Acquired - SoftBank, Fortress and the Vision Fund

0:00I don't know. I don't know if it's two and twenty or lower. But even if it's lower, it's just such a huge amount of money. Well, I have a lot of thoughts here. Welcome to season two episode four of acquired the podcast about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we're your hosts. Today we are covering an acquisition that is forever changed the world of venture capital.

0:40private equity and emerging technology companies forever. I guess it forever twice there. Softbank buying fortress. It's still 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, David, I just need to say congratulations on the big news this week with the formal announcement of Wave Capital. Thank you, Ben. Thank you, Ben. It's nice to, as 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 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.

1:26That is not the vision here. It's not the vision for your fund. Awesome to have that news be out and I'm sure you'll have lots of good opportunities to use that perspective to pepper in good thoughts for future episodes of acquired.

1:43A little bit of business before we move into the show. If you're new to the show, you can check out our Slack at acquired.fm. I just checked and we're over 1200 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.

2:12Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm.

2:38for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lugora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

3:08And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1200 legal teams in 50 countries, and crazily they went from 1 million to 100 million in ARR in about 18 months. Truly insane numbers. And that is the real test.

4:00Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at legora.com slash acquired and just tell them that Ben and David sent you. So David, the soft bank vision fund. Well, first off, what is soft bank?

4:28So Softbank, if there's one big takeaway from the episode, Softbank, not a bank. It is a conglomerate. Japanese conglomerate founded in 1981, mostly focused on telecommunications businesses, and actually originally a PC software distributor in Japan. Indeed. We might just get into that. We might. We might. So they're going to buy Fortress, and we're going to talk all about that. They just started this vision fund.

4:54Presumably you've heard people talking about the vision fund. I'm sure down in Silicon Valley that occasionally comes up You know, it's it's not really a big no actually this is like the only topic here 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 a iconic founder Masayoshi son And it's soft bank. Is this just relevant like to you as a VC? Is this like do you hear other folks talking about it? Does it have repercussions outside of just being a venture investor? Well, so the vision fund is currently 93.

5:33billion dollars can go up to $100 billion. 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. This is literally not just the largest venture fund, but pretty game-changing in the entire investment world. You may have heard of Softbank in this recent news of the tender for Uber shares. Softbank just bought 15% of Uber. They've also made multi hundred million or billion dollar plus investments into we work door dash, wag, slack, and all very, very recently. These deals are happening fast and they're huge and 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.

6:20If we want to really pat ourselves on the back for timing, which we really can't do, we actually have a content calendar now, and we don't know when these things are going to happen. But Softbank did just announce that they are moving Fortress and the Vision Fund under one roof. They just announced that this past week. And so today, and acquired, we will rewind history and cover the acquisition of Fortress and how that plays into this whole Vision Fund thing. Should we do it? Let's do it.

6:48All 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 since this is the Softbank Vision Fund, you really can't talk about any of this without starting with Softbank, but first it's...

7:06really iconic founder, who isn't as well known in the US and the West as he should be, although that's changing quickly, but Masayoshi-san, or Masa as he goes by, he's a pretty interesting character. So he was born in 1957 in Japan, not in Tokyo, but on the island Kyushu in the south of Japan.

7:30His father was a fisherman and they were relatively poor. The family, they were Korean immigrants in Japan. So Masa's grandparents were all Korean and immigrated to Japan. That was not a great situation in Japan. Japan has always had a very...

7:48complicated relationship with both Korean and China. When Maso 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. And this happened when Maso was young. So this family changed their name from their surname from Saan to and Moto. 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? 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, we'll link to it in the show notes. He goes on Charlie Rose a couple of years ago.

8:29Charlie Rose is a little bit of a controversial character himself now with some of the sexual misconduct allegations. But this interview with Masa is really great. He talks about his childhood and how much it shaped him. So through all of this though, even though growing up, son of a fisherman in a rural Japan and in the island, his parents really encouraged him and told him that he was going to be great. And he was really precocious. He was going to do great things when he was a teenager.

8:56I think there was a guy in Japan who was the president of McDonald's Japan, and he had written a book of a business book. And Masa got ahold 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 ahold of his secretary, and kept calling like...

9:14time and time again saying, I need to come. I need to meet with him. He said, you know, the secretary said, no, you're not going to meet with him. Finally, Masa flies to Tokyo, just shows up in the office to meet with this guy. It says, I'm not going home till I get to meet with him. He does. He's 16 years old at the time. Finally, the guy says, all right, I'll let you in. I'll give you 15 minutes. It's a war of attrition. It will literally war of attrition any and this guy tells him.

9:39two things, Moss asked for his advice. What would you tell me as a young 16-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 60s and 70s? This would have been the mid-70s. Wow. Pretty crazy. This guy was pretty prescient.

10:06Masa, as you can imagine, knowing this a 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, ends up finishing high school in the Bay Area. Goes to university here. He does two years at a college called Holy Name's University, and then he transfers to UC Berkeley, where he majors in economics and computer science.

10:33So he's just going 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.

10:45He convinces one of his professors to start a company with him. It was a physics professor, and they make an electronic translator, the language translator, and then they sell it within a year to the Japanese conglomerate shop for $1.7 million. Remember, this is back in the late 70s. And a student, what an awesome thing to do as a student. Yeah, a couple of years ago he was in a fishing village in Japan.

11:11And then the other thing he does during this time, 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. And supposedly according to Masa, he makes about one and a half million dollars from presumably more money than his share of the sale. Yeah, totally, totally. It totally reminded me of...

11:36of Tony Shae and Alfred Lynn and the Zappah's story and selling pizza. Pretty crazy. So by the time Masa graduates in 1980 from Berkeley, he's already a multi-millionaire. And so he decides...

11:52he's going to go back to Japan. In the interim, he actually, first, he starts another company called Unison that gets acquired quickly by Kiyosera, 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 going to come back to Japan. He's made a little bit of a mark. He does two things, decides two things. One, he's going to change his last name back to San. He's done with the You know, Japanese named that his family had adapted. He talks about this. He feels like he's living a false life. He wants to be himself, be his true identity, and be known as, you know, for what he is. And two, he decides, I'm going to start another company, but this one is going to have an enormous impact. So he moves back home. He literally lives at home. Land is around for about six months or so, and decides to start a company and calls it soft bank.

