VCs have actually constantly played a long-shot video game, where the incentives from backing a couple of outbreak champions surpass the losses related to the substantial bulk of losers. To handle threat, VCs normally cofund start-ups with a collection of stage-gated financial investments, where the dimension and also emphasis of each round shows an endeavor’s progressing growth requirements. Over two-thirds of financed start-ups end up being total breasts, returning absolutely nothing to VCs. Only fifty percent of one percent generate income from a leave of at the very least $1 billion within a years of preliminary financing.
Prematurely selecting champions with substantial wagers increases the threat that a business’s race for worldwide dominance end up ending up being a race to oblivion.
Masa introduced Vision Fund to change the policies of the video game. Rather than signing up with common VC financing rounds, SoftBank usually chooses unilaterally whether an endeavor deserves a large cash money mixture–usually a number of times above the endeavor’s ask–at a substantially tipped up appraisal. For instance, the typical dimension of late-stage VC financial investments worldwide in 2018 was $35 million. SoftBank led or sole-sourced 18 late-stage funding rounds of $350 million or more.
From a venture’s standpoint, such unprecedented largesse reflects both an opportunity and a threat. Those that accept SoftBank’s offer can tear up their old business plan and shift focus entirely to ramping up organic growth and acquisition. It’s hard to refuse, particularly knowing that SoftBank is prepared to make the same offer to a venture’s fiercest rival instead. As Uber’s CEO Dara Khosrowshahi remarked after accepting SoftBank’s $10 billion investment in 2017, “Rather than having their capital cannon facing me, I’d rather have their capital cannon behind me.”
Son seems to believe that the Vision Fund’s massive capital investments can be used as a weapon to convey sustainable competitive advantage, global domination, and superior returns for his chosen winners. But this thinking is profoundly flawed for three reasons.
1. The notion that one VC can exploit money to achieve sustainable competitive advantage is ludicrous on its face. In virtually every category in which SoftBank is heavily invested—real estate, ridesharing, meal delivery, freight brokerage, hotels, construction—SoftBank is facing well-capitalized and resilient competition. In a world awash in capital, none of SoftBank’s funded ventures has achieved anything close to monopoly pricing power. This marketplace reality has contributed to chronic and escalating losses across Son’s portfolio.
Bewilderingly, SoftBank itself occasionally backs direct competitors within the same business category such as Doordash and Uber Eats in the US and Didi Chuxing and Uber in Latin America. Not surprisingly, in these cases, SoftBank’s competing ventures have suffered deep losses.
2. SoftBank’s philosophy ignores the value of low-cost learning from stage-gated investing, and instead exposed blitzscaled ventures to massive risk and wasted resources. Capital constraints aren’t an inconvenient nuisance for early stage ventures. Rather, fiscal discipline encourages experimentation to optimize business performance in terms of product/market fit, technology reliability, supply chain efficiency, business process stability, and business model viability.
By often investing too much, too soon in unproven ventures, sometimes with minimal due diligence, SoftBank compels its portfolio companies to rapidly scale businesses that still have unproven or deeply flawed business models (e.g. WeWork and Uber), inadequate core business processes (e.g. Brandless, Wag) or weak defenses against competitive threats (Slack). Prematurely picking winners with massive bets heightens the risk that a company’s race for global domination winds up becoming a race to oblivion.
3. Even if weaponizing capital could promote winner-take-all outcomes, SoftBank has been investing in the wrong types of businesses to achieve its goal of profitable market dominance. Ventures in the best position to benefit from explosive global growth exhibit a specific (and rare) set of business model characteristics: a massive addressable market; compelling consumer value proposition; strong network effects and scale economies; inherently high contribution and operating margins; extremely high customer loyalty; which collectively yield a growing competitive advantage and profitable market dominance.
Companies like Alibaba, Facebook, and Google that have exhibited such characteristics didn’t need massive cash infusions to fuel rapid expansion. Their business models generated much of the requisite growth capital from operating cash flow. Alibaba raised only $50 million of VC capital before becoming cash-flow positive in its third year of operation. In 2014, the company’s $6.6 billion in operating cash flow helped Alibaba float the largest IPO in US history. Google raised only $64 million, and was highly profitable prior to going public. Facebook raised $2.3 billion in venture capital and was generating over $1.5 billion in operating cash flow before going public.