The world of startups is full of pitfalls, but also filled with investors looking to help fund the next big thing. Over the last decade, a whole economy has been created around it – an economy that has produced many successful gadgets, but also many outright failures.
Softbank is one of the biggest players in this economy, its Vision Fund is one of the most coveted funding sources for startups.
The sheer size of the fund, valued at $100 billion, is said to be disrupting the whole venture capital industry by raising the prices on companies and investments. As such, it’s one of the big hitters these days, yet it’s difficult to understand just why it is so important.
Why is it necessary?
Startup companies, particularly in tech, often face a huge problem from the get-go: funding. It used to be, decades ago, that you could start producing whatever widget you wanted by hand, sell it locally, and slowly expand.
That won’t work today.
The global economy has shifted, and today, success in tech often requires having a wide reach and mass production. This means that any new venture needs prohibitive amounts of money to begin with, amounts of money regular people don’t really have.
Does it just give you money?
Of course not. While Vision Fund’s funds are big, it isn’t bottomless – and they aren’t a gift, either.
Vision Fund is an investment program, its core philosophy being that it’ll give entrepreneurs the money they need so they can focus on building a successful company without the financial issues they’d otherwise face.
Softbank is known for being a permissive investor, but it’s still a capitalist undertaking – which means a profit is eventually required.
Moreover, Softbank will naturally be entitled to a share of whatever profit your company makes.
You could, therefore, see this funding as a loan of sorts.
What if no profits are made?
One of the big problems of venture capitals is that many companies indeed never make a profit. This is pretty common when companies try to fix problems that aren’t there, thus failing to find a market.
The Venture Capital world is full of poorly planned, ill-conceived gadgets somebody somehow thought were the next big thing that led to millions of dollars wasted.
In theory, investors review proposals and choose those that are the most likely to succeed and help change our world.
In truth, venture capitals are often seen as a way for certain individuals to promise investors everything, deliver nothing, and live like millionaires.
Softbank’s Vision Fund, however, has a method to try and stop this.
Fighting mismanagement with clauses
As usual with venture capital contracts, if your project doesn’t take off, the investors lose their money. That’s also true of Softbank’s fund, and whatever money was spent on getting the company off the ground will be lost.
Just as well, if the company turns a profit first, then it stops doing so, the fund itself will take the hit.
That is true, however, only for the money that was actually spent on the company.
Softbank’s Vision Fund has a peculiar clause that hopes to fight against venture capital scammers, those who live like millionaires on investor money and then return nothing.
Money spent on management salaries and bonuses can be taken back if the company fails.This doesn’t only extend to the initial investment, but also earnings.
Earnings are divided between the company and Softbank, but if the company stop earning any money soon, managers are expected to pay back a part of the money they took to Softbank.
This makes keeping the company efficient a priority above all things, since results are not just encouraged but expected.
Is this really changing the landscape?
It’s still early to tell. Softbank works in a different way from other funds, since it requires entrepreneurs to have some skin in the game. They’ll fund projects, but they don’t take the full cost of a failure – meaning companies receiving funds need to plan around the idea of having to pay back a part of it.
While the logic is sound, it also means only people who can take a risk can participate – thus thinning the eligible startups and offering the services mostly to people who already have means to begin with and who can take the brunt of failure.
Still, in a world where venture capital is a thing, Softbank Vision Fund has caught many eyes and helped many companies, even when their tactics and clauses are often reviled by others.
The emergence of venture capitalists like SoftBank really makes the difference. With funding that can bring the entrepreneurs dream to reality, it is world heralding.