12:47a Y soft bank, his business plan, what he wants to do is he wants to be a distributor 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 package 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 are a lot of economics in there in a pre-internet world.

13:15Yep, without distributors, without retail, and without B2B distribution of software on, you know, floppy disks, probably like not even the three and a half inch floppy disk, probably the big, truly floppy disks at this point, you know, you can't get software onto your PCs. So we start that and he also realizes that part of succeeding in distribution is you also have to be in the publishing game, not just publishing software, but actually publishing content so that people discover software and want to buy it. So he starts publishing PC magazines 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 was educated and knows how much innovation is happening in software there at the time.

14:10So he does, we're now into the mid-90s. He does two things. First, he buys Ziff Davis, which was the publisher of PC Week, and a whole bunch of other stuff. I totally remember reading these magazines back in the day. So Soft Thank acquires Ziff Davis, and then he also acquires... Ziff Comdex? Comdex. Yeah, an organization called Comdex, which was like the...

14:34That was the computer show. Yeah, it was the computer show. If you were into computers and you were a distributor or a creator, like, you know, if you're actually, have you seen Halt and Catch Fire, David? No, I've heard it's so good. 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 if you were into computers in those days, that was where you went to check out all the new stuff. Totally. Yeah, like the South by Southwest or, you know, What have you of? CS, E3, yeah. All of it 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-90s. He's starting to see the internet is coming too. And let's shape this empire. It's a little empire 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.

15:29And there's going to be a big opportunity to invest in lots of companies that are going to create new businesses on the internet. So what does he do? He starts a VC firm, a US venture capital firm under the soft bank name, and he hires a brings on a few partners to be the partners and investors locally in the US at this VC firm. Do you know, Ben, who one of those partners was Brad Feld, of Foundry Group. And, uh, listen to Brad, is, uh, Brad is, of course, at Foundry Group.

16:06Foundry's an investor in PSL and Wave as well. Yeah. So Mobius, which was the firm that he started before Foundry Group, and where most of the Foundry Group partners have worked together at Mobius before, that was basically a spin-out from SoftBank. Got it. And a number of them had first started working together at SoftBank. Got it, got it. And I believe.

16:33Brad can correct us here. But I believe Brad's first company that he started in Boston out of MIT was a software publishing and distribution company. And I believe Softbank acquired it. And then that's how he got in. All right. Well, Indavisi. We'll have to have Brad on the show and give us some of this history. That's awesome. Yeah, totally. So funnicide.

16:54They start this USVC firm, and these are the go-go years of the mid to late 90s internet. Both the USVC firm and SoftBank itself corporate invests in tons of companies. They end up taking stakes in about 800 companies 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, but they become a major shareholder in Yahoo. They end up investing about $350 million in Yahoo. And at the time of the IPO, Softbank is the largest shareholder in the company.

17:40And they started Yahoo Japan, right? And together, yet Masa goes and proposes to Jerry Yahoo, what you're doing in the US like 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 and it's up IPO in Japan itself and is a huge win for software. So you can start to see like someone what they're doing with the Vision Fund, it's kind of 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 Bayzos rejects them because, because Masa and Softbank want too much of the, of the JB, of the combined company in Japan. It strikes me that, that Bayzos says, what do you mean that's my opportunity? Yeah, exactly, exactly. So this is crazy. And I knew a little bit of this history before I started deviguing and doing the research, but

18:33This actually is shocking. So this is all going, you know, so well during the internet bubble. For a brief moment, Masa actually becomes the wealthiest person in the world. He passes Bill Gates, SoftBank's market cap goes up to almost $200 billion, and they've got the stakes in all these companies. Bubbles do crazy things to non-liquid stock. Indeed, indeed.

18:59So apparently, he's like, vying with Bill Gates through all this to be the world's wealthiest person. Bill comes over and visits him in Tokyo. And Masa had built, this is, he tells the story 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 a, you know, like video golf, but like, had simulated sea breezes and like ocean scents and like all this stuff and simulated light and apparently Bill Gates has like blown away. I mean this is the point in Bill Gates' life where it was like famous that he had the pictures that change on his walls. Yep. That's right up his alley. Yep. Unfortunately though for Masa shortly after he passed Bill the bubble burst and then Masa gets another

19:53infamous 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 fell by 70 billion, 70 billion. In 2001. That's like the GDP of a small country. Totally, totally. It's like, you know, seven tenths of the Vision Fund.

20:27But he learns a couple of things from that and you know, ever the resilience individual. He's kind of more determined than ever to come back. But what he learns is that and what he decides after that is that cash flow and profits are very important in businesses of notoriously part of the problem with the whole the internet bubble was like there wasn't even Certainly not cash flow, not even revenue at a lot of these companies. And so Masa kind of learns less and he's not going to do that. He decides to pivot soft bank at this point away from just being a software and company and tech investor into more infrastructure. He gets really interested in infrastructure because he's

21:09He 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 becoming a thing and people aren't using dial up anymore. And Japan was particularly advanced.

21:24And we should say one other thing that happened during this time in 2000, still kept doing some early stage investing and one of those investments was a $20 million. We're coming to it. We're coming to it. Cliffhanger. Cliffhanger. He doesn't stop the investing, but so he gets into broadband. He buys Japan telecom and then starts investing in broadband. Seize that I promise I'm going to come back to the investing in a minute, but this is.

21:51Actually, I think it even better story. He starts seeing that mobile is going to be the future. And this is a thing about Masa. Like, he's very bold, but he's always thinking like a couple of years in advance. So like mid-2000s, 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 kind of like halfway there. He decides that Mobile is 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, 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 2005, 2006. What? Yeah. So Masa, he's thinking about how he can enter the mobile telephone world.

