Aug 11, 2021 - Economy & Business

Vision Fund 2 and the Great Startup Indexing

Illustration of a hand holding buckets of cash.
Illustration: Aïda Amer/Axios

While Softbank's first Vision Fund was all about "picking winners" in a sector and arming them with a lot of capital to fend off their rivals, the Japanese giant's second Vision Fund has a different strategy: backing as many worthy startups as possible, as early as possible.

Why it matters: Diversified portfolios have been a fixture of seed investing for a while, but with the entrance of investors like Tiger Global into the startup scene, it’s a strategy no longer confined to the earliest stages of venture.

By the numbers: Last quarter SoftBank's Vision Fund 2 invested in 47 startups ($14.2 billion including follow-on capital from VF 1), and has already backed another 27 since July 1.

  • "You'll see more diversification — [SoftBank's Vision Fund 2] is coming in at earlier stages. ... The idea is to be earlier in the cap table and be able to participate in the next round," one person familiar with the Vision Fund's thinking told Axios.
  • Meanwhile, Tiger Global has already been pre-marketing its upcoming $10 billion growth equity fund to back more internet startups while deploying its recently closed $6.7 billion fund at a furious pace.

Between the lines: Startups, especially at the mid-to-late stages, are the new stock market in some ways.

  • With companies staying private longer, crossover funds have been dipping into backing pre-IPO companies for years now to capture gains from the growth that used to happen post-IPO — but this trend has significantly accelerated.
  • And there's a startup market for investors to index. The pandemic forced a lot of activities and industries to move online, boosting the explosion of Internet-enabled startups that was already happening. (Both SoftBank and Tiger Global have touted to investors their success in seeing and backing a large chunk of the world's digital startups.)
  • And of course, there's optionality: Get on the cap table early enough, and be able to participate in subsequent rounds if the startup turns out to be a gem — or write off the smaller initial investment if it's a dud.

The bottom line: Historically, nine out of 10 startups fail, but that's not deterring investors like SoftBank and Tiger from writing a lot of checks.

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