MC Interview | Startups that had to go out of business already have: SoftBank's Rajeev Misra

Rajeev Misra, CEO, SoftBank Investment Advisers

There are very few who can always listen to what the market is saying. Rajeev Misra certainly seems to be one of them.

“Investors must have a clear view of where they can achieve the best risk-adjusted returns in terms of geography and asset class,” he tells Moneycontrol in a prescient tone, sitting at his sprawling residence in Delhi.

Misra was at the helm of affairs for credit at Deutsche Bank when it bet against the subprime crisis in the US. He minted money for the banking giant when financial institutions across the world seethed in pain and the global economy roiled.

He was again in the driver’s seat when SoftBank took the tech-venture investment world by storm with its $100 billion Vision Fund. While the Japanese tech conglomerate’s founder Masayoshi Son created the vision of a technology-led future, Misra was instrumental in selling that blueprint to big-ticket backers from the Middle East.

As the sheen seems to be wearing off tech investing and the crystal ball gazers of the financial world predict the end of the easy money era for a long time ahead, Misra is turning his attention to other things yet again.

Last year, he grabbed the headlines on stepping back from his role as the chief of the second Vision Fund, while still looking after the first one’s portfolio which includes the likes of Uber, TikTok’s parent company ByteDance, Paytm, and Oyo.

It’s not that the 61-year-old financier wants to take it easy. On the contrary, it looks like he is again placing himself under the bough that could deliver the biggest bang for the buck in the next few years — credit to middle-market companies in the US, Europe and India at a time when central banks are tightening interest rates.

Despite the rigmaroles of investing billions of dollars and minding unicorns across geographies, Misra is quite laid back — and has a love for revelry and jewellery. His conversation is peppered with anecdotes of parties he has attended recently, and close aide butts in to say that he enjoys deejaying now and then.

Misra designs jewellery for his architect wife and himself. He showed Moneycontrol a pair of diamond cufflinks — ringfenced by rubies — that were the latest to join his collection.

We sat down with Misra for an hour-long chat on SoftBank and its India bets, his plans for his new investing vehicle One Investment Management, how India stacks up against China, and falling tech valuations amid the funding winter. On the recent instances of corporate governance lapses at Indian startups, Misra said that such cases are far higher in traditional brick and mortar companies.

Here are the edited excerpts of the conversation:

From Masayoshi Son to Mubadala, they’ve been with you through the highs and the lows. What is the secret of your attractiveness to so many investors over the years? 

You have to ask them! (laughs). I am 61 years old, I have been doing this for 30 years, have seen many cycles and have made many mistakes. But the key is to learn from the mistakes.

I evaluate companies by considering both their equity and the assets and liabilities on their balance sheet. It's essential to analyse not only their growth potential but also their business aspects such as go-to-market strategies. Sometimes, raising debt capital can be more advantageous than equity capital, especially when interest rates are low.

Managing money is not just a financial capital business; it's a human capital business too. Having the right people and a global perspective on risk-adjusted returns is vital. Being diversified across multiple asset classes is important because investment cycles vary.

Investors must have a clear view of where they can achieve the best risk-adjusted returns in terms of geography and asset class. It's crucial to hire the right people, especially when building an organization for the long term. The talent you have plays a significant role in the quality of analysis, due diligence, and data gathering. Hiring the wrong individuals can lead to costly mistakes.

It is also very important to have people who have done it for a while, have made mistakes in the past, but have had sleepless nights with a knot in their stomach. If you haven’t experienced that, it is easy to invest, very difficult to monetise and get your money back.

How much have you raised so far for One Investment Management, the new fund that you have started? Gulf investors Mubadala, Royal Group and ADQ are thought to be investors. Who else is backing you?

Unfortunately we cannot comment on our investors or our capital commitments. One Investment Management is a 12-year fund, with a six-year investment period. What is unique is that in the first three years, we can recycle capital.

The focus is to build the platform and hire great people. It is not about the quantum, it is about the quality of performance.

Have you already started deploying capital from the fund in India? What opportunities do you see for the fund in India?

Our primary focus is on the US market due to its deeper and more liquid nature, followed by the European market. We currently have offices in New York and London. However, despite not having an office in India, we have received enough interest and requests from Indian investors. Additionally, given the enthusiasm and interest from Abu Dhabi in investing in India, both with sovereign and non-sovereign funds, we are optimistic about opportunities in India.

