Oh boy, conference season in the venture world and one enduring question this year has been “What to do about the Vision Fund?” It’s been a topic of lobby conversations, off-the-record chats and sometimes even an honest public panel!
What’s my answer to The Softbank Effect? First you need to separate the investments into two categories:
Mature Growth Investments a la Uber: Multi-billion dollar commitments to companies that are already at scale. So far at least these investments seem to contain some secondary sales. Which means as a seed investor, I’m thrilled to see Softbank invest. Yippee, go Masayoshi Son!!! It’s essentially a private IPO where early investors, founders and employees get some liquidity and Softbank gets minority ownership, maybe a Board seat. Cool, cool.
Early Stage Hybrid Buyout a la Wag, Brandless, DoorDash: Softbank becomes the largest investor on the cap table, sometimes clears out the Board, and, if reporting is correct, doesn’t broadly offer secondary to earlier investors. *This* is a more complicated situation for seed investors. You’re basically along for the ride with an investor who has very different incentives than you do – a different time frame, the AUM business vs IRR business, and requiring a scale in outcome that’s just astronomical
What do I think is happening in #2? Vision Fund is selecting categories where they believe a $10-100b company/conglomerate can be built and investing in the tip of that spear. Wag represents pets, Brandless CPG and DoorDash delivery/logistics, OpenDoor home buying, etc. Picking Categories and trying to make Category Killers.
Over time they’ll grow these companies w Amazon-like rapacity. Through internal efforts, through acquisition, through investment. Very exciting if you’re an entrepreneur, perhaps less exciting if you’re a seed fund (or even Series A VC). My guess is obviously don’t do your pro rata into the Softbank round and are left to go along for the ride, hoping to end up owning a very small piece of a very big thing. For the multistage VC it’s more complicated but I bet one reason the Sequoia’s of the world are raising mulitbillion dollar growth funds isn’t to coinvest along Softbank, but to protect their ownership in Sequoia core companies.
From my perspective – and we haven’t been involved in any Vision Fund deals yet – the outcome of a Softbank investment can be inconsistent with our investment model. I want to own a larger piece of a company that we hope can go public but more realistically, in a success scenario, will be bought by another company at a premium. And I worry about the impact of too much capital on a youngish startup.
What would be the most provocative ‘hot take’ I could write about Scenario #2 above? Probably something like “if you’re a seed investor, you want Softbank to invest in your second best companies, not your best” or “a solid venture investment strategy might be to immediately invest in the strongest competitor to a company that Softbank has funded.” I don’t fully believe this but I’m also not sure it’s pure hyperbole. And I *like* everyone I’ve met on the Vision Fund team. It’s not about people, it’s about models.
Anyway, that’s just my POV right now from a hallway conversation occurring in lots of halls at the moment.