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The Vision Fund: hubris or genius?

Anyone unfamiliar with the story of Masayoshi Son, Softbank’s iconic founder, probably gasped at the announcement of the so-called Vision Fund. This $100B VC fund launched in 2017 didn’t catch many eyes for just being the largest VC fund in history: it caught many eyes by trumping established VC funds such as Sequoia Growth Fund III by a factor of 10.

For the uninitiated, this move seemed exuberant, preposterous, and even irresponsible given that this was Softbank’s first foray into the VC fund world. For avid followers of Masayoshi Son on the other hand, this was the logical next step in the Japanese tycoon’s unquenchable ambition.

Son is mostly known for a couple of feats of arms such as turning a $20M Alibaba investment into a $60B stake, yielding a handsome 300,000% return. Other achievements include gaining exclusive rights for SoftBank to distribute the iPhone in Japan, before Steve Jobs even thought about commercializing it. Such a prescient and bold move is all the more impressive as it came just a couple of years after Son lost $70B during the dot-com bubble.

The LATAM component

Softbank’s irruption into the LATAM startup scene started with one man, Marcelo Claure. Originally from Bolivia, the former Softbank executive found the lack of Latino/a entrepreneurs pitching the Vision Fund frustrating. SoftBank had already dipped its toes into LATAM through investments in Brazilian startups Loggi and 99, with the latter ending up being acquired by Didi. Claure wanted to take his firm’s involvement in his home continent to the next level.

In 2019, Softbank announced the launch of the Latin American Fund. Flush with $5B in cash, the fund’s coffers represented more than double the total amount raised by LATAM startups in 2017 and 2018 combined. The LATAM fund also benefitted from relative independence with regards to the broader Vision Fund, as the operating team was free to invest as they saw fit without needing approval from the top. Unsurprisingly, Claure was appointed to lead the initiative. In 2021, Claure announced a Fund II, with $3B to invest.

The so-called “LATAM thesis” made sense for a global investor like Softbank. The region’s VC scene had lagged behind other dynamic regions such as south-east Asia, despite numerous green indicators such as growing GDP, increasing internet penetration, and broadening government support. It did seem to be time to irrigate the region’s founders with the capital they deserved.

Impact on the ecosystem

Arriving with such a massive boat in such a small ocean was bound to make waves. The LATAM fund truly changed the continent’s startup ecosystem, in a multitude of ways.

First, SoftBank’s vocal and open commitment to the region’s startups inspired a myriad of mostly American VCs to venture ‘down south’. The credibility associated with Softbank and the sheer volume of money they were preparing to disburse led to a flock of foreign investors speed-running the continent. While the overall funding bonanza and euphoria of 2021 might’ve led some “helicopter VCs” to come in and out of the region as soon as the market cooled down, the spotlight SoftBank shone on the region can’t be turned off.

“International investors flooded into the region in 2021, with more than 1,100 unique nondomestic investors completing a deal, nearly double the number recorded in 2020, according to PitchBook data. Ribbit Capital , Tiger Global and DST Global are among the other prominent international VCs that have actively targeted LatAm startups.” - Pitchbook

SoftBank’s thunderous entrance into LATAM also severely shook up the nascent, local VC industry. SoftBank has a reputation for being a ruthless investor, often offering its companies way more money than they need in a bid for them to annihilate their competition. The fund’s $1B investment into Colombian startup Rappi, almost directly as the fund launched, set the rules SoftBank was going to play by. In other words: the onus was on funding undisputed market winners. Despite these big tickets, the LATAM funds were still notably more reasonable than the broader Vision Fund in the way they invested.

Local VCs took notice and quickly realized they would need to beef up their bank accounts in order to compete with the Japanese conglomerate. For later-stage VCs, the competition for valuations on the deals they targeted got more intense. In short, SoftBank’s arrival completely turbocharged an already growing VC scene. It can be argued that this express maturation of LATAM’s funding arena made it way more resilient in the face of the current downturn.

“With SoftBank’s arrival, many other local funds may come to the realization that they’re going to need more capital to compete. A number of seed stage and Series A and B funds have been announced recently, including Kaszek Ventures ($600M), EWA Capital ($30M), Accion Venture Lab ($33M), Base Partners ($135M) and Monashees ($250M) to name a few.” - Nasdaq

The SoftBank way of investing, heralded by its outsized tickets, also pushed startup valuations to a level never seen before in LATAM, a phenomenon compounded by the overall 2021 funding fury. For a region used to scarce capital, the advent of a money tree at their doorstep changed many founders’ way of thinking.

