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The humbling of the world’s biggest technology investor has come quickly.
SoftBank’s Vision Fund went from zero to $100 billion in two years, shaking up the venture capital industry with huge bets on household names like Uber UBER, -2.41%, WeWork and Slack WORK, +4.80%. But now the fund is in damage-control mode after WeWork canceled its IPO.
The office-sharing company’s fall from grace has been dramatic. In its last round of private funding, it boasted a $47 billion valuation. But then growing concerns about steep losses and the company’s governance structure prompted the CEO to resign and pushed the company’s valuation to under $10 billion, according to some reports.
With Uber’s and Slack’s respective market values down big since their public debuts, SoftBank’s Vision Fund is facing billions in losses. This has sparked questions from the fund’s backers over how SoftBank founder Masayoshi Son lost his Midas touch.
Surprise over Son
The dominant tone in coverage of the WeWork debacle has been one of surprise that Son, who acquired a deserved reputation as a visionary with SoftBank’s early investments in Yahoo and Chinese e-commerce platform Alibaba BABA, -1.00%, could have so badly misjudged a business and its founder. But for those who understand the venture capital industry and SoftBank’s history in Japan, its current problems aren’t so shocking.
The common image of SoftBank is of a cutting-edge Japanese technology firm. But, in fact, SoftBank is a strange hybrid of unsexy subsidiaries rooted firmly in traditional, industrial Japan. SoftBank is essentially a telecom company.
It didn’t make much sense then, and it makes even less sense now.
A large number of SoftBank’s executives come from the railway industry through its 2004 purchase of Japan Telecom, which emerged from the privatization of Japan Railways. The company’s executive team comes from that staid industry, along with bankers and private-equity specialists picked up in SoftBank’s 2017 acquisition of Fortress Investment Group.
Two moves
Son has had two basic moves since the earliest days of SoftBank. The first was to buy distressed assets on the cheap and use them to create cash flow for further operations and acquisitions. That includes his purchase of the Comdex computer trade show and the Ziff Davis publishing company in 1995, followed later by Japan Telecom.
His second strategy was to throw a ton of money at digital start-ups. This strategy led to a lot of bets that didn’t pay off and two that would make him famous: tens of millions of dollars invested in Yahoo and Alibaba.
This history makes it easier to understand where the Vision Fund went off the rails. Son had always made large bets in hopes of owning a market, but mostly did so on digitally native companies that didn’t have the massive upfront costs associated with a brick-and-mortar business, the exact opposite of Uber and WeWork.
Like Yahoo and Alibaba, those investments had leaders who seemed like visionaries, but they lacked that digital advantage that made scaling so profitable. Son’s strategy of throwing more money at founders than they had asked for remained the same, but that money just got thrown to people in vastly different business models that required heavy investments in things like drivers, insurance and real estate.
If Son were truly following the model that had made him one of the world’s richest men, he would have never sunk billions into Uber and WeWork. He wouldn’t have been the one to watch as they became distressed assets in his own portfolio. He would’ve been the one to buy them on the cheap after somebody else had already lost a fortune.
Distressed-asset model
Which is exactly what he and SoftBank, though not the Vision Fund, just did — SoftBank’s recent WeWork rescue package perfectly fits with that distressed-asset model, it just so happens that it was his fund was the one that provided, and arguably lost, the initial funding.
The other now-obvious red flag about the Vision Fund is the breakneck speed at which it was formed and grew. A venture fund usually works on 12- to 14-year feedback cycles, and the process of transferring the “genius” of the founder to a key successor can take even longer. At the most successful funds like Sequoia, Emergence and Floodgate, successors have all been groomed for years by the original innovators, product experts, entrepreneurs and technologists.
Rather than transfer Son’s “genius” to a successor, the executive staff seem to have been making decisions by committee and compromise. This can be a dangerous approach in the venture capital world, where you have to play in the top 10% of investments to get an acceptable return, and in the top 35% just to break even. Decisions based on compromise tend to drive investments toward the middle, rather than the top. The result may be that instead of magnifying Son’s genius, the structure and culture of the Vision Fund has diluted it.
The SoftBank Vision Fund looks increasingly like an unhealthy attempt to scale with money, rather than with strategy. That it has fallen so hard, so fast, may be shocking now. For those who know Japan, SoftBank, and Son, though, it makes a lot of sense.
Phil Wickham is the former CEO of Kauffman Fellows. He and Koichiro Nakamura are managing directors at Sozo Ventures.
