SoftBank: Venture legacy

Reports of the death of SoftBank's venture capital activities are greatly exaggerated. Fears that the Japanese telecom giant's will withdraw from early-stage bets surfaced last month in response to claims that US-based SoftBank Capital would be wound down.

In an interview with US technology news site Re/code, Nikesh Arora - president and COO of SoftBank Corp, and heir apparent to Masayoshi Son, the company's founder - announced plans to move away from early-stage investments and focus on backing more mature start-ups. Separately, Joe Medved, a partner with SoftBank Capital in the US, was quoted as saying his firm will not make any new investments out of its latest $100 million vehicle or raise any new funds.

SoftBank Capital has not been available for comment since these interviews. However, while SoftBank Group declines to talk about SoftBank Capital directly, it has confirmed a change in investment strategy. This new approach is referred to as SoftBank 2.0.

"We increasingly believe that our future lies in a smaller universe of companies, which pioneer breakthrough innovation and have the potential to be market and category leaders," the company said in a recent statement. "We also think having a diversified portfolio including mature companies and in some cases, exceptional early-stage companies, is the key to SoftBank's long-term viability."

It is not clear what SoftBank Capital's ultimate fate will be. The VC unit - which is not a subsidiary, but an affiliate - could yet re-brand under another name. However, SoftBank Capital is just one of many VCs carrying the SoftBank brand. Is the change in strategy likely to diminish the Japanese company's future role in Asian venture capital?

Going large

Based on events of the last year, it should come as little surprise that SoftBank is focusing more on late-stage investments. In past nine months alone SoftBank has led the charge on no fewer than seven late-stage VC rounds, each valued at more than $100 million. In doing so, it has rubbed shoulders with other big ticket players like US-based Tiger Global Management and Falcon Edge Capital, and government-backed investors such as Singapore's Temasek Holdings.

The majority of these deals have taken place in Asia, and more than half of them were announced in October 2014, a month after Arora, a former Google executive, was hired to head up head up the newly formed investment unit SoftBank Internet & Media Inc.(SIMI) prior to being promoted to COO. SoftBank backed e-commerce firm Tokopedia in Indonesia as well as taxi-booking app Ola and e-commerce marketplace Snapdeal in India.

Neil Juggins, executive director with Haitong International who tracks the firm, says part of the reason for Arora being brought is Son's desire to hand over the business to someone who can recreate SoftBank's earlier success with Alibaba. It initially invested $20 million in Alibaba 15 years ago and still holds a 32% stake worth around $63 billion.

"A lot of this change is to do with the Son's succession plan, and Arora has come in to beef up the returns they have been getting," Juggins explains. "Son did a fantastic job in identifying Alibaba, but it has got to be said that there haven't been many other big hitters."

He adds that for Son, Arora - with his internet experience at Google, his telecoms experience with T-Mobile, and his early investment experience Fidelity Investments - is the ideal person to drive performance. However, to improve that hit rate Arora is seeking targeting larger, less risky investments involving category leaders with proven business models.

A lot of this change is to do with the Son's succession plan, and Arora has come in to beef up the returns they have been getting. Son did a fantastic job in identifying Alibaba, but it has got to be said that there haven't been many other big hitters - Neil Juggins

"If he is putting his name to every one of these investments, Arora needs to be clear he is going to be getting more hits than misses," Juggins says.

This change of focus does not necessarily mean there will be fewer early-stage investments from SoftBank in Asia. For his part, Arora has made it clear that deals coming out of the parent company - or at least from SoftBank Group USA (the successor to SIMI) - will be the exception rather than the rule.

However, it is worth noting that there are at least three early-stage investors bearing the SoftBank name that still offer the company varying degree of exposure to the space: SoftBank Venture Korea; SoftBank China and India Holdings (SBCI); and SBCVC (formerly SoftBank China Venture Capital).

The first of these - SBVK - is directly controlled by SoftBank and raises capital from the both the parent company and third party investors. It was launched in 2000, and has raised 13 funds during its lifetime. The most recent vehicle, SB Global Star Fund, was launched in March of this year with a target of KRW120 billion ($107 million). The latter two are affiliates with which SoftBank maintains links as an LP in their funds.

SBCI's maiden fund, Bodhi Investments, came to market in 2006 with a view to making investments in China, India and Southeast Asia. It reached a final close of $105 million the following year with commitments from SoftBank, Cisco Systems and Deutsche Bank. The GP has since raise two more vehicles: Philippines-focused Kaikaku Fund, which launched in January last year with backing from SoftBank and IP Ventures Group; and Indonesia-focused SB ISAT fund, which reached a final close of $50 million in May 2014, having received commitments from SoftBank and Indonesian telecom giant Indosat.

SBCVC is the oldest, having been set up in 1999, and has since launched five funds. SoftBank initially provided the bulk of the LP commitments but it now accounts for less than 20% of the latest fund's $400 million corpus.

"We are an independent manager but we are affiliated with SoftBank," explains Chauncey Shey, managing partner at SBCVC. "We are mainly focused just on Greater China, making early-stage investments in the IT-related companies, though we do some later-stage deals."

Minimal change

Not all of SoftBank's investment ventures have remained in the fold. In 2001, SoftBank Asia Infrastructure Fund was formed in collaboration with Cisco, and given a remit to invest in technology infrastructure across the region. By the mid-2000s the GP had been renamed SAIF Partners and was fully independent, raising a further two US dollar funds and several renminbi vehicles from its own LP base. Indeed, in 2011, there was a spin-out from the spin-out as SAIF's India team struck out on its own.

However, SBCVC's Shey does not anticipate any change regarding SoftBank's Asian affiliates, many of which still offer exposure to companies at various stages of development. SBVC, for example, was an early investor in Alibaba, while more recently Softbank Venture Korea invested in Tokopedia prior to SoftBank coming in for $100 million round last year.

Recent developments also suggest the early-stage money will continue to filter down though other new funds and side-projects affiliated with SoftBank. A good example is the SoftBank Innovation Program launched to help commercialize innovations in areas such as the internet-of-things (IOT), connected vehicles, digital marketing, and healthcare. Start-ups will receive backing if they are expected to benefit SoftBank's own ecosystem.

"For more than five years, SoftBank's strategy regarding direct venture investments has been focused on strategic and large ticket opportunities, more than $100 million in size, and I would not be surprised to see the continuation of this strategy in future, particularly in Greater China," says SBCVC's Shey.

"However, as a part of a group of venture capital companies affiliated with SoftBank, we are continuing our VC investment focus, and I don't think that is going to change soon."

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