Contrarian View: The case for SoftBank and Masayoshi Son's audacious bets on tech startups across the world

For all of us in the startup world, we've heard and participated in conversations about the recent WeWork debacle. And an overwhelming part of these conversations have centred around SoftBank and its massive investments on tech startups across the world.

To be sure, the Japanese investment firm, which orchestrated a $9.5 billion bailout of the office-rental company WeWork, is suddenly under scrutiny for its audacious bets on disruptive startups around the world.

But do you agree that just as people are an expression of their genes, companies too are expressions of their founder’s traits to a large extent? Could we also say that SoftBank’s audaciousness can, hence, be traced to its founder’s tenacity, boldness, and, perhaps even, an instinct that is his very own?

And let's not forget that we're quick to celebrate these risky bets at the time they are made, laud every small success that follows, but then we're even quicker to criticise the losses and make a noise over any sign of weakness.

Still, aren't these very same risk-loving, massive bets what's needed to scale companies with a vision of transforming whole industries and shaping the future? We all know that the world of entrepreneurship -- as exciting and promising as it is -- is fraught with many challenges, with many of us in need of investors and champions who believe and place big bets on our bold, unconventional plans and vision?

And if SoftBank’s track record is anything to go by, that’s exactly what it has set out to do and done. Because, today, we live in a world where we continue to reap the benefits of the transformation brought about by disruptive tech firms that SoftBank has placed massive bets on.

As part of SoftBank’s $100 billion Vision Fund, the tech-focused which it launched in 2017, the firm and its charismatic founder Masayoshi Son have been betting big on disruptive companies they believe "solve fundamental pain points in a consumer’s life and have the potential to make a meaningful difference to the way people do things in a large addressable market."

Thriving on the edge

For anyone who has followed Masayoshi Son’s journey to building a tech empire and a personal fortune of over $18 billion, one would know that Masa San – as he is fondly referred to in the industry – thrives on the edge.

In fact, Masa San’s ability to rebuild from scratch is well-known.

The recent events bring to mind another time around the turn of the century, when Masa San flew too close to the sun, got burnt and lost 99 percent of his wealth in the market, only to rebuild his empire and his image as the kingmaker of technology companies in due time.

At the time, idiosyncratic Masa San, who had been making a slew of investments in startups around 1999 to 2001, faced a personal loss of $70 billion when the market plummeted during the dot com crash. David Rubenstein in his show called it the "greatest loss that any human being has ever suffered financially”. And yet, Masa San not only survived, but, from whatever we've read and heard, he thrived when living on the edge.

For most investors who’ve experienced even a fraction of the massive losses Masa San has, becoming more conservative and less audacious would’ve been the natural outcome. But not Masa San.

If anything, the current SoftBank troubles – marked by the negative impact on market confidence in the investment firm at a time when it is trying to raise money for its Second Vision Fund – is, in Masa San’s own words, “small crises that pop up here and there today”.

Indeed, WeWork’s failed IPO after the market balked at its unwarranted valuation and the more than 30 percent decline in Uber’s share price within months of the ride-hailing firm going public has caused the market to question Softbank’s seemingly unreasonable bets on businesses it believes can transform entire industries.

Till date, SoftBank has made some 185 investments, and another 75 growth stage investments through the Vision Fund. Today, Masa San’s ambition is to raise $100 billion for a new fund every few years and to bet $50 billion a year in startups.

At the heart of these massive tech investments is Masa San’s 30-year plan and 300-year vision for SoftBank and the future, his belief that artificial intelligence will fundamentally transform all industries in a way that outlasts the impact seen in any other era, and a firm confidence in the vision of the founders of his portfolio companies and an unrelenting patience to see these investments materialise into outsized returns.

Sure, SoftBank has a track record of backing some major successes in the past, most notably, Chinese online retailer Alibaba, which is now valued at more than $400 billion. For Masa San, the current losses with WeWork and Uber are “mere child’s play” in one’s pursuit of visionary companies that can solve unsolvable problems.

For the full list of SoftBank Vision Fund Investments, please refer to this link.

According to YourStory Research and Crunchbase, SoftBank Vision Fund was part of 495 funding transactions since the start of Vision Fund-I in 2017. In total, $128 billion has been invested by SoftBank and other co-investors across 74 companies.

