The $100 Billion Venture Capital Bomb

Illustrations by Max Guther

Illustrations by Max Guther

Softbank’s Masayoshi Son bets the Vision Fund — the biggest VC pool in history — on automation.

On July 11, 2016, Ian Thornton picked up the phone for what he thought was a routine catch-up after a monthlong sabbatical. He had missed a rough couple of weeks in the U.K., including the country’s shock decision in a June 23 referendum to leave the European Union, sending the pound tumbling to a three-decade low against the dollar as investors struggled to comprehend the result. Chris Kennedy, then chief finance officer at computer processor designer Arm Holdings, was about to deliver even less likely news. Arm had a takeover bid.

“Who would want to buy us? Given where we sit in the industry, we thought it would be hard for anyone to acquire Arm,” Thornton says. Arm makes money licensing designs for processors, the “brains” of a computer chip, including the kind that runs 95 percent of the world’s smartphones. Arm has been called “the most successful British tech company you’ve never heard of.” It’s growing fast, and reaping profits of about 40 percent.

The bid came from SoftBank Group, a Japanese telecommunications company best known for turning a $20 million stake in Alibaba into $60 billion when the company went public in 2014.

Masayoshi Son, SoftBank’s founder, had flown to Turkish seaside resort Marmaris a week before Thornton’s fateful call and had met with Arm chairman Stuart Chambers. Son offered an unsolicited £24.3 billion ($32.4 billion) in cash for the company, or 70 times Arm’s 2015 net income. He had pulled out all the stops for what would become Softbank’s biggest acquisition yet — selling off a chunk of Alibaba and other valuable assets to amass $20 billion in ready money. Those close to the Arm deal are still stunned by its velocity.

“The whole thing was very fast,” Thornton says. “Masa wanted the deal done quickly — I think he was worried about someone pinching us away from under his nose. He said he had wanted to own Arm for many years, and the opportunity came in.”

Illustrations by Max Guther

Illustrations by Max Guther

Masayoshi Son — Masa to those who know him — famously thinks in decades, not years. At 19 he sat down and wrote his life plan, which stipulated that by 60, his current age, he would begin looking for a successor. (He now says that he’s not ready to take the backseat.) His vision for SoftBank extends 300 years into the future, far beyond Son’s natural life, the company claims in a slideshow outlining the next three decades.

SoftBank and Arm deny that Brexit influenced the sale. If that’s true, something else compelled Son to strike fast.

Son has one vision, outlined in countless interviews: the singularity, a moment when robots with IQs above 10,000 will outnumber humans. This will happen in the next 30 years, he predicts. He is assembling multiple $100 billion investment vehicles to capitalize on this moment through massive tech investments in the companies at the vanguard of his vision. Son launched the first — the Vision Fund — a month after SoftBank’s acquisition of Arm.

At $97 billion, the current Vision Fund is the largest corporate venture capital fund in history.

SoftBank itself has contributed $25 billion. It’s not the fund’s largest investor, but Son’s company is the largest owner. Saudi Arabia’s $45 billion stake includes $17 billion in equity, against which it has borrowed $28 billion. The debt is in the form of preferred units, which received an annual coupon of 7 percent across the fund’s 12-year cycle, with other investment returns apportioned against only the equity. The money comes from the Saudi Arabia Public Investment Fund, which has its own 2030 “vision realization program” and targets returns of between 4 and 5 percent.

Other backers include Apple, Qualcomm, and Sharp, convinced by Son’s reputation as a resolute deal maker and by SoftBank’s returns. Son must deploy $20 billion, or a fifth of the fund, every year for the next five years to meet investors’ terms and their expectations in a market that many already consider overvalued. The Vision Fund’s early investments — cash injections of more than $100 million into a seemingly random range of companies, from co-working-cum-real-estate-company WeWork to Internet satellite company OneWEB to sports retailer Fanatics — have made some wonder if it’s dumb money. Son has already been branded “a one-man bubble maker.”

But there is a method to the Vision Fund’s billion-dollar rainmaking. And it began with Arm.