22:43He decides that he needs a game-changing device. He decides the only person in the world who could develop such a device would be Steve Jobs in Apple. So he comes over. He meets with Steve. This is like 0506. Apparently he brings a drawing that Masa himself had made. A drawing of an iPod with a phone in it. It's like a, apparently like the Tony Fidel version of the iPhone. No way. He did that. He made the P1.

23:10He made the P1. He sits down with Steve. He meets with him and he's like, I want to get into mobile. I need a great device. You should make it. I have a drawing for you. Meanwhile, in the midst of this head-to-head internal competition, what, 12 months away from launching the iPhone? Totally. Steve apparently laughs. He's like, I don't need your drawing. You think we're not working on this? And Moss is like, fine, I don't care.

23:39If you make this, I want to 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 a hoots, but, you know, show me drawing. 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 Masa's like, I got it. Give me like a couple, give me like a year. So he goes back to Japan.

24:03and he orchestrates a deal to buy Vodafone Japan, which is one of the largest, was one of the largest mobile carriers in Japan, like AT&T or Verizon or Sprint, but he doesn't have the money to do it. So he goes and he raises like $20 billion in debt financing from the capital markets. And in particular he raises, I believe most of it from Deutsche Bank, from a guy named Regif Misra at Deutsche Bank. He's gonna play, come back into the story in a little bit.

24:33He 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 2006 iPhone obviously gets announced in 2007 goes on sale in the US and then in 2008 the newly renamed soft bank mobile which was Vodafone Japan becomes the exclusive carrier of the iPhone in Japan and this like is Huge. They triple their market share to Pan Falls and Love with the iPhone. 3D Chast David 3D Chase. Totally. All because of that drawing. So this is arguably at this point the greatest thing that's happened to Softbank. Huge comeback from having...

25:20had the infamy of losing more money than anyone else in the world. And then actually later in 2013, he tries to get into U.S. mobile carriers they buy Sprint. So Soft Venko and Sprint here in Sprint here in the U.S. And holy, right, they're 100% on some city area. I think at first they bought like 73% or something like that. I don't know if they now own 100% of it, but they certainly own a vast majority of the stake.

25:45There's this other little thing that happens over the interviewing years that Ben you were referring to and that was that all the way back in it actually was in 2000 so it was before the tech bubble burst Massa made one other of the 800 Investments that he made he put 20 million dollars into a company in China called Alibaba in the year 2000 14 years before the IPO 14 years before the IPO so Fast forward to 2014. 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 $60 billion in liquid publicly-tradable securities on the open market. And that really is a combination of all of these things.

26:40But I think it's really that that leads to the vision fund. All of a sudden, SoftBank has $60 billion that they've done in tech investing in liquid securities. And that happens in 2014. Is my math right there that that's a 3000X return on $20 million? It's uncalculable. And people talk about this as like, This may well be with lots of people reference this as the best investment of all time. When we did the next acquisition, the Apple acquisition of next, we called it the best acquisition of all time that created a trillion dollars in market cap. I think that 20 million dollar investment might be the single best investment anyone's ever made. Do you know if that's how the Yahoo Alibaba relationship got started? Do you know if there's a tie in here?

27:35There 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 Masa and Softbank invested in Alibaba. And that was famously a huge part of Yahoo's market cap when Alibaba went public was the Alibaba shares.

28:00Yep. 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 at a much lower valuation than when they did go public. You got to have Masa's conviction to hold, man. Totally. I mean, this guy is like, if it wasn't clear already, like, he's a pretty amazing character. It's not the Oracle of Omaha, but the Oracle in Japan. Yeah, he's like the Jeff Bezos and Warren Buffett of Pan rolled into one. Feels like a guy that should deploy $100 billion, I don't know. Well, if anybody can do it. So today, Masa is the richest person in Japan. And so he has accomplished his, that wasn't explicitly his goal, but when he started Softbank, he wanted to make an impact. And he is the 39th richest person in the world. As of January, his personal net worth was estimated at about $22 billion. So still not the 70th that it once was.

28:57but still pretty amazing. After that IPO of Alibaba in 2014, they now have all of this capital. It's taken a long time, but they've been very successful at being investors.

29:09One 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. They also had a huge return on buying some Supercell shares and selling to Tencent, but Sprint isn't anything to write home about. It doesn't give you tens of billions of dollars on which to go and raise the largest fund in history. Nope, but if you have 60 billion of your own, that gets you a long way. So a couple of things.

29:37in 2015. 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 kind of take over for Massa when Massa retires. Massa's in his late 50s, early 60s at this point.

30:08And then they get, you know, they have all this, this capital now from the Alibaba IPO. Nikesh was originally from India before, before he came to the US. He starts investing in India growth companies. So like 2014, 2015, there was a big, well, in retrospect, really kind of bubble of tech startups in India. Companies like Ola, Snapdeal and Flipkart. Wait, did you just say Snapdeal and Flipkart, David? Uh, so no, uh, Softbank invested in SnapDial but not Flipkart. I think they actually did. I think kind of a crazy thing is, one thing they're willing to do is cut and run, or at least invest in a competitor. SnapDial wasn't going the way that they were hoping it would go. Later on in the Vision Fund in April of 2017, they put $4 billion into Flipkart. Oh wow, wow.

30:58But that was via the Vision Fund. Okay, so that hadn't happened just yet. Right. Right. Nikash could kind of lead investing in these companies in India. So yeah, I should take that back. Maybe that's not fair. Maybe a better assessment is, you know, that was a different entity, a different vehicle. Yeah, interesting, interesting. Although it is part of the Vision Fund's reputation now. And Nikash, when they hired him, they...

31:18paid him his contract was he got paid $200 million over two years. He was the highest paid executive in the entire world. You know, when Mossad does something, he goes big. David, it's not that much money because it's trunched out over multiple years. Yeah, too. But as you were alluding to some of these Indian investments don't go so well, particularly snap deal.

31:43and their relationship kind of sours between Nikesh and Masa, supposedly for a bunch of reasons. And Nikesh actually leaves in 2016. And so now there's kind of this whole of Masa's, you know, still has this huge vision for soft bank and investing, but the guy who was going to run it is no longer there. Now flashback to right after, right around the same time as the Alibaba IPO, Rajiv Misra, who I had mentioned earlier, had been a Deutsche Bank and had helped orchestrate the debt financing for the Vodafone Japan acquisition. Masa had also lured him away and hired him into Softbank 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 worked on what I...

