OYO withdrew on a large scale, WeWork was hit hard, and the founder of Uber sold shares and left. Is Vision Fund's style of play useless?

Text丨Wan Pei

2019 was originally supposed to be a good harvest year for Sun Zhengyi and SoftBank, but the actual situation was not as good as expected. The company was questioned by frequent bad news from invested startups.

Vision Fund also appears to be in some trouble. For example, the second phase of the fund has been rumored many times to be unable to be successfully raised. According to Fox Business, as of the beginning of December 2019, this fund had only received 2 billion US dollars, which is 1.85% of the target amount raised.

Another example is Vision Fund's two key LPs — the Saudi Public Investment Fund (PIF) and Abu Dhabi's Mubadala (Mubadala), which expressed dissatisfaction with Sun Zhengyi's deviant behavior. There are two reasons. First, Sun Zhengyi has raised the valuations of these science and innovation companies excessively, exacerbating the bubble in the technology industry; second, Vision Fund has a problem with improper management style.

This made Sun Zhengyi, who has always been confident in his dictatorship, begin to reflect in front of the media: “There is a problem with my judgment, and I regret it in many ways.”

In 2019, when Sun Zhengyi's rule failed, the tone of the venture capital industry had changed. The inversion of valuations in the primary and secondary markets was the best proof. There is some debate in the market that no one can afford Sun Zhengyi anymore.

How does the venture capital community view Sun Zhengyi's 2019? How will Sun Zhengyi's “Waterloo” influence these startups?

1. Where did Sun Zhengyi's money go?

vsAlibabaThe $20 million high gamble was Sun Zhengyi's most acclaimed investment. In the end, the investment returned more than 100 billion US dollars in return. Since then, the crazy style of play has continued, making Sun Zhengyi and his SoftBank the largest venture capital agency on the Internet today. SoftBank's move once spurred Sequoia — the latter raised the funding threshold for its partners to $250 million.

A large amount of capital means that a large number of companies can get money. According to statistics from the US financial media CNBC website, since its establishment in 1981, SoftBank has invested in at least 600 companies and currently holds shares in more than 300 technology companies. Well-known companies such as Yahoo, ARM, and Alibaba are all on SoftBank's investment list.

In 2016, Sun Zhengyi, who was supposed to retire according to the plan, suddenly announced the establishment of a vision fund. The fund came with huge ambitions, with a total amount of 100 billion US dollars, and plans to invest in 70 to 100 tech unicorns over a period of 5 years. However, according to CV Source's investment data, the average financing amount for each fund in 2019 was only US$251 million.

Sun Zhengyi said that such a huge fund was set up to welcome the next big explosion of technology. “We have anticipated a big explosion in the personal computer field and a big explosion in the Internet field. I believe the next big explosion will be even more intense. To prepare for the reception, we need to establish a platform, that is, the SoftBank Vision Fund.”

The Vision Fund's style of play is distinctive. One characteristic is that corporate control will be sought in the investment. In an interview with Bloomberg, Sun Zhengyi said that most of the investment will account for 20%-40% of the company's shares. Second, SoftBank invests only in companies that have the potential to become number one in various fields, and forms a collaborative group so that the invested companies can collaborate with each other. And once these companies lose their first place in their respective fields, they will consider quitting.

The data confirms this. According to Crunchbase data, as of December 2019, SoftBank's Vision Fund had invested 94 times abroad, of which 81 were leading investors. Furthermore, the number of projects invested in by Vision Fund reached 25 in a single round of financing of 1 billion US dollars, accounting for 27% of the total amount invested since its establishment.

Specifically, according to statistics from Vision Fund's official website, Vision Fund's investment is mainly distributed in the fields of consumption, corporate services, fintech, cutting-edge technology, health, real estate, and logistics, etc. according to statistics from Vision Fund's official website. Among them, there were 10 cases of consumption, 8 cases of corporate services, 9 cases of financial technology, 8 cases of medical technology, 8 cases of medical technology, 6 cases of real estate, and 20 cases of transportation and logistics; if divided by region, SoftBank spent most of its money on America (44 cases), followed by Asia (20 cases).

According to Sun Zhengyi, although it has worked across many industries, Vision Fund actually only does one thing, which is artificial intelligence. These companies can use artificial intelligence to transform various fields such as transportation, real estate, and pharmaceuticals. “Each company is a fulcrum that can support global changes in the future.”