Son had reportedly coveted the British processor firm since before he bought Sprint, the mobile carrier, in 2012. Arm wasn’t looking for a buyer. “But if an offer comes in that’s good for shareholders and customers, we have to consider it,” Thornton says. Arm held a mandatory annual general meeting as quickly as regulation would allow, and there presented shareholders with SoftBank’s offer of 1,700 pence per Arm share, a premium of 43 percent to the closing price of 1,189p. Meanwhile, Son called the U.K. government to smooth the passage of the deal, promising to double Arm’s 4,000-person national workforce over five years and to preserve the existing management and business model.

He also called Hermann Hauser, an Austrian-born entrepreneur who in 1990 spun Arm out of Acorn Technologies in Cambridge, England. Hauser had said publicly that it was a shame that one of Britain’s most successful companies would lose its independence in a foreign buyout. “Son reassured me that he was going to look after my biggest baby, as he called it,” Hauser says. “And he also told me about the vision he had for the company.”

Son explained to Hauser that there was a big new wave of computing coming — the sixth, in Hauser’s estimation, following on from the mainframe, the minicomputer, the workstation, the PC, and mobile. This next wave would automate processes in industrial manufacturing and on consumer devices. Son said Arm could uniquely capitalize on this new order as the leading processor manufacturer behind the Internet of things.

“This is the company,” Son said in a televised interview. “No one can live on the earth without chips — it’s in cars, refrigerators, everywhere. So if chips are the things everyone needs, and one company has a 99 percent market share, there must be a barrier. They’re not monetizing well enough. But if I own it, we can monetize it much better. I think the company is going to be more valuable than Google.”

By September 5, in the minimum amount of time required by law for a takeover, Arm Holdings belonged to SoftBank and Masayoshi Son.

As part of SoftBank, Arm has rebranded its business plan to help the Vision Fund realize Son’s dream. “It’s very much about bringing the future forward,” Thornton says, feeding me the line with a straight face. We’re in the bright food court of a building at the Arm campus in Cambridge. Construction vehicles clog the roads around the campus, working to erect huge new offices as SoftBank comes good on its promise to double the number of employees.

“The time horizon of Masa and his team is way beyond the shareholders I used to have. It used to be one to two years; they could hold that in their heads. Maybe sometimes we thought about what would happen in five years. Masa has no interest in that short-termism. Ten years is the shortest unit of time he can think in. It is stepping-stones of decades.”

Arm has started spending money on one multistory campus building, securing permissions for another, and recruiting its next 4,000 engineers. “We need to get our tech into every chip on the planet,” Thornton says. Aside from its 95 percent domination of smartphones, Arm has 34 percent of the global processors market. There are currently 110 billion Arm processors in the world. The company has forecast a total of one trillion by 2035. As the applications get more advanced — be that a car, a washing machine, or a drone — they demand smarter processors, which are more expensive to produce in-house. “We price our fee at a tenth of the cost of what it would cost to develop it yourself,” Thornton notes. “So when you’re staring down the barrel of $100 million and ten years to develop that processor yourself, we can say it will cost $10 million from us and you can have it instantly. This is why we have expanded so rapidly over 20 years. One by one, design team by design team, we will become the processor of choice in those markets.”

That puts Arm in a cat-and-mouse chase to develop the next-generation processor ahead of the applications that will use it.

Warren Buffett used railway data to forecast structural changes to infrastructure. Likewise, SoftBank taps into Arm to time investments in Internet companies. “Arm Holdings has an insight into the future,” says Mitsunobu Tsuruo, a credit analyst at Citigroup in Tokyo. “When Arm makes a contract with a new business venture, providing the Internet of things for automobiles or farming, Arm will know what is in the pipeline for the Internet of things two years ahead.” SoftBank, in turn, gets a head start on funding companies for a market that doesn’t yet exist.

