When Masayoshi Son was a boy growing up on Japan’s southern island of Kyushu, he kept a notebook to scribble down new inventions he hoped to create one day. Today, the SoftBank founder has almost $100 billion to invest on making the next big thing a reality.

Son’s SoftBank Group Corp. closed the first round of a planned $100 billion investment fund, with money raised from Saudi Arabia, Abu Dhabi, as well as Apple Inc. and Qualcomm Inc. The Vision Fund gives the 59-year-old access to a pool of capital unparalleled in the worlds of private equity or venture capital -- the equivalent of four Silver Lakes or 15 Sequoia Capitals.

Son isn’t one for understatement. He has said, without irony, that he has a 300-year plan for SoftBank and aims to build the world’s most valuable company. With the Vision Fund, Son vows to become the biggest investor in tech over the next decade, as he bets on the future of artificial intelligence, connected devices, satellites and the integration of computers and humans. Indeed in April, he led the $5.5 billion investment in China’s Didi Chuxing, the largest venture funding on record.

“We saw a big bang in PCs, we saw a big bang in the internet,” Son said in February on a call with shareholders. “I believe the next big bang is going to be even bigger. To be ready for that, we need to set the foundation and that foundation is SoftBank Vision Fund.”

Son has some enthusiastic supporters, with very deep pockets. Saudi Deputy Crown Prince Mohammed bin Salman agreed to make his country the cornerstone investor with a $45 billion check after a meeting with Son. Besides Apple and Qualcomm, Foxconn Technology Group and Sharp Corp. are also putting in capital. SoftBank said Saturday the fund has $93 billion in committed capital and aims to reach $100 billion with a final close within six months.

Son’s mega-fund will unleash an unprecedented amount of money into sectors already seen as overcapitalized. Private equity returns have plummeted in recent years because there’s too much money chasing too few deals. Venture capital faces similar issues.

“A $100 billion fund is mind boggling,” says Steven Kaplan, a professor at University of Chicago’s Booth School of Business who co-founded its entrepreneurship program. “There’s too much capital now so bringing in more capital doesn’t make any sense.”

Kaplan struggled to think of a precedent for what Son is attempting. He said the closest parallel may be the late 1990s when money poured into U.S. internet companies, fueling sky-high valuations -- right until the market crashed.

Private equity firms are sitting on record piles of cash. The amount of unspent money hit $820 billion at the end of 2016, up from $755 billion a year earlier, according to the research firm Preqin. The venture total hit $142 billion, compared with $127 billion at the end of 2015.

“There is already a tremendous amount of dry powder out there,” says Felice Egidio, the firm’s head of venture capital products. “Investment opportunities are getting harder and harder to come by.”

In other words, Son may be more than the most powerful investor in tech -- he may be the most dangerous too. A flood of capital into artificial intelligence or driver-less cars, can inflate valuations and spawn too many competitors, leaving everyone struggling to make money.

SoftBank’s Cyber Keiretsu

Son has spent his life defying expectations. He left Japan at 16 to study in the U.S. and ended up at the University of California at Berkeley. While in school, he invented an electronic translator that he sold to Sharp, making his first $1 million.

“It’s like he’s from the future,” said Hong Lu, who began working with Son in California 40 years ago and went on to co-found UTStarcom Holdings Corp.

Son founded his own company in 1981 and began to distribute software for companies like Microsoft Corp. He then built it through a series of high-stakes bets. In a deal that would supply him with cash for other investments, he acquired Vodafone Group Plc’s struggling Japan business and turned it into a profit machine.

His fearlessness almost cost him his company. During the internet bubble, he invested in about 800 companies, vowing to create a "netbatsu," the digital age equivalent of Japan’s zaibatsu industrial conglomerates bound by cross-share ownership. SoftBank shares surged and Son’s net worth hit $68 billion in 2000, almost surpassing Microsoft’s Bill Gates as the world’s richest man. Then the bubble burst and hundreds of his investments went under. His stock fell 99 percent.