The web of SoftBank’s investments activity been joined by 1,244 investments firms, out of which it acted as the lead investor in 368 such transactions. This gives a glimpse of how heavyweight SoftBank is in the dealmaking space. For example, Sequoia Capital, Tiger Global GV, Khosla Ventures Founders fund, DST Global, Temasek, and Accel have all done more than 10 deals each with SoftBank.

"I think I'm better than others at sniffing out things that will bear fruit in 10 or 20 years, while they're still at the seed stage, and I'm more willing to take the risks that entails," Masa San once said in a 2016 media interview.

And so, SoftBank’s hunt for the next Alibaba is set to continue unabated even as the world riles on about the WeWork fiasco. Last month, Rajeev Misra, who heads the Vision Fund, said SoftBank now expects to invest in about 200 disruptive companies, with a focus on AI and tech disruption, once its next iteration of its first Vision Fund is up and running.

At YourStory’s annual flagship event TechSparks, SoftBank’s Munish Varma, who is Partner, EMEA, Asia at SoftBank Vision Fund, told me,

“We would look for companies that are using data in a smart, intelligent ways to fundamentally change certain businesses, certain industries to make the lives of consumers and businesses better and easier. That's the big broad thesis. And the other thing to add is that the Vision Fund itself is a late-stage growth fund. We would do late-stage growth deals; we have the capital and we would want to deploy that capital to accelerate the rate of growth of investee companies.”

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India strategy and focus

In India, SoftBank has deployed $10 billion in the Indian startup ecosystem, with plans to invest up to $4 billion more in the next two years in its hunt for unicorns and visionary companies. High profile investment include digital payments firm Paytm, hospitality chain Oyo Rooms, logistics courier service company Delhivery, and baby and kids store FirstCry.

In a fireside chat, SoftBank’s Munish Varma outlined how SoftBank looks at growth investing. “When we look at investing in a business, the first thing you have to see is that how big is their addressable market? That's almost up one… We will also look for whether the company actually has a product or a service that is genuinely going to make a difference to a consumer's life or a business’s ease of doing business. And the third thing, which is super important, is our belief and faith in the entrepreneur. Does the entrepreneur have the energy, the vision, and the passion to make this into a real success? And will that, in terms of time, scale, and does that match our vision?”

He adds, “So we are constantly looking for companies that solve fundamental pain points, that are playing in markets that are big markets, and that can grow even further, both within India and outside.”

From my conversation with Munish, it was clear that SoftBank’s approach is to over-index in what they say is the quality, the nature, the enthusiasm, the courage, the energy of the entrepreneur. At late stage growth, they eye businesses that have established product market fit, are already doing well in their chosen space, and that they believe, with SoftBank capital infusion, can significantly increase the rate of growth, expand into new geographies and adjacent markets, and foray into related verticals.

In a space where there is scale and scope-benefit, capital will be a differentiator. For a company with more capital, the opportunities are tremendous. It could attract more talent, pursue an acquihire or an early M&A, and aggressively market and capture customers. Indeed, while we know that writing bigger checks doesn’t guarantee success, it sure helps increase the likelihood and speed of achieving success.

In its first two years of operations, SoftBank’s Vision Fund has returned $6.4 billion to investors. This includes a $2.9 billion gross gain on US technology group Nvidia and a $1.3 billion profit on Indian online retailer Flipkart.

Going forward, SoftBank, which has a “very positive on the outlook for India,” expects to invest $2 billion to $4 billion over the next two years in Indian startups.

Munish told me, “We have invested on some phenomenal companies here. We continue to see very exciting opportunities in India. We are amazed and we are excited with the quality of the entrepreneurs that we meet in India. And we are excited about helping some of these entrepreneurs working with some of these companies to take them global.”

To be sure, SoftBank’s portfolio companies such as Ola, Oyo, and Paytm have already gone global. Ola now has an international presence in Australia, New Zealand, and the UK, while Oyo operates in over 80 countries, including the US, Europe, Middle East, and Japan, and Paytm in Canada and Japan.

