Compiled by/Jun Lin
For a long time, critics believe that Sun Zhengyi's strategy of investing in money burning start-ups is too radical and will not be accepted by investors in the public market. However, when the once high-risk Asian bets went public in high profile, Sun Zhengyi steadily pulled back the game.
In a recent interview, Sun Zhengyi said that his focus was "completely focused" on new investment in unicorns. Recently, he also promised to expand the Vision Fund, which will verify whether investors finally believe his optimistic expectations for the technology industry.
Can the investment strategy of "growth is king" always bring profits?
Coupang has now become the largest e-commerce company in South Korea. In that year, the founder of Coupang, Bom Suk Kim, dropped out of Harvard Business School and started his own business. A few years later, Jinfanxi faced a key choice. He already has a fast-growing e-commerce website and is considering listing his company.
But Jinfanxi has a bigger goal. He wants to build Coupang into Amazon pattern. This means that he needs to take another big step forward to create his own distribution network. The only problem is that to do so, Coupang will need a lot of money - possibly billions of dollars. If the company goes public in this way, investors in the public market may be full of doubts about this "burning money" model.
This is for Sun Zhengyi SoftBank For the group, it is just right. According to the insider involved in the transaction between Softbank and Coupang, Sun Zhengyi's investment team in Seoul made an analysis of Coupang and its competitors. They found that although other companies have better cash flow, Coupang has a better user experience. In 2015, Softbank made an investment of $1 billion in Coupang, breaking the record for Korean start-ups at that time.
With the support of this unprecedented large amount of cash, Coupang began to deploy logistics centers across South Korea. According to Coupang's financial statements, even though gross profit declined that year, the company's revenue tripled compared with the previous year.
One billion dollars is not enough. In 2017, Softbank established a vision fund with a scale of nearly $100 billion. At the end of 2018, Vision Fund again injected $2 billion into Coupang. The second capital injection helped Coupang launch two new services: grocery distribution and food distribution. With the surge of demand for these related businesses during the epidemic, the whole industry has become increasingly competitive under the agitation of Coupang.
Today, Softbank's bet on Coupang seems to be paying off. Although the company lost as much as 475 million dollars in 2020, when Coupang was listed on the New York Stock Exchange in March, the opening market exceeded 100 billion dollars - more than 10 times the valuation price given by Vision Fund when it invested in 2018. This has at least brought generous book returns to Vision Fund, and also made Softbank recently hand over the most exciting financial report ever, with an annual net income of $46 billion.
In the following years of 2021, a series of promising IPOs have been put on the agenda. Sun Zhengyi's critics always believe that Softbank Alibaba The group's most famous investment - the initial investment of $20 million eventually grew into shares worth more than $100 billion - was just a flash in the pan. At the moment, it is hard to say whether this is still the case. In fact, Coupang's listing is the largest foreign company listed in the United States since Alibaba's listing in 2014.
But besides success, failure cases are also eye-catching. For example, recently it was revealed that Katerra, a Silicon Valley intelligent building company, was facing closure, Greenhill Capital, a financial startup company that applied for bankruptcy protection at the beginning of March this year, and WeWork, a hybrid office startup company whose IPO died prematurely in 2019. These famous failure cases also made the market begin to doubt Softbank's strategy of "growth is king".
At the same time, the epidemic has led to market turbulence, and the prospects for technology stocks are still uncertain. Last year, at the beginning of the outbreak of the epidemic, the sudden drop in investor confidence forced Softbank to sell $50 billion of assets, and similar pessimism may be swept back.
But the bigger question may be whether the radical growth strategy supported by Softbank will eventually bring profits? The investment obtained by Coupang helped the company expand its share in the Korean e-commerce market, but the competition is still fierce. Startups and large enterprise groups want a piece of the Korean e-commerce market, including Amazon, which cooperates with local e-commerce operators.
Sun Zhengyi is ambitious. He wants to support the entrepreneurial army and unite to realize what he calls the "information revolution". But various factors cast a shadow on his ambition.
