Tiger Global vs SoftBank: Part 2

In the first part of the series, we dived into Tiger Global’s history, its playbook, and current state of affairs. In the second part, we’ll trace SoftBank’s origins, come up with a definition for SoftBank, understand its playbook, the current state of affairs and Arm’s IPO. So fasten your seat belts, as we’re going on a ride with Masa.

Origins

Birth of SoftBank: Masayoshi Son, or Masa as he’s fondly known, was raised in a poor Korean family who had migrated to Japan. Son arrived in the US in the late 1970s to study at the University of California, Berkeley. He made his first million dollars while in college by selling his invention- the first electronic dictionary to Sharp for US$1.7 million. After working on another project, Son raked in US$3.2 million in total, which he later used to incorporate SoftBank. Founded in 1981, Son set up SoftBank (Bank of Software) to distribute PC software. 

Yahoo!: Fast forward to 1996, Masa met Jerry Yang, then CEO of a startup called Yahoo!, and offered to invest US$100 million, which helped propel Yahoo! to become the dominant web search engine in the pre-dotcom crash era. Two years later, SoftBank Corp. was listed on the first section of the Tokyo Stock Exchange. 

Richer than Bill Gates: At the turn of the new millennium, Son made one of the greatest investments in history. He met a young Chinese teacher and founder of an e-commerce firm called Alibaba and asked him to accept US$20 million as an investment promising to transform the company into the next Yahoo!.  Soon Son’s net worth was growing by an astounding US$10 billion per week, making him richer than Bill Gates for three whole days before the dot-com bubble burst, forcing SoftBank’s shares into a downward spiral. By the end of 2000, SoftBank’s shares had fallen by 93%. 

Rajeev Misra: Within a few years, Son got back on his feet and was gearing up for the purchase of Vodafone Japan; that’s when he met Rajeev Misra, who was then the global head of credit, emerging markets at Deutsche Bank. Misra helped SoftBank fund and structure the complex deal, and SoftBank acquired Vodafone Japan for US$15.4 billion. 

Alibaba’s IPO: Misra and Son reconnected in 2014, the year when Alibaba listed on the NYSE, raising US$21.8 billion, the largest IPO in the history of the US. Flush with cash, SoftBank wanted to expand globally, and Son wanted Misra to work for him.

Vision Fund: Son theorised that AI would revolutionise every industry and wanted to make global investments in this segment. So, naturally, Son wanted to become the biggest investment fund on the planet; thus the Vision Fund was born. Initially, the plan was to start with a US$30 billion fund, but Son raised the stakes and set US$100 billion as the target. The US$100 billion fund was launched in 2017, with the help of Misra’s deep connections. Misra is credited with pulling in Saudi Arabia’s sovereign wealth fund Public Investment Fund (PIF), and Abu Dhabi’s Mubadala, who invested US$45 billion and US$15 billion, respectively. Other prominent backers include Qualcomm, Apple, and Foxconn who contributed an additional US$5.5 billion. 

It’s a Hedge Fund…It’s a Family Office…It’s a Vision Capitalist

The SoftBank Group Corp. (SBG) has five main reportable segments (excluding Other) and a dizzying number of subsidiaries and investments under them. 

Segments: 

• Investment Business of Holding Companies: Covers investment activities by SBG and its subsidiaries. Core entities under this segment include SBG, SoftBank Group Capital Limited, SoftBank Group Japan Corporation, and SB Northstar L.P.
• SoftBank Vision Funds: Investment activities by SoftBank Vision Fund I and SoftBank Vision Fund II are clubbed under this segment. Core entities under this segment include SB Investment Advisers (UK) Limited, SoftBank Vision Fund L.P., SB Global Advisers Limited, and SoftBank Vision Fund II-2 L.P.
• SoftBank: Core entities under this segment include SoftBank Corp., Z Holdings Corporation, Yahoo Japan Corporation, and LINE Corporation. This segment has four sub-segments-

1. Consumer business: Includes mobile services, sale of mobile devices, and provision of broadband services to retail customers in Japan.
2. Enterprise business: Provision of mobile communications and solutions services to enterprise Japanese customers.
3. Distribution business: Involves the provision of ICT services to enterprise customers. Also includes the provision of communication device-related products and IoT equipment to retail consumers.
4. Yahoo! JAPAN/LINE business: Provides internet advertising and e-commerce services.

• Arm: The Arm segment involves designing microprocessor intellectual property and related technology and the sale of software tools, and provision of related services. The core entity under this segment is Arm. 
• Latin America Funds: Investment activities of SoftBank Latin America Funds are clubbed under this segment. Core entities include SBLA Latin America Fund LLC, SBLA Advisers Corp., SBLA Latin America Fund (Cayman) L.P., SBLA Holdings (Cayman) L.P., SBLA Holdings II DE LLC, and SLA Holdco I LLC. 
• Other: Businesses that fall under this segment include the smartphone payments business, alternative investment management business, and Fukuoka SoftBank HAWKS-related businesses. Core entities include PayPay Corporation, Fortress Investment Group LLC, and Fukuoka SoftBank HAWKS Corp.

With such a complex web of companies and SBG at the centre of it, investors have found it hard to define SoftBank. Some investors think of it more as a hedge fund, especially after the whole Nasdaq whale saga. While others think of it as a gigantic family office or even a technology investment conglomerate. But no one was satisfied with Son’s definition of “vision capitalist”.

