Yahoo, SoftBank and Naspers’ varying venture paths

• Yahoo sale of operating company and creation of holding company to wind up portfolio including Alibaba and Yahoo Japan stakes
• SoftBank leverages Alibaba and investment returns to create funds to raise hundreds of billions of dollars to invest
• Naspers will move operating assets to Netherlands-listed company and focus on operating businesses with corporate venture collaboration and low debt

This is a story about different routes to creating value.

First, find your mega-growth story.

Yahoo and SoftBank’s investments in Alibaba and Naspers’ secondary purchase of shares from International Data Group in Tencent, all about 20 years ago, have reaped multiples on investments made but how the corporations went on to use their fortunes has varied.

As one of the investors said: “That is just so happens to be the way the dice fell. Out of 1,000 good Chinese companies around the millennium, five became mega-companies and two super-mega ones [Alibaba and Tencent]. But the three investors have different DNA and different structures, and this affected their next steps.”

In 2005, internet content provider Yahoo invested $1bn for a large stake in Alibaba, five years after SoftBank had backed Jack Ma’s China-based retailer with a $20m investment.

Yahoo sold part of its stake back to Alibaba in 2012 through a deal that valued the shares at $13, two years before the retailer floated in the US at $68 per share in a then-record $25bn initial public offering that valued the company at $231bn.

Yahoo kept another 15%, and in 2017, with the sale of its media assets to media and communications group Verizon imminent, set up a subsidiary, Altaba, to house the stake and other assets such as its 35.5% holding in Yahoo Japan, a local media subsidiary.

Four percentage points of Altaba’s stake in Alibaba were sold in 2018. In April the company said the remainder could be sold by the end of 2019 for about $40bn, though it was unable to comment for this article.

Altaba’s Yahoo Japan shares were sold in September 2018 for more than $4bn, a few months before SoftBank agreed a complicated deal for its stake in their Japanese joint venture. Yahoo and SoftBank formed it in the mid-1990s to set up the first web portal in the country and Masayoshi Son, CEO of SoftBank, also offered Jerry Yang, co-founder of Yahoo, a reported $100m in investment.

In May, the conglomerate SoftBank Group Corp said it would sell its 36% stake in Yahoo Japan back to the internet company and its telephone subsidiary, SoftBank Corp, said it would invest $4.2bn to increase its stake in Yahoo Japan to 45% from 12%.

SoftBank Group has been rearranging its telephone assets, including trying to merge its US-based carrier, Sprint, with peer T-Mobile in a $26.5bn deal going through regulatory approvals.

This has partly been driven by SoftBank looking to reduce its debts and free up cash for its $38bn commitment to a second Vision Fund, which it said in July had $108bn in capital. The other $70bn is reportedly mainly in the form of memoranda of understandings from corporations, such as Microsoft and Apple, according to the Financial Times.

SoftBank said electronics manufacturer Foxconn (also called Hon Hai) and other “major participants” from Taiwan had signed memoranda of understanding. The newspaper added that seven Japanese financial groups including the top three banks — Mizuho, Sumitomo Mitsui Banking Corporation and MUFG Bank — and Dai-ichi Life Insurance and Daiwa Securities were also participating.

SoftBank committed $28.1bn of equity to the first Vision Fund, which raised $97.2bn in 2017 with another $1.4bn anticipated to be added.

The first fund had $40bn in the form of debt with a 7% fixed rate of return, particularly aimed at sovereign wealth funds in the Middle East, including Saudi Arabia, which committed $45bn, and the United Arab Emirates through its Mubadala investment unit.

As at the end of March, SoftBank said the first Vision Fund was up 45% after fees for the equity investors, including itself. This is mainly based on paper returns from higher valuations based on follow-on fundings but also included some exits, such as India-based retailer Flipkart, acquired by Walmart for $16bn, and sale of shares in US-listed chipmaker Nvidia. In its annual results, SoftBank said it made about $2.8bn from these two deals.

It has also seen flotations for other portfolio companies since the end of March, including mobility service Uber and messaging service Slack, Guardant Health. It also floated for Ping An Good Doctor last year in Hong Kong with one for subsidiary Ping An HealthKonnect expected later this year.

SoftBank’s website at the start of August indicated 68 deals for the first fund, with a reported about $70bn invested. The remainder is likely to have been allocated for follow-on funding.  The second is ready to begin investing before a formal close, the FT said.

Further deals last month included storage provider Energy Vault and lending marketplace C2FO, as well as a securities filing for shares purchased in Berkshire Grey, a warehouse robotics company.

