SoftBank Vision Funds 2023 Activity and Portfolio Positioning Deep Dive | Earnings Takeaways, Key Trends and Thought Bubbles

In this post, I compile and analyze key trends regarding SoftBank Vision Funds' dealmaking and exit activity as well as portfolio positioning in 2023.

Following the latest SoftBank earnings release on February 8, 2024, we now have information on how the funds (SoftBank Vision Fund 1, or "VF1" in this post; SoftBank Vision Fund 2, or "VF2" and the LATAM funds, or "LATAM") have performed throughout the calendar year of 2023, as well as the Funds' investments and exits. (To minimize potential confusion, I have converted all fiscal year statements of the Japanese conglomerate into calendar year. For example, FY2023Q3 is listed as Q4 2023 here.)

The purpose of this post is threefold:

• The private market is opaque, and the venture landscape is especially so. Publicly available information on the VFs provide market participants a window into investment activity and valuation trends by the world's largest private capital investment fund.
• AI has been the ultimate buzzword of 2023 and pops up in almost everywhere within the venture community. SoftBank's AI-driven approach, in light of the 2023 (Gen AI) hype, rapid adoption and integration of AI by corporations across industry sectors, again brings about an opportunity to observe an AI-focused investment strategy for mid- to late-stage companies across the globe.
• Earnings updates get stale quickly. With other pending writing commitments, I don't foresee an opportunity to work on a polished research article. But before the information gets outdated, I hope to share it with the broader community that is as curious as I am about the Funds' latest trends.

(For a list of key takeaways on 星巴克 Q4 2023 earnings, feel free to check out my prior LinkedIn posts: part 1 & part 2. For American Express Q4 2023 earnings recap, click here.)

Disclaimer and methodology:

• All views are my own.
• All charts are made with SoftBank earnings data that's publicly accessible. In a few places where I use PitchBook and online search data, and those will be marked where applicable.

2023 Investment Activity & Portfolio Positioning Recap

As of end of year 2023, the VFs have a balanced and diversified portfolio across the global. In light of the ongoing economic headwinds plaguing China, the Q4 2023 earnings presentation highlights that to date, there are 55 investments that the VFs have made in China. During the Q&A session of the Q3 earnings call, management stated that (SoftBank Group was) "not actively investing in China" due to country risks. Nonetheless, among the top 3 investments in China by fair value: ByteDance, DiDi and Full Truck Alliance, 字节跳动 served as a main driver of VF1 gains. We will circle back to the company that owns TikTok and the Chinese version, Douyin, when we get to Q4 earnings later.

In 2023, the VFs made 29 investments (including new deals and follow-on rounds), which were among 300+ companies studied. Using PitchBook , I found 19 deals associated with SoftBank Investment Advisers on the platform: ShareChat, Howdy, MVPR, eToro, Infogrid, ElevateBio, Kigen, Enpal, Carro, Polygon Labs UI, eFishery, Tractable, CMR Surgical, GoStudent, Better, Zopa, Cato Networks, Forward, and Lumu Technologies. (Listed by deal date from January to December 2023).

Stripping out the 10 undisclosed rounds, here's a breakdown of the VFs' 2023 investments by geography and industry sectors:

High-level background context: VF1 had previously stopped making new investments. So new investments are being made by VF2. This point was emphasis during multiple earnings calls during the past year.

As of Q2 2023, there was $19B dry powder across the VFs. For VF2, total commitment of $60B – acquisition cost of $51.5B = 8.5B dry powder.

The latest earnings call updated that there were a total of 41 financing rounds raised by the VFs' portfolio companies in 2023. These deals may or may not include SoftBank's participation. 29 deals and the respective companies are listed on page 25 of the slide deck, and there are 12 rounds that remain undisclosed. Drilling into financing rounds by the listed companies and supplementing it with PitchBook information & online searches, we see that the VFs participated in ~38% of the 29 deals.

(Caveat: the information here may not be 100% accurate due to incomplete, unavailable or in some cases, conflicting information from online searches. That's why I had "maybe" listed for one of the companies.)

Thought bubbles:

1. Portfolio companies being able to gain traction from external investors (and in some cases, other existing investors as well) demonstrates healthy performance metrics.
2. On the flip side, generally speaking, there remains signaling risks when existing investors do not participate in a follow-on round, and this is especially true when it comes to brand name investors.
3. The second point also correlates to equity stakes risk getting diluted, especially in flat or down rounds. (Page 25 of the presentation deck shows 48% of these deals are up rounds, which leaves 52% of them falling into the other two categories.)

