As the Japanese company prepares to distribute profits in December, some of its key startup investors have headed for the door.
Ever since billionaire investor Masayoshi Son set up the giant Vision Fund in 2017 to provide backing for technology startups, he’s struggled with how to compensate his partners. He still hasn’t figured out how to keep them happy.
Son’s company, SoftBank Group Corp., is preparing to make the first distribution of profits to employees at the Vision Fund in December, according to people familiar with the matter. But the company’s eccentric approach to compensation is contributing to a stream of defections, say these people, who asked not to be identified because the matter is private. Seven managing partners have left since March of last year, and the only senior managing partner, Deep Nishar, will depart by yearend. He didn’t respond to a request for comment.
At the heart of the matter is that Son set up the world’s biggest venture capital fund within a Japanese conglomerate. While corporate staffers in his home country earn modest salaries by global standards, the finance industry’s startup gurus are among the highest-paid in the world. Venture firms often allocate 20% of their profits to partners, which can mean tens of millions of dollars each, but that kind of structure would be deeply controversial at a company like SoftBank.
Son’s plan calls for profit distributions based primarily on seniority, and all investors from the vice president level on up are entitled to an allocation, whether their deals include such hits as SoftBank’s investments in DoorDash and Korean e-commerce company Coupang or fiascoes like WeWork and Greensill Capital, the people say. Nishar, a leading authority on artificial intelligence, and partner Lydia Jett, who counts Coupang Inc., among her investments, are said to be up for the biggest checks.
The total could reach $100 million to $150 million shared among about 70 people, on top of base salaries and bonuses. That may sound like a lot of money, but it’s less than what top venture firms hand out. And Vision Fund, which raised $100 billion to invest in what Son has called a once-in-a-lifetime “gold rush” in companies built around the internet and big data, was meant to be the VC world’s power player.
“Considering all the big talk they had and the expectations about what they were trying to achieve, it seems somewhat mediocre, even if this is only the first distribution with more to come,” says Ben Narasin, a former venture partner at New Enterprise Associates who recently left to start his own fund. “If you are senior, this will seem light. If you are somewhere in the middle, it’s about right. And it’s outrageously great if you are junior.” A spokesman for the Vision Fund declined to comment.
Base salaries for staffers at both junior and senior levels are high. The Vision Fund offers around $500,000 in base pay for its mid-level investors, and $700,000 or above for more experienced staff, according to people familiar with the compensation structure. Its partners are paid a wider range, with base salaries in the millions of dollars, they added.
Son is revising his compensation strategy yet again for the $40 billion Vision Fund 2, but the new approach has also alienated staff, say the people familiar with the situation. There’s no common pool of profits to share this time, and people are rewarded only for the deals they worked on, one says. That will discourage broad collaboration, the person says, and it gives partners an incentive to do as many deals as possible because there’s no punishment for misses, while pay is also capped when things go well.
Adding to the frustration is Son’s decision to receive a cut of Vision 2’s profits for himself as an equity holder before they’re distributed to staff and SoftBank. He plans to take a stake of as much as 17.25% in Vision Fund 2. According to Son, he’s putting his own money on the line to seed profits for others to share. “I will take risks all by myself initially,” he said in August. “Then I will distribute to other people in the management. We want this to remain as the culture of SoftBank.”
Among the recent departures is Jeff Housenbold, who counted DoorDash among his portfolio companies. He declined to comment. “Compensation is the hardest thing that the companies do, and getting it right is truly difficult,” says Steven Kaplan, co-founder of the entrepreneurship program at the University of Chicago Booth School of Business. “What happens when you don’t pay people enough is that, if you are good, you leave. And if you aren’t, you stay.”
Raising a smaller fund on your own is more profitable than being a partner at a megafund, according to Narasin. He says a fund with $50 million—the amount he raised for his Tenacity Venture Capital—could generate almost $150 million in profit sharing for partners, given a tenfold return and fewer people to share it with. Since leaving the Vision Fund, Housenbold started his own venture capital firm, Honor Ventures, and SoftBank has committed to invest $100 million, says someone familiar with the matter.
The loss of top talent comes at a time when the Vision Fund is sharply accelerating the pace of investments. Son has signed off on more than 115 deals this year, quintupling the number of companies in the Vision 2 portfolio in less than nine months. That’s more than the combined number of deals the first Vision Fund made since it started, according to Bloomberg calculations based on data released by the company. Rivals have also stepped up their pace of investments.
“The premium for talent is much higher now” compared with when the Vision Fund launched, says James Kim, a senior adviser with Coda Advisors LLC, an independent executive and board compensation consulting firm in San Francisco. “Especially this year, there is lots of opportunity. And not just in venture capital, but across any type of fund.” Kim notes that the sheer size of the Vision Funds may make it unrealistic for managers to expect a percentage of profits typical at other funds—the numbers are potentially too big.
Among Japanese companies, SoftBank consistently ranks among the most generous in executive compensation. Its top eight executives made more than $64 million in total last fiscal year after the company reported record profits. Simon Segars, who heads SoftBank’s chip unitArm Ltd.topped the list with a $17 million paycheck. Rajeev Misra, who heads the Vision Fund, earned $8.4 million, most of which came as base pay. Son’s $900,000 put him at the very bottom.
Of course, Son can also make money from his stake in Vision 2 as well as another fund focused on Latin America. That kind of setup has drawn criticism in the past for his mingling personal interests with those of his company. Son, who’s also known as Masa, took a 33% personal stake in a unit called SB Northstar, which invested in public stocks and derivatives. “I am surprised this went forward considering the ill will it generates from employees and investors,” says Kirk Boodry, an analyst at Redex Research in Tokyo. “The justification is that Masa adds value with his experience, but that is his job already.”
When confronted with top-level departures, Son has dismissed the threat of a possible brain drain, saying the company can always raid the major financial firms for more able bodies, according to one of the people. “Son is making the ultimate calls anyway,” Narasin says. “The Vision Fund is not winning deals on the quality of its team. For the most part, it wins by paying up big-time. And then who cares if the person giving the offer is a young ex-banker or a seasoned VC?”