When Uber rang the bell to begin trading on the New York Stock Exchange on Friday, it ushered in the biggest win yet for a Japanese conglomerate that has upended Silicon Valley investing over the last two-and-a-half years.
Uber’s largest shareholder is not one of its founders, nor one of the traditional blue-chip, old-guard venture capital firms that was behind generation-defining IPOs like Facebook or Google. It is instead a telecom giant that most closely resembles Japan’s Verizon — SoftBank — which two years ago raised $100 billion for its “Vision Fund,” an investment pool featuring money from not just SoftBank but also some foreign governments. The Vision Fund owned around 15% of the $80 billion company before its IPO, an achievement that is slated to return billions to SoftBank and should therefore quiet some critics of its controversial foreign ties.
It’s important to understand just how powerful the SoftBank Vision Fund has become in Silicon Valley. The $100 billion at SoftBank’s disposal — the entire VC industry raised just $55 billion altogether last year, for comparison — has made it a force that the rest of the startup world has had to reckon with. And it has already invested 80 percent of that money into startups around the globe, often at very rich valuations that have drawn the sneer and jealousy of rival venture capitalists.
No investment firm has been as talked about in Silicon Valley as SoftBank — the mere utterance of which can send tremors down the spines of rival firms or the competitors to SoftBank’s portfolio companies. It is behind the (unprofitable) tech companies familiar to so many of us: Uber. Slack. WeWork. DoorDash.
Yet the Vision Fund’s investments have stirred a long-gestating debate about whether it is good for Silicon Valley. Particularly troublesome in recent months have been its ties to Saudi Arabia, a country that has fallen in the graces of the tech sector since Saudi leaders allegedly ordered the murder of dissident journalist Jamal Khashoggi. The Saudi’s sovereign wealth fund (PIF) is behind 45 percent of the Vision Fund and been Son’s strongest ally: “Without the PIF, there will be no SoftBank Vision Fund,” Mohammed bin Salman has said.
But after years of speculation, we’re beginning to see real results that show that the Vision Fund has a legitimate claim to be a positive force in the world of startups.
What is SoftBank?
SoftBank is a Tokyo-based company founded almost four decades ago by Masayoshi Son at the age of 24. What started as a store for computer parts has become one of Japan’s most important public companies, valued at over $115 billion. It now is essentially a tech, media, and telecom conglomerate — it owns more than 80 percent of Sprint, more than one-quarter of Alibaba, and 100 percent of the robotics company Boston Dynamics, whose nightmare-inducing animatronics might be familiar to you.
But SoftBank in recent years has been transitioning from a Verizon or AT&T of Japan to something like more of a Blackstone of the world, intentionally moving from a telecom-based giant to a global investing vehicle — thanks, largely, to the Vision Fund.
To understand SoftBank is to understand Son, an eccentric, Star Wars-quoting, diminutive man who is known in the world of high finance solely as “Masa.” To his fans, Son is a daring savant, whose early investment in Alibaba has become part of venture capital lore and at one point made him one of the richest men in the world. To his detractors, Son is an arrogant fool who got lucky once but has since run roughshod over a venture capital system that was already working.
“We invested in the No. 1 company in respective industries. And I don’t like No. 2,” Son said at SoftBank’s annual shareholder meeting on Thursday. “From my personality perspective, I can’t accept No. 2. I need to be No. 1. I’ve been like this since I was kid. So if I try something, I want to be No. 1 in that area.”
Son raised money from foreign governments to finance the Vision Fund alongside the money from SoftBank Corp, but he is the Vision Fund’s maestro. And so one thing everyone should agree on: To believe in the SoftBank Vision Fund is to believe in Masa.
What is SoftBank’s strategy?
SoftBank’s Vision Fund is placing a bet that the future of the technology sector is far brighter than its critics — who say that its $100 billion checkbook is a bubble in Silicon Valley — believe it to be.
Son sees himself as the ultimately patient investor and speaks of placing bets on iconic companies and industries based on a 300-year vision for the world. And the technology at the core of that new strategy is artificial intelligence, which Son says he spends 97 percent — that specific, yes — of his “time and brain” thinking about. That’s why so many of the Vision Fund’s portfolio companies are trying to use AI to trigger technological breakthroughs, such as Nvidia and Nauto.
“I believe AI will bring about the greatest revolution in human history,” Son has said.
And to win access to the leading AI-enabled startups, the Vision Fund has shown a willingness to pay up — pumping more money into a company than sometimes its founders initially expected to raise. (The Vision Fund has a floor of $100 million per deal, which for some competitor VC firms would be among its biggest checks.) But alongside the big check, SoftBank also often is said to offer a friendly valuation for the companies in which it invests, which means the founder has to give up less control, or equity, than he might if he took rival venture capital money.