Shifting gears to runway preservation, because cash is key to business survival, particularly in a tough financing climate.

The following charts show VFs' portfolio companies with 12+ months cash runway by fair value:

A couple of notes here:

• Methodology: the fair value of private portfolio companies with 12+ months runway compared to total unrealized fair value of private investments.
• Q3 2023 data is missing from the earnings deck, so it's left blank.
• The underlying data excludes portfolio companies where cash runway data is unavailable and investments in Funds, for the full calendar year of 2023 and inclusive of Q4 2022.

The reason I included Q4 2022 data in the second chart here is to illustrate the upward trajectory in terms of cash runway for the LATAM funds, having steadily rose from 79% in Q4 2022 to 84% in the ensuing quarter, then 88% in Q2 2023, and ascending further to 94% in the most recently reported quarter. Without digging into details, given runway is calculated based off of fair value, my assumption here is that the largest portfolio company (or companies) from the LATAM funds were able to demonstrate traction and solid unit economics, thereby securing large funding rounds, or in conjunction was able to cut down burn while progressing towards the next inflection point.

Thought bubble: as stated during the earnings call, geopolitical risks have not settled. The LATAM venture ecosystem remains in relatively early stage of development, and there are risks such as potential forex loss. For instance, during the latest earnings release, American Express reported taking a dent from the devaluation of Argentine Pesos, and the company was far from being the only one being hit by the same set of challenges.

Regarding exits, in 2023, the VFs achieved 5 public listings and took a bullish stance on its India portfolio, given the recent strong performance witnessed in the Indian public markets.

The chart below tracks the number of public listings completed each year, since the inception of VF1:

While IPOs are splashy, they're not the only channel to exits. In 2023, the VFs completed 49 full and partial exits. Company names from the "notable exits" were taken directly from the presentation deck, with some additional context:

• Arm : IPO’d on Nasdaq in September, 2023.
• Zomato : IPO'd on the National Stock Exchange of India in July 2021.
• Policybazaar.com : IPO’d on the Bombay Stock Exchange in November 2021. (According to PitchBook , the VFs sold a 5.1% stake in the company via secondary transaction.)
• PhonePe (The VFs received PhonePe proceeds as dividend from its Flipkart investment. According to TechCrunch , Flipkart and PhonePe completed separation as of Dec 2022. The Indian e-commerce giant no longer owns a stake in PhonePe.)

Dealmaking: Invested Amounts Broken Down by Quarter

Drilling into VFs Quarterly Performance in 2023

Q1 2023 performance highlight:

• Gains driven by public investments benefiting from a "modest recovery in global markets"
• Private investment losses primarily came from 2 sectors: Consumer & Logistics
• The "Gain/Loss on Investments" section points to portfolio company performance being the main driver of markdowns, with market factors being the second largest factor.

Q2 2023 performance highlight:

• From a portfolio value standpoint, from Q1 to Q2, there was little change in the underlying structure of (cumulative) value gain/losses for portfolio companies. For example, in Q1, 346 portfolio companies, or 73% of the overall position, recorded losses, and the number trended down slightly in Q2, settling at 347 companies, or 72% of the total position.
• Portfolio valuations started to stabilize due to having a broad and diverse investment coverage.
• Sector-wise, exposure to Proptech and US Autonomous Vehicles witnessed adverse impact.
• Reasons for why Arm valuation was marked up during the quarter: multiples of comparable companies to Arm have expanded; performance of Arm showing strong top line growth as well as EBITDA performance

Background context: The topic of organizational restructuring came up during the Q&A session for the Q2 earnings call. The VFs experienced 2 rounds of restructuring in Q3 2022 and Q2 2023 respectively. Management indicated that "now we believe we’re a right-sized organization for investing and the functions."