In addition, although the fund pool is not deep enough, Sun Zhengyi still admitted that he missed some of the most competitive deals in the entrepreneurial field. He said: "I have experienced many failed investments, such as WeWork, Katerra and Greenhill. But what I regret more is that I missed some investment opportunities. "
During the epidemic period when technology stocks rebounded in a large scale, other investors who won the transaction also reaped huge returns, and then increasingly reinvested these returns in Softbank's competitors. As a result, it is more difficult for Softbank to buy the shares of its competitors. When the M&A trend appears on the horizon, Softbank's hope of becoming the "king maker" in the investment industry is also more remote.
Just in front of you? A succession of failed investments raised doubts
Sun Zhengyi set up the Softbank Vision Fund four years ago to realize the transformation of Softbank from telecom business to technology investment. Today, Softbank Vision Fund covers two funds with more than $130 billion in consolidated assets (including committed but not yet invested capital). The team of Vision Fund is located in London, Silicon Valley, Mumbai and other places. Members of 26 investment teams are constantly searching for valuable start-ups around the world. In the end, Sun Zhengyi will personally participate in the discussion of potential investment. Today, most of these meetings are held in Zoom On. For Sun Zhengyi, the decision of billions of dollars may be made in less than an hour.
Sun Zhengyi said: "When we invested, only about 5% of the companies were profitable. 95% of the companies were in a loss state, and the loss will continue to expand. But the valuation we gave is also huge. You need courage."
"Usually, based on the traditional way of thinking of financial institutions, it is difficult for you to make these investment decisions." He said, "One of the reasons why we can do this is that we understand technology."
Sun Zhengyi seems indifferent to the risks of success and huge failure. He stressed that when he first invested in Alibaba, Alibaba also lost money. He said, "We should make good use of our imagination. If the company also uses AI in this way and obtains customers, it will succeed. Of course, one step wrong is an abyss."
In fact, the seeds of billions of dollars of investment had been planted years before the launch of Vision Fund. On the eve of investment in Coupang in 2015, Softbank jointly led an investment of $100 million in Tokopedia, Indonesia's largest e-commerce platform. At the same time, Softbank has also joined the investment battle in Asia's emerging shared ride industry, investing $250 million in Grab Taxi in Southeast Asia, and led the fast taxi financing round of $600 million in China. These companies later received billions of dollars from Softbank Vision Fund.
In 2017, before the launch of Softbank Vision Fund, investors in the market were mainly divided into two types. One is large private equity funds. They will buy companies with stable cash flow, improve the company's profit margin, and then sell them, and then share profits with fund investors. Second, venture capital investors, who tend to spread their net widely, hope to win the lottery of a few start-ups with a small amount of investment.
The first Softbank Vision Fund to obtain financing of $98 billion is a unique combination of these two types. It invests in the largest private equity fund, but it also targets technology companies with rapid growth whose business model has not yet been verified.
Oliver Matthew, an analyst at CLSA, said: "You are buying time for these companies to prove that their business model is right. Some of these investments will fail, and they will accept it. But the overall disruption you bring through these companies will eventually offset a small number of failed investments."
Take Tokopedia as an example. Its founder, William Tanuwijaya, was a part-time employee of an Internet cafe. In the first few years of business, Tokopedia had almost no income. Indonesia's infrastructure is poor, so the economic benefit of distributing goods on such an island is very poor ideal 。
However, once there is a scale, it is another scenario. Tokopedia began to expand rapidly after it obtained the investment from Softbank in 2014. Later, the capital injection of Softbank Vision Fund made Tokopedia's development even higher. Tokopedia found that although there are 60 to 80 million consumers on the platform, many people are not willing to buy. Instead of waiting for the income level of consumers to increase, Tokopedia decided to lower the threshold of online transactions as much as possible. To realize the so-called "infrastructure as a service" business model, Tokopedia began to build a series of dazzling transaction services: utilities, train tickets, groceries and loan waiting.
Lydia Jett, a partner of Softbank Vision Fund and a member of the board of directors of Tokopedia, Coupang and other companies, said: "The core vision is clear at a glance: how can we let more Indonesian consumers use online wallets?"
