Season 2, Episode 4: SoftBank, Fortress and the Vision Fund

0:00 I don't know. I don't know if it's two and twenty or lower. Um But even if it's lower, it's just such a huge amount of money that like it's a I have a lot of thoughts here. Mm-hmm. Welcome to season two, episode four of Acquired. the podcast about technology acquisitions and IPOs.

0:31 I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today we are covering an acquisition that has forever changed the world of venture capital, private equity, and emerging technology companies forever. I think I said forever twice there.

0:46 Softbank buying fortress. It's so forever. It's doubly forever. It's double forever. And of course the subsequent creation of the Softbank Vision Fund. And we will tie up the connection between those two things. But before we dig in Too far.

1:02 David, I just need to say congratulations on the big news this week with the formal announcement of Wave Capital. Uh thank you, Ben. Thank you, Ben. It's Nice to uh, as uh one of our listeners pointed out in the slack, not have to be Totally coy about what I'm doing anymore. We're excited and uh it'll be fun to build wave over the next couple of years. Who knows? Maybe in, you know, a couple of years we'll be bigger than Softbank. That is not the vision here. Awesome to uh you know have that news be out and uh I'm sure we'll have lots of good opportunities to use that perspective to pepper in good thoughts for future episodes of Acquired. Indeed.

1:43 A little bit of business before we uh we move into the show. If you're new to the show, you can check out our our Slack at acquired.fm. I just checked and we're over twelve hundred people, so come join us and talk about any big tech news that's going on, suggest episodes for us and chat with other people who listen to the show. All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chat bot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

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4:21 So David, the Softbank Vision Fund. Well, first off, what is SoftBank? So Softbank, if there's one big takeaway from the episode, Softbank not a bank. It is a conglomerate, uh Japanese conglomerate, uh founded in in nineteen eighty one. mostly focus on telecommunications businesses.

4:41 and actually originally a PC software distributor in Japan. Indeed. We might just get into that. We might. We might. So they're gonna buy Fortress. We're gonna talk all about that. They they just started this vision fund. Presumably you've heard people talking about the the vision fund. I'm sure down in Silicon Valley that occasionally comes up. You know, it's uh it's not really a big no, actually this is like the only topic here. You can go like you literally cannot walk into a coffee shop in San Francisco or Silicon Valley without hearing somebody talking about the vision fund. And Soft bank and it's uh Iconic founder, Masyoshi Sun.

5:17 And in SoftBank, is this just relevant like to you as a VC? Is this like do you hear uh other folks talking about it? Does it have repercussions outside of just being a venture investor? Well, so the vision fund is currently 93 billion dollars. uh can go up to a hundred billion dollars. It is the largest fund ever raised by anyone in the history of mankind across the entire world. And largest by a factor of like five. Um this is literally Not just the largest spenture fund, but pretty game changing in the entire investment world. You may have heard of Softbank in this recent news of the the tender for Uber shares. A Softbank just bought of Uber. Um they've also made multi hundred million or billion dollar plus investments into We work, DoorDash.

6:07 Wag slack. And all very, very recently. Like these these deals are happening fast and they're huge and they're they're changing everything. Which is why we're here on the scene. And it just so happens that a key part of all of it was an acquisition. if we want to really pat ourselves on the back for timing, which we we really can't do. We actually have a content calendar now and and we don't know when these things are gonna happen, but SoftBank did just announce that they are moving Fortress and the Vision Fund under one roof. Uh they they just announced that this past week And so

6:36 Today and acquired, we will we will rewind history and and cover the acquisition of of Fortress and how that plays into this whole vision fund thing. Should we do it? Let's do it. All right. Well We're doing a little bit of a switch up on history and facts here. We are we are gonna cover Fortress a little bit farther on, but

6:57 Uh, since this is the Softbank Vision Fund, you really can't talk about any of this without starting with Soft bank, but first it's Really iconic founder. who isn't as well known in the US and the West as as he should be, although that's changing quickly, but Masayoshi san, or Masa as he goes by. He's a pretty interesting character.

7:21 So he was born in nineteen fifty seven. In Japan. Uh not in Tokyo, but on the island Kyushu in the south of Japan. His father was a fisherman. And they were relatively poor. The family, they were Korean immigrants in Japan. So Masa's grandparents were all Korean uh and immigrated to Japan.

7:43 That was Not a great situation in Japan. Uh Japan has always had a very complicated relationship with uh both Korea and China. When Masa was growing up, the Japanese government actually mandated that all Korean families in Japan had to change their surnames to be Japanese. So they had to essentially like reject their identity. Um and this happened when when Masa was was young. So this family changed their name from their surname from San to Anmodo. Real quick, David, is this like a thing that you knew about culturally before doing the research, or is this a part of your research process?

8:19 No, I did not know this beforehand. But Masa talks a lot about this, so this was like really formative to him. There's a great uh we'll link to it in the show notes. He goes on Charlie Rose a couple years ago. Charlie Rose is a little bit of a uh controversial character uh himself now with uh Some of the sexual misconduct allegations, but this interview with Master is really great. He talks about His childhood and how much it shaped him. So through all of this, though, even though growing up, you know, son of a fisherman in uh rural Japan and the island, uh His parents really encouraged him and told him that he was gonna be Great. He was really precocious. He was gonna do great things.

8:53 When he was a teenager. Th there was a guy in Japan who was the president of McDonald's Japan, and he had written a book, a business book, and and Masa got a hold of it. He read it and he was super inspired. He decided he had to meet this guy. And so he started calling his office, got a hold of his secretary, and kept calling like Time and time again, saying, I need to come, I need to meet with him. And he said, You know, the secretary said, No, you're not gonna meet with him. Finally, Masa flies to Tokyo, just shows up in the office to meet with this guy and says, I'm not going home until I get to meet with him. He does. He's sixteen years old at the time. Finally the guy says, All right, I'll let you in, I'll I'll give you fifteen minutes.

9:37 And this guy tells him. Two things. Masa asked for his advice. You know, what would you tell me as a young sixteen year old here in Japan? He gives him two pieces of advice. He says one Learn English. And two, study computers and computer science because that's the future. Which is advice that you get today. Not advice that you would have gotten, what, in the the sixties and seventies? This would have been the mid seventies. Uh

10:02 Yeah, pretty crazy. This guy was was pretty present. Uh Masa, as you can imagine, knowing this little bit about him so far, he not only takes the advice to heart, within like weeks He moves to the US. His family has no ties to the US and moves to the Bay Area.

10:18 ends up finishing high school in the Bay Area. goes to university here. He goes to uh he does two years at a college uh called Holy Names University, and then he transfers to UC Berkeley, where he majors in economics and and computer science. So he's just going and and and it's all of this is because he wants to follow in this guy's footsteps. He wants to be a businessman. He wants to start companies. So while he's at Berkeley after he transfers there. He does two things. One, he convinces one of his professors to start a company with him.

10:48 Um it was a physics professor, and they make an electronic uh translator, the language translator, and then they sell it within a year to the Japanese conglomerate Sharp for one point seven million dollars. Uh remember this is back in like the late seventies, so and a student. Like what an awesome thing to do as a student. Yeah, I mean a couple years ago he was, you know, in a fishing village in Japan. And then the other thing he does during this time, uh partially with the proceeds from that sale, he starts importing space invaders arcade machines from Japan. to the Bay Area and to the Berkeley campus. Uh and supposedly, according to Massa, he makes about one and a half million dollars from Presumably more money than his share of the sale. Yeah. Totally. Totally. This totally reminded me of um Of uh Tony Shay and Alfred Lynn and uh and the Zappa story and selling pizza.

11:43 Pretty crazy. So by the time Masa graduates in nineteen eighty from Berkeley. He's already a multi-millionaire. And so he decides he's gonna go back to Japan. Um in in the interim, he actually first he starts another company called Unison that gets acquired quickly by Keosera, um, which I believe is a Korean company. Unclear how much money that one was for. Masa doesn't talk about that one. But he decides he's gonna come back to Japan. He's made, you know, a little bit of a mark. He does Does two things. Decides two things. One

12:14 He's gonna change his last name back to San. He's done with the you know, Japanese name that uh his family had adopted. He wants to he talks about this. He wants to he feels like he's living a you know false life, he wants to be himself, be his true identity, um, and be known as, you know, for what he is. And two, he decides I'm gonna start another company, but this one is going to have an enormous impact. So he moves back home. He literally lives at home, uh lounges around for about six months or so. and decides to start a company and calls it SoftBank.

12:47 Why Soft Bank. his business plan, what he wants to do is he wants to be a distribut of software. In Japan. And this is back in the day, you know, software, you know, there are no CD drives. Like these come in packaged boxes that you buy in stores. You know, in a zero distribution cost world, we tend to devalue distributors in our heads. Like that doesn't strike you as a huge business. That was an essential part of the value chain that was there there are a lot of economics in there in a pre internet world.

