

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Many of SoftBank’s problems are down to its own poor decision-making, but they also come at a time when a more cautious mindset is taking hold among venture capitalists. The VC community has begun talking about a “Great Reset” amid falling valuations and a wave of startups tightening their belts and reducing their labor costs with layoffs.

The Q1 2022 PitchBook-NVCA Venture Monitor, meanwhile, notes a pause in VC exit activity on the back of poor public market performance for growth assets. It also describes a near-complete halt in IPOs involving VC-backed startups in the first quarter. SoftBank’s results are just the icing on the cake.

But even before the ongoing tech rout, the conglomerate had been mired in a series of debacles involving the likes of WirecardWeWork and Greensill Capital. These major upsets alone led to steep losses along with heavy scrutiny for SoftBank.

SoftBank’s bets in China have also backfired. One of its big losses has been ridehailing company Didi Global. In addition to being kicked out of app stores by Chinese authorities, Didi has been under investigation by the SEC over the circumstances surrounding its 2021 IPO. SoftBank also has a 25% stake in Jack Ma’s ecommerce group, Alibaba, which has been under pressure from Chinese regulators.

Even SoftBank’s attempt to counter these losses with an exit from UK chipmaker Arm in February fell flat. The planned sale to Nvidia, which would have represented a $40 billion deal, collapsed due to regulator pressure in the US and Europe.

During SoftBank’s earnings presentation, Son has said the company will be more conservative when it comes to new investments. The once-profligate investor is now going into what Son called “defense mode.” What does this mean? First, SoftBank is expected to cut its startup investment in this next fiscal year by more than half. It also said it’s going to be more selective about its investments in China.

Perhaps a little too late, SoftBank has recognized the pitfalls of being overexposed to any one particular geography. Indeed, Son has acknowledged that the Vision Fund needs to diversify. This is already evident if you look at Vision Fund 2’s recent activity, which has seen a significant rise in investments not just in the US, but also in Europe and Asia outside of China.

There are still some sectors where the group is becoming increasingly bullish, specifically AI, where SoftBank made 43 new investments in the first quarter.

Nevertheless, this is a significant change in posture for a company that has been both a major benefactor and a beneficiary of the tech boom we have experienced over the past decade. Its braggadocious bets were emblematic of a hubristic culture that now seems to be in retreat.

It’s worth remembering that SoftBank was not alone in its bold investments in recent years. Tiger Global is another mammoth VC investor that was left licking its wounds this week. According to the Financial Times, the hedge fund racked up losses of $17 billion. Tiger backed many startups similar to those funded by SoftBank, including Didi and Coupang.

Many other VC investors who made bets similar to those of SoftBank and Tiger will be feeling the pain, too. Venture capital has been on a roll in recent years. In the US, VC-backed companies pulled in more than $330 billion last year—nearly double the previous record of $167 billion set the year before. As the past three months have shown, this kind of performance is not indefinitely sustainable.

Since its humble beginnings as a software distributor, SoftBank has proven its ability to bounce back. But its recent losses, and subsequent pullback, represent a watershed moment for the wider VC industry. Yes, the dealmaking will continue. But the party, for want of a better word, is over.

Featured image of SoftBank CEO Masayoshi Son by Tomohiro Ohsumi/Getty Images

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