VCs have always played a long-shot game, where the rewards of supporting a few winners outweigh the losses associated with the vast majority of kills. To manage risk, VCs typically combine start-ups through a series of staged investments, where the size and focus of each round reflects a venture's development needs. Over two-thirds of the funded start-ups turn out to be complete busts and return nothing to VCs. Only half a percent make money on at least $ 1 billion in a decade after initial funding.
Premature selection of winners with massive bets increases the risk that a company's race for global domination will wind up becoming a race for oblivion.
Masa launched the Vision Fund to transform the rules of the game. Instead of participating in shared VC funding rounds, SoftBank often unilaterally decides whether a business is worthy of a massive cash infusion ̵[ads1]1; often several times larger than the venture's business – at a significantly increased value. For example, the median size of late-stage VC investment worldwide was $ 35 million. SoftBank managed or obtained 18 late-stage funding rounds of $ 350 million or more.
From a venture's point of view, such a greatness reflects both an opportunity and a threat. Those who accept SoftBank's offerings can tear down the old business plan and shift the focus completely to increase organic growth and acquisition. It's hard to refuse, especially knowing that SoftBank is prepared to make the same offer to a venture's fiercest rival instead. As Uber's CEO Dara Khosrowshahi stated after accepting SoftBank's $ 10 billion investment in 2017, "Rather than having the capital canon to me, I'd rather have the capital cannon behind me."
Son seems to believe that Vision Fund's huge capital investment can be used as a weapon to convey sustainable competitive advantage, global dominance and superior returns for its chosen winners. But this thinking is deeply flawed for three reasons.
1. The notion that a VC can leverage money to achieve sustainable competitive advantage is ridiculous in its face. In virtually all categories where SoftBank is heavily invested – real estate, ridesharing, meal delivery, freight brokerage, hotels, construction – SoftBank faces well-capitalized and resilient competition. In a global raising of capital, none of SoftBank's funded businesses has achieved anything near monopoly price strength. This market reality has contributed to chronic and escalating losses in the Son portfolio.
Surprisingly, SoftBank sometimes even supports direct competitors within the same business category as Doordash and Uber Eats in the US and Didi Chuxing and Uber in Latin America. Not surprisingly, SoftBank's competing businesses have suffered major losses in these cases.
2. SoftBank's philosophy ignores the value of low-cost learning of incremental investments, and instead exposed blitzscaled ventures to enormous risk and wasted resources. Capital constraints are not an impractical nuisance to early stages. Rather, fiscal experimentation encourages experimentation to optimize business performance in terms of product / market customization, technology reliability, supply chain efficiency, business process stability, and business model viability.
By investing too often, too soon in unprovoked businesses, sometimes with minimal due diligence, SoftBank forces portfolio companies to scale rapidly companies that still have unprovoked or deeply deficient business models (e.g., WeWork and Uber), insufficient core business processes (e.g., Brandless, Wag) or weak defense against competing threats (Slack). Premature selection of winners with massive bets increases the risk that a company's run for global domination will wind up being a run for oblivion.
3. Although firearm capital can promote all winners-taking outcomes, SoftBank has invested in crazy types of businesses to achieve its goal of profitable market dominance. Ventures in the best position to benefit from explosive global growth show a specific (and rare) set of business model characteristics: a massively addressable market; compelling consumer value proposition; strong network effects and economies of scale; inherently high contributions and operating margins; extremely high customer loyalty; which together provides an increasing competitive advantage and profitable market dominance.
Companies such as Alibaba, Facebook and Google that have shown such characteristics did not need massive cash infusions to provide rapid expansion. Their business models generated much of the required growth capital from operational cash flow. Alibaba raised only $ 50 million of VC capital before it became cash flow positive in its third operating year. In 2014, the company's cash flow of $ 6.6 billion helped Alibaba to float the largest stock exchange listing in US history. Google raised just $ 64 million and was very profitable before it went public. Facebook raised $ 2.3 billion in venture capital and generated over $ 1.5 billion in operating cash flow before it went public.