Q3 2023 performance highlight:

• VF1 gain primarily driven by Arm transaction
• VF2 loss driven by decline in value of public portfolio, particularly Autostore
• During the quarter, WeWork filled Chapter 11 bankruptcy, which explains why multiple WeWork-oriented questions came up during the Q&A session during the Q3 earnings call. Key takeaways regarding WeWork include: 1. There are no incremental investments to WeWork 2. most exposure (to WeWork) has already been written down. There’s no residual exposure, except for the equity exposure based on the stock price that was trading at September 30. 3. SoftBank's investment ratio to WeWork: equity and debt combined ~ JPY 14B, with a 70% ownership. Cumulative loss was $14.3B.

Background context: During this call, it was re-emphasized that:

• VF1 has external (third-party) LPs whereas VF2 does not.
• VF1 has stopped making new investments, whereas VF2 is still within actively deployment period.

Q4 2023 performance highlight:

• VF1 gains primarily driven by strong ByteDance performance. As a point of reference: ByteDance generated $110B revenue in 2023, which surfaced a 30% YoY revenue growth, and was assigned a 2.8xrevenue multiple. To compare the metrics with its peers: Meta recorded $30B revenue during the same period, grew by 14%, had 6.5x revenue multiple; and Tencent generated $86B revenue, grew by 10% YoY, and had a 4.2x revenue multiple.)
• VF2 gains driven by recovery in public assets (for example, Autostore) and private up rounds (such as Ola Electric)

Spotlight #1: Portfolio Companies Expanding into the Japan

A differentiated value-add for the VFs to help portfolio companies expand into the Japanese market. Being the world's third largest economy by nominal GDP, Japan is a small but mighty market. (If the venture market in Japan is a topic of interest to you, feel free to check out my 2023 analyst research on the state of venture in Japan, including CVC and banks' participation in venture.)

Despite Japan's strong economic position, history and culture of innovation and the country being the homeland of many internationally acclaimed name brands, Japan doesn't come naturally to non-Japanese entrepreneurs as a global expansion destination, likely due to 1. the market being highly localized 2. language barrier being a real issue 3. Japan's own struggles, most prominently slowed growth for multinational conglomerates, an aging population and the legacy of the lifetime employment system. With the SoftBank Group Corp. and its subsidiaries being established players on the ground with vast connections and resources, the VFs are equipped with a unique advantage to help portfolio companies enter the Japanese market, where it makes sense.

An example is in June 2021, DoorDash announced its official launch in Japan, which makes the company's first footprint in Asia and its fourth market after the US, Australia and Canada. (Note that the first 3 markets are relatively similar and share the same language - English - except for Canada adding a second official language of French.)

During the past few years, the government of Japan has been proactively pushing for development in the domestic startup ecosystem, which is expected to drive the country's future growth. Having global businesses entering the domestic market is likely going to be beneficial in a few ways, including fostering shared knowledge and (healthy) competition, as well as cultivating talent (in particular tech workers) that will be conducive to future growth in the startup landscape. A parallel could be found in Vietnam, where the entry of global companies after the government amended its policy to be more flexible and friendly to foreign businesses led to a positive impact on workforce skill development in the long-term.

For more background context, here's a recent post I wrote on the spectacular gains the Japanese stock market recorded in 2023 and the underlying tailwinds to the regional ecosystem.

Spotlight #2: Emerging Market Portfolio Companies: PayPay and eFishery

Among all VF portfolio companies, I'm most interested in following the future trajectory of PayPay Corporation (Japanese mobile payment app) and eFishery (Indonesian IoT-based acquaculture startup). The simple reason for taking a bullish stance on these 2 companies is how the products are well-positioned to target a specific, unmet need within their respective ecosystems.

Regarding PayPay, here's a post I wrote about the progress in cashless payment in Japan during my last visit to Tokyo in December 2023. This is situated within the context of COVID tailwinds and the government of Japan driving for digital payment's further market penetration.

In terms of eFishery, I'm hoping to provide a more comprehensive picture of the Southeast Asian private market in an upcoming research piece, but long story short - it's incredible how a simple app that emerged to serve a clear unmet need among the Indonesian fish and shrimp farmer community was able to stand out from the crowd and to initiate a flywheel that in turn transformed into a super app with a range of functionalities all serving the same target audience. Relating to the success we saw from other super apps such as Grab (Southeast Asia), and the fact that eFishery having raised Series C and D in 2022 and 2023 respectively with co-investors such as Temasek (that typically do not invest in earlier stages within the region) makes me curious to see the startup's future moves.

Happy to share the underlying data file I compiled if this is something of interest to anyone.