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Sequoia and Tiger Global take SoftBank to the cleaners

Shuli Ren
Shuli Ren7/7/2022 07:24 PM GMT+08  • 4 min read
Sequoia and Tiger Global take SoftBank to the cleaners
SoftBank's founder Masayoshi Son somehow always manages to hold the worst cards / Photo: Bloomberg
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If the fiascoes at WeWork and Greensill Bank were not enough, Klarna Bank should serve as another fine reminder that SoftBank Group is the unluckiest whale in a crowded venture capital world. Founder Masayoshi Son somehow always manages to hold the worst cards.

The Sweden-based fintech, known for its buy-now-pay-later offering, is in talks to raise about US$650 million — mostly from existing investors led by Sequoia Capital. If completed, this deal would reset Klarna’s valuation to US$6.5 billion, a fraction of the US$45.6 billion it was priced at just a year ago in a US$639 million funding round led by SoftBank.

It is a round-down of epic scale — unless you are SoftBank. Two years ago, the US$100 billion Vision Fund manager slashed its WeWork valuation to US$2.9 billion from US$47 billion in 2019. While the absolute dollar amount involved with Klarna is much smaller, the blow to Son’s reputation is nonetheless as damaging. The second Vision Fund will soon have to write down its Klarna stake, wiping out much of its returns. At March 31, this US$56 billion fund recorded only US$0.8 billion investment gains. A SoftBank Vision Fund spokesman declined to comment on the queries sent by Bloomberg Opinion.

Meanwhile, Sequoia’s Michael Moritz, who also serves as chairman of Klarna, has played his cards well. Sequoia was backing Klarna as early as 2010 — since then, it has led a funding round in 2014 with a reported US$1.4 billion valuation, and invested again in 2019 at US$3.5 billion. As of March, it was Klarna’s largest shareholder.

Unlike SoftBank, this deal will not force Sequoia to record unrealized losses, because it had invested early. More importantly, with Klarna needing capital as buffer against worsening consumer balance sheets, why should Moritz care if Son’s unicorn valuations are crash landing again?

It is also worth pondering if SoftBank’s Klarna blunder was a panic response to recent seismic changes to the venture capital world, most notably the arrival of New York-based hedge funds. SoftBank started losing access to the hottest startups because the newcomers could write bigger and faster checks.

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Last year, Chase Coleman’s Tiger Global Management overtook SoftBank as the world’s busiest venture capitalist. Tiger was a money magnet, raising almost US$20 billion in just one year for two new funds.

Granted, Tiger is a threat to the Silicon Valley VC funds too. But Sequoia found a solution, overhauling its structure to become an investment advisor just like Tiger as a way to attract investors who prefer a one-stop shop. Sequoia is reportedly raising for two new US-focused funds, valued at up to US$2.25 billion. Its Chinese affiliate is about to close US$9 billion in fresh capital, the biggest pool of money ever raised by a single VC firm to bet on local tech startups.

SoftBank, on the other hand, has no defense against Tiger. The company had to self-fund its second Vision Fund. To make matters worse, now that capital is no longer his edge, Son shifted to a spray-and-pray mode. As of March, his second Vision Fund made 252 investments, versus only 94 for the much larger first.

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A second major challenge in the VC world is to retain talented fund managers, who can simply quit and set up their own businesses. Compensation has been soaring, and the new structure deployed by the likes of Sequoia can help minimize pay disputes among partners.

Alas, SoftBank has no solution to that either: It has been suffering from a brain drain. The most high-profile departure, in January, was that of former chief operating officer Marcelo Claure, who turned around WeWork. Claure had asked for up to US$1 billion; he got US$34 million in severance pay instead. In April, two of the three managing partners at the company’s Latin America Fund left to start their own venture business as well. It is thus questionable just how good SoftBank’s newest investments are — or will be.

Call it karma, or just life coming full circle. Five years ago, SoftBank disrupted the venture capital world with the US$100 billion Vision Fund. Now, its value proposition is under attack from all corners. A disruptor is getting disrupted, and crushed. - Bloomberg Opinion

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