In India, our focus will be on the next layer of conglomerates and tech companies with reasonable valuations. We take a holistic approach and believe that India's per capita GDP will double along with the overall GDP growth. However, it's important to note that India's property values are not cheap, and the stock market is currently at an all-time high. Considering risk-adjusted returns, we are particularly interested in consumer-facing companies that align with our investment criteria and are operating at the right scale and stage.

What is your role when it comes to companies in the Softbank Vision Fund 1 portfolio? What are your goals there?

I am still the CEO of Vision Fund 1, where we have about 350-400 employees globally.

We have already returned 60 percent of the money. We only called $88 billion of capital out of $100 billion and we stopped making new investments in 2019.

We have public stakes in Coupang and Doordash and when we monetize that, we can return more. We own 25 percent of Arm, which we expect will later go public in the later half of this year.

In India, we have Oyo, Firstcry, all good companies in Vision Fund 1, which also are IPO candidates, and a bunch of them in the US. The weak ones which had to go out of business, have already gone out of business.

We have 45 percent of Oyo, marked at a very conservative valuation, with scope for considerable upside. So, I expect that Vision Fund 1 will have positive returns. It is positive now, I am quietly confident it will continue to improve.

How much longer will the funding winter for Indian startups last? SoftBank hasn’t invested in over a year and it’s been 9 months since India minted a unicorn. We understand SoftBank is looking at a few deals in India?

The Vision Funds don’t do early stage, their focus is late growth-stage. Vision Fund cheque sizes (particularly Vision Fund 1) were generally a few hundred (million) to a billion dollars. We haven’t invested because, the late-stage guys we already have invested, whether it is Firstcry, OfBusiness, Lenskart, Meesho, the Vision Funds have invested in all of them.

The action in India is in early-stage. Between $5-10 million or $1 million. This is not something the Vision Funds are in because it is too small for them. So it may happen later.

SoftBank Group today is sitting on $38 billion of cash on its balance sheet before Arm IPO. So capital is not the constraint, opportunity is. The Vision Funds already own 20 percent of what we feel are the most compelling companies. We haven’t added to it.

Is there a constraint when it comes to opportunity in India?

We already own 20 percent in all the good companies. We haven’t added to it.

Can you give us a sense of how much returns India has generated for SoftBank?

It is the best performing market for us. Best performing in the Vision Fund portfolio.

Is SoftBank currently evaluating any deals in India?

We are… we have 10 people in our Mumbai office. They are not sitting idle (laughs).

 Anything we can expect soon?

There will be follow-ons in our existing portfolio.

Do you see any fundamental changes in the way startups operate as a result of the latest funding freeze? For instance, since the start of 2022, Indian startups in SoftBank's portfolio have reduced costs by 50-75 percent to extend their runway by at least 12 months.

Let’s take Oyo where we own (almost) half the company. They went through the roughest time because hotels were shut because of Covid. They used the time to invest in technology, provide value to retain and reduce churn of their stakeholders.

Cost is just one aspect. It is knowing when to stop experimenting and focus on your core business. It is important to create those values.

Should startups be open to reprice their valuations, go through down rounds amid a new reality of the end of the cheap money era?

If they don’t, they won’t get money anyways. This indigestion will take some time to clear. It won’t go away. Everybody who was graduating was doing a startup or working for one. That has to be readjusted for the better. Regular industries would get people now, churn will come down, employee retention will go up, and the cost of a programmer will come down.

So, the whole economy has to readjust. It hasn’t happened yet.

We have seen so many unicorns getting created in the last 10 years, was it only because of money supply and not because of the  actual fundamentals of the business so to say?

Uber has never made a profit. But it is worth $80 billion market cap. People are saying look scale will come in and benefit. Alibaba took 10 years to be profitable, Amazon took 10-15 years to be profitable and once they were at the scale, they made a lot of money.

Talking about India, specifically, it is still a $3 trillion GDP market. It had gone ahead of itself in terms of valuations. The total addressable market is not that big. There are 60-70 million people who have affordability… maybe a 100 million.

So, did investors overestimate the Indian market?

Definitely.

You have stakes in four publicly listed companies in India. Will you look to book profits as these companies have been doing well of late?