The high valuations SoftBank came in at were beneficial for the founders’ equity stakes but put pressure on their companies to grow exponentially in order to raise their next round. This new focus on blitz scaling rather than the more reasonable unit economics LATAM founders used to abide by is a topic for the reader to make their own opinion about.

Performance

Is the LATAM fund a success? I would opine that it’s too early to tell. At the height of the 2021 funding frenzy, the SoftBank Vision Fund seemed to be another Masayoshi stroke of genius. A couple of months later, the Vision Fund’s portfolio value crashed, losing an impressive $23B in Q2 2022, with Masayoshi regaining the “delusional optimist” status.

As for the LATAM funds, they showed a handsome 32% net IRR as of March 2022 before plummeting with the rest of the portfolio as the funding winter set in. As of December 31st, 2022 SoftBank’s LATAM funds cumulative losses stood at $900M. However, it is arguably more interesting to look at Softbank’s LATAM portfolio's makeup than its value during a funding winter.

Contrary to companies like WeWork, the companies in SoftBank LATAM funds are mostly solving structural issues that the continent needs to resolve. Companies like Clip (payments), Creditas (credit), and Frubana (B2B supply chains) are building structural solutions that are key to the continent’s economic development. The case for the engrained structural problem WeWork solves is weaker. While the long-term success of these companies is in no way guaranteed, the perennity of the problems they target makes them more solid than other SoftBank investments in the West.

SoftBank has also managed to stick its nose in many of LATAM’s most successful startups to date, including QuitoAndar, Kavak, Gympass, and Rappi. The global growth potential for these companies, with Kavak expanding to the Middle East for example, makes me relatively bullish on the LATAM funds’ long-term performance.

Management issues

Cohesive and flawless management has never been one of the Vision Fund’s forte. Son’s sometimes overbearing influence can lead to games of musical chairs between his closest lieutenants, all vying for the still unannounced role of successor. While the LATAM funds were operated separately from the broader Vision Funds, it went through tumultuous times of its own.

For starters, the man behind this entire initiative has left the ship. In early 2022, Marcelo Claure resigned from SoftBank, supposedly following a dispute over his pay. In mid-2022, the LATAM funds lost two of its other managing partners, who left to create their own VC firm.

The internal management turmoil, combined with the broader market downturn, has led to drastic reorganization within the LATAM funds. Following Claure’s departure, the LATAM funds lost the “sovereignty” the Bolivian executive had advocated for.

“SoftBank is moving to fold the Latin America strategy into the Vision Fund operations and will report to Vision Fund CEO according to a person familiar with the matter. Additionally, SoftBank has revised the division's compensation structure, removing profit-sharing commitments.” - Pitchbook

To enable it to focus on the Vision Fund’s investment mandate, a new independent early-stage VC called Upload Ventures was created. While SoftBank remains the main LP, Upload is independent and can raise money from other LPs. This enables them to operate without the Vision Fund’s supervision while simultaneously enabling SoftBank to keep a stake in the early-stage LATAM scene.

Conclusion

SoftBank undoubtedly took the LATAM startup ecosystem to the next level. The ticket sizes, valuations, and subsequent ambition SoftBank engrained in the startups it invested in made a number of LATAM startups global contenders in their field. It also revitalized the local VC scene, creating a more robust funding corpus that is coming in handy as foreign investors retreat during funding winter. According to insiders, Softbank’s arrival led to a proliferation of good-quality early-stage funds, but the region still lacks a solid collection of growth-stage funds.

The performance of the LATAM funds itself will be judged in the long-term. Comparing its value between the peak of VC funding and the current funding winter does little to translate the actual value of the companies SoftBank invested in, at least in my opinion. I personally do subscribe to the thesis that the importance of the problems LATAM fund portfolio companies are solving makes them smart bets.

SoftBank may come in and out of the region depending on its internal priorities, but I think LATAM’s startup ecosystem has been ignited. Founders have gotten the taste of big VC money, and I doubt that they will now settle for anything less.

The Realistic Optimist provides weekly, in-depth analyses of some of the most relevant stories in our now-globalized startup world. Subscribe below to receive it directly to your inbox and don’t hesitate to share it with your colleagues :)

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