Author: Yi Xian Translator: Kunyang Wang
Publisher: GPLP
Among numerous complaints about the difficulty of fund-raising, some investment institutions have easily completed billions or even hundreds of billions of dollars in fund-raising. This sometimes befuddles us: why is that and if the market would be better some day?
In 2015, Softbank established the Vision Fund, with a $100 billion fund-raising target. By the end of June, the fund has raised $91.7 billion (external funds of $63.6 billion) and has invested a total of $21.7 billion in 29 companies, which the investment value has risen to $32.5 billion.
Facing the fast and furious action of Softbank, Sequoia cannot simply sit back and watch. Sequoia Capital recently completed its first round of $6 billion in fund-raising, which will be used to invest in emerging global companies. The report said that Sequoia’s move is also to compete with Softbank’s 100 billion funds, and plans to raise $2 billion in the coming months.
KKR, the world’s leading investment institution, recently announced that it has completed the raising of KKR Asia III Fund, which will raise a total of US$9.3 billion. The fund will be used for private equity investment in the Asia Pacific region.
Top institutions seem to raise billions of funds without the slightest effort! How enviable!
Top institutions, which do not lack funds, accelerate investment in the “investment winter” in 2018.
This explosive situation in investment would trigger a war in an instant.
The choice over-weighs the investment, the direction surpasses the process
As Warren Buffett says, only when the tide goes out do you discover who’s been swimming naked.
The secret of investment, according to an investment bigwig,, investment is basically like a game of the lucky ones: few investment institutions continue to maintain unbeaten performance, even top investment institutions would sometimes fail. The so-called investment myth of many institutes, in fact, are almost the hidden failure that they dare not to reveal.
However, would you buy that if they say that they have no failure?
So the core of the investment is that most people are left ordinary, while the lucky few stand out.
When the economy plummeted down, various investment institutions started going skinny dipping. With the real situation right in front of them, fund-raising difficulties emerged consequently. Of course, in 2018, the secondary market as an outlet of primary market, drops terribly, and the primary market was also risky. After due there is no way to withdraw, postpone, or pay in accordance with the promise, and incidents occur frequently. The difficulty in fundrasing can be clearly seen in general.
A US company called Credio researched the performance of US mutual funds. From 2005 to 2015, after deducting management fees and sales commissions, only about 45 of the US 25,000 mutual funds have a average rate of return more than 7.5%, while the annual average return of the S&P fund in the broad market was 7.5%.
Professional investors didn’t nail their game, so did that of the VC industry.
According to US Sequoia’s performance data, Sequoia’s 2003 fund relied on Linkedin, Youtube, and the its 2006 fund relied on Airbnb and Dropbox. After deducting the management fee, the return on its fund performance is about 8 times.
As a top fund, the picture looks rosy.
However, we need to look at market performance during the same period to understand comprehensively.
In the secondary market of the same period, Tencent has increased 170 times in the past decade, and Apple has increased 100 times from 2003 to 2012.
Any investor who invests $1 million in the secondary market to these emerging companies, like VCs do, even if 99 of them lose money, they can still get a return beyond Sequoia.
So why do some LPs support these investment institutions?
Some analysts have pointed out that in the United States, LPs based on state pensions and university funds in the United States, they have to pretend to provide Boss with an average annual return of more than 8%. Venture capital, as an alternative asset, must be configured. Serious losses and returns after ten years are problems for others. Why? Because LPs as the top management, usually sit on the chair for only three years and the seats change frequently.
Similar to China, during negotiation, few GPs will really consider LP’s long-term interests, which are not linked to their income, but how to maintain a good relationship with GP is crucial to switch to the next one.
This truth is like many odd things in life.
In life, we often encounter a variety of things that make you envy. For example, certain students dropped out of school in early age with low level of education but fortunately bought houses early at an affordable price. They consequently got rich overnight due to the skyrocketing price.
Or some rich female investor, actually does not understand those investment terms, and cannot tell theory and logic behind the investment, but their investment performance is good, including well-known projects; or, one may see many people who obviously, are less capable than himself or herself, but because of the “good luck”, joined the BAT company, followed by the bigwigs, and now also realize the freedom of wealth.
What’s the secret behind all these?
The choice over-weighs the investment, the direction surpasses the process of investment.
Once you have chosen the right direction, even if you are not as smart as others, as long as you work diligently, then one day you will succeed. To put in Lei Jun’s words, “even a heavy pig can fly, if it stands at a particularly windy spot. ”
According to research by Illy Strebulaev, a finance professor at Stanford Business School, the results of their research on “How do venture capitalists make decisions? ” show that their survey of 900 professionals in more than 650 VC firms showed that the most important factor in driving risk investors to make decisions is not the potential of the product, but the quality of the team behind it.
But how do you quantify characteristics of person when evaluating one team?
It’s obviously a paradox.
Some people may ask that if investment is so simple, what’s the necessity of professional investment institution and the root for the emergence of top investment institutions?
This involves another matter of the investment industry, which is why could top VCs be called top?
Oligopoly in the investment industry: the secret of top investment institutions
Usually, it’s the unique perspective that differ the top investment institutions from the common ones. For example, Sequoia dared to invest in Google when it was relatively small and so did Softbank Group invested in Alibaba.
