The Aleph Report

Is SoftBank ready for global domination?

If you read technology news often, you've read about SoftBank. They've been all over the news during the past few months. In May they announced SoftBank Vision Fund (SVF). With an expected 100 billion dollar war chest, it's the largest technology-based fund we've ever seen.

What caught my attention, apart from the size, is the speed at which Softbank is deploying the funds. Since May, they've already invested 18.4 billion dollars.

But who is SoftBank anyway? I knew it was one of the largest corporations in Japan, but how did they manage to pull such a fund. Even more surprising, their last round of investments have been super strategic, critically so.

SoftBank Group Operating Results 2012-2016

It surprised me because it's extraordinary to see a corporate-backed fund being so prescient about technology. Most corporate venture arms aim to support their parent company in a mix of open innovation and acquisition strategy. Their goal is to scout compelling technology that will advance the parent's company agenda. Few venture arms are independent of the mothership.

SoftBank's Vision Fund is very different. The goal is to invest in the future of computation. And they're doing an impressive job at it, something that's all but random.

SoftBank isn't a bank, despite their name. Masayoshi Son founded SoftBank in 1981 as a wholesale of PC software (hence the name, Software Bank). Now it's one of the top corporations in Japan and Son the wealthiest man in Japan. This is no accident.

Son is an extraordinary visionary with an impressive long-term thinking strategy. When he was 23, this is how he approached starting SoftBank.

"For a year and a half, I did research and made business plans. While I prepared, I had no income. I spent money; I had a new baby. My wife was worried. All my friends, my father, my mother, everybody was worried. They asked me, what are you going to do? You spent years studying in the United States, and now you aren’t doing anything. I spent all my time just thinking and thinking, studying what to do. I went to the library and bookstores. I bought books; I read all kinds of materials to prepare for what I would do for the next 50 years."

In the 80s, the PC industry wasn't apparent. The PC was just starting, and many considered it a hobbyist toy, and not the ubiquitous device it is now.

"I thought about making software myself and starting a software business like I had done while I was at Berkeley. But, I thought, if I make good software, who would sell it? Making software and selling software are entirely different businesses. Even if I make good software, if there’s no one to sell it, I’d have to close the business. I looked around for someone who was selling software, and I couldn’t find anyone. So, I thought, if no one is going to do it, I should do it."

The way young Son thought in term of the value chain is impressive. His vision was holistic, not deterministic. He analyzed the whole system and decided to build his business around the integration point.

Masayoshi Son – Forbes.com

As the integration point of any value chain keeps moving with each innovation wave, it's essential to keep up with it. Masayoshi san was already working on the next stage. In 1992 he was already describing his next move.

"The PC and PC software has gone through three stages of growth. The first stage was a game software business. PCs were used mostly for games and for hobbies. The second growth stage was business applications like word processing and spreadsheets. The third growth stage is here now—the networked company."

Son's capacity to adapt, kill old businesses and move onto the next integration platform is remarkable.

He also realized, early on, that he couldn't do everything himself. So the moment he had capital, he started investing in supporting ventures.

One of his most prescient moves was to invest 20 million dollars in Alibaba in 2000. Those 20 million became 58 billion dollars when the company went public in 2014.

It shouldn't be surprising seeing his track-record. Retail was moving, with the advent of the Internet, from brick & mortar to the browser. It stands to reason that the same principle he used to start SoftBank, applied here. Control the distribution channel and monetize it.

He pulled a similar move when he invested 338 million dollars in Yahoo, just before they went public. By mid-1999, the investment was worth 10 billion dollars.

The same principle is at work. Invest and control the distribution of the new currency, in this case, knowledge.

"Inside the brain are wisdom and knowledge. Wisdom and knowledge are the most valuable things in the body. I want to be number one in the business of supplying wisdom and knowledge all over Japan.

Son's idea is to build a company that can survive the next 300 years. Everything he does, from investing, de-investing, rearranging organizations or even grooming his successor, maps to this vision.

He also takes massive risks. He lost 70 billion dollars at the high of the dot-com bubble, in one day, and nearly bankrupted SoftBank in the process. He admitted he lost 99% of his net worth by 2000.

He's human, and because he takes risks, he also gets it wrong. But that has never stopped him.

"After that, many people were laughing at me. They said that guy’s really dumb. He’s a nice guy but dumb. I said, OK, I’m dumb. But I’m going to keep at it, and someday, somebody will find out what I can do and what real software distribution means."