13:15 Yep. Without distributors, without retail, uh, and without B to B distribution of software on, you know. floppy discs. Probably like not even the three and a half inch floppy disks, probably the big truly floppy discs at this point. You know, you can't get software onto your onto your PCs. So so he starts that and he also realizes that Part of succeeding in in distribution is you also have to be in the publishing game.

13:39 And not just publishing. software but but actually publishing content, uh so that people discover software and want to buy it. So he starts publishing PC magazines uh First in Japan. realizes that that's actually a really interesting business itself. And that goes pretty well and he decides he wants to start to expand. And he wants to get in particular, he wants to get back into the US, where he, you know, was educated and and knows how much

14:07 Innovation is happening in software there at the time. So he does we're now into the kind of mid nineties. He does he does two things. First he buys Ziff Davis, which is the publisher of PC Week and a whole bunch of other stuff. Uh, and I totally remember reading these magazines back in the day. So Softbank acquires Ziff Davis, and then he also acquires uh Comdex. Comdex, yeah, an organization called Comdex, which was like the

14:34 That was computer show. Yeah, it was like the computer show. If you were into computers and you were a a distributor or a creator, like You know, if you're actually have you seen Halt and Catch Fire, David? The TV show. No, I've heard it so good. It's it's awesome. One of the big moments in the show is the first sort of demo at Comdex. You know, I think this predates both you and I, but i if you were into computers in those days, That was where you went to check out all the new stuff. Totally.

14:59 Yeah, like the South by South West or You know. what have you of uh of a C S, E three, all of it like rolled into one. There was all there was in the tech industry because it was all PCs. So he's now got this kind of empire going. And this is the mid nineties.

15:15 He's starting to see the internet is coming to. Uh and let's shape let's shape this empire. It's a little empire of of PC distribution and media and events about PCs. Yes, in Japan and now in the US. He starts to see that the internet is coming. And there's gonna be a big opportunity to invest in lots of companies that are gonna create new businesses on the internet. So what does he do?

15:38 He starts a VC firm, a US venture capital firm. Under Soft Bank name. And he hires a brings on a few partners to be the partners and investors locally in the US at this V C firm. Do you know, Ben, who one of those partners was? Brad Feld.

15:59 Of Foundry Group. And uh Listening to Brad is uh Brad is of course at at Foundry Group and uh Foundry's an investor in PSL and uh uh and wave as well and uh so Mobius, which was the firm that um he was that he started before Foundry Group, um and where uh most of the Foundry Group partners have worked together at Mobius before

16:22 That was basically a spin out from SouthBank. Ah and uh and a number of them had first started working together at SouthBank. Got it, got it. And I believe B Brad can correct us here, but I belie Brad's first company that he started in Boston, uh, out of MIT, was a software publishing and distribution company. And I believe SoftBank acquired it, and then that's how he got in. Uh well into V C. We'll have to have Brad on the show and uh and give us some of this history. That's awesome. Totally. So fun aside, so so

16:53 They start this US V C firm. And these are the go go years of you know the late mid to late nineties internet. Both the USVC firm and SoftBank itself, corporate, invest in. Tons of companies. They end up taking stakes in about eight hundred companies uh across the world. And one of those companies is Yahoo. So Masa, when he's in the US at one point in time, he ends up meeting Jerry Yang right as they're getting started, and SoftBank invests a small amount in Yahoo. I don't know if it was alongside Sequoia or before or after

17:28 But they become a major shareholder in Yahoo. They end up investing about three hundred and fifty million dollars in Yahoo. And at the time of the IPO, Softbank is the largest shareholder in the company. And they and they started Yahoo Japan, right? And together the yeah, Masa goes and and proposes to Jerry. W Yahoo, what you're doing in the US, like

17:49 You need to do that around the world too. Why don't we start Yahoo Japan together? So they do that as a joint venture. it becomes hugely valuable, ends up IPOing uh in Japan itself. And is a huge win for software. So you can start to see like some of what they're doing with the Vision Fund. It's kinda like What's old is new again. They've been doing this all along. They actually they approach Amazon. They want to do the same thing with Amazon, apparently. And Bezos rejects them because uh because Massa and Softbank want too much of the of the J V of the combined company in Japan. It strikes me that that Bezos says, What do you mean that's my opportunity?

18:24 Yeah, exactly. Exactly. So this is crazy. And and I knew I knew a little bit of this history before I started diving in and doing the research, but This actually is shocking. So this is all going, you know. so well during the during the internet bubble. For a brief moment Massa actually becomes the wealthiest person in the world. He passes Bill Gates. Softbank's market cap goes up to almost a two hundred billion dollars, and they've got the stakes in all these companies. Bubbles do crazy things to uh non liquid stock. Indeed. Indeed. And uh So apparently he's like vying with Bill Gates through all this to be the world's wealthiest person. Bill comes over and visits him.

19:06 in Tokyo. And Masa had built this is he he tells the story on on Charlie Rose and elsewhere. He had built in his house, in his mansion in Tokyo, a golf simulator in the basement that was like So not just like uh you know, like video golf, but like had uh simulated sea breezes and like ocean sets and like all this stuff and simulated light and apparently Bill Gates is like blown away. I mean this is the point in Bill Gates' life where it was like uh famous that he had the Pictures on his walls.

19:39 Yep. Like that's that's right up his alley. Yep. Unfortunately though for Masa Shortly after he passed Bill, uh The bubble burst.

19:49 And then Masa gets another um Infamous distinction. I believe this is still the case. as a single person lost the most amount of money that anyone has ever lost in history. So his personal wealth within a matter of weeks during the bursting of the internet bubble

20:10 uh fell by seventy billion. Seven zero billion uh in two thousand one. It's like the GDP of a small country. Yeah totally, totally. It's like, you know Seven tenths of the vision fund. But he he learns a couple things from that. And uh you know, ever the uh resilient individual, he's kind of more determined than ever to come back. Uh, but what he learns is that and what he decides after that is that Cash flow and profits are very important in businesses. I mean

20:44 Notoriously part of the problem with the whole of the internet bubble was like There wasn't even certainly not cash flow, not even revenue at a lot of these companies. And so Massa kinda learns the lesson. He's not gonna do that. He decides to pivot SoftBank at this point away from Just being a

21:00 uh software and uh company and tech investor. into more infrastructure. He gets really interested in infrastructure because he's He he sees the sort of attractive cash flow dynamics of it. And specifically what he does is he gets into broadband. in Japan. So this is when broadband is like, you know, becoming a thing and people aren't using dial up anymore. Um, and Japan was particularly advanced. And we should say one other thing that happened during this time in two thousand, still kept doing some early stage investing and and one of those uh investments was a a twenty million dollar. We're coming to it. Cliffhanger, cliffhanger. He doesn't he doesn't stop the investing. But so he gets into broadband, he buys Japan Telecom.

21:43 And then starts investing in broadband. Sees that uh I I promise I'm gonna come back to the investing in a minute. But uh but this is Actually, I think an even better story. He starts seeing that mobile is gonna be the future. And this is the thing about about Massa. Like he's very bold, but he's always thinking like a couple years in advance. So like mid two thousands Japan, you know, mobile telephones are much more advanced than anywhere else in the world. But it's still not like what we think of as mobile today. It's kinda like halfway there. He decides that

22:13 Mobile's the future of the internet. He wants to get in on it. And what's the best way to do it? He thinks he needs uh he's not in mobile at all. He's only in wired broadband at this point. He thinks he needs like a game changing really device to do this. So he flies to the US. And he meets with Steve Jobs. This is in like two thousand five, two thousand six. What Yeah. So Masa he's thinking about how he can enter

22:40 the mobile, you know, telephone world. he decides that he needs a a game changing device. He decides the only person in the world who could develop such a device would be Steve Jobs and Apple. So he comes over, he meets with Steve, this is like 0506. Apparently he brings a drawing that Masa himself had had made. A drawing of an iPod with a phone in it. It's like uh apparently like the Tony Fidel version of the uh the iPhone. No way. He did that he made the P one. He made the P one. He made the P one. He comes he sits down with Steve, he meets with him and he's like

23:14 I wanna get into mobile. I need a great device. You should make it. I have a drawing for you. And meanwhile Apple's in the like in the midst of this head to head internal competition, what, twelve months away from launching the iPhone. Totally. And uh and Steve apparently laughs and he's like, I don't need your drawing. Like you think we're not working on this? Uh and Massa's like, Fine, I don't care. Like if you make this, I wanna be the first. And Steve's like, This is Hilarious, you know. Nobody knows we're working on this, but we are. But because you came to see me and you said you had such uh

23:48 Hut uh you know, show me a drawing. Uh I'll work with you on it. So, you know Let me know what you need. But you know, we need a mobile carrier. And Mass is like I got it. Give me like a couple give me like a year. So he goes back to Japan.

