SoftBank, known for its aggressive investment strategies, has recently shifted its focus to artificial intelligence (AI) infrastructure. SoftBank wants to invest in AI infra from balance sheet as part of a broader strategy to dominate the AI industry. Despite the Japanese tech giant’s claims of returning to an offensive investment mode, its Vision Fund unit’s new investments dropped by 60% to $620 million in the June quarter. This decline might suggest that SoftBank is not aligning its actions with its rhetoric. However, the reality is different.
While the Vision Fund’s contributions have decreased, SoftBank has been making substantial investments at the group level. The company poured in a massive $1.9 billion during the same quarter. The bulk of these investments now come directly from SoftBank’s own balance sheet, rather than the Vision Fund unit.
Strategic Focus on AI Infrastructure
SoftBank wants to invest in AI infra from balance sheet to ensure more stable and predictable cash flows. Insiders reveal that SoftBank’s strategy involves using its balance sheet to invest in AI infrastructure, while the Vision Fund unit focuses on backing AI use-case startups. This dual approach allows the conglomerate to maintain a diversified investment portfolio.
Two recent deals highlight this strategy. SoftBank recently acquired UK-based AI chip startup Graphcore, which competes with NVIDIA, and the Vision Fund unit invested $10-20 million in Perplexity, a search engine startup based in San Francisco. Perplexity has quickly gained popularity, reaching a valuation of $3 billion, as users seek AI-generated answers rather than traditional search engine results.
AI Infrastructure vs. AI Use Cases
SoftBank’s preference for balance sheet investments in AI infrastructure may stem from the longer holding period required for these investments to mature. AI infrastructure investments, such as those in chips, data centers, and solar energy, tend to have more predictable and reliable cash flows. In contrast, AI use-case startups are still in the early stages and carry higher risks with lower immediate returns.
Siddarth Pai, managing partner at 3One4 Capital, explains that AI infrastructure investments are similar to other infrastructure plays, offering a steady stream of cash flows. This stability makes them well-suited for balance sheet investments, where there is no set fund tenure. On the other hand, AI use-case startups face significant execution and equity risks, making them more appropriate for a traditional venture fund structure. SoftBank wants to invest in AI infra from balance sheet to avoid the limitations of traditional venture fund structures.
SoftBank’s Vision Fund unit is also encouraging its portfolio companies to adopt generative AI technologies. In a recent investor presentation, the Vision Fund showcased how companies like Klarna, Meesho, Revolut, Grab, and ByteDance have leveraged AI to improve business metrics and develop new use cases for their customers. This emphasis on AI adoption underscores SoftBank’s commitment to staying at the forefront of technological innovation.
Strengths and Potential Benefits
SoftBank’s strategy to invest heavily in AI infrastructure, such as AI chips, data centers, and solar energy, is rooted in the stability and predictability of these sectors. Infrastructure investments typically offer more reliable and consistent cash flows compared to the volatile and high-risk nature of AI use-case startups. By focusing on infrastructure, SoftBank positions itself to benefit from the foundational elements that will power future AI advancements. This approach allows the company to maintain a steady revenue stream.
Additionally, investing from the balance sheet rather than through the Vision Fund gives SoftBank more flexibility. There is no fixed tenure for these investments, allowing the company to hold on to its stakes for as long as necessary. The success of this approach will depend on SoftBank’s ability to manage these risks effectively and to adapt to the rapidly changing AI industry. If it is successful, it will truly start a new investment era.
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