How $100 Billion from the SoftBank Saudi Fund Will be Transformative

Posted on 11/02/2016

Startups and growth-focused technology companies need to pay close attention to the amount of capital sitting in sovereign wealth.

Let the unicorns breathe. Unicorns are startups that have valuations of over US$ 1 billion. Tokyo-based SoftBank Group Corporation, overseen by Masayoshi Son, and Saudi Arabia’s Public Investment Fund (PIF) announced the formation of a US$ 100 billion technology-focused fund with a working moniker – SoftBank Vision Fund. The fund, to be based in London, could have less assets than US$ 100 billion dependent on how much it could raise. However, if destiny were to come true, the techie fund would be a multitude times larger than singular private equity funds managed by The Blackstone Group or The Carlyle Group. With regard to funding, SoftBank is kicking in US$ 25 billion over a period of time, while the re-oriented PIF plans to allocate US$ 45 billion over a 5-year span. The fund investment is in line with Saudi Arabia’s Vision 2030 strategy, in which to help diversify the country away from oil, according to Saudi Deputy Crown Prince Mohammed Bin Salman, Chairman of PIF, in a press release. The rest of the fund capital plans to be raised from long-term patient capital such as sovereign funds, pensions and other like-minded investors. Other public institutional investors have had their interest piqued in the technology fund. Abu Dhabi-based Mubadala Development Company is in discussions with SoftBank on potentially committing a few billion dollars to the fund. Another sovereign investor, the Qatar Investment Authority (QIA), has also expressed a level of interest.

Increased Competition for High-Quality Growth Equity Investments

Startups with strong stories to tell and prospects for growth may fight for higher valuations, as more capital enters from the sidelines. In contrast, to mature startups that have failed to materialize and grow revenue. This formidable undertaking of the vision fund could transformationally impact how venture capital raises money. Historically, startups relied on angel investors and venture capital funds. The capital base has shifted as more large asset owners prefer to go direct, bypassing these fee-generating vehicles. Venture capital firms with less known reputation could be crowded out of investment opportunities, forced to take on higher-risk earlier stage startups, or face overpaying for sections of private companies. The fund could possibly create friction in the private equity growth community by competing for technology buyouts from firms like Thoma Bravo, MSD Capital, Francisco Partners, and Vista Equity Partners.

Funding Large-Scale Innovation

More patient capital is steadily flowing into the venture and growth equity ecosystem, according to data from SWFI. There are investor entities such as OMERS Ventures, the venture arm of pension giant Ontario Municipal Employees’ Retirement System (OMERS), fostering and backing promising startups in North America such as social media company Hootsuite Media Inc. and Shopify Inc. Other sovereign wealth funds, such as Singapore’s GIC Private Limited, have made commitments to familiar startups such as San Francisco-based Square, the payment systems company. This influx of public investor capital could lead to greater risk taking in innovative technologies. How much could the vision fund impact the startup/growth equity technology industry? If the vision fund could reach a US$ 100 billion capital commitment and has a 5-year investing period, that means potentially US$ 20 billion could chase technology investments annually. The amount of capital could, according to Masayoshi Son in a press release, “further accelerate the Information Revolution by contributing to its development.” This would trounce individual traditional venture capital funds and even private equity funds in annual commitments. The fund would mostly likely target growth equity or mature technology investments due to size.

SoftBank Rationale

SoftBank is a veteran investor when it comes to backing sprawling technology. The Japanese conglomerate has amassed a colossal portfolio of investments in e-commerce, cybersecurity, financial technology, telecommunications, wearables and online marketing. By partnering with PIF, and other capital-rich investors, SoftBank can utilize its expertise in sourcing top-tier deals and adding value. SoftBank has all the trappings of an ideal technology business partner – track record, deal flow and connections in many technology sub-industries. SoftBank’s earlier mega investments include Yahoo Japan, e-commerce giant Alibaba, and recently U.S. telecommunications giant Sprint. The Saudis are bullish on the idea and hope that the fund could have spillover effects into their domestic economy to help offset their reliance on fossil fuels. In fact, Saudi royal delegates paid visits to technology giants Apple Inc., Facebook Inc and Microsoft Corporation in October 2016. PIF famously invested US$ 3.5 billion into Uber, the popular taxi-app business.

Baby Steps

The Saudi government has made inroads over the years developing partnerships with companies like General Electric (GE), Siemens and IBM. The move toward information and communications technology is part of Saudi Arabia’s strategic roadmap. The PIF is not the only vehicle looking to back technology companies. For example, Riyadh-based Saudi Telecom Company, a telecommunications company that offers landline, mobile, internet services and computer network services, in 2011, formed a US$ 50 million venture fund to allocate capital for smaller enterprises operating in the telecommunications and information technology space. In June 2014, Riyad Capital, the investment banking unit of Riyad Bank, started a US$ 270 million fund that was backed by PIF to make investments in advanced materials, sustainable energy, and information, communication and technology industries.

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