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It is a round-down of epic scale — unless you are SoftBank. Two years ago, the $100 billion Vision Fund manager slashed its WeWork valuation to $2.9 billion from $47 billion in 2019. While the absolute dollar amount involved with Klarna is much smaller, the blow to Son’s reputation is nonetheless as damaging. The second Vision Fund will soon have to write down its Klarna stake, wiping out much of its returns. At March 31, this $56 billion fund recorded only $0.8 billion investment gains. A SoftBank Vision Fund spokesman declined to comment on the queries sent by Bloomberg Opinion.
Meanwhile, Sequoia’s Michael Moritz, who also serves as chairman of Klarna, has played his cards well. Sequoia was backing Klarna as early as 2010 — since then, it has led a funding round in 2014 with a reported $1.4 billion valuation, and invested again in 2019 at $3.5 billion. As of March, it was Klarna’s largest shareholder.
Unlike SoftBank, this deal will not force Sequoia to record unrealized losses, because it had invested early. But more importantly, with a global recession looming and Klarna needing capital as buffer against worsening consumer balance sheets, why should Moritz care if Son’s unicorn valuations are crash landing again?
It is also worth pondering if SoftBank’s Klarna blunder was a panic response to recent seismic changes to the venture capital world, most notably the arrival of New York-based hedge funds. SoftBank started losing access to the hottest startups because the newcomers could write bigger and faster checks.
Last year, Chase Coleman’s Tiger Global Management overtook SoftBank as the world’s busiest venture capitalist. Tiger was a money magnet, raising almost $20 billion in the span of just one year for two new funds. The asset manager had tapped into its banking relationships, reaching investors as wide-ranging as private wealth clients.
Granted, Tiger is a threat to the Silicon Valley VC funds too. But Sequoia found a solution, overhauling its structure to become an investment advisor just like Tiger as a way to attract investors who prefer a one-stop shop. Sequoia is reportedly raising for two new US-focused funds, valued at up to $2.25 billion. Its Chinese affiliate is about to close $9 billion in fresh capital, the biggest pool of money ever raised by a single VC firm to bet on local tech startups.
SoftBank, on the other hand, has no defense against Tiger. The company had to go it alone, self-funding the second Vision Fund. To make matters worse, now that capital is no longer his edge, Son shifted to a spray-and-pray mode. As of March, his second Vision Fund made 252 investments, versus only 94 for the much larger first.
A second major challenge in the VC world is how to retain talented fund managers, who can simply quit and set up their own businesses. As a result, compensation has been soaring, and the new structure deployed by the likes of Sequoia can help minimize pay disputes among partners.
Alas, SoftBank has no solution to that either: It has been suffering from a brain drain. The most high-profile departure, in January, was that of former Chief Operating Officer Marcelo Claure, who turned around the troubled WeWork. Claure had asked for up to $1 billion in compensation; he got $34 million in severance pay instead. In April, two of the three managing partners at the company’s Latin America Fund left to start their own venture business as well. It is thus questionable just how good SoftBank’s newest investments are — or will be.
Call it karma, or just life coming full circle. Five years ago, SoftBank disrupted the venture capital world with the $100 billion Vision Fund. Now, its value proposition is under attack from all corners. A disruptor is getting disrupted, and crushed.
More From This Writer and Others at Bloomberg Opinion:
• Tiger Global’s Day of Reckoning May Never Come: Shuli Ren
• Buy Now, Pay Later? You Might Regret It: Alexis Leondis
• The Eternal Optimism of Masayoshi Son: Culpan and Reidy
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.
More stories like this are available on bloomberg.com/opinion
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