The Effect of SoftBank Vision Fund on Venture Capital Cycles

Abstract

The venture capital (VC) industry is highly volatile and undergoes cycles of boom and bust. This research explores the influence of the SoftBank Vision Fund (SBVF), a 100 billion USD venture capital fund raised by the Japanese multinational conglomerate telecommunications company SoftBank, as a disruptor in the venture capital industry and as a major driver of directions of current and future swings in venture capital cycles in terms of fund behavior and investment. I provide evidence on the effect of the entrance of the Vision Fund on changes in two things: (1) fund size and (2) investment focus of funds raised by VC firms. I work with a data sample of 1123 venture capital funds in the United States with initial closing years of 2011 to 2019, from VentureXpert, one of two major databases used by researchers. I use an empirical difference-in- differences design to look at both extensive and intensive margin effects on the two outcomes of interest in this paper. Though my results are not all significant, they provide important insight and confirm potential factors that attract or deter VC firms from following SBVF in its strategy of raising huge funds and investing in technology and other industries in which SBVF is interested. The factors that attract VC firms to follow SBVF in its strategy include behavioral factors, beliefs formed by reputation signaling or certification, and herding. The factors that deter VC firms from following SBVF in its strategy include agency costs, long-term reputation consequences, operational costs, status quo bias, and situation awareness. This paper thus takes steps toward learning about the extent of and channels through which shocks like SBVF may influence and disrupt the U.S. VC industry. The findings here have major implications in terms of real challenges and vulnerabilities that may arise from the end of a cycle driven by influences like SBVF, as well as for the change in innovation levels and consequently rate of economic growth in the United States.