32:35believe 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 $32 billion. So that was what Rajeev worked on for his first couple of years. And so kind of simultaneously as Nikesh is leaving the company and Rajeev has just had this big success. And it's worth pausing for him over there. It's interesting to look at.

33:02pre-vision fun soft bank, 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 Heli Baba. They've got the telecommunications layer with Sprint and with soft bank Japan. They're buying the technology that is the design for the chipsets of every mobile phone today, 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.

33:31Yep, one really gets back to that vision, which will quote-unquote, that Masa 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, it's all of these things. So they acquire arm.

34:05And then immediately after that, another interesting meeting happens. So Masa and Rajeev are starting to think about Nikesh'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?

34:23And Masa ends up having a meeting in 2016 with the deputy crown prince of Saudi Arabia, who's in charge of running Saudi Arabia's sovereign wealth fund. That's an amazing title. Total, the deputy crown prince. I want business cards to say that. Yeah, totally. It's like the famous Mark Zuckerberg CEO 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 You should go watch the social network if you haven't already. So Masa gets this meeting in Tokyo with the deputy crown prince. Apparently, it's a 45 minute meeting. And by the end of the 45 minutes, Masa has convinced the crown prince to invest 45.

35:11billion dollars. Yeah, that's how it goes. A billion dollars per minute. Yep. Yep. Exactly. I mean, that's really how it went at wave. Not quite. So by the end of this meeting, they have a commitment from the public investment fund of Saudi Arabia to put $45 billion into a new technology and global technology investment fund that Softbank is going to start and that Rajeev is going to run. And that's the beginning of the vision fund. So SoftBank itself commits 25 billion on top of the 45 from Saudi Arabia. So that gets us to 70 billion. That's a heck of a general partner commit right there. Totally. Yeah, we did the same at weight now. Not even close. And then they announce at the end of 2016 that they're going to create this fund, which is already the largest ever. They're targeting $100 billion for the total fund size.

36:09They do the first close in May of 2017. They bring on Mubadala, which is the sovereign wealth fund of the UAE. They bring on Apple, so Apple invests a billion dollars into the fund. Sharp, I think, is another billion dollar investor investor. Yep. As is Foxconn and Qualcomm as well. Three billion from Qualcomm. Yeah. I think Larry Ellison's family office. It's a pretty nutty lineup. It's.

36:37totally nutty. And so the first clothes is done at 93 billion. So they still can raise up to 100, but they have 93 billion that they've closed on. As I mentioned at the top of the show, this is like like the largest fund ever raised in any other asset class private equity hedge fund real estate. What have you is like 20 billion dollars. So this just blows it out of the water.

36:59And it's worth thinking through to like seed funds will be, you know, 30 to 100 million. You'll have your sort of early stage funds that can typically or traditionally go up to 300 million. You've got 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 injuries and hororrhoids is in your Sequoias. And then this happens.

37:25Even when if you look all the way up at huge private equity firms like KKR, they manage 168 billion, but that's across a ton of funds that's happened over decades and decades of building reputation and risk models and an understanding of what the types of investments they're going to make. This is so unprecedented by an order of magnitude.

37:46Yeah, and the other really interesting thing. So the term of the fund, so what's in the charter of the fund for how long, what it's time horizon is, is 12 years. 12 years plus a two year extension. So up to 14 years for this fund to play out, that's even longer than your typical early stage venture fund. The typical early stage venture fund is 10 years plus a one year extension. So not only is this the largest fund ever raised, It explicitly has a longer time horizon than anything else including a private equity funds are usually five years hedge funds usually have like a one-year lock up and then you can remove your capital after that so it's it's both the largest and the longest fun longest time horizon fund ever is and here's why this gets really interesting so their goal with the fund is to deploy it and they want to make 70 to 100 investments which puts your average deal size around a billion dollars and so

38:45Typically, 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 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 two-ish, three-ish more years before a big exit, an IPO or an acquisition, those will be that sort of bigger check size, but shorter life.

39:14They're making billion dollar investments and they don't have to return the capital to their investors for 12 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. Yep. 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'd 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? Well, to a lot of people, it sounded pretty great. All right, listeners. Now is a great time to tell you about a long time friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would not and you're done.

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41:39So we promised you that we would be covering the fortress acquisition here, and again apologies for the very, very long 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 press release essentially, of the commitment from the Saudi Arabia Public Investment Fund, and then when they do the first close, in between that in February of 2017, Softbank makes a really curious announcement. They announced that they're going to buy an investment firm called Fortress, which was a publicly traded private equity firm and hedge fund, a so-called alternative asset manager, and they're buying it for $3.3 billion. And everybody was kind of scratching their heads. Like Fortress was in Is.

42:30a manager of multiple private equity funds, multiple hedge funds, multiple credit funds, debt funds. They invest in things like mortgage servicing, subprime lending, real estate itself, transportation. Zero technology. Yeah, not at all a technology investor. This is about as far away as you could get from technology and venture in the money management world. They're kind of a second tier Wall Street asset management firm. They're kind of a middle, I mean, 70 billion under management.

42:59You 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. No, they're most of that 70 billion that they have is in fixed income credit funds. So these are, you know, think...

43:13corporate debt, municipal debt, government treasuries, that kind of stuff. And when you manage those types of assets, the management fees that you take on that are much, much lower. So a typical venture or private equity firm will take what's called two in 20. So a 2% annual management fee to run the business on the capital that they've committed. So if you have a billion dollars committed, you'll take 2% of that annually in fees.

43:40and then 20% 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. Make sense. So that's why it's possible to have that 70 billion under management, but still get bought for what is a highly marked up 3.3 billion. Yep. So Fortress, super interesting, was actually, it started in 1998, originally as just a private equity firm.