The Vision Fund is taking shape around Arm. In December 2016 president-elect Donald Trump appeared in the lobby of Trump Tower with Masayoshi Son. “He’s one of the great men of industry,” Trump told the assembled journalists. “He’s just agreed to invest $50 billion in the United States and 50,000 jobs.” A smiling Son held a piece of printer paper showing the names of two companies, Foxconn and SoftBank, up to the camera. According to Tsuruo and Citigroup, Foxconn, a Taiwanese electronics company, plans to invest a further $7 billion in North America and create 50,000 jobs separately from SoftBank, some at an LCD panel and TV assembly plant.

Analysts say SoftBank, which declined to comment for this article, is at work on vertical integration: Foxconn builds devices, Arm supplies the chips, and SoftBank-owned Sprint and OneWeb, an Internet satellite company, operate the networks on which the devices run. Vision Fund portfolio companies will reap the benefits of these partnerships. SoftBank sits in the middle, introducing high-growth prospects from the fund to one another and to the infrastructure on which their success rides.

SoftBank has assembled a crack team of bankers to manage the investment side of the fund. Details of hires have emerged in piecemeal fashion since the fund’s inception, with officials confirming the news. Reports suggest that about 20 staff members work at the Vision Fund headquarters in Mayfair, London. The Vision Fund team is led by Rajeev Misra, an India-born investment banker. Misra is best known for recruiting risk-hungry traders like Greg Lippmann to Deutsche Bank’s derivatives business before the financial crisis. (Lippmann was later played by Ryan Gosling in The Big Short.) He has filled Vision Fund’s desks with ex–Deutsche staff, including Akshay Naheta, a former proprietary trader; Saleh Romeih, a former managing director; and Colin Fan, a former co-head of investment banking who rose to fame for a leaked internal video of him telling younger staff not to be boastful.

Yet the fund’s portfolio companies can seem random. What does Fanatics — a sportswear supplier noted for its rapid turnaround of branded gear for Hurricane Harvey relief efforts — have in common with Plenty, an indoor farming start-up? One thing: data.

“Our investments in ride-sharing companies, from Uber to Grab, are really not about moving people from place to place,” Vision Fund managing director Jeffrey Housenbold told a cross-border venture summit in November. “It’s about the data from that and what downstream businesses can you be in if you own the data.” Computers cannot learn without data. Unlike humans, they need numbers to make inferences and predictions. Once they have it, their analytical capacity far surpasses ours. Son once told an interviewer, “Those who rule chips will rule the entire world. Those who rule data will rule the entire world. That’s what people of the future will say.”

But Stephen Hawking has said the singularity could be the “worst event in the history of our civilization.” Elon Musk has warned of a computer-initiated third world war and said that humans will have to merge with machines to stay relevant.

The Vision Fund model anticipates benevolent digital dictators. Our intellectual superiors, Son has said, will be too smart to allow wars. “If you look at mankind in history, people were killing each other every day. But now we don’t have that in everyday life. So if the robot is more intelligent than humans, it will see that fighting is not an efficient way of living. Harmony is more efficient,” Son explains. It’s a deeply human conclusion drawn using his own brainpower. But who’s to say? Perhaps the Vision Fund is bankrolling a Zoloft-dispensing mediation bot in the bowels of Foxconn.

The term “Internet of things” irritates Ian Thornton. “It’s the word ‘things’ I don’t like,” he says. “If you describe anything as ‘stuff,’ it tells me you probably don’t understand the market you are looking at.”

Clues heralding the singularity are starting to appear within the Vision Fund. AI-centric markets are crystallizing in health care and self-driving cars. In May the fund led a $360 million round in Guardant Health, a cancer detection start-up, followed by a $1.1 billion August injection into Roivant Sciences, which licenses experimental medicine. It’s making inroads into the smart automotive market as well. In July, SoftBank led a $159 million series B funding round for Nauto, a vehicle tech company developing deep-learning algorithms. There’s also a billion-dollar bid for an Uber stake on the table, and SoftBank has stated interest in Lyft.