But among the wreckage, Son had some winners. He was an early backer of Yahoo! Inc. and he bet on China’s Alibaba Group Holding Ltd., which turned into one of the best venture bets of all time. He parlayed an initial $20 million investment into a stake that is now valued at more than $90 billion, or 4,500 times his original investment.

If Son was spooked by the crash, he never let it show. He continued to cut big deals, including the $22 billion acquisition of U.S. wireless carrier Sprint Corp. Last year, he made the biggest deal of his career, buying chipmaker ARM Holdings for $32 billion.

After the announcement, his stock got hammered as stunned investors fled. “It would be unfair to Masa Son if we said we were not warned that some ‘crazy ideas’ were on anvil,” Atul Goyal, an analyst at Jefferies Group, wrote at the time. “To us, the ARM acquisition announced yesterday appears largely inconsistent with SoftBank’s investment strategy ... It does not inspire much confidence.”

Son responded with an impassioned pitch. He argued this is a rare moment in history when technology’s rapid evolution provides opportunities that may never appear again.

“People think this was a stupid move, they’ve voted with their money,” Son said at the time. “It’s easy to look at where your pieces are now and place the next one nearby. This one is 10, 20, 50 moves ahead.”

That set the stage for the Vision Fund. Son saw once-in-a-lifetime opportunities, while SoftBank’s investors fretted the risks. The question was where he could find a new set of backers willing to finance his vision of the future.

Then the Saudi deputy crown prince came to Tokyo last September just as he was looking for ways to diversify his country’s economy beyond oil. The prince needed to invest billions of petro-dollars in new industries -- he even called his effort ‘Vision 2030.’

SoftBank’s Vision Fund was announced publicly in October and Son’s deal-making synapses have been firing even before the fund closed. Son agreed to invest $1 billion in OneWeb Ltd., a startup that aims to beam internet connectivity to every corner of the globe. He is also putting $300 million into WeWork Cos., a New York-based startup that rents out offices to small businesses and freelancers.

Son is raising the Vision Fund because he sees deals he thinks are even more promising than Alibaba. In his February call, he cited the leaders of the sharing economy, including Uber Technologies Inc. and Airbnb Inc.

SoftBank is behind major funding for rivals to Uber. Didi, the biggest ride-hailing service in China, last month announced its record $5.5 billion fundraising, led by the Japanese company. Southeast Asian operator Grab plans to raise more than $1.5 billion in a round backed by the Japanese company, people familiar with the matter have said.

“Uber is redefining the transportation industry now; Airbnb is doing it to the hotel industry. You can expect that to happen in every single industry,” he said in February. He has given a few details of how he plans to use the capital. It is likely to be a mixture of many investments on the scale of OneWeb with a handful of very large deals.

“This won’t be a typical fund,” he said in February. “Most of our investments will range between 20 and 40 percent, making us the largest shareholder and board member, in a position to discuss strategy with the founders.”

Son will have unusual influence over investments. He will be the only so-called key man in the fund, according to a person familiar with the matter. There are typically several people with such a designation in investment funds, which gives limited partners the option to withdraw from the fund if one of those key men leave.

Dealmakers are cautious. Ted Gooden, managing director at Berkshire Capital Corp., predicts returns are likely to decline given the excess of capital. “There is so much money in the system, it changes the industry,” he said.

Not everyone outside of Son’s orbit is a skeptic though. David Brophy, a finance professor at the University of Michigan, said the sheer size of SoftBank’s fund will give Son advantages that no other investor has. He can jump into deals that are more capital intensive than anyone else can handle and he can keep funding them longer.

“You can walk in with muscle that no one else has,” said Brophy, who is also director of the university’s Office for the Study of Private Equity Finance. “I wouldn’t focus too much on what we see in the rear view mirror. It’s more important to look ahead.”

Source:
courtesy of BLOOMBERG

by Peter Elstrom and Pavel Alpeyev

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