24:03 And he orchestrates a deal to buy Vodafone Japan, which is one of the largest, was one of the largest mobile carriers in Japan, like ATT or or Verizon or Sprint, but he doesn't have the money to do it. So he he goes and he raises like 20 billion dollars in debt uh financing from the capital markets. And in particular, he raises I I believe most of it from Deutsche Bank from a guy named Rajiv Misra at uh Deutsche Bank, who's gonna play come back into the story in a little bit. He ends up buying Vodafone, knowing in his back pocket that when the iPhone does come out, he's got this handshake agreement from Steve to be the exclusive provider in Japan. That's in two thousand six. iPhone obviously gets announced in two thousand seven, goes on sale in the US.

24:50 And then in two thousand eight, the newly renam Softbank Mobile, which was Vodafone Japan was becomes the exclusive carrier of the iPhone in Japan. And this lake is Huge. Uh they triple their market share. Japan falls in love with the iPhone. Three D chess, David. Three D chess. Totally. Totally. All because of that drawing. So this is arguably at this point the greatest thing that's, you know. happened to Softbank. Huge comeback from having

25:19 had the infamy of losing more money than anyone else in the world. And then actually later in two thousand thirteen he tries to get into uh US mobile carriers, they buy Sprint. Um, so Softbank owns Sprint, um here in Sprint here in the US. And Holy, right? They're a hundred percent owned subsidiary. Uh I think at first they bought like seventy three percent or something like that. I don't know if they now own a hundred percent of it. But they certainly own a vast majority of the stake. But There's this other little thing that happens over the over the interviewing years that uh Ben you were referring to.

25:51 And that was that All the way back in uh it actually was in 2000, so it was before the tech bubble burst, Masa made one other of the eight hundred investments that he made. He put twenty million dollars into a company in China called Alibaba in the year two thousand. Fourteen years before they IPO'd. Fourteen years before the IPO. So

26:13 Fast forward to twenty fourtine. Alibaba goes public in I believe the largest IPO Ever. Definitely one on our list that we're gonna have to cover. And when that happens That stake that SoftBank owns in Alibaba is now worth sixty billion dollars in Liquid publicly tradable securities on the open market.

26:36 And that really Is a combination of all these things. Uh But I think it's really that that leads to the vision fund. All of a sudden SoftBank has Sixty billion dollars. That they've done in tech investing.

26:48 in liquid uh securities. And that happens in twenty fourteen. Is my math right there that that's a three thousand X return? On twenty million dollars. It's uh

27:00 uh uncalculable. And people talk about this as like um This may well be lots of people reference this as the best investment of all time when we did the the next acquisition, uh the Apple acquisition of next, you know, we called it the the best acquisition of all time that created a trillion dollars in market cap. I think that twenty million dollar investment might be the single best uh investment anyone's ever made. Hm.

27:27 Do you know if that's how The Yahoo Alibaba relationship got started. Do you know if there's a a tie in here? There definitely is. So I didn't research the exact timeline. So I don't know if it was Jerry Yang who first met Jack Ma or if it was Masa who first met Jack Ma and invested. But both of them, both Jerry Yang and Yahoo and Uh Ma and Softbank invested in Alibaba.

27:51 And that was uh you know famously a huge part of Yahoo's market cap when Alibaba went public was the The Alibaba shares. Yep, yep. And A couple of years before Yahoo ended up getting sold off. They sold half of their stake in Alibaba before Alibaba went public, uh at a much lower valuation than when they did go public. You gotta have Massa's conviction to hold, man. Totally. I mean this guy is like like if it wasn't clear already, like uh

28:21 He's a pretty amazing character. Yeah, he's like the Jeff Bezos and Warren Buffett of Japan like rolled into one. Feels like a guy that should deploy a hundred billion dollars. I don't know. Well, if anybody can do it. So today Massa is the richest person in Japan. And so he has accomplished his uh that wasn't explicitly his goal, but when he started SoftBank, he wanted to make an impact. And he is the thirty ninth richest person in the world. As of January, his personal net worth was estimated at about twenty two billion dollars. So still not the 70 that it once was. But still pretty amazing.

28:59 After that IPO of Alibaba in twenty fourteen. They now have All of this capital. It's taken a long time, but they've been very successful at being investors. One thing that is worth noting is they don't always work. Like they bought Sprint, but Sprint hasn't hugely grown in value. They're good investors. Uh you know, they they also had a huge return on on buying some supercell shares and and selling to ten cent, but sprint isn't anything to write home about. It doesn't it doesn't give you, you know, tens of billions of dollars on which to go and raise the largest fund in history.

29:30 Nope. But if you have sixty billion of your own, that gets you a long way. So a couple things. In twenty fifteen. They bring on a guy named Nikesh Aurora, and Nikesh had been an early Google employee, and he was the chief business officer at Google. So he was in charge of building all of Google's ad business over the years, and he was essentially head of monetization. They hire him away at Softbank, he becomes the president and COO. And he's very explicitly like next in line to kinda take over for Masa when Master retires. Masa's in his uh late fifties, early sixties at this point.

30:08 The cash and and then they get, you know, they have all this this capital. Now from the Alibaba IPO. Nikesh. is originally from India before before he came to the US. He starts investing in India growth companies. So like twenty fourteen, twenty fifteen, there was a big um Well, in retrospect really kind of bubble of tech startups in India. Companies like Ola and Snapdeal and Flipkart. Wait, did you just say Snapdeal and Flipkart, David?

30:34 Uh uh Softbank invested in Snapdeal, but not Flipkart. I think they actually did. So I think I think kind of a crazy thing is one thing they're willing to do is is cut and run, or at least invest in a competitor. So Snapdeal wasn't going the way that they were hoping it would go. Later on in the Vision Fund in in April of twenty seventeen, they put four billion dollars into Flipkart. Oh wow. Wow. Uh but that was via the Vision Fund. Okay, so that hadn't happened just yet. Right. in these companies in India. So yeah, I should take that back. May maybe that's not fair. Maybe a better assessment is, you know, that was a it was a a different entity, a different vehicle. Yeah, interesting. Interesting.

31:12 Although it is part of The Vision Fund's reputation now. And Nikesh when they hired him, they paid him his contract was he got paid two hundred million dollars over two years. He was the highest paid executive in the entire world. You know, when Massa does something, he goes big. David, it's not that much money'cause it's tranched out over multiple years.

31:33 Yeah, two. Uh but as you were alluding to Some of these India investments don't go so well, particularly Snap Deal. And the relationship kinda sours between Nikesh and Masa, uh, supposedly for a bunch of reasons. And Nikesh actually leaves in twenty sixteen. And so now there's kind of this hole of Massa's

31:55 you know, still has this huge vision for soft bank and investing, but the guy who was gonna run it is no longer there. No. Flashback to right after right around the same time as the Alibaba IPO. Rajiv Misra, who I had mentioned earlier,

32:11 had been at Deutsche Bank and had helped orchestrate the debt financing for the uh Vodafone Japan acquisition, Massa had also lured him away and hired him into soft bank as head of strategic finance. Rajiv is from India, but London based, is that correct? Yep, based in London. Yep, also from India. And then Rajiv uh worked on Uh what

32:34 I believe was and still is Softbank's largest acquisition, which was the UK company Arm Holdings, the designer of mobile phone chipsets. Which ultimately got done in 2016 for thirty-two billion dollars. So that was what Rajiv worked on for his first couple of years. And so kind of simultaneously as Nikesh is leaving the company and Rajiv has just had this big success. It's worth pausing for a moment there. It's interesting to look at prevision fund softbank, uh what they're doing in this era. They're really building out different pieces of the mobile value chain. So they've got the commerce layer with Alibaba, they've got the telecommunications layer with Sprint and with uh SoftBank Japan. They're buying the technology that is the design for the chipsets of every mobile phone today, um, all the way down at the hardware layer. It's a very clear play on we want to benefit from every piece of the value chain on what we see as the future and it is mobile.

33:31 Yep. Well and it really gets back to that vision which will quote unquote that Massa has after the bursting of the tech bubble of getting into infrastructure, getting into cash flow businesses, and you know, what are sort of like the Amazon tax, like what are the What are the elements of this massive market for mobile? What are the elements of the value chain that are, you know, just as mobile grows are going to be taking a tax, you know, on the industry? And it's chip design, it's the carriers. It's commerce and Alibaba.