SoftBank's new Vision Fund isn't the first time Masayoshi san uses such a structure. He's been orchestrating similar joint-ventures for years.

In 1990 he created a joint venture to sell networking equipment with Novell.

"Novell owns 54%, NEC, Toshiba, Fujitsu, Canon, and Sony each own 4%, and we own 26%. […] It’s the first time in the industry that five competing hardware vendors have joined in one company—NEC, Toshiba, Fujitsu, Canon, and Sony all invested."

The new Vision Fund displays a very similar structure. The Public Investment Fund of the Kingdom of Saudi Arabia (“PIF”) invested 45 billion dollars, SoftBank 28 billion dollars, Abu Dhabi’s Mubadala Investment Company 15 billion dollars and Apple, Foxconn, Qualcomm, Sharp and Larry Ellison's Family Office, one billion dollars each.

Same structure, 27 years apart. If anything, Son is consistent. The participation of SoftBank is always significant but never controlling. He regularly tries to bring competing parties into a win-win situation. Softbank has been co-investing with Apple, Foxconn, and Qualcomm for the past ten years.

Another critical aspect of his willingness to partner is how he always looks for synergies within his holdings. He engineers some of his investments, so they work well with other parts of his portfolio. Sometimes that's for SoftBank; other times is among his portfolio companies.

Vision Fund strategy

The fund has been aggressively investing in strategic niches. All of them respond to Son's consistent vision. He's been pursuing to invest in the next generation of technologies that will enable human existence.

The fund (SVF) has less than a year but it's already producing results for SoftBank.

SoftBank Group Corp. Consolidated Financial Report For the six-month period ended September 30, 2017 (IFRS)

Four strategies underpin the overall direction of the fund. Artificial Intelligence is the one technology that glues everything together.

The scaffold

The fund is aggressive in pursuing investments on the actual infrastructure that will enable the rise of the Artificial Intelligence age.

From chipmakers like ARM or NVIDIA, to more subtle investments in bare metal cloud computing like Packet or operating systems to run deep learning cloud services.

Basic human needs

The fund is also investing in the future of our species, from genomics to pharma to agrotech solutions. The one common thread, they only invest if the service is supported by AI technology.

Plenty Vertical Farming. SoftBank investment July 2017.

A big theme here is also cybersecurity. The need to secure and protect all assets of the value chain through smart AI-powered cyber defenses. To achieve that, they hold several investments in leading cybersecurity solutions, both for cloud and IoT.

Human enablers

Two significant human enablers, transportation, and financial services are two key points. FinTech to support the investment and growth of innovations, and transportation as a way to change human society.

LIDAR generated point cloud for 3D mapping – Techcrunch

The fund is bullish on autonomous vehicle (AV) technology. They have several investments in the space that also cover the whole value chain. From mapping to sensing, AV Operating systems, IoT integration systems, satellite communication, to ride-sharing and car dealers.

Future user interaction

They aren't ignoring the next user interaction frontier, Augmented Reality and Virtual Reality. They have several investments both in hardware, software, and platform base.

Worlds Adrift screenshot – SpatialOS from Improbable, SoftBank investment May 2017

Expected investments

First of all, I would expect more fast-moving investments from the fund. That's an essential trait of Masayoshi san. One he's shown before at SoftBank Capital. After all, Son will be involved in the day to day operations of the fund:

“I am going to be personally involved in every investment decision,” he stated.

I expect the fund to invest in technologies around Autonomous Vehicles (AV). Expect them to finance, for example, Lidar technology (reminiscent of Son's investment in Kingston) or things like AV simulation platforms. Cybersecurity in AV will also become a theme for them soon.

I'm tempted to say they'll invest in Virtual Reality / Augmented Reality, but this space might not be mature enough for them to double down heavily. That said, the fund might make tentative seed investments in critical areas. I wouldn't be surprised to see them invest in the distribution aspect of VR/AR knowledge for example.

I wonder if they're brave enough to venture into Quantum technology. Quantum will become a key component of both Autonomous Vehicles and Deep Learning training.

Also surprising the lack of voice interfaces investments. I speculate it's because they haven't found the right company to invest it. The obvious choice would be Amazon, but that's obviously not going to happen. Taking into account their fight over the Indian market, I wouldn't discard some move to support an independent voice-enabled marketplace either.

Key lessons from SoftBank

There are several key lessons other funds can take from SoftBank. It's one of the brightest corporate stories I've seen in a while. Any investors both private or corporate should take a page from Masayoshi san's manual.

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