And how does SoftBank expect its money will be spent? Founders are pushed to pursue international expansion and growth, growth, growth — beating down their rivals (who often are terrified from the moment their competitor receives Vision Fund money). For instance, after raising hundreds of millions of dollars from the Vision Fund, the food-delivery startup DoorDash overtook UberEats in market share.
“Rather than having their capital cannon facing me, I’d rather have their capital cannon behind me, all right?” Uber’s CEO, Dara Khorsrowshahi, memorably said at one point.
That focus on growth — sometimes at the expense of profitability — also allows their portfolio companies to stay private for longer (a trend in Silicon Valley that goes well beyond SoftBank’s impact), meaning that they avoid the scrutiny and short-sellers of public markets but also that Wall Street investors can’t make money off their growth. Sometimes its portfolio companies are raising more money in a private fundraising round led by SoftBank than they would raise in an IPO anyway. And investors and founders can still get an opportunity to turn their shares into real riches, thanks to SoftBank’s frequent use of “secondary” deals, in which SoftBank buys out existing shareholders as part of their transactions.
Why is SoftBank so controversial?
At face value, SoftBank seems like a godsend: offering big money that founders want, big valuations that investors want, and hot deals that SoftBank wants. But there are three big criticisms lodged of the Vision Fund:
- The Vision Fund has extensive backing from the Saudi government — $45 billion, to be exact. The Saudis have investments in other startups and in other venture firms, but their relationship with SoftBank has troubled some ethics-minded investors virtually since the moment it was announced. That criticism was muted until the murder of Jamal Khashoggi, which spurred some VCs to speak out publicly about whether the Saudis should have so much influence in Silicon Valley. By some measures, the Saudis are the US startup industry’s largest individual investor. Son said after the Khashoggi killing that he has a “responsibility” to the Saudi people to invest their money well.
- Some venture capitalists gripe that the Vision Fund’s checkbooks have totally distorted Silicon Valley fundraising. They allege that the amount of money being thrown at young companies by the Vision Fund has created “winners” unnaturally and punished “losers” — effectively turning startup competition into a battle for Masa’s favor and stifling possible innovation and competition. They also worry about the broader ecosystem now that rival VC firms feel forced to raise even more money and throw it at startups to compete, creating something of a tech bubble.
- And then there are observers who say the amount of money that the Vision Fund is investing in companies isn’t even good for the startups that receive it. Many old hands in Silicon Valley believe that startups run better when they’re not overflush with cash: tighter ships have a smaller margin for error, goes the argument. So even though they’ve got more money behind them, are their companies actually more sustainable, more pressure-tested — especially once they IPO and no longer have the luxury of a SoftBank check?
Is this strategy that crazy?
Critics and fanboys alike will have to wait a few years to learn whether SoftBank is as much of a flamboyant failure or raging success as they are oh-so-sure it is now, two years after it started investing.
But after two years of weathering largely abstract arguments, SoftBank is beginning to notch real exits that should give some cautious support to the notion that the Vision Fund was a smart idea. SoftBank said at its annual meeting that the fund had returned an impressive 45 percent in paper gains to its backers so far. Here’s a few of the big wins:
- SoftBank was able to capitalize on Uber’s scandals in late 2017 and purchase shares at about a $48 billion valuation. Uber is now trading at about a $80 billion market cap. Yeah, that’s less than the $120 billion pitched by bankers a few months ago. But given how cheaply SoftBank acquired its stake in Uber? Not bad.
- The Vision Fund bought into Slack at a $5 billion valuation. Slack has confidentially filed to go public and it’s been valued at more than three times that on private markets.
- The Vision Fund’s biggest bet alongside Uber has been WeWork, the coworking startup that said this month that it confidentially filed to go public. WeWork, last valued at about $48 billion, is perhaps the SoftBank deal that best represents how love-it-or-hate-it the Vision Fund is in Silicon Valley. Some startup observers see WeWork as wildly overvalued and SoftBank’s bet as foolish, while others envision it as what the workplace will look like in the future. If this bet turns out poorly, it could color how people think about SoftBank.
What is clear at this point is that SoftBank is not fading away as a powerful — if not the most powerful — financial force in Silicon Valley. SoftBank confirmed Thursday that it is preparing to raise even more money for its second $100 billion Vision Fund — although it’s not clear if the Saudis will be a part of the second iteration. SoftBank reportedly has even discussed taking the Vision Fund itself through an IPO — which would give regular mom-and-pop investors the ability to invest in the Vision Fund just as they can invest in holding companies like Berkshire Hathaway.
SoftBank has created a type of fundraising product that still has no competition. And in Silicon Valley, a monopoly is generally a good thing.
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