Masayoshi Son’s Softbank Group may launch a third, massive venture fund. From a report that broke this morning in The Wall Street Journal:

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Global tech investor SoftBank Group Corp. is considering the launch of a new giant startup investment fund, part of a plan to turn a new leaf after the poor performance at its two earlier funds, according to people familiar with discussions at the company. 

SoftBank, led by Chief Executive Officer Masayoshi Son, has been hit particularly hard by the rout in tech valuations that began last fall, posting a record $23 billion loss in the three months ending in June. 

The first two Vision funds, massive at $99 billion and $56 billion respectively, have not performed well. The first is up just 20% since its launch in 2017, while the second has lost nearly 20%.

Massive bets on WeWork, Didi Global, and others have soured, leaving the funds with huge losses.

But if we look at Softbank’s performance more closely, the picture begins to brighten.

Vision Fund 1 is at least in the black. And since it was launched in 2017, it has about another 5 years on its fund life.

That’s a lot of time to notch big gains.

Vision Fund 2’s performance looks awful, until you realize it’s only 3 years old. It’s common for venture funds to lose money early on, as poor performers go bust.

The big winners usually take longer to mature.

But the Vision funds have one big thing against them: size. A venture fund is expected to at least triple in 10 years to justify the risk.

That’s hard enough with a small fund, but when you’re sitting on $100 billion, it’s almost impossible.

If you own 10% of companies you invest in, you have to find companies that will generate $3 trillion of value in 10 years. That’s more than the entire market cap of Apple.

Even if you own 20%, you still need to find a Google. In every fund.

Companies like Apple and Google are rare, coming along perhaps once a decade. The idea that you’ll find one every few years and be able to get major ownership is unlikely.

Another problem with having so much capital is that you have to write tons of huge checks, fast. It’s venture capital meets Brewster’s Millions.

This means writing giant checks at high valuations with minimal oversight. After all, who has time to attend all those board meetings when you’ve got billions more to deploy?

Big investors have been lured by the siren song of venture capital for years, from Softbank to Tiger Global. They see the big returns and think “What if I could get returns like that on my $100 billion?”

The problem is that venture capital doesn’t scale that big.

Done right, Vision Fund 3 could be a huge success.

Valuations are down and capital is scarce. This is especially true at the late stage, Softbank’s specialty.

Son could have his pick of deals, making gains so large any past failures are forgotten. But he’d be wise to keep the fund small.

Son has had some incredible successes — Alibaba, DoorDash, Uber. He may be struggling now, but something tells me he’ll make a comeback.

Would you invest in Vision Fund 3? Why or why not?

Leave a comment at the bottom and let me know!

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Photo: Masayoshi Son