Undoubtedly, this kind of comprehensive expansion needs to consume a lot of funds year after year, and it is indeed too risky for most investors. However, Sun Zhengyi successfully persuaded the sovereign wealth funds in Saudi Arabia and Abu Dhabi to join the Softbank Vision Fund, and provided 7% annual coupons for half of their investment, as well as committed to investing $33 billion of Softbank's own funds.
However, this has exposed Softbank to huge risks from the very beginning - Softbank has to pay billions of dollars before realizing, but once the investment returns, Softbank will also have the opportunity to get rich profits.
In 2019, the "growth is king" model was questioned. At that time, Uber's share price, the biggest bet of Softbank Vision Fund, fell sharply after its listing in the United States. A few months later, WeWork suspended its IPO process. Previously, the company's valuation was as high as $47 billion. Then, the epidemic broke out, and the outside world doubted whether the companies in Softbank's portfolio could survive the difficult period of the epidemic, and then sold the shares of Softbank, ultimately prompting Sun Zhengyi to announce the sale of large-scale assets and buy back shares.
Recalling his investment in WeWork, Sun Zhengyi said: "We looked up to Adam Neumann, the founder, or we were too confident of him." Uber's share price "although it was sold at a price higher than what we paid, the share price still suffered serious losses after listing".
Sun Zhengyi then added that Softbank's assessment of its entire portfolio was "very conservative", "because the company may fall into the epidemic trough."
Greenhill Investment initially claimed to serve supply chain finance "in a technology driven way". Softbank has invested 1.5 billion dollars in it, which is also a waste. Greenhill's investment technology should have enabled the company to provide short-term financial services to enterprises with high risks in the traditional sense. But in fact, most of the loans Greenhill invests in are given to other companies in the Softbank Vision Fund portfolio. Greenhill Investment declared bankruptcy after major insurance companies stopped renewing insurance.
Sun Zhengyi said, "I think the business model of this company is very good. Now I still believe so... It's just that it has too many loans for some companies", which eventually led to the collapse of confidence. "Some of the companies we invest in are also Greenhill's loan customers. I don't know about direct interaction, but we must accept this reality and reflect."
Hidden willows and bright flowers: Successful IPO record brings returns and recovers reputation
In the next few months, a series of IPOs to be launched may justify Sun Zhengyi's strategy.
In April this year, Grab, the Southeast Asian online car hailing giant, announced that it would go public through merger with SPAC (special purpose acquisition company), with a valuation of nearly $40 billion - marking the largest SPAC transaction ever. Tokopedia also recently announced that it would merge with Gojek, Grab's main competitor, and then some executives said that the merged company planned to go public before the end of this year.
In addition, it is reported that Didi Chuxing, after the merger of Kuaidi Taxi and Didi Taxi, has also begun to cooperate with the Securities and Exchange Commission of the United States. It aims to be listed on the New York Stock Exchange, and its valuation is expected to be between $70 billion and $100 billion. It is reported that Softbank has invested nearly US $11 billion in Didi Chuxing to help the latter expand rapidly in China and enter new fields including automatic driving and grocery distribution.
WeWork has also announced plans to go public through SPAC merger, which seems to increase the opportunity for Softbank to recover some losses. According to insiders, China's online education brand Jobbang and the freight platform Manbang Group, as well as India's logistics start-up company Delhi and online insurance company Policybazaar, are preparing for listing.
These investments may be a big windfall for Softbank Vision Fund. As of March this year, the shares of Coupang held by Softbank alone had been worth $27 billion. In addition to a series of smaller IPOs, as well as the value growth of listed companies in the investment portfolio, the total investment income of Softbank Vision Fund I and Softbank Vision Fund II in the year ended March reached $58 billion.
Sun Zhengyi himself downplayed the record profits as a series of lucky events happened at the same time. His focus is to expand the Group's portfolio from "224 companies..." to "300, 400 or even 500". Softbank hopes to create a "group of enterprises" in the words of Sun Zhengyi: "a group of cutting-edge engineers and entrepreneurs who solve all global problems".
This goal will be tested in the public market. In the world of Softbank, traditional indicators such as profit are no longer important. Instead, "unit economy" is an indicator to measure future profitability once the money burning model is over. This will be in line with the quarterly returns presented to investors in the public market.