44:07by three former investment bankers, and then two others joined shortly thereafter. And this was in kind of the beginning of the private equity boom. And then Fortress has also the dubious distinction of they were the first large private equity hedge fund asset manager to go public. Yeah. So in 2007, right before the financial crash, they go public. And then this kicked off a wave of KKR went public after this. 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.

44:57you know, as a basket of other things. It's nutty. And basically it's been kind of decided at this point that any fund that would do something like this, like this is a really bad sign and a bad way to manage these companies. 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 Madonna or Wave or, you know, KKR, whomever doesn't matter, they're all structured the same way. There's a management company, and that is what the people who started the firm, that's what they own, and the fees that we were talking about, those 2% annual fees on capital commitments, that's revenue that flows 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, then

45:50The the fees that your investors are in theory paying the people who run the firm to run actually getting dividend out are now getting dividend it out to public shareholders like the the 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 cash flows. Now, I would assume upon going public they needed a structure in a way that that couldn't happen, but it is interesting that 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,

46:40You've created a situation where the fee streams that are supposed to go to the people running the fund and making investments are now going somewhere else. And this is interesting, this is kind of what Softbank and the Vision Fund have ultimately end up picking up on. If you go back to Masa's now vision of infrastructure, of cash flow, of guaranteed cash flow payments. Like, what is more guaranteed than a contractually locked up management fee that is going to happen for 10, maybe in soft bank visions case, even 12 to 14 years. So when soft bank acquired fortress, everybody said, what is going on here? You know, soft bank wants to be a technology investor, but they're acquiring this asset management firm. It doesn't make any sense. Well,

47:24Flashboard, it takes a little while 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 2017, so just a few months ago. Then what happens, as we mentioned at the top of the show just last week in March 2018 now, SoftBank announces that they are creating a new division of the company called SoftBank Financial Services.

47:50Rajeev Mischa is the CEO. He's going to be running it based out of London. And in this financial services division, they are going to build, create, manage and acquire multiple funds. So the Vision Fund, the $93 billion Vision Fund is put into this vehicle. All of Fortresses 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 debt. The rest of those are getting pulled into this vehicle as well. Which is about 40 billion, right? Which is about a little over 40 billion. All told, this new division, Softbank Financial Services, has almost $140 billion 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 the value of the investments when they exit them.

48:48Okay, so what we're here today on acquired to talk about is Softbank is most of the way they've got 70 billion of their 100 billion already raised into the vision fund No, 93 93 of the hundred so I'm sorry at the time when they announced the acquisition. Oh, yeah, yeah, so they've got 70 billion 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 a regime. They've gotten rid of the sides of the business that don't make sense as much. But why? Why did you do that? Well, and I think this is what we see now is, and why we couldn't do this episode till now, people are asking this question. But now it's clear, they want, and Masa wants to become the largest...

49:41money manager in the world and they're already pretty close so like the next largest fund manager is KKR which has 168 billion under management KKR has 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 140 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, I think this is the New York Times from Rajiv. Right now we are close to 140 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 what pocket does it end up in, but the 25 billion that that soft bank contributed to soft bank financial services.

50:33Does that draw a management fee and is there carry on that? Or how does that work? Yeah, I don't know. I suspect though, if they structured it like a typical...

50:45what would be a general partner commitment in funds, 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 100% of the profits. So they don't, instead of getting 20% of the profits, they carry, they get 100% of the profits on that capital. And so then this is sort of interesting question of What is soft bank financial services? Is it a venture fund or PE fund or call it a private equity firm that has one very large LP called soft bank that put in 25 and then another very large LP that put in in 45 or

51:26is it corporate venture where they've also taken on a whole bunch of other investment, like the biggest corporate venture of all time that actually is a way bigger business than their core business. It's this weird and between thing that we've not really seen before. Yeah, well, let's move into it.

51:43acquisition category now. I think what's going on and with this announcement, to me, this is a new major division of SoftBank that is going to be its own business entity that lets just assume they have 2% management fees on capital under management and that they have 25 billion of the commitment from SoftBank so they're not getting fees on that.

52:05So remove that down to 115 billion under management. That is an annual fee stream of $2.2 billion annually of just straight cash flow into soft bank. As I was skipping ahead a little bit to where I was going to grade, I was just doing my calculation on just the 75 billion of the non soft bank money in the vision fund over the 12 years of the fund that draws an 18 billion dollar management fee.

52:34If you couldn't do the Vision Fund without buying Fortress, was it worth 3.3 to generate 18 guaranteed over 12 years? It really gets to that guarantee that you're talking about, that was so interesting, and what Softbank saw in Fortress. Yeah, yeah. And not to mention, if they can 2X the Vision Fund, that carries another 15 billion.

52:54the carried interest on the profits of that venture fund. And, you know, the goal obviously is to- I mean, the man is, oh, if they return 2X in terms of profits on the vision fund, then the carry that they get 20% of that is another- Well, it's even more than that if, say, the vision fund ends up at $100 billion if they return $200 billion. Oh, I was thinking of them just the non-soft bank portion. Oh, just the non-soft bank portion. Yeah. They, two X-ing of $75 billion fund, $75 billion, a profit of which $15 billion goes to soft bank financial services just as they carried interest off that profit. Now,

53:35I bet you they believe they can do a lot more than 2X, but... Well, I don't know. Maybe they do, maybe they don't. So this is where I think is sort of, to me, this announcement and doing all this research, what came out of it, the key to me is that realization that Masha had after the tech bubble burst about the value of stable, predictable cash flows and the management fee. So even if put aside performance of the Vision Fund, they could lose all of the money.

54:03And yet still, they're going to make $18 billion in management fees over the next 12 years from that 100% certainty. What can you finance within all the rest of soft bank with that cash flow? If that's not rent seeking, I don't know how you define rent seeking. It's just incredible. It's justifiable in lots of ways, but there is no arguing that that is just incredible.

54:31Yeah. So for me, the category, actually, I don't know that anybody would have predicted this when they announced the Vision Fund a year and a half ago and then announced this acquisition. But to me, this is a business line. This is a new business line within SoftBank that is a asset management business line that is going to be extremely casual or positive regardless of the outcome of any of the investments. Yep.