Tiger Global vs SoftBank: Part 1

SoftBank’s Playbook

Cluster of Number Ones: In the quest to be the world’s largest company, SoftBank follows a unique strategy called cluster of number ones. The strategy involves forming a diverse group of companies with remarkable technologies and business models in specific fields. The companies will be induced to evolve and grow together based on capital ties and a shared vision while making decisions independently. Son envisions a SoftBank-led ecosystem of AI companies, spanning all industries from transportation to robotics.

Investment Workflow: Misra heads a team of managing partners based in Silicon Valley, Japan and London, who are in charge of analysing dozens of companies weekly in search of potential opportunities for investment. They meet regularly to review deals presented by individual partners. Due diligence is then handled by a separate team that conducts a rigorous vetting process that can take months to complete. The deals finally arrive at the desks of the Investment Advisor Committee, which includes Son and Misra. If the startup seems promising, the founder is then invited to sit down with Son, who meets every single founder before a deal is finalised. But this setup will change now that Misra is stepping down from his role at SoftBank to launch a multi-asset investment firm. But he is expected to continue as the CEO of SoftBank Investment Advisers and lead SVF1 for at least a year more, while Son will be more involved in managing SVF2. 

SVF1: Typically, SVF1 invests in high-growth-potential companies that are leveraging data and AI and have 50 to 80% market share. The fund invests US$100 million or more with a special focus on unicorns. SVF1 became known for its outsized bets on companies like Uber, Didi Chuxing, and WeWork. But soon, cracks started emerging in SoftBank’s carefully crafted image when WeWork’s IPO imploded due to investors’ concern regarding WeWork founder Adam Neumann’s fraudulent practices, severe cash burn with no path to profitability and an insane valuation, among other things. 

SVF2: Launched in Oct 2019, the second fund was supposed to raise a staggering US$108 billion, but due to the WeWork fiasco, it failed to attract external investors, and SoftBank ended up investing US$40 billion from its own balance sheet. While SVF2 invests in similar companies leading the AI revolution, it writes comparatively smaller checks and invests in earlier rounds.

Current State of Affairs

SBG was on top of the world last year, recording a total gain on investments to the tune of ¥7.53 trillion (~US$57.5B), with around 84% of it coming from the Vision Funds. The pandemic accelerated many of the trends that SBG was betting on, such as online education, food delivery, e-commerce etc. But now, the tables have turned; the group posted a record loss on investments of ¥3.43 trillion (~US$26.2B), with the Vision Funds contributing to 109% of the losses (gain on investments in other segments such as Latin America Funds and Investment Business of Holding Companies softened the blow). In terms of segment-wise income before income tax, the Vision Funds posted a loss of ¥2.64 trillion (~US$20.2B), down ¥6.67 trillion (~US$51B) from the previous fiscal. SBG’s shares have lost around 29% of their value in the past year. 

China’s tech crackdown and its ban on profitmaking in the education sector have severely affected SoftBank’s portfolio. The value of SoftBank’s stake in Alibaba has fallen by 67%, from US$208 billion in Nov 2020 to US$69 billion in Mar 2022. Chinese ride-hailing app Didi’s shares fell by 44% on Mar 11, 2022, after news broke out that it had suspended its planned Hong Kong listing. Its shares had already dropped by around 76% from its IPO price before the plunge. SBG’s bets in the US have also not worked out well. Coupang, the South Korean e-commerce company listed on the NYSE, has lost 70% of its value since its IPO. SBG has also marked down the value of some of its private sector investments in sectors such as transportation, fintech, and consumer.   

Son has stated that his conglomerate will take a defensive position and slow down investments. He also stated that the group will not stop investing in China but will invest in smaller amounts. Son is pinning his hopes on listing the group’s crown jewel, Arm, on Nasdaq following the collapse of the sale to chipmaker Nvidia due to regulatory pushback. 

Arm’s IPO

Founded in 1990, Arm is in the business of licensing semiconductor intellectual property, which includes the design of energy-efficient microprocessors and related technologies. Its chip blueprints can be found in everything from smartphones to data centres. Son, who was impressed by Arm’s dominant position in the smartphone market, believes Arm’s chips will power the future digital economy. In 2016, SoftBank acquired the UK-based company for an astronomical US$32 billion, Europe’s biggest ever technology deal.

Initially, SoftBank hoped to sell Arm to Nvidia for US$40 billion but later shelved the plan after the FTC (Federal Trade Commission) sued to block the deal. Son now plans to list the company on Nasdaq within Mar 31^st, 2023.

Arm’s quarterly FY21 results painted a positive picture of the company. The company raked in US$2.7 billion in revenues, up 35% YoY (year-on-year). More importantly, licensing revenues which serve as an indicator of growth in future royalties, increased by 61% YoY to US$1.13 billion. 

Conclusion

Masa has a lot on his plate. The US is technically in a recession, so a successful listing of Arm seems unlikely in the near future. And SoftBank, which is known to take out loans against its equity stake in other companies, will find it increasingly difficult to borrow as stock markets across the globe have been on a downward spiral since Jan this year. Given that Misra was the architect behind the US$100 billion Vision Fund, it’ll be hard to find someone to fill his shoes.  Misra’s departure will surely leave a void in SoftBank. While China’s tech crackdown is easing, it’s adamant about continuing its insane zero Covid policy that’s choking its economy. Owing to the Covid-induced lockdowns and the real estate crisis, the IMF downgraded China’s growth to 3.3 per cent this year, the lowest level in more than four decades. 

With all that being said, Son has been in this situation before, he has overcome seemingly insurmountable losses, but will he be able to recreate that magic this time?

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