34:02 Um, it's all of these things. So they acquire arm, and And then immediately after that, uh another interesting meeting happens. Masa so Masa and Rajiv are starting to think about Nikesha's out, they're starting to think about like How can we really systematize this investing that we're doing and really build something large? And

34:23 Masa ends up having a meeting in twenty sixteen with the deputy crown prince of Saudi Arabia. Who's in charge of running uh Saudi Arabia's sovereign wealth fund. That's an amazing title. Total The Deput Crown Prince. I want business cards that say that. Yeah, totally. It's like the famous uh Mark Zuckerberg CEO of business cards. Which I don't think we can say on the show and keep our clean rating. No, I don't think we can, but uh You should go watch the social network if you haven't already. So Masa gets this meeting in Tokyo

34:59 With the deputy deputy. Apparently it's a forty five minute meeting. And by the end of the forty five minutes, Masa has convinced the crown prince to invest forty five. Billion dollars. That's how mine always go. A a billion dollars per minute. Yep. Yep, exactly. I mean that's really how it went at wave. Uh not quite. So by the end of this meeting, they have a commitment from the public investment fund of of Saudi Arabia to put forty five billion dollars into a new technology and global technology investment fund.

35:33 that SoftBank is gonna start and that Rajiv is gonna run. And that's the beginning of the Vision Fund. So Softbank itself commits twenty five billion on top of the forty five From Saudi Arabia. So that gets us to seventy seventy billion. That's a heck of a general partner commit right there. Totally. Yeah, we did the same at wave. No, not not not even close. And then they announce at the end of twenty sixteen that they're gonna create this fund, which is already the largest ever. They're targeting a hundred billion dollars for the

36:07 Total fun size. They do the first close in May of twenty seventeen. They bring on uh Mu Mubatala, which is the sovereign wealth fund of the UAE. Uh, they bring on Apple, so Apple invests a billion dollars into the fund. Sharp, I think, is another billion dollar uh investor. Investor, yep, uh as is Foxconn um and Qualcomm as well. Three billion from Qualcomm. Yeah. I think Lar Larry Ellison's family office.

36:34 It's a pre. Pretty nutty lineup. It's it's Totally nutty. And so the first close is down at ninety-three billion. Um, so they still can raise up to a hundred, but uh, but they have ninety-three billion that they've closed on. As I mentioned at the top of the show, this is like like the largest fund ever raised

36:51 In any other asset class, private equity, hedge fund, real estate, what have you is like twenty billion dollars. So This just blows it out of the water. And it's worth thinking through too, like seed funds will be, you know, thirty to a hundred million. Um, you'll have your sort of early stage funds that can typically or traditionally go up to two, three hundred million. You've got these these funds that go across stages that, you know, people three years ago were talking about how quote unquote crazy it was that you were having these new billion dollar venture capital funds. And you know, your Andrews and Horowitz's and your Sequoia's, and then this happens. Even when if you look all the way up at huge private equity firms like KKR, they manage a hundred and sixty eight billion, but that's across a ton of funds. That's happened over decades and decades and decades of of sort of building reputation and risk models and sort of an understanding of what the types of investments they're gonna make. I mean, this is this is so unprecedented

37:44 By an order of magnitude. Yeah. And the other really interesting thing, so the term of the fund. So what's in the um charter of the fund for how long what its time horizon is is twelve years. Twelve years plus a two year extension. So up to 14 years. for this fun to play out. That's that's even longer than your typical early stage venture fund. The typical early stage venture fund is ten years plus uh a one year extension. So not only is this the largest fund ever raised, It explicitly has a longer time horizon than

38:19 Anything else includ you know. Private equity funds are usually five years. Hedge funds usually have like a one year lockup, and then you can remove your capital after that. So it's it's both the largest and the longest fund, longest time horizon fund ever raised. And here's why this gets really interesting. So their goal with the fund is to deploy it in they want to make 70 to a hundred investments. Which puts your average deal size around a billion dollars. And so Typically, like if we rewind in a world before the Vision Fund, you would have a long ish lifetime for early stage investing, but if you're doing mezzanine rounds, so so buying some equity right before an IPO, hoping to get a 1.5 or a 2X markup, or if you're doing growth equity where you think a business maybe has

39:03 two ish, three ish more years before a a big exit, uh an IPO or an acquisition, th those will be that that sort of bigger check size, but you know, shorter life. They're making billion dollar investments and they don't have to return the capital to their investors for twelve years. Like this is very much changing the dynamic of what do big companies do as they mature and how are they capitalized to do that.

39:28 Yeah. Totally. In the past, you know, historically there's always been an inverse relationship between size of fund and stage of investing and time horizon. And they just went You completely turn that on its head. What if we have a ton of money and we don't have to give it back for a while? How does that sound? Uh well To a lot of people it sounded pretty great.

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41:47 Preamble to it. We'll get to it now, but I think it was super important to understand the context for all this. What happens in the interim between when they announce make the the press release essentially of the commitment from the Saudi Arabia public investment fund. And then when they do the first close, In in between that, in February of twenty seventeen, Southbank makes a really curious announcement. They announced that they're going to buy an investment firm called Fortress. Which was a publicly traded

42:17 private equity firm and hedge fund, uh so called alternative asset manager. And they're they're buying it for three point three billion dollars. And everybody was kind of scratching their heads. Like Fortress uh a manager of multiple private equity funds, multiple hedge funds, multiple credit funds, um debt funds. They invest in things like mortgage servicing, subprime lending, real estate itself transportation. Yeah, not not at all a technology investor. This is about as far away as you could get from technology and venture, you know, in the in the um money management world. They're kind of a second tier Wall Street asset management firm. They're kind of a middle I mean, seventy billion under management, you know, it's a lot of money, but for the types of groups that they would be sort of competing with, they're not the marquee brand.

43:05 No, they're most of that seventy billion that they have is in fixed income credit funds. So these are you know, think you know, corporate debt, municipal debt, um, you know, government treasuries, that kind of stuff. And when you manage those those types of assets, the management fees that you take on that are are much, much lower. So you know, a typical venture or private equity firm will take uh what's called two in twenty, so a two percent annual management fee. to run the business on the capital that they've committed. So if you have a billion dollmitted, you'll take two percent of that annually in fees. And then twenty percent of the upside of profits that you make from your investing. And Fortress for their private equity funds had structures like that, but for the vast majority of their capital it was much lower.

43:50 Makes sense. So that's why, you know, it's possible to have that set seventy billion under management, but still get bought for what is a highly marked up three point three billion. Yep. So Fortress. Super interesting. was actually it was started in nineteen ninety eight, originally as just a private equity firm. By three former investment bankers, and then two others joined shortly thereafter. And this was in kind of the beginning of the private equity boom.

44:15 And then Fortress has also the the dubious distinction of they were the first large private equity, you know, hedge fund, asset manager to go public. Yeah. So in two thousand seven, right before the financial crash, They go

44:32 Public. And then this kicked off a wave of KKR went public after this, uh Blackstone went public. Which is a fascinating thing in itself, right? You have a firm whose responsibility is to manage other people's money and take a fee and profits off of those investments off the top. that themselves are publicly traded. as equities either by retail investor or other funds who are buying shares in them. You know, as a as a basket of other things. It's nutty. And basically it's been kinda decided at this point that any

45:04 fund that would do something like this. Like this is a really bad sign and a bad way to manage these companies. And and there was a ton of drama with Fortress and with these other firms that did this because essentially what they did They took the quote unquote management company public. So if you're an investment firm, you know, if you're uh Madrona or Wave or you know KKR or whomever. Doesn't matter. They're all structured the same way. There's a management company, and that is what the the people who started the firm, that's what they own. And

45:34 the fees that we were talking about, those two percent annual fees on Capital commitments. That that's revenue that flow into the management company and that's how the financials of these firms work. Now if you take that public or if you sell That company.

45:49 Then The the fees that your investors are are in the paying the people who run the firm to run actually. Alignment is all messed up here. Not to mention, if you're a shareholder in the management company, but the governance of the actual fund is in any way allows it to make independent decisions, the fund could make decisions in its own best interest that the shareholders of the management company wouldn't actually get those those cash flows. Now I would assume Upon going public, they they needed to structure it in a way that that couldn't happen. But it is interesting that

46:27 You're taking an entity public that is wholly dependent on the fees from another entity continuing. Yeah. Well Yes. And What it essentially does when you do this You've created a situation where the the fee streams that are supposed to go to the people

46:44 running the fund and making investments are now going somewhere else. And this is interesting. This is kinda what Softbank and the Vision Fund have ultimately end up picking up on. If you go back to Massa's now vision of of infrastructure, of cash flow, of guaranteed cash flow payments. Like what is what is more guaranteed than a contractually locked up, locked up management fee that is gonna happen for ten, maybe in Softbank Vision's case, even twelve to fourteen years. So when SouthBank acquired Fortress, everybody said, What is going on here? You know, Southbank wants to be a technology investor, but they're acquiring this asset management firm. It doesn't make any sense. Well.