55:01and in a couple of interviews, they've alluded to the fact that Fortress probably isn't the only one and the next couple of years that they're gonna buy. Yep, yep, they're gonna buy more 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 that they needed to buy Fortress to have the sort of credibility to run and deploy a fund before they could raise the vision fund.

55:29I don't actually think that's it. I think they want to be in the business that fortresses in and they want to be in a lot of other financial services businesses too. Yep, yep. Now the question then is why would if you know this about the incentives, 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 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 they wanted to invest in Sequoia. Sequoia's early stage venture fund will even take their growth fund together too. That's probably about two or three billion dollars across the two of them.

56:21They're not going to 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 can't put that money back into their core business to generate a return on it Yep, and the dynamics are totally the same with the sovereign wealth funds. They just have so much money. They need to put it somewhere to try and create a return. So actually what the product that Softbank and Massa have created is a vehicle for that to happen. One thing we haven't talked about yet is 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

57:16owning big pieces of companies where they have actually quite a bit of control and big governing chunks of the companies in a lot of cases that are way more than your average venture investor 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. There's highly autonomous data driven, 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, Moss has been prescient a few times before and there are worse people to follow.

57:57Well, 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 soft bank invested in 800 companies to get those two, but between those two and then Yahoo Japan. That's the game, baby. Like, it doesn't matter. They got it. They made, uh, probably...

58:20If I say 60 billion from Alibaba alone, then you add in Yahoo and Yahoo Japan. That's probably another 10-ish, I'm guessing, so let's say 70 billion. And then now they're in the middle of doing this with the next wave of mobile, you know what that they did with Vodafone Japan, the carrier, then getting the iPhone, and then buying ARM. And now they're doing it with the next future wave of, you know...

58:46Well, it's sort of hard to define, but machine learning, artificial intelligence of 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, truly, like does anybody have a divergent vision from what the vision funds vision is? Like do we think that 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 it just feels like their vision is sort of like what everyone has looked around and not at their heads and agreed upon as the vision. But nobody else has created a vehicle like they have. That's true. That's true. I'll throw in. I also think it's a

59:39People acquisition also it's you know, it's a business line but there's a thousand people now in soft bank financial services many of them came from fortress They aren't the big name people, you know, it's not Regif that's that's you know running the operation, but although we did we forgot to mention the most important thing about the fortress acquisition Regif had worked at fortress directly before joining soft bank, 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 Softbank. Yep, great point. Great point. But you know, 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.

1:00:24you know, the trading desk for the- That's your relation. Public securities, all of these things. That's off bank didn't have anybody. And Fortress is over 1,000 people, most of whom are this back office element doing all this. So category you would say, 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 that was actually what I was going into.

1:00:52The episode or going into the research category that we have on the show and we're taking our license to just add more categories that work categories But doing the research I really realized that like no, this is a business line that is a new thing within a new product and business line within soft bank All right listeners now is a great time to thank our longtime friend of the show service now If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part. Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real.

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1:03:21Without something like soft bank, 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 return. Where is the tradeoff? Like, the question is, is it zero sum or not? Like, is soft bank, are the soft bank returns that are going to these new investors, these new LPs in the Vision Fund 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 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, because ultimately what's happening is big companies alongside sovereign wealth funds and soft bank are

1:04:19putting 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 private so public companies that they take private and what could have happened is instead of unifying that all into one fund which takes its own management fee 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 arms length transaction of having a 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. Well, and you're just limited too. I mean, Softbank made $60 billion from Alibaba.

1:05:12But that's still, even if they had turned around and used all of that capital to reinvest, that's still only $60 billion. Now, less than two years later, they have $140 billion because they've opened it up to others as well to Apple, to Qualcomm, to Foxconn, to Sharp, to Sovereign Wealth Funds. I guess I'm trying to make the point of like, what does Apple do with that billion dollars? Yes, they could go invested in startups, but they tend not to. Right. Oh, yeah. You're saying they would do it themselves. Yeah.

1:05:41Yeah, 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 soft bank plus Qualcomm plus the sovereign wealth funds. Right. I guess I don't really care about how much money because it's the same money, whether it's all spread out or put together, but for example, Let's see, what's a good example of one of these recent big, big, soft bank investments? Well, take the Uber investment. I mean, that was $8 billion. Yeah, how do you line up $8 billion from the types of LPs that the Vision Fund has in order to invest in an Uber and have that unified front in order to do the weird tender thing that they did for 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.

1:06:26Well, can 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. But Mark's length is actually value creative in that way. I'm buying it, or I'm trending toward buying. Well, I do think it's a new product. Nobody could do something like that before Softbank. Right. It's also value creative in the sense, like if you believe that partially saved Uber, it's massively value creative.

1:06:54that 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 line everyone up. Which honestly, the traditional venture, well, traditional venture community, I mean, you've got folks at the end of the spectrum like Wave that are, it's 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 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 1% or less stake in the business. You can't then drive change with that. Right. Great point. Great point. One other thing that I do want to say that you just reminded me of about the Vision Fund is even though they're deploying

1:07:53private equity sums of money, or even larger than that, they are acting like venture investors. So whereas a private equity firm would either take a company private and cut head count or buy a late stage profitable company and cash flow it, soft bank 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 profits out of it and 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 as 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, which

1:08:50we will hold on to. Indeed, indeed. It's the time horizon of the fund, too. It's not only is it the largest fund ever raised, it also has a very long time horizon. So it's structurally set up to operate just like you're talking about then. To be more of a venture investor mindset than a private equity, I'm going to come in and within three years squeeze. Yeah. All right, well, the first tech theme.

1:09:19Stay private longer. Stay private indefinitely. So that is the question, right? Are we in this period so to recap? I want to throw out a couple of pieces of data and I want to try and make this as digestibles as possible in a verbal format. In 2017, there was 80...

1:09:38for billion dollars deployed by venture capitalists, which is twice as much as 2013. So it's been steadily increasing since 2009, since after the real estate crisis, and twice as much venture dollars being deployed into companies today, or I'm sorry, in 2017 as compared to 2013. 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 less companies exiting for more money.

