SoftBank Reports $23 Billion Loss for the quarter ending June 30, 2022. According to their investment presentation, the big loss can be primarily attributed to the global stock market turmoil and the rapid fall of the yen. As illustrated above, they had quite a roller coaster ride in the past two years with great gains in FY 2021 and big losses in FY2022 and Q1FY2023. If you look at the cumulative loss/gains below, Vision Fund I ,a $100B fund started in 2017 generated total investment gains of 1517.2 billions yens or $11.2B, which is a 11.2% gain over 5 years. Compared to SPY’s 5 year-return of 86%, this return is horrible but hardly surprising.
It’s incredibly hard to drive returns for a $100B fund. In the VC/PE world, investors expect to 3X their money over 10 years. With a $100B fund, after accounting for the 2/20 fees, expenses and carried interest, we are talking about growing $80B to $400B for investors to get the 3X returns. Assuming Vision fund owns 20% of the companies it invested in, it would have to turn $400B of total market cap into $2 trillions. In other words, the market cap of their portfolio has to grow $1.6 trillion dollars after the investment. To make this work, they basically have to invest in one trillion-dollar company like Google, Apple or Microsoft, Tesla or two 500B+ companies like Meta, Alibaba or Tencent when they are relatively small. I don’t know if there’s a practical strategy that could have made the math work with reasonable odds.
I had a lot of doubts when they raised the $100B fund in 2017. Don’t get me wrong. Masayoshi Son is a legendary investor and he has made some iconic investments like Alibaba or Uber. If they had a $10B fund, I think it would have worked exceptionally well as he has a lot of good bets like Arm, DoorDash and Coupang that could generate $160B market cap growth. But $1.6 trillion is a whole different level. With the $100B slushing around, they also overfunded companies with insane valuations. Now, they are facing the predictable consequences. “I must humbly and honestly acknowledge that things are really bad,” a somber Chief Executive Masayoshi Son told reporters Monday. “I must face up to this.” Well, Softbank was able to recover from the dotcom bust. Hopefully, they could stage another rebound. We are probably going to see a very tough funding environment for startups in the foreseeable future as investors become more disciplined.