47:23 Flash forward, it takes a little while for the for the deal to close. There was a lot of regulatory scrutiny. It ends up not closing until the very end of the year in twenty seventeen, so just a few months ago. Then what happens, as we mentioned at the top of the show, just last week in March two. Two thousand eighteen now. Softbank announces. that they are creating a new division of the company called Softbank Financial Services.

47:49 Rajiv Mishra is the CEO. He's gonna be running it based out of London. And In this financial services division, They are going to

47:59 build, create, manage, and acquire multiple funds. So the vision fund, uh the ninety three billion dollar vision fund is put into this vehicle. all of Fortress's funds that they still have. They divested a few of them, primarily the large fixed income fund that we were talking about that was just trading in in debt. The rest of those are getting pulled into this vehicle as well. Which which is about f forty billion, right? Which is about uh a little over forty billion. All told.

48:27 This this new uh division, South Bank Financial Services, has Almost a hundred and forty billion dollars uh in capital under management, with a goal of doubling that in the next five years. And all of that capital is getting management fee streams and then eventually profit streams on uh on the value of the investments when they exit them. Okay, so what we're here Today.

48:51 on acquired to talk about is Softbank is Most of the way they've got seventy billion of their hundred billion already raised into the vision fund. Uh no, ninety three, ninety three of the hundred. So Oh I'm sorry, at at the time when they announced the acquisition of four. Yes. Yep. So they've got seventy billion.

49:10 There's nothing that looks like technology investing about Fortress. Why are they buying Fortress? What are they doing with that? How does that make sense? And fast forward to today, they're under the same umbrella under Reg. They've they they've gotten rid of the sides of the business that don't make sense as much, but Why?

49:28 Why'd they do that? Well, and I think this is what we see now, is is uh in and why we couldn't do this episode till now. People were asking this question, but now it's clear. They want and Massa wants to become the largest money manager in the world. And they're already pretty close. So like the next largest fund manager uh is KKR, which has$168 billion under management. KKR's been around for decades. The soft bank Financial services, you know, has been around for like A year, a year and a half, and they have a hundred and forty, uh, with a goal of doubling in the next five years. So they are very likely soon to become the largest money manager in the world. Yeah, there's the quote from uh I think this is in the New York Times from Rajiv.

50:10 Right now we are close to 14 billion, counting the combined assets. If we perform well, we hope to be two times that number in the next five years. That's a mark on the wall. Yeah. Here's a question I've got, David. in one sense it's just accounting. It's it's what pocket does it end up in, but the twenty five billion that that Softbank contributed to

50:31 Soft bank financial services. Does that draw a management fee and is there carry on that or How does that work? Yeah, I don't I don't know. I I suspect though

50:43 If they structured it like a typical what would be a general partner commitment in funds. Um so what the general partners of funds, the amount that they would invest personally into the fund. I suspect there is no management fee on that, but then they get a hundred percent of the profits. So they don't instead of getting twenty percent of the profits the carry they get a hundred percent of the profits on that capital. Mm-hmm.

51:05 And so then there's this sort of interesting question of What is Softbank financial services? Is it a venture fund or PE fund or call it a private equity firm that has one very large LP called Softbank that put in 25 and then another very large LP that put in In forty five. Or i is it corporate venture where they've also taken on a whole bunch of other investment, like the the biggest corporate venture of all time that actually is is a way bigger business than their core business. It's this weird in between thing that we've not really seen before.

51:40 Yeah. Well Let's move into into acquisition category now. So I think you know what's going on and and with this announcement, to me, this is a new major division of SoftBank that is going to be its own business entity that uh let's just assume they have two percent management fees on capital under management. And that they have twenty five billion of the

52:01 commitment from soft bank, so they're not getting fees on that. But So remove that down to a hundred and fifteen billion under management. That is an annual fee stream of two point two billion. Yeah. Annually of just straight

52:17 Cash flow into SoftBank. as I was skipping ahead a little bit to where I was gonna grade, I was just doing my calculation on if just the seventy five billion in of the non soft bank money in the in the vision fund over the twelve years of the fund, that draws an eighteen billion dollar management fee. So If you couldn't do the vision fund without buying Fortress, was it worth the three point three to generate eighteen guaranteed over twelve years? It really gets to that guarantee that you're talking about that was that was so interesting and what SoftBank saw in Fortress. Yeah, yeah.

52:48 And and not to mention if they can two X the vision fund that carry is another fifteen billion. the the carried interest on the profits of the um of that venture fund. And you know the goal obviously. Oh, if they return two X in terms of profits on on the vision fund uh then the carry that they get twenty percent of that

53:09 Is yeah, another Well it's even more than that. If say the vision fund ends up at a hundred billion dollars, if they return two hundred billion dollars. Oh, I was thinking of just the just the non soft bank portion. Oh just the non soft bank portion. Yeah, yeah. They two Xing a seventy five billion dollar fund. You know, seventy-five billion dollars of profit, of which fifteen billion goes to soft bank financial services just as they carried interest off that profit. Now I I bet you they believe they can do a lot more than two X, but Well, I don't know. Maybe they do, maybe they don't. So this is where I think is is sort of To me, the the this announcement and then the uh doing all this research, what came out of it, the key to me is that realization that Massa had after the tech bubble burst about the value of stable predictable cash flows.

53:55 And The management fee. So even if put aside performance of of the vision funds, they could lose all of the money And yet still they're gonna make eighteen billion dollars in management fees over the next twelve years from that like a hundred percent, you know, certainty. What can you finance within the all the rest of SoftBank with that cash flow? If that's not rent seeking, I don't know how you define rent seeking. Um

54:22 And it's just incredible. It's justifiable in lots of ways. But there is no No arguing that that is just incredible. Yeah.

54:34 So for me, the category. Actually I I don't I don't know that anybody would have predicted this when they um announced the vision fund, you know, a year and a half ago and then announce this acquisition. But to me this is a business line. Uh this is a new business line within Softbank that is a asset management business line that is going to be

54:54 Extremely cash flow positive, regardless of the outcome of any of the investments. Yep. And in a couple of interviews they've alluded to the fact that Fortress probably isn't the only one in the next couple of years that they're gonna buy. Yep. Yep, they're gonna buy more uh asset management firms that may or may not have anything to do with technology. You know, I thought when I first cursory understanding of this before I did real research was

55:19 That they needed to buy Fortress to have the sort of credibility to run and deploy a fund before they could raise the the vision fund. I don't actually think that's it. I think they wanna be in the business that Fortress is in and they wanna be in a lot of other financial services businesses too. Yep. Yeah.

55:38 Now the question then is Why would uh if you know this about the incentives, why would you why would you invest? I think there actually still is a really good argument for why the investors in the vision fund would invest, which is that if you think about who those investors are and the amount of capital that they have, whether the Saudi Arabia Sovereign Wealth Fund or Mubadala or or Apple There's really no other way to try and generate returns on that amount of capital without doing something like this. You just can't say say they wanted to invest in Sequoia. You know, Sequoia's uh early stage venture fund.

56:16 is it will even take their growth fund together too. That's probably about two or three billion dollars across the two of them. The they're not gonna take Apple as an LP taking half of the fund when they've already got all these other LPs. Apple has hundreds of billions of dollars in cash. And Apple can't even you can't even put that money back into your core business. Like they're trying and they they can't put that money back into their core business to generate a return on it. Yep. And and the dynamics are are totally the same with the sovereign wealth funds. They just have

56:44 So much money, they need to Put it somewhere to try and create a return. Um so actually what the product that SoftBank and Massa have created Is is a vehicle for that to happen.

56:56 One thing we haven't talked about yet, it's it's called the Vision Fund, What is the Vision? And the vision is to own pieces of all of the companies that may underpin the global shifts brought on by artificial intelligence to transportation, food, work, medicine, and finance. And so if you look at the seemingly scatter shot investing that they're doing, what it is is owning big pieces of companies where they have actually quite a bit of control and you know big governing chunks of the companies in a lot of cases that are way more than your average venture investor. Yep. That have tons of data, tons of access to you know, these companies that generate tons and tons of data that that SoftBank believes creates the constellation of what the world looks like in the future that is highly autonomous, data driven.

57:41 lots of information moving around in real time across a bunch of different sectors. It's a little loose and it's a little fuzzy, but to the extent that you agree with that vision and you believe that that's where the world's going, MASS has been present a few times before and there are worse people to follow. Well, this is really the third time he's tried to do it. This is the by far the biggest swing he's ever taken, but the first time was with the first wave of the internet with Yahoo and Alibaba. Now, a Softbank invested in eight hundred companies to get those two, but between those two and then Yahoo Japan. That's the game, baby. Like Doesn't matter. They they g they got it. They made uh probably If I sixty billion from Alibaba alone, then you add in Yahoo and Yahoo Japan, that's probably another ten ish, I'm guessing. So let's say seventy billion.

