SoftBank deals hit a historic low, squeezing startup funding
- ByStartupStory | January 27, 2023
As values continued to decline, the SoftBank Group’s new start-up bets fell to a record low, further chilling an already chilly start-up winter.
The largest technology investor in the world, which once participated in financing rounds totaling US$30 billion (S$39.4 billion) in more than 90 start-ups in a single quarter, only made eight investments worth a combined US$2.1 billion in the three months that ended in December, according to data compiled by Bloomberg.
It was the first time since the beginning of its Vision Fund in May 2017 that SoftBank’s deal volume dropped below ten.
According to a person familiar with the situation, the Vision Fund unit’s start-up investments fell below US$350 million in the most recent quarter. The segment invested about US$144 billion in total over 512 years, or over US$6 billion on average per quarter.
It’s not only SoftBank. Rivals Sequoia Capital, Coatue Management, and Tiger Global Management have also tightened their spigots after taking significant write-downs in 2022. Deep-pocketed investors have pushed back, pausing billion-dollar fundraising rounds that had become popular in recent years because they were denied attractive exits due to a collapse in tech values.
“With all these players slowing down, we will see fewer headlines about newly anointed unicorns, but I would argue that this is a healthy recovery period after partying a bit too hard these last three years,” said Coral Capital chief executive officer James Riney.
According to market research company Preqin, venture capital investments decreased 37% globally last year, reaching US$527 billion. The venture capital ecosystem was completely changed by SoftBank’s Vision Funds, which invested billions of dollars in hundreds of start-ups while pressuring other investors to make similar significant commitments. SoftBank and its competitors made it possible for businesses to pursue expansion without having to submit to the scrutiny of public listings by flooding private markets with cheap money. As late-stage investors competed to buy their interests, prices rose across a murky area of investment, giving early-stage investors a chance at a profitable exit.
These bets have lost their appeal, along with claims of quick profits from significant initial public offerings (IPOs). SoftBank’s Vision Funds have lagged the rest of the venture capital market in performance. One fund is insolvent.
Investors are still wondering how much more valuations will decline even after a year of write-downs, which is affecting start-ups’ capacity to obtain new capital and driving both large and small start-ups to make significant expense reductions.
In a recent survey conducted by January Ventures, which included 450 early-stage start-up founders from the US and Europe, it was discovered that about 80% of them lacked the financial resources to last another year, while late-stage start-ups had to resort to fund raising at significantly lower valuations.
This could result in a frenzy of start-up acquisitions this year as investors urge entrepreneurs to sell their businesses or their stakes to larger legacy organisations, similar to Adobe’s US$20 billion agreement to acquire Figma.
SoftBank suffered significant losses last year as a result of taking significant write-downs on investments in some of the most successful start-ups in the world. After losing a record-breaking US$17 billion the quarter before, the Vision Fund unit lost US$7.2 billion in the third quarter of 2018.
SoftBank is unlikely to change course very soon since its billionaire founder Masayoshi Son has vowed to play defence as long as the market remains fragile. A weaker US dollar, which fell 9% against the yen in the December quarter following seven consecutive quarters of strength that boosted profitability, is also hurting its performance.
According to Mr. Kirk Boodry, an analyst at Redex Research who writes for Smartkarma, oftBank is likely to have booked another loss at its Vision Fund unit as a dip in the dollar more than offset local currency gains.
Instead of investing in deals, SoftBank spent 532 billion yen (S$5.4 billion) on share buybacks, which helped its stock rise 15% over the three months that ended on December 31. The stock’s performance was the greatest it has been in a quarter in almost two years.
A successful IPO of chip designer unit Arm or an asset sale might give SoftBank the fuel to pump into transactions later in the year, according to Mr. Boodry, even though no recovery in Vision Fund investments is anticipated in the immediate future. Arm was acquired by SoftBank for around US$32 billion.
However, Mr. Son confronts a tough fight in a still-fragile IPO market as US-China tensions put pressure on the chip industry. SoftBank executives have stated that they are ready to reduce investments for many more months to come, if required, given the likelihood of a slow recovery.
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