1:10:07And 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 waiting for the IPO explosion, where the 70 plus unicorns that exist today, the billion dollar plus valuation companies, are we waiting for them all to IPO, are we...

1:10:31somehow believing that there's going to be M&A that's actually buying that many billion dollar plus companies like are there actually acquirers that have the appetite for that? Or are we entering this new era where with funds like the Vision Fund is it possible to sustainably stay private?

1:10:48And 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 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 held privately through your growth years all the way until profitability and never go public.

1:11:09And 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 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 profits of innovation.

1:11:35Yeah. Well, in many ways, I have to imagine that for the Vision Fund, the model for the Vision Fund is Alibaba. You know, they invested in the year 2000. They invested 20 million. And the company then didn't go public until 2014. So 14 years later. And when they went public, it was at over a $200 billion market cap. So all of that value creation happened privately. Now, if that had been in the Vision Fund and generated 60 billion of value, or perhaps even more because they would have been able to invest far more than 20 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. 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. What happens to the...

1:12:30the 68th unicorn that is worth like 1.1 billion dollars and doesn't have a likely acquirer. I don't know. Yeah. Well, maybe the answer is just like you're saying, they operate as a private company in the same way that in the past they would have gone public and would have been a one to two billion dollar market cap public company indefinitely. They'll just be that privately. But yeah, I don't know. Well, to keep going on that philosophical piece there for a moment, There's a societal trend of wealth polarization and a sort of parallel trend is more power and more, 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

1:13:22and 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 an investor in the pool that that continue to capitalize that company later on. I think there's a yes but here yes a hundred percent but soft bank itself is a public company. So anybody, you know, you and I can go invest in soft bank right now. And then we're benefiting from this. Which is super interesting when you actually think about this and compare that to how it would work otherwise if this were all, you know, if this were Sequoia or whomever, which Sequoia supposedly is raising a $12 billion fund to compete in some sense with with with soft bank here.

1:14:20The public has zero access to that. Whereas anybody, you know, our parents and grandparents can go by share as a soft bank. 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, all getting a cut. It's turtles all the way down there. And it's actually circular too. That's the craziest thing is like, I don't need to paint the whole circle, but like there are ways where you can own something and simultaneously be owned by something all the way around.

1:14:48Okay, so my question for you, David. We've talked a lot about the value creation here. Let's talk for a minute about being value destructive. Is there any way that some of the repercussions 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 any VC in Silicon Valley and they'll talk here off about this.

1:15:15feels like they may have an opinion or incentives to have an opinion. Yes. Yes. Well, with that caveat in mind, I mean, I think the scenario in which this is value destructive is, you know, what is, you know, I view as, you know, having been in VC for a while and observed like companies there's this almost like law of gravity with companies and 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 I wonder how that happens thing that is largely driven by IRR 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

1:16:01forces that 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 get a return out of it. Yep. The problem is when you have so much money flowing into the ecosystem and into direct competitors with one another.

1:16:25Primarily, then, the way that the money gets spent is in customer acquisition. 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 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.

1:16:54Truly. It's really. It also can train an organization to only know how to spend irrationally on customers where you will never be able to when you have to spend rationally be able to get customers for less than their long-term value. I'm thinking back to our episode on Zappos with Alfred Lin and him talking about the best thing that happened to Zappos was the .com crash where they then A had to learn how to Operate leanly and acquire customers through things like the ad units in the in the shoe trays and in the 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 the sort of Downside scenario that a lot of VCs would paint about what the vision fund is doing is it's just gonna

1:17:47It's just going to create this hyper competition 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 capital in this kind of war of attrition, whether that's Uber or Lyft or DD 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 up valuations or unjustifiably drives up valuations?

1:18:15It depends how big you think any individual market opportunity is. Yeah. Well, one more tech theme, I feel like we've now painted all sides here. One more I want to slide in before we move to grading is just this whole story and doing the research and really learning about Massa reminded me so much of Jeff Bezos. A theme I just want to call out here is what he's done.

1:18:43If you look at the Vision Fund and this whole asset management business line as a business, 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...

1:19:08add businesses versus Amazon, which builds them in-house. But I think it both approaches have the same root, which is just being willing to constantly push the horizons of what your company is and how big it can get. Yes, 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?

1:19:35It's market engineering and financial engineering right now in a big way. You look at Amazon and you ask that same question and it's 30 things. It's two or three that are multi-billion dollar. It's a very different way to go about the same problem. They have very different reputational things associated with them. If you talk to somebody who has soft bank on their board, they may tell you Boy, it's really tricky to deal with them. They take tons of control provisions. They take a huge number of voting shares in the company. They're highly opinionated on what we need to do and how we need to do it. I think your mileage may vary and different people may say different things, but if an investor is sort of too controlling and coming into a company, it often has negative reputational things associated with it. Look at the way that Amazon is doing it, instead of SoftBank.

1:20:26They have 100% of the economics in that, the new quote unquote company. They have 100% 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 kind of this funny, like not invented here, us versus them inside outside dichotomy. David, I love the way that you framed it 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. That's interesting. Maybe the ultimate what would have happened otherwise would be if Jeff Bezos had accepted Moss's proposal to create a joint venture Amazon Japan. Amazon bank. Yeah. That'll be a story for another day. Should we create it?

1:21:20Let's grade it. The criteria we're grading on here is how good of a decision was it for soft bank to buy fortress. And so to walk through that, you sort of need to have a, since they're not done yet, a perspective on what soft bank will be in the future, how big it can be, and how much buying fortress actually had to do with that. And was it worth laying out the 3.3 billion? I will make the case that just from a, is it a good place to to park your money perspective, they did actually pay up pretty good for... For Fortress? For Fortress. Yeah, I mean, it was about... It could be about 40% premium. Yeah, and typically when you're buying a publicly traded company, we see 20 to 25% premiums, so expensive purchase, but the question is, if it was essential to creating this new vehicle, this soft bank financial services, that as we talked about, we'll generate...

