How SoftBank could have created real economic value
The SoftBank playbook for its Vision Fund has been mainly focused on investments in digital service businesses that are scalable. Many of these digital service businesses are networks for aggregating products and services. Value creation for these ventures is from the margins derived from the aggregation and cross-selling of new services.
Value creation is limited to gaining a subset of existing value chains of the industry, and it comes at significant costs to achieve the same.
The winner-takes-it-all format of the network model businesses also has contributed to the enormous costs of investments required to maintain market position for these businesses without tangible value creation for these investments. Significant subsidies offered by these ventures do not offer immediate returns.
There are a few exceptions within the SoftBank portfolio with the likes of ARM, Guardant etc. which do not follow a network based model. However, a significant portion of the portfolio would still be classified within the same structure, thus creating value for the overall fund commensurate with typical network models.
Also, the investment process of the Vision fund has been focused on identifying businesses that are showing already significant traction and hence are comparatively late stage in terms of typical venture backed businesses, resulting in entry at higher valuations.
Limited true potential
While I am a big fan of the bold intentions of the Vision fund, I do believe the true potential of value creation for the fund is limited due to the focus on network model businesses and late stage investments.
The question that arises is if the same scale of funding was channeled to solving some of the core economic challenges the world is facing, would the real economic value created be significantly higher?
Below are some initial thoughts on where those opportunities may exist.
Many parts of the world continue facing energy shortages in today’s world, a significant jump of energy production would have an impact to the overall economy and allow an enterprise to gain fair share of that economic benefits.
The costs of photovoltaic cells and wind turbines have been on a downward trend with increasing demand and improvement of technology.
At organic demand levels the cost of solar power has come down by 80 per cent across a period of eight years in some markets such as Spain.
Changing energy economics
Now that begs a question on how would energy economics change with $100 billion (or a portion thereof) of investment towards capacity creation for either of these technologies?
With such levels of focused investments one can definitely expect a step towards change in the availability and cost of energy. Offering opportunities for economic value creation for the entire society and specifically for enterprises are driving this change.
For the last 16 years, around $800 billion were invested in renewable power generation globally. So, hypothetically speaking a one-off investment to the tune of $100 billion would give Vision Fund roughly a 12-per cent share of this global investment.
Renewable energy is expected to have an incremental impact to GDP in the region of $1.3 trillion, therefore a two-per cent value extraction for the fund via services offered would deliver value in the region of $26billion, in actual hard cash.
Looking into other possibilities
This is without the impact to the growth in valuation based on future potential.
Beyond energy there are other possibilities, like food production, medical supplies etc. where there exist significant real value creation opportunities and also societal impact.
And by looking only at the opportunity at the renewable energy, one wonders what would be the actual impact on those other industries as a result of such enormous scale of investment?
Navonil Roy The SoftBank playbook for its Vision Fund has been mainly focused on investments in digital service businesses that are scalable. Many of these digital service businesses are networks for aggregating products and services. Value creation for these ventures is from the margins derived from the aggregation and cross-selling of new services. Value creation is limited to gaining a subset of existing value chains of the industry, and it comes at significant costs to achieve the same. The winner-takes-it-all format of the network model businesses also has contributed to the enormous costs of investments required to maintain market position...
The SoftBank playbook for its Vision Fund has been mainly focused on investments in digital service businesses that are scalable. Many of these digital service businesses are networks for aggregating products and services. Value creation for these ventures is from the margins derived from the aggregation and cross-selling of new services.
Value creation is limited to gaining a subset of existing value chains of the industry, and it comes at significant costs to achieve the same.
The winner-takes-it-all format of the network model businesses also has contributed to the enormous costs of investments required to maintain market position for these businesses without tangible value creation for these investments. Significant subsidies offered by these ventures do not offer immediate returns.
There are a few exceptions within the SoftBank portfolio with the likes of ARM, Guardant etc. which do not follow a network based model. However, a significant portion of the portfolio would still be classified within the same structure, thus creating value for the overall fund commensurate with typical network models.
Also, the investment process of the Vision fund has been focused on identifying businesses that are showing already significant traction and hence are comparatively late stage in terms of typical venture backed businesses, resulting in entry at higher valuations.
Limited true potential
While I am a big fan of the bold intentions of the Vision fund, I do believe the true potential of value creation for the fund is limited due to the focus on network model businesses and late stage investments.
The question that arises is if the same scale of funding was channeled to solving some of the core economic challenges the world is facing, would the real economic value created be significantly higher?
Below are some initial thoughts on where those opportunities may exist.
Many parts of the world continue facing energy shortages in today’s world, a significant jump of energy production would have an impact to the overall economy and allow an enterprise to gain fair share of that economic benefits.
The costs of photovoltaic cells and wind turbines have been on a downward trend with increasing demand and improvement of technology.
At organic demand levels the cost of solar power has come down by 80 per cent across a period of eight years in some markets such as Spain.
Changing energy economics
Now that begs a question on how would energy economics change with $100 billion (or a portion thereof) of investment towards capacity creation for either of these technologies?
With such levels of focused investments one can definitely expect a step towards change in the availability and cost of energy. Offering opportunities for economic value creation for the entire society and specifically for enterprises are driving this change.
For the last 16 years, around $800 billion were invested in renewable power generation globally. So, hypothetically speaking a one-off investment to the tune of $100 billion would give Vision Fund roughly a 12-per cent share of this global investment.
Renewable energy is expected to have an incremental impact to GDP in the region of $1.3 trillion, therefore a two-per cent value extraction for the fund via services offered would deliver value in the region of $26billion, in actual hard cash.
Looking into other possibilities
This is without the impact to the growth in valuation based on future potential.
Beyond energy there are other possibilities, like food production, medical supplies etc. where there exist significant real value creation opportunities and also societal impact.
And by looking only at the opportunity at the renewable energy, one wonders what would be the actual impact on those other industries as a result of such enormous scale of investment?