This $100 billion tidal wave has been anything but subtle. Slack raked in $250 million in a recent Vision Fund–led fundraise, resulting in a $5.1 billion valuation for the workplace-chat program, making it one of the highest-valued private companies in Silicon Valley. Bradley Rowbotham, a private markets research analyst with NEPC Consultants in Boston, describes the Vision Fund as a boulder that has been dropped in a body of water. “The ripples are still moving through all the smaller venture ponds.”

Smaller funds risk getting bumped out of rounds or having to pay more to stay in, Rowbotham says. On the contrary, Vision Fund could ease pressure on the market by providing liquidity. Softbank tends to invest in late-stage private companies with strong market presence and high valuations. Some may have held off on initial public offerings, fearing valuation busts like Snap’s and Blue Apron’s. Private market investors appraised the meal-kit company at $2 billion in 2015, for example. After six months of trading under the ticker APRN, the ex-unicorn had a market cap of $580 million at the end of November 2017. Other than in a single quarter of 2016, Blue Apron has been a money-losing business. Stock markets show less patience, or optimism, for overgrown start-ups’ prospects than does Silicon Valley. Rowbotham’s colleague Tim McCusker sees the Vision Fund as a $100 billion lifeline to existing equity holders in overvalued companies. “As a lot of unicorns extend their time to go public, an offer by SoftBank can be a good way of getting out.”

McCusker, a partner at NEPC, doesn’t think SoftBank is creating a bubble on its own. But that big-spending behavior — combined with signals such as indiscriminate pricing and euphoria elsewhere in the market — could indicate the beginning of one. “The last two years were a really important reality check [with the] drying up of IPOs,” he adds. “There was not a correction, but a reset of any move toward a bubble.”

SoftBank has discovered as much. A month after it invested, Roivant got the devastating news that its much-hyped Alzheimer’s drug, interpirdine, doesn’t work. Shares plummeted 75 percent on the news. The Uber deal has been mired in share-pricing complications and rocked by revelations of a huge, previously undisclosed data breach and the cover-up that followed. The size of the fund and its investments magnify these pressures. “I would be very surprised if they didn’t make stupid mistakes,” says Hauser, Arm’s founder. “The only difference is if they have a success, it will be much bigger.”

Hauser’s venture capital firm, Amadeus Capital, has felt the Vision Fund’s ripples. It was an early investor in a virtual reality start-up called Improbable, which received $502 million from Softbank via the Vision Fund in May — the largest-ever financing round for a British company. “It was a very exciting development. It gives Improbable a chance,” Hauser says. “This is a new option that high-tech companies have rather than going public. In that sense, it’s a welcome contribution to the financial world.”

Thanks to SoftBank, Arm doesn’t have to worry that its 40 percent profit margin is expected to halve in 2017, halve again in 2018, and then sit in single digits for a number of years. After its rapid expansion, Arm will need two to three years to develop the next wave of processors and another two to three years for clients to build a computer chip around Arm’s designs. Thornton says it’s possible that the margin won’t grow again for eight more years. “We could not have done that as a listed company,” he says. “Imagine saying to shareholders that we’re going to take a profitable company and turn it into one that makes no money at all. That’s the bringing-the-future-forward bit. Now we don’t have to worry about the present so much.”

Yet there are already signs that Son would like to take Arm public again eventually, and that he is eyeing returns on a level with the $60 billion windfall that followed the Alibaba IPO in 2014. In a televised interview with Bloomberg, Son explained how he convinced the now–crown prince of Saudi Arabia in 45 minutes to invest $45 billion in the Vision Fund by promising him huge returns. “Here’s how I can give you a $1 trillion gift,” he said he told Crown Prince Mohammed bin Salman. “You invest $100 billion to my fund, and I give you $1 trillion.”

Those returns will depend on the Vision Fund’s ability to accelerate the singularity at a time when many executives say it is coming more slowly than expected. So far, fewer than one in ten companies surveyed by Arm and the Economist Intelligence Unit say they have implemented the Internet of things in a meaningful way.

“I have no reason to believe that they are any dumber money than the rest of us,” Hauser says. “But the real great success stories in tech take a long time to mature. There is a saying in this business: Lemons ripen early.”