Speaking about this trend, Munish says,

“Few of our portfolio companies have already ventured outside of India and these companies have done a phenomenal job expanding outside of India. So, obviously we are super engaged. We are very positive about the prospects for Indian companies, both domestically and internationally. When we find entrepreneurs that have managed to make a success of their business in India and have found a local solution, we think that that local solution very often can be turned into a global business.”

Stimulating growth with capital

Indeed, SoftBank’s massive checks have enabled companies to grow beyond their markets and take on rivals to assume the No. 1 spot in their space. Again, this is reflective of Masa San’s own ambitions to always be the No.1 in anything he sets out to do.

At an annual SoftBank shareholder meeting, Masa San famously said, “From my personality perspective, I can’t accept No. 2. I need to be No. 1. I’ve been like this since I was a kid. So, if I try something, I want to be No. 1 in that area.”

This also explains Masa San’s commitment to seeing WeWork succeed. After WeWork’s failed IPO, Softbank led a $9.5 billion bailout plan, putting on the table a tender to buy $3 billion worth of stake from existing shareholders, along with $5 billion in fresh capital injection, and $1.5 billion commitment for global subsidiaries. With this, SoftBank now owns 80 percent of WeWork, taking its total investment in WeWork to $12 billion.

Today, We Co’s valuation is roughly where it was in 2015. Their operation and scale isn’t where they were in 2015. To steer We Co, Masayoshi Son has brought in his right-hand man Marcelo Claure and Ron Fisher from Sprint.

Credit rating firm Moody’s has downplayed WeWork’s impact on SoftBank, saying that even a devaluation of 50 percent of WeWork would only affect 1 percent of Softbanks investment portfolio. On a key metric, loan-to-value ratio, Masa San wanted to keep his firm’s LTV below 25 percent; currently, analysts say SoftBank's LTV is approaching the 22 percent gauge.

Growth of SoftBank Vision Fund portfolio

Six years ago, Masa San made another similar bet when SoftBank acquired US telecom major Sprint, taking a majority stake of 80 percent. At the time, Masa San bet Sprint would become the biggest telecom player in the US; while that didn’t happen, Sprint is now getting merged with larger rival T-Mobile. Today, the question is, will SoftBank orchestrate the turnaround of We Co and, perhaps even, steer it out of troubled waters to the shores of a meaningful exit like Sprint? This, only time will tell.

But one thing is for certain, the co-working trend is here to stay. For businesses, the co-working model solves a fundamental problem, helping change what used to be a fixed cost into a variable cost. This begs likeness to the way AWS, Azure, and Google Cloud have transformed working on a cloud infrastructure as an on-demand affair with a variable cost. This, at the core, is what users what, and as long as the market continues to want it, co-working firms will continue to make money off it. 

Admittedly, in the grand scheme of things, for SoftBank and Masa San, mistakes in investing are inevitable, provided one does not lose sight of the long-term vision.

“We will not get everything right. We will obviously make mistakes. Investing is mostly making mistakes as well. But what drives us is to be able to find good businesses solving pain points for consumers and other businesses. Picking the right entrepreneurs, picking the right markets, and then backing those entrepreneurs, not just with capital but with access to the entire SoftBank group ecosystem to help them expand, help them grow both within India or from an Indian context and internationally,” says Munish Varma.

He further adds, “A fundamental role at the firm is to try and exercise fiduciary responsibility, invest with intelligence, invest with some amount of caution, and produce a return for the LPs, while helping companies really scale, really grow, and solve pain points for consumers.”

And if SoftBank’s track record is anything to go by, that’s exactly what it has set out to do and done. Because, today, we live in a world where we continue to reap the benefits of the transformation brought about by disruptive tech firms that SoftBank has placed massive bets on.

For instance, whether we send Slack messages, or use Uber/Ola to commute, or sit at a desk at WeWork, or transact on Paytm/Flipkart/Snapdeal, or stay at OYO, or receive delivery from Grofers or Delhivery, or take a loan through Policy Bazaar – if we do any or all of these things, we know that SoftBank has its fingerprint behind the scene.

After all, the audacious, risk-loving bets made by Masa San have helped all these companies scale and how.

Also Watch: SoftBank's Munish Varma in a fireside chat with YourStory Founder and CEO Shradha Sharma