Before those deals, the FT had noted about 80 deals for the Vision Fund, while TechCrunch tracked 82, amid uncertainty about what is actually in the fund – SoftBank’s own website reports Nvidia but not Flipkart for example. The US regulatory filing for CloudMinds Technology ahead of its initial public offering discloses the Vision Fund as shareholder (and two of the fund’s partners as company directors) but the portfolio company is not on the Vision Fund’s website.

GCV has tracked more than 200 SoftBank investments and exits since the start of 2017 as the corporation invests through a number of subsidiary and investment units, not just SoftBank Investment Advisers, which manages the Vision Fund out of the UK and other regional offices.

As Robert Lavine, GCV’s news editor, said: “We just go by what is in the release, though in this case I’d imagine it is complicated by SoftBank transferring some of their existing portfolio companies into Vision Fund.

“For instance, the 10x Genomics release clearly states SoftBank Group and not SoftBank itself. SoftBank apparently was not an investor in that [OneConnect] round according to media reports.”

Both are now on the Vision Fund website, similar to SoftBank’s purchase of chip developer Arm. SoftBank paid $32bn for UK-listed Arm and said a quarter would be held in the Vision Fund. In May last year SoftBank also agreed to transfer, subject to approval, its combined $12.9bn stakes in ride hailing services Uber and Didi Chuxing, as well as holdings in Grab and Ola, although only the last portfolio company is yet to be listed on the Vision Fund website. SoftBank was unavailable to comment.

Many of these deals have a strong focus on artificial intelligence (AI) and this approach will continue for the second fund.

SoftBank said the next Vision fund will target “market-leading, tech-enabled growth companies” to enable “the continued acceleration of the AI revolution,” the FT quoted. In an earnings call, Son added: “Our image remains a telecommunications company with a lot of debt. But we’re no longer that.”

Going by its website at the start of last month, SoftBank’s focus areas for investment are heavily around transportation and logistics, with 19 portfolio companies, 11 in consumer business, such as Oyo and Tokopedia, eight in the health, financial, enterprise and frontier technology sectors, and six in real estate, including WeWork before its expected autumn flotation.

But what makes SoftBank different from Yahoo is Son’s desire to create a structure that facilitates interconnections between portfolio companies through its 30-strong operating group. SoftBank and its other corporate and regional partners are often investors through its Vision Funds.

Son has called this a “cluster of number ones” strategy. Wired described it as a “SoftBank-led ecosystem of AI companies, spanning all industries from healthcare to transportation, from ride-hailing to robotics” and one where “the complex network of affiliated and portfolio companies whose whole is theoretically greater than the sum of its parts. An added value derived from the partnerships and business opportunities that come with being a part of the SoftBank family.”

This is a global network and investment structure Yahoo moved away from after Yang left Yahoo in 2012 and focused on his personal investments, AME.

SoftBank, therefore, is reminiscent of the structure put in place by the founders of Google when they set up the Alphabet holding company to manage the cashflow from the search engine’s advertising – its ‘alpha’ – into corporate venturing deals through its GV, CapitalG, Gradient Ventures and Google Assistant Investments units and other ‘bets’, with a similar focus on the data and knowledge.

Given the fees to SoftBank Investment Advisers for managing the Vision Funds, SoftBank also increasingly resembles the diversified, listed private equity companies, such as Blackstone, KKR and Carlyle that have recently turned from partnerships into corporations as part of their own evolution.

Africa’s SoftBank

The approach taken by South Africa and London-listed media group Naspers resembles Yahoo and SoftBank’s, but is perhaps more understated.

The group, which the FT called “Africa’s SoftBank” in a profile in July, has set up Prosus, listed on the Euronext in the Netherlands in a Spotify-type direct listing this month. The vehicle will hold its near-30% shareholding in Tencent, worth more than $130bn, as well as other consumer internet holdings valued at about $30bn.

Naspers’ weight on the Johannesburg Stock Exchange (JSE) in South Africa had grown to about 25% of the JSE index, from about 5%, and the share price’s discount to net asset value from 20% to a peak of 44% before the decision to set up Prosus was announced.

By direct listing shares on Euronext, rather than issue new shares to raise money Naspers will keep fees lower and allow the share price to find its own level rather than require book building by investment banks.

The group will retain three-quarters of Prosus, with special voting rights if this economic interest falls below 50%. It spun off its African pay-television division, MultiChoice Group, in February.

Prosus will hold about 99% of Naspers’ operating assets. This means it will become effectively the new vehicle for corporate venturing (and Naspers Ventures is likely to be renamed Prosus Ventures over time). However, Naspers, as its main shareholder, will retain its own corporate venturing vehicle, set up earlier this year as Naspers Foundry.

