India Shows the Challenge in Firming Up SoftBank

Country is a test ground for SoftBank’s new, more tempered investment strategy

By guest authors Laura Forman and Megha Mandavia from the Wall Street Journal.

Caption and Graphic courtesy by the Wall Street Journal

Amid a technology bear market, the industry is racing to position itself as having somehow reformed—what venture-capital firm Sequoia Capital last month dubbed a “crucible moment.” But for SoftBank, 9434 there may be little defence.

SoftBank’s Vision Funds lost about USD 27 billion for the fiscal year ended March 31. The investment firm blamed much of those losses on poor performance of its public companies beholden to regulatory developments in the U.S. and China. Chief Executive Masayoshi Son has been clear that he expects the current market uncertainty to stay for the foreseeable future, with geopolitical risks a key compounding factor.

Like everyone else in tech right now, Mr. Son seems confident SoftBank can weather the storm with a few important changes. SoftBank will be dialing back its investments in China, he has said, and it will be writing smaller, more diverse checks. Unfortunately, SoftBank’s problem is a global one, and it would take an awful lot of smaller checks to turn around its fortunes.

Take India, a key market for SoftBank’s Vision Fund investments. As of March, USD 4 billion, or around 9% of invested capital in Vision Fund 2, went to India-based companies, according to SoftBank’s investor materials. That mix could increase this year: At the peak of the recent tech funding boom, SoftBank had enthusiastically said that if it found the right companies, it could invest USD 5 billion to USD 10 billion in India in calendar 2022 alone.

In late 2018, SoftBank hired Sumer Juneja to set up a local presence in India. Mr. Juneja was previously at venture and growth equity-focused Norwest Venture Partners’ subsidiary in India.

SoftBank founders describe the firm’s investments there as before and after Mr. Juneja’s hiring. Whereas its Vision Fund 1 investments were concentrated in a small number of growth-hungry companies such as payments company Paytm, which flopped in its November public debut, and hotel operator Oyo Hotels & Homes, which recently shelved its plans for a 2022 initial public offering,

Vision Fund 2 investments thus far are generally smaller and far more numerous. SoftBank founders describe Mr. Juneja as far more focused on unit economics than Mr. Son has historically been. This makes India something of a test ground for SoftBank’s new, more tempered investment strategy.

Mr. Juneja is still ambitious, though. In his online profile for Vision Funds, he refers to the investment opportunity in India as “massive,” noting “we’re a country of a billion people, with about two-thirds of the population under the age of 35, more than 300 million smartphones, and some of the cheapest data in the world.”

The recent increase in checks has made SoftBank incredibly important to India’s startup ecosystem, local founders say. Across its Vision Funds portfolios and its investments made before them, SoftBank has 21 Indian unicorns, or companies worth over USD 1 billion, in its portfolio, according to the data shared by Tracxn Technologies.

SoftBank has tempered its investment pace in India, but continues to meet founders and will likely take more bets at the right time and price once the market stabilizes a bit, according to a person familiar with the matter, adding that, for SoftBank, the investment opportunity in India hasn’t changed.

It certainly hasn’t been competing in a vacuum for opportunities there. Tiger Global, an early investor in e-commerce company Flipkart and ride-sharing company Ola, has also been aggressively funding Indian startups. Last year, SoftBank was part of six fundraising rounds that led to unicorns versus Tiger Global’s 17, according to Tracxn.

One key difference between SoftBank’s Vision Funds and its competitor: As a crossover fund, Tiger is able to opportunistically buy into companies that have already gone public. Focused on still-richly valued private companies, Vision Funds won’t have that comparative luxury.

In the current market, that could be a problem. Last month, Mr. Son explained to SoftBank investors that, while we have already seen a significant deterioration in public market valuation, private companies adjust their valuations “one year or two years behind” the public market.

Mr. Son seemed to be referring to SoftBank’s chances at eventually getting attractive valuations on new investments. In the near term, the dynamic applies negatively to the potential for exits on investments SoftBank has already made. Of Vision Fund 2’s USD 56 billion in committed capital, USD 48.2 billion, or 86 %, was already drawn as of March 31.

Combined, nearly 90 % of SoftBank-invested companies in Vision Funds 1 and 2 were still private as of March 31, according to the company’s consolidated financial reports. Of the investments SoftBank’s Vision Funds has made in India, just three have gone public. A weak IPO market in India makes getting handsome returns on new offerings a more distant dream.

Tweaking the investment approach can only do so much. Until the market’s mood on technology companies brightens, in India and elsewhere, the outlook for SoftBank’s Vision Funds will be dim.