SoftBank’s investments will elbow out other funds from the market

Masayoshi Son, president and CEO of Softbank, delivers his keynote speech at Mobile World Congress in Barcelona, Spain, February 27, 2017

Masayoshi Son, president and CEO of Softbank, delivers his keynote speech at Mobile World Congress in Barcelona, Spain, February 27, 2017(REUTERS)

The New York Times reported on July 25 that SoftBank Group Corp. is considering a “multi-billion dollar investment” in ride-hailing service Uber Technologies Inc. The report said talks between the two companies were still at a preliminary stage.

SoftBank already has a stake in several Uber rivals, including Ola (ANI Technologies Pvt. Ltd) Ola in India and Grab (GrabTaxi Holdings Pte. Ltd) in Singapore. The Indian company already has an investment from China’s Didi Chuxing, which also has a stake in Uber (made after Uber exited China after selling its Chinese operations to Didi). SoftBank itself has a huge investment ($5 billion) in Didi. What this means is that SoftBank wins, no matter who does in the market.

That’s probably one of the advantages of having a $100 billion (give or take a few billion) fund, which is what SoftBank has. Called the SoftBank Vision Fund, this is the largest technology fund ever raised. The size of that fund is probably why the storied investor can make a play for a stake in the world’s most valuable start-up (Uber) — just to hedge its bets.

In India, Ola and the local arm of Uber are fighting it out for market dominance. Independent analysts say the two companies are neck-and-neck; Ola says it is significantly ahead; Uber says it is significantly ahead.

There’s no debate about one of SoftBank’s other investments in India, though. Snapdeal (Jasper Infotech Pvt Ltd), was once mentioned in the same breath as Flipkart. Now, it is a distant third after Flipkart and Amazon.com Inc’s Indian unit and in all sorts of trouble. Still, SoftBank is just a step away from parlaying its investment in Snapdeal into a stake in Flipkart (by getting the latter to buy the former). What’s in it for Flipkart? A significant investment by SoftBank from its new fund. In this case, SoftBank is simply salvaging an older investment that hasn’t worked out (which, again, is fairly easy to do for a company that has just raised a $100 billion fund). SoftBank is also a significant investor in Alibaba Group Holding Ltd, which, while it may be taking forever to finalise its India strategy, is seen by some as the only company capable of standing up to Amazon in India. SoftBank also has an investment in One97 Communications Ltd, the company behind Paytm. Alibaba, through its payments company Alipay, already has a significant stake in Paytm. Clearly, there are wheels within wheels, and SoftBank is at the hub.

That’s not a bad position to be in for a company many of whose early investments didn’t play out as expected. Somehow, despite that start, SoftBank has manoeuvered itself into a position of strength – a process that has no doubt been aided by the money at its disposal.

That’s both good and bad news for other venture capital firms. It’s good news because the size of the cheques the new fund will write. According to a January report by Mint, the SoftBank Vision Fund will “not make early-stage investments, preferring to invest in later rounds (so-called Series C and Series D rounds), and putting in at least a few hundred million to up to a few billion dollars in each investment.” Such investments could result in consolidation, or they could accelerate the share-sale process for companies looking to launch an initial public offering (IPO). Both provide exit options for investors.

It’s bad news simply because the size of SoftBank’s investments will crowd most other funds out of the market. A senior executive at a venture capital company says this happened in 2014-15, and that his fund, a well-known US one, and several others, had to choose between being relegated to the sidelines by SoftBank and Tiger Global Management (the other company that was writing big cheques back then) or competing with them by making investments of the same magnitude. Neither, this person told me, was a preferred option. The situation changed in the second half of 2015 and 2016 and some amount of rationality returned to the space, this person said. “Now, we are back in those times,” he added. Only, Tiger is no longer playing that game because it can’t afford it. Now, it’s just SoftBank, which seems to have all the money in the world.