By definition, we do not rush through it. They (portfolio companies Delhivery, Zomato, Paytm, PB Fintech) are all in Vision Fund 1. We haven’t monetised fully in DoorDash, Coupang, and others. We have large stakes. So, we would do it slowly… Slowly could mean over the years.

India appears to be in a sweet spot. How do you assess the Indian government’s management of the economy?

If you look at the macro environment, the oil shock didn’t hit us. We got oil, our biggest import, for cheap. The Rupee has held up. Due to tech and fintech, we got an extra 50 million investors in our public market because the ease of opening a demat (dematerialised account) or brokerage account became much easier, even from tier 2 and tier 3 cities. Our public stocks are holding good because of capital coming in from domestic segments.

India is not cheap but we have a long way to go in terms of access to public capital. IPOs are still very few. Let’s see a few large IPOs how they perform. End of the day, India needs capital and technology.

There have recently been governance lapses at about a dozen Indian startups.

This is not a large number in percentage terms. Historically there have been a higher rate of lapses at traditional brick-and-mortar companies.

Has it impacted the perception of Indian startups in the eyes of the West?

Not at all. In fact, there are more lapses in the West in percentage terms. There will be governance lapses in an overheated industry, but the percentage is not at all high.

Is there a problem with the incentives to grow too fast?

Depends on the founder. If they have a short term view, it is an incentive problem. They all have ESOPs. If they take a 10-year view, then you will be fine. It should be long term. Build the right foundation and grow gradually. Don’t overvalue a company. You don't have to go from $1 billion to $3 billion valuation. Dilute more and ask for ESOPs.

Do you have any plans to have a perpetual or rolling fund structure like Sequoia announced a couple of years back?

Vision Fund 1 is no longer making new investments. The capital commitments for Vision Fund 2 are all off SoftBank Group’s balance sheet, we don't need a rolling fund. SoftBank Group is sitting on $38 billion of cash on its balance sheer;  SoftBank decides when to invest. In that sense, SoftBank Group are like Berkshire Hathaway.

When a large legacy company goes bust, you can still have roads, airports, chemical plants, etc that are there for the investments that were made. What remains if any consumer tech unicorn goes bankrupt? Does it then just amount to nothing?

No, it is not like that. The brand has value. The network has value. The data has value. You can’t say that if Amazon goes bankrupt, there is no value. It has a large logistics infrastructure and a network of merchants.

Many predicted Paytm could be worth nothing, but it has come back. It has an amazing network that connects every village. It has one of the best technology platforms for payments in the world. The problem was to monetise which it has done now. It takes time.

What can we expect from SoftBank in India for 2023-24?

We continue investing in our existing portfolio. As midsized companies come and look for a few hundred million dollars, Vision Fund 2 will invest in them. SoftBank doesn't write small ticket cheques. So, when the right sized opportunity comes, SoftBank will invest… It is getting more appealing as capital withdraws.

Are valuations becoming more reasonable?

Equilibrium of demand and supply has to happen in the next six or eight months. Valuations in India are still on the higher side, like the rest of the world. If you look at Abu Dhabi and other investors, more money will flow into non-tech at regular intervals in sectors like manufacturing, steel, cement.

SoftBank has reportedly invested in only one of the 26 generative artificial intelligence unicorns, compared to peers like Coatue and Tiger Global that have invested in several each. Are you late to the AI party?

They might have invested in the last 2-3 years. I can go and invest today. So, what? But, hey! We also invested in Alibaba and Bytedance which are the biggest AI companies… Lining up 20 short videos for you based on your behavioral data (requires AI). Yes, large language models and generative AI are the next big things. We are seeing a lot of AI applications being built in the West, in areas like drug discovery…

There will also be huge ramifications of AI in valuing companies, investing in companies, monitoring companies. Forget ChatGPT, applications are important — whether in lifesciences, government services, education, etc.

New-age companies that went public in the last two years allotted large ESOPs to founders just prior to the IPOs. Public market investors said that it was dumped on them as a burden. Do you think it was overdone or that it should have been done a couple of years before going public?

It was all disclosed. Incentivising the management is nothing wrong. Don't forget, two years ago, it was difficult to retain staff and keep management also… ESOP vesting is useless unless it is given for free. If it is given at a strike price and the stock drops to half its value, it is worthless anyways.

(Nikhil Patwardhan contributed to this interview)