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Masayoshi Son hurries out Vision Fund 2 before market turns

SoftBank founder does not want to see high valuations of investments cut

SoftBank Group CEO Masayoshi Son speaks at a news conference in Tokyo on Aug. 7. (Photo by Ken Kobayashi)

Three times in recent years, SoftBank Group founder Masayoshi Son went to visit the Kuwait Investment Authority in an attempt to cajole that Middle Eastern sovereign wealth fund into investing in the first iteration of his Vision Fund.

"You can have the honor of taking the fund from $93 billion to $100 billion," he said, promising the KIA returns of 44%, according to people familiar with the matter. Ultimately, the Kuwaitis, unlike the Saudi sovereign wealth fund and an investment arm of Abu Dhabi, declined to write a check.

It is too early to know whether the first Vision Fund will return anything close to the 44% returns Son quoted to the Kuwaitis. So far most of the gains exist on paper, rather than on actual returns.

It is only after a company with SoftBank money goes public, allowing earlier investors to cash out over time, that it will become clear if SoftBank was profligate or prescient. Recent listings, such as that of Uber, have not settled the debate.

But in a world where central banks in developed markets are reaffirming their commitment to easy money, Son looks likely to be among the biggest beneficiaries of these policies. That's because in Europe, the U.S. and Japan, these policies continue to drive financial assets, particularly riskier assets like stocks -- whether in private or public companies -- ever higher.

The timing of the launch of Vision Fund 2, as well as the accelerated timetable for listing some of SoftBank's bigger bets such as WeWork -- which could come as soon as the autumn -- has everything to do with the liquidity and the equity-market euphoria that central banks are generating with their zero-rate policies.

That means Son is right to be in a hurry -- before these benign conditions change.

Early-stage investing in tech companies used to involve small sums of money. The formula for success was all about finding the most promising entrepreneurs who had identified both a need and a solution and then supporting them with capital and advice.

Venture capitalists generally seek profits rather than market share. They believe that outsize checks usually lead to wastage -- a higher burn rate of cash, in the jargon of the industry -- and complacency, which stifles the hunger for innovation.

But Son has changed the nature of the game. He believes that cash, rather than vision or merit, can determine outcomes. He doesn't aspire to merely find winners and back them -- he aims to create monopolies in sectors such as ride-sharing.

He believes in winner-take-all, and aspires to achieve this by writing checks that are bigger than anyone else's, enabling a young startup to outlive any challenger. It is all about who runs out of money last.

Son's relations with rival investors, therefore, are not always cordial. Most say selling to Son is better than taking the companies in their portfolios public, given those high valuations.

But often when he comes into a company, he will give management options as sweeteners that involve dilution for earlier investors, as he did when he put billions into Chinese ride-sharing platform Didi.

Son has both admirers and detractors among his network of entrepreneurs. In India, where there is a shortage of domestic risk capital, Son's high valuations have proved both irresistible and a trap for desperate entrepreneurs.

Several say in retrospect they gave up control over their fate, because in return for a high valuation, he demands board seats and other ways to influence decision-making, as the price for a high valuation. In other cases, no other investor would ratify Son's valuation, making any later fundraising at a lower valuation all but inevitable.

In any case, as long as companies stay private, there is no hard or objective rule regarding the value of any investment. SoftBank has had a history of putting money in startups at a far higher valuation than other investors.

"If they step away, the valuation would fall away instantly," says one investor who is often in deals in which SoftBank later invests or who backs companies that compete with SoftBank-backed businesses.

One reason, therefore, that there has to be a second Vision Fund is to support what other investors consider overly-high valuations with the promise of more money to come.

As Son prepares to raise his second fund, this one at $108 billion, according to a filing made to the Tokyo Stock Exchange on July 26, he is looking closer to home, with many investors coming from Japan itself.

Japanese bankers who used to fret about their exposure to SoftBank have been reassured by the rise in the value of their collateral -- SoftBank's shares in Yahoo Japan and Alibaba, says one former executive at Sumitomo Mitsui Banking Corp., which is the second largest lender to the SoftBank Group after Mizuho Bank.

Still, the amount of money each is putting up isn't clear -- nor whether the money is in the form of debt or equity.

SoftBank itself is committing $38 billion, though here too the form of that money hasn't been explained. The first Vision fund structure involved a lot of debt, analysts say.

So far, at least, neither the Saudis nor the Mubadala investment arm of Abu Dhabi has signed up. Nor have any mainland investors. "The Chinese are not so interested," says the head of China for one major international venture capital firm. "He has tried before."

Still, a second Vision Fund is bad news for competitors. "We want to be underfunded. We want to survive through innovation and talent," says the founder of one Indonesian company that competes against a SoftBank-supported rival. "But going against a competitor who can outspend us 100 times teaches humility."

Perhaps the best comment on Son comes from William Tanuwijaya, founder of Indonesian e-commerce unicorn Tokopedia. "He believes in the underdog, he relates to people who are misunderstood by society," says Tanuwijaya, who first met him in Tokyo in 2013, when he got a small amount of money from a Korean arm of SoftBank. "He dreams as high as the sky."

Henny Sender is the Financial Times' chief correspondent for international finance, based in Hong Kong, and contributes occasional columns to the Nikkei Asian Review.

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