58:30 And then now they're in the middle of doing this with the next wave of of mobile, you know, with that they did with um Vodophone Japan. the carrier than getting the iPhone. um and then buying arm. And now they're doing it with The next future wave of you know

58:46 Well, sort of hard to define, but machine learning, artificial intelligence, of st yes stuff. The next wave of stuff. And now they're doing it with this massive fund. It's a broad vision. It's not a vision like we invest in really great marketplaces. It's a vision like we invest in the future of the way that people do things using technology. I mean tr truly, like does anybody have a divergent vision from what the vision fund's vision is? Like do we think that

59:13 It's not gonna be Tons of sensors everywhere generating data that are used to make intelligent decisions and do autonomous things and use a bunch of maps and use a bunch of geodate like I it just feels like their vision is sort of like what everyone has looked around and nodded their heads and agreed upon is the vision. But nobody else has created a vehicle like they have. That's true. That's true.

59:36 I'll throw in I also think It's a people acquisition also. It's you know, it's a business line, but there's a thousand people now in Softbank Financial Services. Many of them came from Fortress. They aren't the big name people, you know, it's not Rajiv that's that's you know running the operation, but although we did it we we forgot to mention the most important thing about the Fortress acquisition, Rajiv had worked at Fortress directly before joining Softbank. So he was only there about six months. But he from Deutsche Bank he went to UBS and then from UBS he went to Fortress briefly and then joined South Bank. Yep, great point.

1:00:10 Great point. But the you know that it's it's a huge team of people that are really the infrastructure on how do you raise, deploy, manage, account for, do everything that you need in a big fund. compliance, uh you know, the trading desk for the relationship public securities, yeah, all of these things. Um that South Bank didn't have anybody, uh, and and Fortress is over a thousand people, most of whom are this back office element doing all this. So category you would say

1:00:40 I'm still going business line, but it's a little bit of an infrastructure play also. It's like infrastructure of people. Yeah, yeah. I almost said infrastructure, but uh Uh that was actually what I was going into. Um The episode or going into the research. More categories. But doing the research, I really realized that like no, this is a business line that is.

1:01:04 A new thing within a new Product and business line within Softbank. All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is uh no longer the hard part.

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1:03:02 I know. Well, okay, but but let's take it from the investors in the vision funds standpoint. The Apples, the sovereign wealth funds. They have all this capital. They need to do something with it. They want to chase returns. They want to They want to invest in

1:03:19 The future of technology. Without something like Softbank, how do they do it? Well, let's just say it would have been harder to park big piles of money and generate the kind of returns that the Vision Fund hopes to to return. Where is the trade off? Like the question is is it zero sum or not? Like is SoftBank Are the soft bank returns that are going to these new investors, these new LPs in the Vision Fund

1:03:43 being generated at the expense of where cash could have gone otherwise, or by creating this new financial product. Have they actually created new value? I don't know, I'm not sure it could have happened otherwise. Like who else would do this? Yeah. I mean maybe a

1:04:01 Bank an actual bank as opposed to a soft bank. But they wouldn't have the credibility. Yeah, and I guess what happens otherwise is each of those companies try to deploy'cause ultimately what's happening is big companies. alongside sovereign wealth funds and soft bank are

1:04:19 putting capital into growth stage startups or late stage startups or actually what they haven't done yet, but said they could do with some of it is take privates. So public companies that they they take private. And what could have happened is instead of unifying that all into one fund, which takes its own management fee and and carried interest, They could have all done that individually through very large corporate venture, but very large corporate venture isn't really a thing and companies aren't that good at doing that and it creates conflict of interest all over the place. And so if you have that arm's length transaction of having a

1:04:54 separate fund managing that for you. Then you get exposed to upside that Corporations. tend not to get the exposure to because they're worried about cannibalization.

1:05:06 Well, and you're just limited too. I mean, Softbank made uh sixty billion dollars from Alibaba. But that's still even if they had turned around and used all of that capital to reinvest. That's still only sixty billion dollars. Now less than two years later, they have a hundred and forty billion dollars because they've opened it up to

1:05:25 Others as well. To Apple, to Qualcomm, to Foxconn, to Sharp. To sovereign wealth funds. I guess I'm I'm trying to make the point of like what does Apple do with that billion dollars? Yes, they could go invest it in startups, but they they tend not to. Right. Oh yeah, you're saying they they would do it themselves.

1:05:40 Yeah. Yeah. Exactly. Exactly. Yeah, but they're not equipped to do it. Apple by itself is a lot of money, but it's less money than Apple plus Softbank plus Qualcomm plus the sovereign wealth funds. Right. I guess I don't really care about how much money'cause it's the same money whether it's all spread out or put together. But

1:05:59 For example. Let's see. Who's a what's a good example of one of these recent big big soft bank investments. Well take the Uber investment. I mean that was eight billion dollars. Yeah. How do you line up eight billion dollars from the types of LPs that the Vision Fund has in order to invest it in Uber and have that unified front in order to do the weird tender thing that they did for the the lower price. You basically can't get everybody in a line to do that on their own. Like that's the argument for centralization. Well, and could you imagine Apple trying to do that? Then it's like Apple's negotiating with Uber to do this thing and to replace the CEO and Arms Length is actually value creative in that way. I'm buying it.

1:06:37 Or I'm trending toward buying it. It's a new product, you know? Um Nobody could do something like that before SoftBank. Right. It's also value creative in the sense like if you believe that

1:06:50 Partially saved Uber. It's massively value creative. that th that company would continue to thrive when they wouldn't have been able to get their ducks in a row before because they had too many warring shareholders. And there could be future Ubers that require someone like SoftBank to do something similar in order to to line everyone up. Which honestly the traditional venture com well, traditional venture community, I mean, you've got folks that

1:07:14 the end of the spectrum like wave that are is is just a totally different thing. But even the larger investors and the later stage investors, they're not they're not really equipped to do it either because The amount of capital they're bringing is is much less. The stakes they're taking are much smaller. If you're taking a 10% stake in a business, You know, with well, let's take the valuation of Uber. I mean The Firms that were investing in Uber's late stage rounds were taking a one percent or less stake in the business. Uh, you can't then drive change with that. Right. Great point.

1:07:44 Great point. One other thing that I do wanna say that you just reminded me of about the Vision Fund is Even though they're deploying private equity sums of money. Or even larger than that.

1:07:57 acting like venture investors. So whereas a private equity firm would either take a company private and cut headcount, or buy a late stage profitable company and cash flow it. Softbank is primarily buying cash flow negative companies or chunks of cash flow negative companies that still have a lot of growth left in them and investing in that growth. rather than trying to suck all the the profits out of it and

1:08:25 over leverage it with debt or have it declare bankruptcy later or something like that. So It's the first time we've seen this much money. from a private investor be deployed into high growth companies and the alternative that you would see that is if if s if this is another form of what wouldn't have happened otherwise, but if the Vision Fund didn't exist some of these companies would have to go to the public markets in order to continue to get growth capital.

1:08:49 Which We will hold on to in our tough things. Indeed, indeed. It also has you know, a very long time horizon. So that's why you know, it's structurally set up to operate just like you're talking about, Ben.

1:09:08 to be more of a venture investor mindset than a private equity, I'm gonna come in and within three years Um squeeze. Yeah. Alright, well the first tech theme Stay private longer. Stay private uh indefinitely. So that is the question, right? Is it are we in this period, so to to recap, I want to throw out a couple of pieces of data and I wanna try and make this as digestible as as possible in a verbal format.

1:09:35 In twenty seventeen. There was eighty four billion dollars deployed by venture capitalists, which is twice as much. as twenty thirteen. So it's been steadily increasing since two thousand nine, since after the the real estate crisis, and you know, twice as much venture dollars being deployed into companies today, or I'm sorry, in twenty seventeen as compared to twenty thirteen.

1:09:56 However. the total exit value of these companies has stayed relatively steady and the number of deals has actually gone down. So the exits are are less companies exiting for more money. And so what does that lead to? There's more private companies than ever that are around today. And the question that everyone's asking is Are we

1:10:17 Waiting. for the IPO explosion where the seventy plus unicor that exist today, the the billion dollar plus valuation companies Um are we waiting for them all to IPO or we somehow believing that there's gonna be MA that's actually buying that many billion dollar plus companies? Like are there actually acquirers that have the appetite for that?