1:22:1920 plus billion dollars over the next 12 years from the Vision Fund and Fortress, just from fees. It feels super justifiable. The question is, is it Apple next justifiable? Is it Instagram justifiable? Did buying Fortress give them this 100x upside on that purchase? Do you want a great first or do you want me to? I want you to grade first. Well, to me, I never would have said this before we dug in on the episode. I mean, especially being in the Silicon Valley ecosystem here and everybody poo- pooing soft bank, which again, there are definitely negative consequences to what's happening here. I think it's brilliant. Like, Masa is, he created a brand new product, which is a vehicle for these very large pools of capital to credibly invest in

1:23:13in growth and in the future. And I don't think anybody else except him could have done it credibly. And I think the fortress acquisition for $3.3 billion as a means to jumpstart that and to within a year and a half become the world's second largest fund manager. And with a goal to in another few years being double that, to me, it's a neck. I mean, we will see how it plays out over the next few years, but even already like adding that infrastructure.

1:23:42to 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 Fortress. Like the Vision Fund was like a couple of people, you know, with no management, no compliance, no trading desk, no nothing. So the question then to me is like, So 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, did Fortress actually give them the ability to deploy that capital, or is it still pretty much, you know, Rajiv and Masa that are doing the main investing? Well, I think you got to think about it beyond the vision fund. Like Fortress gave them the ability to be a money manager.

1:24:41The Vision Fund is the first product in this. I see. I was thinking about like, do they have to show returns from the Vision Fund in order to raise Vision Fund to no? But will they have to raise Vision Fund 3? Yes. And let's say they're not actually that returns focus. They're more fee focused at this point. What really matters in this context, I think, is would they be able to to raise Vision Fund 3 and draw the predictable cash flows from the management fees of that?

1:25:08Well, 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 going to buy other asset management firms. I mean, I'm less convinced than you, so I'll go A- but I think this is a very dangerous company for the next few decades. But you know, I can like, 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. Well, listeners, before we jump on to 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 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, thanks for coming with us on this journey. And we hope that this sort of provides a nice

1:26:05canonical understanding of what is soft bank, what is the vision fund? Why is it all happening and what's it gonna be? It certainly shaped my thinking on it. Yeah, me too. Thank you as always. Carbouts? Carbouts. So I've got two. The first one is a shout out to friend of the show Brian McCullough of the internet history podcast.

1:26:24So Brian's launched a new podcast with tech meme called The Ride Home, where you can get highlights of the news of the day. So if you want to stay current in a bite-sized chunk, it's really fun, and Brian's a great host, and it's a really great way to kind of keep in touch with what's going on, and get a little bit of Brian's loose editorial on things, which is always great. And the second one is, David, I think I texted you this. I finally got around reading e-boys. Uh-huh, so great. It is a...

1:26:51such an awesome book. For those who haven't heard of it, it is about the founding of Benchmark Capital. It was published in 2000. So the whole thing is colored with, you know, it's...

1:27:02the five, six years, five years, I think that benchmark was around the really sort of special relationships between the founding partners, bringing on Bill Gurley, the early investments that they made, the incredible story of eBay, the nuttiness of the dot com bubble, and the author is actually embedded with benchmark.

1:27:22to 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 it's crazy. You do get to hear these really like everyone, you talk to lots of people, especially now in crypto or back in the bubble days, who will tell you like, oh, I called it and you're like, really? Because like, why didn't you move all your money out then? And you get to hear some of the comments in 98, 99 in benchmarks office where one partner will say to another, this doesn't feel right to me for these reasons. And it's amazing to actually have documentation of that. And so the most fascinating part of the book is it's really before everything.

1:27:56completely 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 kind of want, like, I want to read part two, like what, you know, what are all the opinions in 2004 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, no, it's the very fact of it.

1:28:24Being written and the reaction when it came out like no venture firm would ever do this again But it's just so great that it happened and happened with with benchmark one of the very best firms like I learned so much reading this book It's just an incredible resource David. I don't know much about it. What was the reaction when it came out?

1:28:43Well, I think benchmark was mortified because it like it paints this window into, you know, and during the go-go days too and everybody was making so much money. They did all make an insane amount of money. And insane amount of money. And like all the dirty laundry gets aired. Like, you know, people's opinions of other people and like, oh, you know, is this founder the right part? Are we gonna fire there, you know, like, and bringing in the new seat? Make women is the new seat. I will say though, like benchmark comes out pretty good. Like the... Oh, yeah, they do. It's the other firms that I would...

1:29:12All of this stuff tends to be so private, and that's why this book can never be written again. It's a real true window until what it's like on the inside. In an industry that has only gotten more private. Yep. And the names are named. Yeah. And there are the names. Every name that's in there is the names in venture. Totally recommend it. Well, mine real quick.

1:29:40Just can't, you know, give enough shout outs and thank yous to Nick Fight, other friend of the show and former episode. One of the other books he recommended to me was he's just got all my carve outs like covered was the three-body problem. This amazing sci-fi book written by Chinese author Liu Shishin. I hope I'm pronouncing that right. It's incredible. The three-body problem is the first in a trilogy. The trilogy is the remembrance of Earth's past.

1:30:08Three-body problem is great. The second book in the series, The Dark Forest, was actually my favorite. There's like a, 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 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 that Earth has the only life in the universe.

1:30:37But we haven't received any signals from anyone else. Why not? And this is a potential answer to why not. And it's really cool. So highly recommend it. Thank you, Nick. Cool. Well, David, I think that's what we've got. Believe it or not, we are out of things to say. I know. Our offices just keep getting longer. We need to get some quick ones in here. We do. Listen, there's some exciting stuff coming up in the next few weeks. We've got a an IPO with Dropbox, we've got, is it technically an IPO of Spotify? A direct listing? Yeah, I think it's just a direct listing. There's no offering because they're not creating any new shares to sell. No. So that'll be a fun one. We'll try and get that out in short order after trading begins with a typical acquired narrative and our quick take on what's going on. I think that's all we've got though. We're out of gas. We are. I'm hungry. Thanks for sticking with us.

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