The Smartest Guy In The Room

“The gambling known as business looks with austere
disfavour upon the business known as gambling”.

Ambrose Bierce 1882

All businesses go through their lifecycle taking gambles. Early stage is your kind of ‘poker money with some mates’ gambling, at the other end of the scale you have investment bankers and their Las Vegas copycat business models, and then you have SoftBank. In the last week, SoftBank went from $124 billion to $112 billion after they were revealed to be the investor vacuuming up options in Tesla, Amazon, Microsoft, and Netflix. The move spooked investors who deemed the tech markets reaching an unsustainable valuation level. Why is it not surprising? Well, it’s not the first time they have made market impacting investments.

In 2019, SoftBank grew their share of retail bonds in Japan to 51% of the market, 3 times more than the nearest competitor. Prior to that Softbank Founder, Masayoshi Son, even laid out his vision for doing so in the launching of the Vision Fund to help technology and AI entrepreneurs and ultimately become a whale in those industries too.

Masayoshi; the Unconventional Renegade

Masayoshi Son is a dreamer among many other things. In 1981, with only 2 employees, he stood atop some boxes and declared he would make $75 million in sales within 5 years. The employees both quit.

Subscribing to the norms rarely yields entrepreneurial success of his magnitude. With such an appetite for risk and a possible compulsive buyer disorder, it is no surprise SoftBank loudly marched into the venture capital arena when it launched the Vision Fund to the tune of $98 billion. It became the largest technology investment fund in the world, and all supported by the Public Investment Fund of Saudi Arabia.

Technology venture capital was not even close to running dry by any means but a surge like that is astronomical. The Vision Fund was the lottery win the industry scarcely needed but was nonetheless willing to use like it was rocket fuel. Son is a die-hard entrepreneur with unrelenting ambition and curiosity. Both his fund and attention were focussed squarely on artificial intelligence.

Vision Fund’s Layered Strategy

Scatter plots of SoftBank investments from Yahoo to Stripe, Arm Brightstar and Alibaba struggle to unveil any discernible pattern but Vision Fund had, well, a vision. Each move following the 2017 launch was part of a layered strategy seemingly intent on becoming a whale in AI. The fund would focus on long-term, scalable tech solutions in lucrative markets but it doesn’t stop at that. While overlooked by many, it also pledged $5 billion to Latin America after watching entrepreneurial activity surge to 25%. Cheap capital, high entrepreneurship levels and few competitors would mean that you could conceivably grab significant stakes for your investment. Beyond this hypothesis, the Venture Fund aligned with digitally focussed accelerator units. The Y-Combinator, who are possibly the Garden of Eden of incubator units, acts almost as a surrogate for willing investors and the Vision Fund was quick to ‘hop into bed’ with them. The final obvious piece of the Vision Fund strategy is portfolio diversification; consumer, enterprise, financial, frontier, health, real estate, transport, and logistics technologies across 4 continents received a piece of the $98 billion.

The Good, the Bad and the Ugly

The announcement and launch of the Vision Fund was never going to be a shy and retiring strategy but the attention derived has positive and negative results. Aspiring companies were put on notice for potential investment but also, confident entrepreneurs knew the pockets ran deep. The latter coupled with the insatiable appetite for AI companies led to overpaying for the best companies on the market. Cue the image of the child who really wants to be liked doing silly things to impress the cool kids. Only this kid is doing it in front of the whole world with billions of dollars.

Chief among the examples of this is Uber. It’s a globally recognised brand in the right industry but was it worth $10 billion of an investment? Posting net losses of $5.2 billion and a decreasing growth in sales of 12% might answer that question. I’m sure it didn’t help that they also invested in Doordash, a direct competitor to some of Uber’s products.

Equally questionable under the glaring spotlight was the shambolic WeWork deal. WeWork, a real estate firm offering modern shared workspace for tech start-ups was just the type of irresistible candy to attract Son. $4.4 billion later and SoftBank were officially part of the story. This would rise to $10.3 billion. A mere 2 years later, WeWork filed S-1 paperwork for an IPO which was publicly ridiculed and derailed due to the heavy losses suffered prior to the proposed date. The postponement asked questions of whether SoftBank’s exuberance had any interest in prudency at all.

Uber and WeWork are fairly monumental, haphazard conquests but are only 2 of 91 entrepreneur ventures backed by the Vision Fund. That is 91 companies sourced, vetted, and funded since May 2017. If I swung 91 times, I’d likely miss a few too. Rajeev Misra, Director of SoftBank group is pretty confident that some of those will land eventually. Whether it is in an effort to restore investor confidence or his genuine belief, he is predicting dozens of IPO offerings in the next 18-24 months. Every investment CEO will tell you that. Without questioning credibility, the majority of newsworthy investment blunders occur in the US where sensational news is common. However, 33 of the investments are made in Asia, 7 in Europe and a handful in Latin and South America.

When Vision’s 2018 investment in ByteDance is taken into account, optimism may not be too farfetched. For the less social trend savvy among us, ByteDance is the parent company of TikTok and Douyin. TikTok, who Donald Trump seems to vehemently dislike this month, has 800 million users as of July 2020 and with that explosion of success, ByteDance’s valuation rose from $75 billion to $100 billion in 2 years. Zhang Yiming, ByteDance owner, is the typical entrepreneur the Vision Fund invests in. 30-50 age bracket, offering either a time saver or highly popular technological solution to B2C and B2B channels that is extremely scalable. When you add a cohort of successful Y-Combinator alumni such as Slack, Flexport, Doordash, and Rappi, things stay interesting. Finally, a dash of prosperous independent enterprises such as Oyo, Guardant Health, Fanatics, Kabbage, Arm, and Alibaba might yet bring Misra’s predictions to fruition.

What Have We Learned?

The investment doors that were violently kicked open in 2017 quietly closed in September of 2019 showing an initial loss. 91 companies funded with $98 billion dollars. Masayoshi Son’s insatiable appetite seems far from satisfied but there are harsh lessons every entrepreneur learns regarding finances and it appears Son may have finally learned some of them. Rumblings of a Vision Fund 2 simmer in the background but I find it hard to believe that the Princes of Saudi Arabia are keen on another $45 billion investment spree.

The entrepreneurial landscape has undoubtedly been a beneficiary of the lavish spending and the market has likely changed for good. Just as it may seem like a short sensational foray into jet fuelling the AI tech sector comes to an end, and the affects will be felt long into the future.

Any company that creates the kind of disruption witnessed by the Vision Fund will obviously generate some questions and fervor. If truth be told, we may not even see the answers for another few years as Misra predicts. That’s not to say they’ll be good, but the experience has been a wild ride.

And for entrepreneurs when engaging with investors – choose wisely, it’s a long relationship.

© Justin Floyd. All rights reserved.