1:10:40 Or are we entering this new era where With funds like the Vision Fund Is it possible to sustainably stay private? And and in the old days, that was either sort of owned by the person who started the business or it went to private equity and it was really a s uh it stopped growth and it was really about cash flows. Are we gonna be able to see the vision fund create a new way to be

1:11:03 held privately through your growth years all the way until profitability and never go public. And then you get segmentation in something like the vision fund where there's some sort of true private equity once the growth has graduated, but they still hold on to it for the cash flows. And then there's other younger high growth companies in there. I I don't know. It's kind of an interesting interesting different future. There's pluses and minuses, but one big minus is the retail investors and the American public or any other public doesn't really get access to the the profits of innovation.

1:11:35 Yeah. Well in many ways I I have to imagine that for The Vision Fund, the model for the Vision Fund is Alibaba. You know, they invested in The year two thousand. They invest twenty million. And the company then didn't go public until twenty fourteen, so fourteen years later. And when they went public it was at over a two hundred billion dollar market cap. So

1:11:56 All of that value creation happened. Privately. Now if that had been in the vision fund And generated uh sixty billion of uh of value.

1:12:06 Or perhaps even more because they would have been able to invest far more than twenty million in the beginning and along the way. It's like they're playing the venture game where there's a power law, but they're doing it at this enormous scale. Mm-hmm. But the downside is like all the companies that aren't at the top of the power law I think what you're saying is like what Happens to them. Right.

1:12:28 What happens to the The sixty eighth unicorn that is worth like one point one billion dollars and doesn't have a likely acquirer. I don't know. Yeah. Well, maybe the answer is just like you're saying.

1:12:41 they operate as a private company in the same way that in the past they would have gotten public and would have been a one to two billion dollar market cap public company indefinitely. They'll just be that, um, privately. But yeah, I don't know. Well, to keep going on that that philosophical piece there for a moment, There's a societal trend. of of wealth polarization.

1:13:03 And a sort of parallel trend is more power and more uh more economics going to corporations over individuals. And If the late stage growth all the profits of that are going to shareholders like a vision fund instead of shareholders like retail investors. Then

1:13:22 And and all the LPs of the vision fund are either sovereign wealth funds or huge corporations. That does further entrench that narrative of more of the profits of innovation even later stage going to to corporations, even when, you know, they actually have very they're not even in the same line of business. They were just a an investor in the pool that that continue to capitalize that company later on. I think there's a yes but here. Yes, uh a hundred percent. Um

1:13:48 But Softbank itself is a public company. So anybody, you know, you and I can go invest in SoftBank right now. And then uh we're benefiting from this. Which is super interesting when you when you actually think about this and compare that to How it would work otherwise if this were all you know, if this were um you know Sequoia or whomever, which Sequoia supposedly is raising a I think twelve billion dollar funds to compete in in some sense with uh with with Softbank here. The public has zero access to that. Where's anybody, you know?

1:14:23 Our parents and grandparents can go buy shares of Softbank. So at the end of the day it's just one more money manager in the middle of a chain of money managers who are all uh all getting a cut. Turtles all the way down, Ben. Yeah. And it's it is actually circular too. That's the craziest thing, is like

1:14:39 I don't need to paint the whole circle, but like there there are ways where you can own something and simultaneously be owned by something uh all the all the way around. Okay, so my question for you, David, we've talked a lot about the value creation here. Let's talk for a milli uh a minute about being value destructive. Is there any way that some of the repercussions of of what the Vision Fund creates and the amount of capital that it needs to deploy and the speed at which it needs to deploy it Are there situations where that could be value destructive? Well, talk to uh any VC in Silicon Valley and uh they'll talk your ear off about this. It feels like they may have an opinion or or incentives to have an opinion. Yes. Yes. Uh well with that caveat in mind, I mean I think The scenario in which this is value destructive is

1:15:28 You know, what is um You know, I view as you know having been in V C for a while and observed like companies There's this almost like law of gravity with companies in fundraising where If you raise the money, you will spend the money. No matter what your intentions or And let's be clear, like that's not just like a I wonder how that happens thing. That is largely driven by IRR.

1:15:52 Like if if you're an investor and you put money in a company you want to be able to return the most money as fast as possible to your shareholders. So all of the forces at play on that company from, you know, when you put a bunch of money into a company, you get a board seat, you get you get influence on the business is to encourage the deployment of that faster so that they can grow faster so that they can raise more, you know, on and on and on and and get a return out of it. Yeah. The problem is when you have so much money flowing into the ecosystem and into direct competitors uh with one another.

1:16:24 primarily then the way that m the money gets spent is in customer acquisition. Um and when you have multiple companies spending money in customer acquisition All you're doing is driving up the price of Customer acquisition. And giving money to Google and Facebook on their ad platforms, yeah by by both spending gobs and gobs of money against each other bidding on the same keywords. It's shocking to me that Google and Facebook aren't investors in the Vision Fund because they're the biggest beneficiaries.

1:16:53 Yeah. Truly. Truly. Truly. It also can train an organization to only know how to spend irrationally on customers, where y you will never be able to, when you have to spend rationally, be able to get customers for less than their long term value and their life. Well I'm thinking back to you know our episode on Zappa's with Alfred Lynn and and Him talking about

1:17:15 the best thing that happened to Zappos was uh was the dot com crash. Where They then A had to learn how to operate leanly and acquire customers um through things like the ad units in the uh in the shoe trays and in the uh TSA security lines and airports. But it was that they didn't have the competition spending against them through in all these things. So the question is and and the the sort of

1:17:40 downside scenario that a lot of VCs would paint about what the Vision Fund is doing. Is it's just gonna It's just gonna create this hyper competition. uh in so many markets like you've seen play out in ride sharing where the revenues just keep growing and growing, but everybody's hemorrhaging massive amounts of of capital in this kind of war of attrition.

1:18:01 Whether that's Uber or Lyft or D D or Grab or any of these companies. Do you think it drives up valuations? Well, of course. Yeah. I mean if you're taking this money. Or do you think it irrationally drives that valuations or un unjustifiably drives up valuations? Any individual market opportunities. Yeah. Um Well, one more tech theme, uh I feel like we've uh

1:18:26 We've now painted all sides here. One more I wanna slide in before we move to grading is um Just this whole story and doing the research, it really And and learning about Massa reminded me so much of Jeff Bezos.

1:18:39 A theme I just wanna call out here is is what he's done If you look at the vision fund and This whole Asset management. business line as a business.

1:18:49 What he's done is the same thing that Bezos is doing with Amazon, which is adding more legs to the stool of SoftBank, more great businesses with predictable cash flows that can then come in and then finance Use those cash flows to finance The next businesses that they add. Softbank just happens to be much more acquisitive in how they add businesses versus Amazon, which builds them in-house. But I think it both approaches have the same root, which is

1:19:15 Just being willing to constantly push the horizons of what your company is and how big it can how big it can get. Mm-hmm. Yeah, it's two models of innovation. There's internal and external for big companies. And SoftBank is doubling hard on the external. Like if I asked you in the last five years, what innovative product has SoftBank created?

1:19:35 You know, it's market engineering and financial engineering right now in a big way. And you look at Amazon and you'd ask that same question and I it's thirty things. You know, and it's it's two or three that are are multi billion dollar. it's a very different way to go about kind of the same problem. And they have very different reputational uh things associated with them. Like if you talk to somebody um who has SoftBank on their board.

1:19:59 They may tell you. Boy, it's really tricky to deal with them. They take tons of control provisions. They take a a huge number of voting shares in the company. They're highly opinionated on on what we need to do and how we need to do it. I I think your mileage may vary and different people may may say different things, but if an investor is sort of too controlling and coming into a company, y it often has negative reputational thing things associated with it. Look at the way that Amazon is doing it instead of SoftBank. They have a hundred percent of the of the economics in that the the new quote unquote company. They have a hundred percent of the decision making authority. They can force any employee's hand in that new quote unquote company to do whatever they want. And so it's kinda this funny like

1:20:38 uh not invented here, us versus them, inside outside, dichotomy. David, I love I love the way that you framed it and in in comparing it to Amazon because it really sort of it extends the borders of what is the system and who is the us to companies that that you own own pieces of rather than just us as a company. Yeah. Yeah, it's interesting. Maybe the ultimate what would have happened otherwise would B if Jeff Bezos had accepted Massa's proposal to create a joint venture Amazon Japan.

1:21:14 Amazon bank. Yeah. That'll be a story for another day. It's great it. The criteria we're grading on here is

1:21:24 How good of a decision was it for SoftBank to buy Fortress? And so to walk that uh you sort of need to have a since they're not done yet, a perspective on what SoftBank will be in the future, how big it can be, and how much buying Fortress actually had to do with that.

