Son’s $100bn fund: too much Vision for the future?
Tokyo — When Masayoshi Son was a boy growing up on Japan’s southern island of Kyushu, he kept a notebook to scribble down new inventions he hoped to create one day. Today, the SoftBank founder has almost $100bn to invest on making the next big thing a reality.
Son’s SoftBank closed the first round of a planned $100bn investment fund, with money raised from Saudi Arabia, Abu Dhabi, as well as Apple and Qualcomm. The Vision Fund gives Son access to a pool of capital unparalleled in the worlds of private equity or venture capital — the equivalent of four Silver Lakes or 15 Sequoia Capitals.
Son is not one for understatement. He has said, without irony, that he has a 300-year plan for SoftBank and aims to build the world’s most valuable company. With the Vision Fund, Son vows to become the biggest investor in tech over the next decade, as he bets on the future of artificial intelligence, connected devices, satellites and the integration of computers and humans. Indeed in April, he led the $5.5bn investment in China’s Didi Chuxing, the largest venture funding on record.
"We saw a big bang in PCs [personal computers], we saw a big bang in the internet," Son said in February on a call with shareholders. "I believe the next big bang is going to be even bigger. To be ready for that, we need to set the foundation and that foundation is SoftBank Vision Fund."
Son has some enthusiastic supporters with very deep pockets. Saudi deputy crown prince Mohammed bin Salman agreed to make his country the cornerstone investor with a $45bn cheque after a meeting with Son. Besides Apple and Qualcomm, Foxconn and Sharp are also putting in capital. On Saturday, SoftBank said the fund had $93bn in committed capital and aimed to reach $100bn with a final close within six months.
Son’s mega-fund will unleash an unprecedented amount of money into sectors already seen as overcapitalised. Private equity returns have plummeted in recent years because there too much money has been chasing too few deals. Venture capital faces similar issues.
"A $100bn fund is mind-boggling," said Steven Kaplan, a professor at University of Chicago’s Booth School of Business who co-founded its entrepreneurship programme. "There’s too much capital now so bringing in more capital doesn’t make any sense."
Kaplan struggled to think of a precedent for what Son was attempting. He said the closest parallel may be the late 1990s when money poured into US internet companies, fuelling sky-high valuations — right until the market crashed.
Private equity firms are sitting on record piles of cash. The amount of unspent money hit $820bn at the end of 2016, up from $755bn a year earlier, according to the research firm Preqin. The venture total hit $142bn, compared with $127bn at the end of 2015.
"There is already a tremendous amount of dry powder out there," said Felice Egidio, the firm’s head of venture capital products. "Investment opportunities are getting harder and harder to come by."
In other words, Son may be more than the most powerful investor in tech — he may be the most dangerous too. A flood of capital into artificial intelligence or driverless cars can inflate valuations and spawn too many competitors, leaving everyone struggling to make money.
Son has spent his life defying expectations. He left Japan at 16 to study in the US and ended up at the University of California at Berkeley. While in school, he invented an electronic translator he sold to Sharp, making his first $1m.
"It’s like he’s from the future," said Hong Lu, who began working with Son in California 40 years ago and went on to co-found UTStarcom Holdings.
Son founded his own company in 1981 and began to distribute software for companies such as Microsoft. He then built it through a series of high-stakes bets. In a deal that would supply him with cash for other investments, he acquired Vodafone Group’s struggling Japan business and turned it into a profit machine.
His fearlessness almost cost him his company. During the internet bubble, he invested in about 800 companies, vowing to create a "netbatsu", the digital-age equivalent of Japan’s zaibatsu industrial conglomerates bound by cross-share ownership. SoftBank shares surged and Son’s net worth hit $68bn in 2000, almost surpassing Microsoft’s Bill Gates as the world’s richest man. Then the bubble burst and hundreds of his investments went under. His stock fell 99%.
But among the wreckage, Son had some winners. He was an early backer of Yahoo! and he bet on China’s Alibaba, which turned into one of the best venture bets of all time. He parlayed an initial $20m investment into a stake that is now valued at more than $90bn, or 4,500 times his original investment.
If Son was spooked by the crash, he never let it show. He continued to cut big deals, including the $22bn acquisition of US wireless carrier Sprint. In 2016, he made the biggest deal of his career, buying chipmaker ARM Holdings for $32bn.
After the announcement, his stock got hammered as stunned investors fled. "It would be unfair to Masa Son if we said we were not warned that some ‘crazy ideas’ were on anvil," Atul Goyal, an analyst at Jefferies Group, wrote at the time. "To us, the ARM acquisition announced yesterday appears largely inconsistent with SoftBank’s investment strategy…. It does not inspire much confidence."
Son responded with an impassioned pitch. He argued this was a rare moment in history when technology’s rapid evolution provides opportunities that may never appear again.
"People think this was a stupid move, they’ve voted with their money," Son said at the time. "It’s easy to look at where your pieces are now and place the next one nearby. This one is 10, 20, 50 moves ahead."
or the Vision Fund. Son saw once-in-a-lifetime opportunities, while SoftBank’s investors fretted the risks. The question was where he could find a new set of backers willing to finance his vision of the future.
Then the Saudi deputy crown prince came to Tokyo in September 2016 just as he was looking for ways to diversify his country’s economy beyond oil. The prince needed to invest billions of petro-dollars in new industries — he even called his effort "Vision 2030".
SoftBank’s Vision Fund was announced publicly in October and Son’s deal-making synapses have been firing even before the fund closed. Son agreed to invest $1bn in OneWeb, a startup that aims to beam internet connectivity to every corner of the globe. He is also putting $300m into WeWork, a New York-based startup that rents offices to small businesses and freelancers.
Son is raising the Vision Fund because he sees deals he thinks are even more promising than Alibaba. In his February call, he cited the leaders of the sharing economy, including Uber and Airbnb.
SoftBank is behind major funding for rivals to Uber. In April, Didi, the biggest ride-hailing service in China, announced its record $5.5bn fundraising, led by the Japanese company. Southeast Asian operator Grab plans to raise more than $1.5bn in a round backed by the Japanese company, people familiar with the matter have said.
"Uber is redefining the transportation industry now; Airbnb is doing it to the hotel industry. You can expect that to happen in every single industry," he said in February. He has given a few details of how he plans to use the capital. It will probably be a mixture of many investments on the scale of OneWeb with a handful of very large deals.
"This won’t be a typical fund," he said in February. "Most of our investments will range between 20% and 40%, making us the largest shareholder and board member, in a position to discuss strategy with the founders."
The Vision Fund will be based in West London’s Mayfair and advised by SoftBank subsidiaries collectively called SB Investment Advisers. Rajeev Misra, SoftBank’s head of strategic finance, will be CEO of SB Investment Advisers and a member of the fund’s investment committee.
Son will have unusual influence. He will be the only so-called key man in the fund, according to a person familiar with the matter. There are typically several people with such a designation in investment funds, which gives limited partners the option to withdraw from the fund if one of those key people leave.
Dealmakers are cautious. Berkshire Capital MD Ted Gooden predicts returns are likely to decline given the excess of capital. "There is so much money in the system, it changes the industry," he said.
However, not everyone outside of Son’s orbit is a sceptic. David Brophy, a finance professor at the University of Michigan, said the sheer size of SoftBank’s fund would give Son advantages no other investor had. He could jump into deals that were more capital intensive than anyone else could handle and he could keep funding them longer.
"You can walk in with muscle that no one else has," said Brophy, who is also director of the university’s Office for the Study of Private Equity Finance. "I wouldn’t focus too much on what we see in the rear-view mirror. It’s more important to look ahead."