Of course, it is not that simple to become a successful investor. They should take initiatives to dig out great companies and hunt for promising startups in order to gain a competitive advantage and then gain a great reputation to keep getting chips.
Let’s take Softbank as an example.
Masayoshi Son, the founder of Softbank, is known for his long-term vision. This long-term we are talking about is not a few years, but decades. At the age of 19, he sat down and wrote down his life plan, stipulating that by the age of 60 he would start looking for a successor.
For the future, Masayoshi Son painted a picture: the future satellite network will cover every corner of the earth, and trillions of connected devices will transmit data to the cloud and analyze them through AI.
Under this estimation, Masayoshi So began to act.
In the first half of 2017, Masayoshi So launched the first fund of Softbank, Vision Fund, which is the world’s largest technology fund by now. In May 2017, the first round of fund-raising was as high as $93 billion. The funders of first round includes Softbank Group, Saudi Sovereign Fund, UAE Sovereign Fund, Apple, Foxconn, Qualcomm and Sharp.
In May 2018, Son is said to engage with investors in initial contact to set up the second vision fund. The fund-raising scale could reach 100 billion dollars, and it may start as early as next year.
The investment direction of these funds is artificial intelligence, chips and the Internet. Softbank, which tasted the sweetness of Ali, still prefers the Internet software industry, followed by information technology companies. This is very consistent with Softbank’s ability. While accelerating the layout, Softbank is also realizing to ease its financial pressure.
Softbank itself is a physical business, and its investment succeeded to some extent by luck. Before the booming of the Internet, Son has purchased a large number of shares in Internet companies, unexpectedly, Softbank also followed their skyrocketing price. But after the Internet bubble burst, Softbank’s share price fell 99%! Fortunately, he invested in Ali and Yahoo, which saved him from desperation.
As a result, Softbank began to accelerate its investment in the road of investment, and invested in many companies, becoming one of the Asian companies with the highest return on investment. The Softbank Group has invested in startups in the areas of retail, virtual reality and real estate. At the Softbank Shareholders’ Meeting held in mid-2017, Sun wrote on a slide that investment in 2018 is expected to receive a return of $175 billion, with an average annual increase of 44%. The portfolio includes Alibaba, Yahoo, Cisco, and Sprint.
Recently, the fund-raising of the first and second phases of the $100 billion fund is in an early layout of the Softbank in the face of changes in the global economic pattern.
After the establishment of the Softbank Vision Fund, Softbank also provoked complaints from peers. Everyone thought that Softbank pushed up the value of the company, and the profit was tiny when they withdraw.
Of course, the response of peers is also accelerating the raising of funds.
In March 2018, according to US news, Sequoia Capital is fully replenishing its “war fund.” It seeks to raise more than $12 billion through seven funds, including global growth funds ($8 billion), funds targeting China ($2.5 billion), and funds targeting Southeast Asia ($675 million).
According to media reports, a person familiar with Sequoia Capital plans said that if the funding target is met. The company will raise more than 12 billion US dollars to back its ambitions in the United States, China and other countries.
According to public information, Sequoia Capital is now in the process of raising $8 billion for its next global growth fund (the fund is known as Global Growth Fund III), to raise $8 billion. Sequoia Capital plans to get $2 billion from original investors and the other $6 billion from new investors, bringing investors closer to sovereign wealth funds or other new investors who have not participated in past fund-raising. Data show that the funding of global growth fund II in 2017 was $2 billion.
At the same time, Sequoia Capital raised another six funds in the market, raising a total of at least $4.35 billion.
Of course, in order to successfully complete the fund-raising, Sequoia Capital also charges a reasonable fee apart from the funds, such as limiting the management fee to the allocation of funds, rather than a larger amount of committed funds; in addition, it plans to charge 20% of the incidental revenue, which is relatively low among top-performing VC firms. Some of same-grade VC firms charge 30%.
Of course, Sequoia Capital’s fund-raising plan does not stop there – now, the funds that Sequoia Capital is raising include:
Raise a maximum of $1 billion for the US Growth Fund VIII;
Raise up to $550 million for the US venture capital XVI;
Raised three funds totaling US$2.5 billion for China, including the China Growth V fund with a target fundraising of approximately US$1.6 billion to US$1.8 billion;
Sequoia Capital also raised a maximum of US$550 million for China Venture VII and raised a maximum of US$150 million for its first seed fund focused on the Chinese market.
Meanwhile, Sequoia Capital plans to raise a maximum of $675 million for the India Venture VI, which targets the entire Southeast Asia region and focus on investments in Indonesia, Singapore and other countries (although according to PitchBook Data, the fund is actually smaller than the previous 930 million dollars Indian fund of Sequoia Capital).
Sequoia Capital’s massive fundraising plan indicates that it has joined the heat of capital raising among the top players in the industry, which means that the investment circle has also begun to have an oligopoly effect.
It is sad that most investors who have been arrogant about entrepreneurs are starting to be harvested by the head companies.
Of course, Under the premise that everyone is accelerating the fund-raising, will there be an investment war in the future?
We’ll wait and see.