1:21:42 And was it worth laying out the three point three billion? I'll make the case that just from a is it a good place to to park your money perspective. Um they did actually pay up pretty good for uh For Fortress. For Fortress. Yeah. I mean it's about a forty percent premium. Yeah, yeah. And typically when you're buying a publicly traded company, we see twenty to twenty five percent premiums. So expensive purchase. But

1:22:07 You know, the the question is if It was essential to creating this new vehicle. This uh uh soft bank financial services That

1:22:16 As we talked about, we'll generate you know, twenty plus billion dollars over the next twelve years from the the vision fund and fortress, just from fees. You know it it feels super justifiable. The question is, is it, you know, Apple Next justifiable? Is it Instagram justifiable? Like did Buying Fortress give them this hundred X upside on that purchase.

1:22:39 Do you want to grade first or you want me to? I want you to grade first. Uh well I'm gonna I'm gonna go uh to me, um I never would have said this before we dug in on the episode. I mean, especially in the Silicon Valley ecosystem here and everybody Poo pooing Softbank. Which I again there like there are definitely negative consequences to what's happening here. I think it's brilliant. Like

1:23:01 Masa is he created a brand new product which is a vehicle for these very large pools of capital. to credibly invest in in growth and in the future. And I don't think anybody else except him could have done it credibly. And

1:23:18 I think the fortress acquisition. For Three point three billion dollars. as a means to jump start that and to within a year and a half become the world's second largest, you know, fund manager and with a goal to in another few years being double that. To me it's an A. I mean we will see how it plays out over the next few years, but even already, like Adding that infrastructure.

1:23:41 to get them the guaranteed cash flow streams from the management fees across these funds is brilliant. So I think it's an A. Do you think Apple would have put money in? Do you think Sharp would have put money in if They hadn't bought Fortress. Well, I think they would probably be justifiably pretty worried before they bought

1:24:00 Fortress like the vision fund was like a couple people, you know, with no no management, no compliance, no Trading gas no nothing. So the question then to me is like So let let's say that they could paint the right picture and get them to put the money in. If they would have been worse at deploying it, because they don't have the scale to deploy it,

1:24:21 Did Fortress actually give them the ability to deploy that capital, or is it still pretty much you know, Rajiv and and Masa that are Hard. doing the main best. I think you gotta think about it beyond the vision fund. Like Fortress gave them the ability to be

1:24:39 A money manager. The vision fund is the first product. in this I see. I I was thinking about like i do they have to show returns fund in order to raise vision fund two? No. But will they have to to raise vision fund three, yes. And let's say they're not actually that returns, they're more fee focused at this point. What really matters i in this context, I I think is would they be able to to raise vision fund three and draw the predictable cash flows from the management fees of that.

1:25:08 Well what I'm saying is it's not even all about the vision fund with Fortress and now with this new unit. The Vision Fund is just one product of What will be many. They're gonna buy other asset management firms. Mm-hmm. I mean, I'm less convinced than you, so I'll go A minus, but I think this is a very dangerous company for the next few decades.

1:25:27 Yeah. But you know, again, like it's I totally agree. On the other hand, it's a publicly traded company. You know, it's not like the global public does not have access to the returns. Right. Right.

1:25:40 Well, l listeners, you know, before we jump onto the next part here, thanks for bearing with us over this in a very long episode. It's a topic I've long been curious about and heard people talk about and has been the topic of of dinner parties and you get bits of information here and there. The whole story is really fascinating to follow end to end. And if you're still listening you know, thanks for coming with us on this journey and we hope that this sort of provides a nice canonical understanding of what is SoftBank, what is the Vision Fund, why is it all happening and what's it gonna be. It certainly shaped my thinking on it.

1:26:12 Yeah, me too. Thank you as always. Carbouts? Yeah.

1:26:18 So I've got two. Um the first one is a shout out to friend of the show Brian McCullough of the Internet History Podcast. So Brian's launched a new podcast with uh Tech Meme called The Ride Home, where you can get highlights of the news of the day. So if you wanna stay current in a bite sized chunk, It's really fun and and Brian's a great host and it's a really great way to to kinda keep in touch with what's going on and get a little bit of uh of Brian's loose editorial on things, which is always great. And the second one is I David, I I think I text you this. I finally got around to reading E Boys.

1:26:49 Uh, so great. It is a Such an awesome book. It for those who haven't heard of it, it is about the founding of uh Benchmark Capital. It was published in two thousand. So the whole thing is colored with, you know, it's it's the five, six years, five years I think that benchmark was around, the really sort of special relationships between the the founding partners, bringing on Bill Gurley, um, the early investments that they made, the incredible story of eBay the nuttiness of the the dot com bubble. And the author is actually embedded with Benchmark to do all of the writing. He's actually in meetings, like transcribing stuff, and he's sort of a fly on the wall. And so you do get to hear these really like everyone you talk to lots of people, especially now in crypto or

1:27:33 back in the bubble days who will tell like oh I called it and you're like, Really?'Cause like Why didn't you move all your money out then? And y y you get to hear some of the comments in ninety eight, ninety nine in Benchmark's office, where one partner will say to another, This doesn't feel right to me for these reasons. And it's it's amazing to actually have documentation of that. And so the the most fascinating part of the book is it's really before everything completely falls apart and there's just a few sort of early indicators of uh oh, like this feels weird to me, but I would love to I kinda want like I want to read part two. Like what you know, w w what were all the opinions in in 2004?

1:28:10 And you know, how are they reflecting on those conversations? But it's also kind of thrilling, like it's really well written. So if you like this podcast You will love that book. This book could never be written again. Like it's the very fact of it being written and the reaction when it came out, like no venture firm would ever do this again. Um but it's just so great that it happened and it happened with with Benchmark, one of the very best firms. Like I I learned so much reading this book. Uh it's just an incredible resource. David I don't know much about it. What was the reaction when it came out? Uh well, I think Benchmark was mortified because it like it paints this window and uh you know and during the go go days too when everybody was making so much money. They did all make an insane amount of money. An insane amount of money. And like

1:28:56 all the dirty laundry gets aired, like, you know, people's opinions of other people and like, uh, you know, is this founder the right part? Are we gonna fire the you know, like and bringing in the new C make Witman is the new C O E baby. Benchmark comes out pretty good. Like the Oh yeah, they do. They it's it's the other firms that I w Um All of this stuff, um tends to be so private and that's why like this book can never be written again. Like It's a real true window into like What it's like on the inside.

1:29:24 In an industry that has only gotten more private. Yep. Yep. And like the names are named, you know. Yeah. Yeah. And there are the names. Like every name that's in there is the names in in Venture. So Yep.

1:29:37 Uh, totally recommend it. Well, mine real quick. Just can't, you know, give enough shout outs and thank yous to to Nick Fight. other friend of the show in former episode. One of the other books he recommended to me was he's just got all my carve outs like covered. Uh was the three body problem. This amazing sci fi book, um, written by Chinese author Uh Liu Shi Shin

1:29:59 I I hope I'm pronouncing that right. It's incredible. Uh the three body problem is the first in a trilogy. The trilogy is the remembrance of Earth's past. Three body problem is great. The second book in the series, The Dark Forest, was actually my favorite. There's like a uh what the dark forest is is like this completely mind blowing concept. It's all set in the future and very sci fi, but like it's very realistic too. And the whole series is sort of about um

1:30:26 an answer to the Fermi paradox. The Fermi paradox being like statistically it's very unlikely that we are the only life in the universe, uh that Earth has the only life in the universe. But we haven't received any signals from anyone else. Why not And this is like a an a potential answer to why not. Uh and it's Really cool. So highly recommend it.

1:30:48 Thank you, Nick. Cool. David, I think. I think that's all we've got. Believe it or not, we are out of things to say.

1:30:55 I know. Our our episodes just keep getting longer. Yeah. We need to uh we need to get some quick ones in here. We do. Listeners, there's some exciting stuff coming up in the next few weeks. Um we've we've got uh An IPO with Dropbox we've got

1:31:09 Is it technically an IPO of Spotify? A a direct listing. Yeah, I think it's just a direct listing. There's no offering'cause they're not creating any new shares to sell. No. Oh so that'll be a fun one. We'll try and get that out in short order after after trading begins with uh typical acquired narrative and and our quick take on on what's going on.

1:31:30 I think that's all we've got though. Yeah. We're out of gas. We are. I'm hungry. Thanks for sticking with us. Yep. We'll talk to you guys soon. All right listeners. Now is a great time to talk about one of our favorite companies, Statsig.

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1:32:45 Comment on this on Breaker. We love the hearts and even more the comments. Would love an iTunes review, uh or an Apple Podcast review. So if Apple Podcasts is uh is where you are listening to this, or if you have a free moment right now and enjoyed this show, um, we'd love nothing more than uh share it with your friends on social media, uh more privately on iMessage. or a uh a review or a comment on on one of those platforms and thank you so, so much. Mm-hmm.

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