The company said: “Naspers Foundry is a startup initiative that aims to fund and develop talented and ambitious technology entrepreneurs in South Africa, who use technology to improve people’s lives. Naspers has allocated R1.4bn ($91.5m) to Naspers Foundry over three years…

“We already invest in and/or operate a number of exciting technology business in South Africa, such as OLX, Takealot, Mr D Food, and Media24 and we know there is huge potential to invest in, and to support more upcoming internet start-ups through Naspers Foundry.”

Having now reorganised its structure, Naspers says it “builds leading technology companies”, with 41 companies listed on its website at the start of August – before last month’s Meesho investment – and a ventures unit investing across food, education, big data, health, agriculture, blockchain among other assets.

In some ways the diversified portfolio lacks a cash cow that Google has in search engines, SoftBank has in telecoms or Berkshire Hathaway in insurance but the return on investment from deals beyond Tencent to include Brazil-based Movile and IFood has been impressive.

The FT noted that, since 2008, Naspers has invested just less than $15bn in businesses excluding Tencent. These assets – some of which were sold including a chunk of Flipkart, in which the Vision Fund also invested – are now valued at over $28bn by markets or analysts, according to the company. Other exits include Middle Eastern ecommerce company Souq, acquired by retailer Amazon for $580m in 2017, according to GCV Analytics’ tracking of nearly 80 investments and exits this decade.

Investing on average more than $1bn per year over a decade, particularly in emerging markets such as Brazil and India as well as increasingly in the US, puts the company in the upper echelon of venture investors. However, it has been increasing its pace in part to compete with SoftBank and other investors.

A Naspers insider said it had been “cash constrained” for the past decade as it has preferred holding on to investments and reaping dividends of about $300m to $400m a year to reinvest but last year’s sale of 2% of Tencent reaped about $10bn. Four billion dollars of this “war chest” has already been invested, primarily in its three main segments, food, payments and classifieds, and the rest will be put to work in the “next few years” the insider said.

Naspers views itself as an operating company as well as an investor – a hybrid in its jargon – with the sides helping each other.

For example, its food segment grew out of its corporate venturing investment in Brazil-based IFood, which it said it spent “an enormous amount of time helping run”, as well as Germany-based Delivery Hero, where it was active on the board.

Naspers’ insider said: “We took the minority stake in Delivery Hero in part because we saw IFood’s economics as attractive and good and this encouraged investment in others. Our global network and platform enables better decisions and stronger returns. The Naspers Ventures team makes smaller bets [about $20m to $50m] in big spaces, such as education, and after time to learn about the network economics and value creation and where we can add value. “In two to three years we could get to the same point and education could be another segment. Already, the aggregate value invested [in education] is about $1bn and worth $5bn to $6bn. We could do that in blockchain, health, agriculture, mobility [which are other themes in the Ventures portfolio].”

Naspers’ approach comes without creating a Vision Fund-style structure to manage more cash for investment but also without quite as much risk if valuations for the tech companies do fall or debt becomes harder to service.

The Naspers insider said two years ago, it had looked closely at raising a fund with external investors but decided against it as the group “is not a VC company making money from management fees. We create value for our own business and the relationship with founders is vital.

“Having different funds and balance sheet money can bring conflicts of interest. It is also difficult to invest $50bn well at our target 20% IRR [internal rate of return, an annual performance measure], then there is the issue of leverage.

“Naspers has relatively little, at about $3bn of debt, and while we would not publicly say it, we are worried about an economic downturn looming and by having listed equity rather than a fund we can hold on to assets if required; it might affect our share price but not the value in the business. We have not sold assets in Russia because they are undervalued with economic sanctions on the country but are good businesses.

“We can sit and ride this out because we have no debt. We buy into businesses people have initially never heard of, such as Swiggy in food, or Byju in education, or Flipkart in commerce, that start small and grow.

“Naspers learned from Yahoo, which spent on share buybacks and not investing in the business so the core went backwards and was outpassed by everyone. We are paranoid about this and so invest as much to grow the business and when mature, as with pay TV [Multichoice] can return to shareholders.”

If Son is right about the opportunities for data and technology if we reach the point of singularity – an upgradable intelligent agent (such as a computer running software-based artificial general intelligence) would enter a “runaway reaction” of self-improvement cycles to far surpass all human intelligence – then the risk entailed raising more than $200bn and investing a large part of it in just a few years could pay off handsomely.

If it takes longer or the market falls substantially, Naspers’ more organic approach offers a resilient structure.

Regardless, the world is already a different place because of the corporate venturing strategies of Yahoo, Naspers and SoftBank, even if the first is soon to be mainly a footnote of shareholder value created and returned through Altaba.