On May 18th, 2020, a Japanese multinational conglomerate by the name of SoftBank made several headlines around the world with its fourth-quarter results like these:
“SoftBank’s Vision Fund posts record loss of US $17.7 Billion.”
“SoftBank CEO compares himself to Jesus and The Beatles.”
“SoftBank pitches with unicorns in coronavirus Valley.”
“SoftBank to sell its shares in Alibaba to stay afloat and, Jack Ma leaves the board.”
It is too easy to lose details in these rather simple headlines. So, today, we are going to open up the curtain behind headlines and numbers to get a closer look at the enormity of SoftBank.
A History Lesson
In 1981, the concept of personal computers was taking off significantly. But, there was a gap in the equation. There was enough hardware but not enough software to match it. That’s when a 24-year-old boy named Masayoshi Son saw an opportunity of business and SoftBank was born. The name SoftBank came from the idea of the distributor of software. Within a year, they were selling US $2 million of software every month.
Later, it pivoted into publishing and became Japan’s largest publisher of computer and technology magazines and trade shows.
In 1994, the company went public and was valued at US $3 billion.
In 1996, SoftBank made a joint venture with rising American internet company Yahoo!, creating Yahoo! Japan, which would go on to become a dominant site in the country.
The year 2000 was SoftBank’s most devastating and most successful at the same time. The dot-com crash hit Son particularly hard. Before the crash, he had a net worth of US $78 billion, making him the richest person on earth for 3 days. But, lost it all overnight, losing $70 billion in one fateful day. Softbank’s shares lost 99% of their value as a result.
(What would you have done in case you lost 90% of your wealth overnight? Leave your thoughts in the comment section below!)
It was a crushing blow for Son but, he was determined to rebuild his empire and made a move that would define his career. He invested in a small e-commerce site called Alibaba. The US $20 million investment in 1999 was valued at US$60 billion when Alibaba went public in 2014, and is currently valued at about US $129 billion. A 645,000% return!
Into the investment Spree
After seeing the successes Son had achieved through his unique investment strategy, many big-name investors were ready to pour money into SoftBank to earn extraordinary returns. In the next decades, SoftBank went to achieve its vision to conquer the world with investments in sectors like telecom, online gambling, video streaming, gaming, and even expanded into robotics and owned baseball teams.
In 2016, Son announced the acquisition of British silicon chip designer ARM Holdings for US $32 billion making it SoftBank’s largest deal ever. Arm-based chips are used in 99% of smartphones and over 100 billion chips based on Arm have been sold to date!
In the same year, SoftBank announced a record 14.2% repurchase of shares of value US $4.4 billion to boost investor confidence and sold US $7.9 billion worth of shares in Alibaba.
Son also met the President of the United States of America, Donald Trump to discuss further investments into the United States and creating thousands of more jobs.
The Vision Fund Revolution
In 2017, SoftBank partnered with the Public Investment Fund of Saudi Arabia, the main sovereign fund of the kingdom, to create the largest private equity fund of around US $100 billion calling it ‘SoftBank Vision Fund’. Other notable investors of the fund include Apple, Qualcomm, ARM, Foxconn, Sharp, Larry Ellison, and Mubadala.
The main focus of this fund was, as Son explained, to invest in all companies developing technologies in line with the global artificial intelligence trends, including various sectors such as finance or transportation. Son’s evaluation matrix for SoftBank’s investments from the vision fund is simple:
- He must love the business for 50 years.
- It must be unique
- It must become market leader within 10 years
Using this strategy, SoftBank now has investments in 88 companies spread across various sectors. Most notable of them are Uber, ByteDance (Parent of Tik Tok), WeWork, Slack, DiDi, Nvidia, Boston Dynamics, and a recent merger of T-Mobile.
SoftBank has also invested in Indian start-ups like Paytm (its largest investment in India of US $1.2 billion), Policy bazaar, Ola Cabs, Oyo, First cry, and Grofers. Interestingly, around 20% of all unicorns coming out of India are backed by SoftBank.
Before the vision fund revolution, it was pretty rare for a start-up to raise US $100 million and even more so for US $1 Billion. SoftBank with its US $100 billion war chest normalized this and significantly skewed bargaining power in its favour to virtually leaving companies no choice but to accept money even if it doesn’t need additional funding as there was always the risk of big money going to a competitor.
For better or worse, SoftBank completely changed the venture capital game forever. It ranks 66th in the list of Forbes Global 2000 list of world’s largest public companies as in May, 2020.
Mistakes Were Made
The aggressive investment strategy that has made Son billions also has led to him lose some. In 2019, Uber IPO received a soft welcome on the wall street. WeWork IPO was cancelled as it received harsh criticism for bad governance, incurred a loss on the sale of its interest in dog walking app Wag.
A basic unwritten rule in the VC world is that the same firm or bank does not lead subsequent rounds of funding in the same company. This provides arm’s length validation from an independent party of the company’s value.
SoftBank didn’t mind it much and led the subsequent rounds of fundraising in WeWork resulting in undermining of its own previous valuation and pouring huge sum of money in a loss-making company based on a promise of profitability in the distant future.
As a result, WeWork’s value eventually went down by more than 90% from US $47 billion. In February 2020, Elliott Management, an activist hedge fund, bought a $2.5 billion stake in Softbank and pushed for restructuration and more transparency, especially regarding its Vision Fund.
The rise of a Covid-19 pandemic made things only worse for SoftBank. With no cash inflow due to lockdowns around the world, the cash-strapped companies began cutting costs and laying off employees in thousands. 47 of the 88 investments were marked down with a valuation loss of US $14 billion in the last quarter ended March 2020. Consequently, the plan of US $108 billion Vision Fund 2 did not receive enough backing from investors and was pushed back.
In March 2020, SoftBank announced the sale of assets to increase liquidity (including the sale of Alibaba stock) and plan of a huge buyback totalling 45% shares.
The Number Games
All the headlines focus on a single number, ‘SoftBank loses US $17.7 Billion’ on Vision Fund. But, there’s more to it than meets the eye here. It is easy to forget that SoftBank also has other businesses and revenues from those businesses.
On a consolidated basis, SoftBank lost only US $8.8 billion. A huge number of a single quarter loss regardless but, the other businesses cut the Vision Fund loss in half.
Another interesting fact about that number is that the total mark-up in the value of 26 investments since the inception of the fund is US $13.4 billion. So the overall net investment loss is only US $0.8 billion. Comparing that with the total cost of investment i.e. US $ 81 billion , the loss comes to only around 1%.
Rise and Fall and Rise Again?
SoftBank has grown from a simple software distributor to a mammoth venture capital player. Masayoshi Son has demonstrated his ability to handle crisis and resiliency to rise from ashes and show the world that he had the business acumen to identify businesses that can disrupt industries.
As long as he can repeat history and keep pulling bunnies out of the hat, all of the little things like comparing himself to Jesus, or the Beatles, or using a unicorn in a corona valley presentation can easily be considered irrelevant.
In the end, one can not underestimate the power of ambition. As for Masayoshi Son, it gave him the power to blaze through high school in 3 weeks, making a first-ever digital dictionary, and to create SoftBank which will always be remembered in history as the company which changed the rules of every game it entered to play.
“I don’t have much time to waste. One can think as much as he likes. However I need to act and follow through with my ambition. Because we only live once, I want to do something that will be remembered in history. If I do the same as others do, I will never be able to make history.”
-Masayoshi Son’s thoughts during exams
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