2. Sun Zhengyi's “Waterloo”

Sun Zhengyi's good fortune did not last until 2019. Many of the companies he has invested in have had trouble this year. The most typical of these are Uber and Wework.

These two highly valued companies have even dragged down Sun Zhengyi Vision Fund's performance because of their huge losses — according to the prospectus, WeWork's losses are increasing year by year. Losses for the full year of 2016 were US$429 million. Losses for the full year of 2018 had further expanded to US$1,927 million, and losses in the first half of 2019 were US$900 million. Uber's financial report for the third quarter of 2019 also showed an increase in losses, with a net loss of US$1,162 million, an increase of 18% over the previous year.

OracleFounder Larry Ellison once said that although he has a good personal relationship with SoftBank's Sun Zhengyi, he doesn't think WeWork or Uber has significant investment prospects; it's simply “nothing.” In his opinion, Uber has no technology, and no loyal users, and the act of spending money to seize market share is very foolish. “My cat can write their apps”; WeWork is even more ridiculous; it's just “rent a building from me, renovate it, and then sublet it out,” claiming to the outside world that it is a technology company.

According to The Information report, the experience of Uber and WeWork has already influenced Didi. Some of Didi's current shareholders are hoping to sell shares in the secondary market at a price that is 10 billion US dollars less than Didi's valuation of 57 billion US dollars in the last round of private financing.

And the companies that SoftBank invests in are in the same predicament. For example, the current price of Zhongan Online is about half of the issue price; the valuation of Melon Zi's used car, which exceeds 9 billion US dollars, is also subject to controversy, while the valuation of its rival Big Search Car is only 3 billion US dollars; when Ping An Finance One Account first went public, the valuation was 3.7 billion US dollars, which is about half of what it was when SoftBank invested 100 million US dollars.

Furthermore, according to public information compiled by China Investment Network, since this year, many companies invested by SoftBank (including Vision Fund), such as Wag, Fair, Zume Pizza, Katerra, OYO, Rappi, and Uber, have experienced layoffs. Companies such as Brandless, Uber, and Compass have experienced high-level turmoil. Among them, Uber founder Travis Kalanick sold 94% of his shares and completely broke up with Uber.

Also, according to CNN reports, SoftBank is currently betting 31.4 billion US dollars on the transportation and logistics circuit. However, as of the end of the third quarter of 2019, the fair value of these companies was only US$31.1 billion. In other words, SoftBank had already lost about 1% here.

3. How will it affect the venture capital industry?

In order to regain market confidence, Sun Zhengyi ousted WeWork founder Adam Neumann; SoftBank completely abandoned Wag in 2019 and sold its shares back to the company at a loss; furthermore, SoftBank also withdrew from deals with San Francisco homecare company Honor, San Diego B2B company Seisic, and San Francisco robotics company Creator.

According to foreign media reports, a head of Vision Fund in China said that SoftBank has reduced the size of a single investment transaction from 200 to 300 million US dollars to 50 million US dollars.

SoftBank has become cautious not only because of the amount it sells, but also because of the frequency of its moves. SoftBank has abandoned investments in three startups, Honor, Seismic, and Creator. Prior to that, these deals had been delayed over and over again.

According to the Wall Street Journal, SoftBank Group intends for Vision Fund to conduct an IPO. US financial blogger Zero Hedge believes that this may be an exit strategy to lock in profits from investments in startups that have not yet been profitable.

What impact will SoftBank's various initiatives have on the venture capital industry? An investor told China Investment Network that now everyone is ridiculing. The investment rounds include A, B, C, Sequoia, Gaoyu, and SoftBank, which means all three are rich, especially SoftBank. Some institutions may have followed SoftBank's investments in the past. Recently, SoftBank has been unfavorable, so many institutions may not follow him. “But it won't have much impact. If it's a good company, don't worry about taking over. If it's a bad company, no one will take over in the first place.”

Wu Shichun, founding partner of Meihua Venture Capital, believes that Sun Zhengyi is one of the main buyers of pre-IPO financing. His cautious attitude will spread anxiety forward, and investors should begin to consider the question “if Sun Zhengyi doesn't take over, who can the project still be sold to?”

However, Wu Shichun also believes that investment has always kept pace with the times, and Sun Zhengyi will also adjust itself. Wework may not have been a good company at 50 billion dollars, but it was a good company at 10 billion dollars.