For the stars of Silicon Valley, there has been little incentive in recent years to brave a public listing. As low interest rates prompted a rush of mainstream investors into venture capital, companies such as Uber and Airbnb have been able to raise billions in private markets, without irksome requirements for financial disclosure and quarterly reporting.
Yet in the past year, private markets have been cooling and the hype around so-called unicorns has given way to talk of “unicorpses” as some fund managers wrote down the value of earlier investments.
Against this backdrop, Snapchat’s decision to start preparing for an initial public offering raised hopes that other leading tech companies might follow suit and turn to Wall Street. A clutch of large IPOs would provide a reality check on the high valuations of other late-stage start-ups. It would also please VC stakeholders seeking an exit from investments and give employees holding stock a chance to cash in.
These calculations could be upset by Saudi Arabia’s announcement that it will make a huge new commitment to the sector, just as other investors are becoming wary. A tech fund launched this week in partnership with Japan’s SoftBank could manage as much as $100bn, of which $45bn would come from the Saudi sovereign wealth fund and $25bn from the Japanese telecoms group, with other large investors in talks to contribute the remainder.
The attractions of this arrangement for its protagonists are clear. For Riyadh, it is part of an ambitious strategy to end the kingdom’s dependence on oil and diversify its economy. Even for Saudi Arabia, with foreign exchange reserves of some $550bn, this is a huge sum. Given the scant returns available in traditional asset classes, to invest a proportion of national wealth in venture capital is not unreasonable. And Mohammed bin Salman, the deputy crown prince driving the agenda, is acutely aware of the need for experienced international partners.
SoftBank has no lack of experience. Indeed, it has made a series of large bets in the tech sector, including this summer’s purchase of the UK’s Arm Holdings, which have left it with net debt of some $90bn. The Saudi partnership, and the management fees it will bring, could not be more timely.
What is less evident is how the new fund can possibly put such sums of money to good use, without again flooding the sector with cash and inflating prices. The intention is to invest over five years, implying annual payments of up to $20bn. Set this against a total of $87bn invested by the global venture capital industry in 2014, a record year, and it is clear there is a risk of swamping the market and driving down returns.
SoftBank has given little indication of the kinds of deal the fund would pursue but it would be impossible to invest on that scale purely in early-stage ventures. If the idea is to take stakes in late stage start-ups, then the fund may well provide a convenient private alternative for some of the companies who would otherwise be considering a public listing.
This would be welcome news for Silicon Valley billionaires reluctant to answer the demands of Wall Street. But it could delay a much-needed dose of market discipline in the sector. It would also be unlikely to be in Saudi Arabia’s best interests. A better approach would be to split the funds between a number of established VC firms, which already struggle to sift through a plethora of mediocre applicants. The deputy crown prince is a man in a hurry but he may well be turning up late to this party.