Claudia Zeisberger, professor of private equity and venture capital at the School of Business of the European School of Business Administration, said: "You are shifting from the thinking mode of venture capital and private equity to the thinking mode of public equity. Once the entire portfolio is listed and traded, internal measurement indicators are no longer important."
For example, Coupang's net loss in the first quarter of this year was $295 million, an increase of 180% over the same period last year, which exceeded the growth of revenue (revenue increased by 74% year-on-year). However, based on the company's own key indicator, namely "consumption by consumer group", the average consumption of users who joined the platform in 2016 is 3.59 times that of users who joined the platform in 2020. Therefore, the fact that existing users increase consumption on the platform every year shows that once the company stops building new factories and recruiting more distribution personnel, Coupang will have the opportunity to turn losses into profits.
Jeter of Softbank Vision Fund said: "We are very happy to see that consumer interaction has been increasing and their consumption level has also been growing. When we stop burning money and make forward-looking investment for our expected needs, our utilization of logistics capacity will increase and our profitability will be better."
Having a successful IPO record is the key, not only for return, but also for the reputation of Softbank. Meesho, an Indian social e-commerce website, recently received investment from Softbank. Vidit Aatrey, co-founder and CEO of Meesho, said: "Softbank has always been a part of some of the largest e-commerce companies in the world. When Softbank said it would invest in us, we accepted without thinking."
The advantages are reduced! The Venture Capital Market Is Gradually Saturated; The Inheritor Problem Is Concerned
Softbank is no longer the leading force in investing in start-ups. The current funds of the second phase of the Softbank Vision Fund are all from Softbank, and the scale is only one third of that of the first phase of the Vision Fund. Therefore, the competition between Softbank Vision Fund II and more and more private technology company investors is more intense. Mutual funds, even hedge funds that traditionally invest in listed stocks, are also eyeing this field.
The early investors of the top unicorn are also doubling their bets, and the large investors are even more generous than Softbank. According to CB Insights, Tiger Global Fund, an American investor, has participated in financing worth more than $20 billion this year alone, compared with $17.8 billion from Softbank.
A Singapore startup investor said that Tiger Global's strategy is very similar to that of Softbank Vision Fund, which is also "changing the rules of the game with cash". He said: "This is really a good thing for entrepreneurs with strict self-management. However, many entrepreneurs can't wait to move into luxury offices before they can make a profit. Therefore, there are both advantages and disadvantages."
Razorpay, an Indian financial technology company, is a very representative example. In the past few months, this company has successively obtained financing from well-known venture capital such as Tiger Global Fund, GIC, Sequoia Capital, Ribbon Capital and Jingwei Venture Capital. Razorpay's valuation was only $1 billion in October last year, and has soared to $3 billion by April this year. Razorpay, known as the Indian version of Stripe (an online payment service provider with the latest valuation of US $95 billion), has also been growing in popularity. But Softbank is neither an investor in Stripe nor an investor in Razorpay.
In addition, according to a person familiar with the transaction negotiation, although Meesho accepted the investment of Softbank, he still politely declined the proposal of Sun Zhengyi to increase investment.
The earth shaking transformation from historic losses to record profits also shows that Sun Zhengyi, who owns nearly 30% of the shares of Softbank Group, is indifferent to the call for change. To improve corporate governance, Yuko Kawamoto joined Softbank as an external director a year ago. In June this year, she and two other board members resigned. Before them, many well-known directors have resigned, including those famous for questioning Sun Zhengyi Uniqlo Founder Tadashi Yanai.
The new candidates for the board of directors come from the core circle of Sun Zhengyi: Keiko Erikawa, Sun Zhengyi's long-term friend, Kentaro Kawabe, who manages Z Holdings, a subsidiary of Softbank, and Kenneth Siegel, a lawyer who advises Softbank on M&A transactions.
In a message posted on Softbank's website, Yuko Kawamoto explained that he chose to resign because he received an internal appointment from the Japanese government. She also said that Softbank "needs to develop a form of governance so that Sun Zhengyi can fully display his talent, and his talent can be integrated with the value of shareholders." Yuko Kawamoto also stressed that Softbank's biggest challenge at present is to "develop a succession plan".
