It’s hard to write and speak about Asia tech without talking about SoftBank and its billionaire Chairman Masayoshi Son. He has been a major player in digital Asia (including China) for 4 decades. And his Vision Fund and its companies (WeWork, Uber, Didi, Oyo, etc.) are a staple of tech news.
But I have long been confused by SoftBank and Masayoshi Son.
On one hand, when he speaks about tech companies like Uber and WeWork, I almost always think he’s wrong. His analysis seems terrible and often nonsensical to me. And he tends to buy companies within minutes of talking to a CEO, which (if true) is crazy. Or at least indicating that he is not doing much real analysis.
On the other hand, he has built a global tech empire in one lifetime – and it spans multiple waves of technology. He has been consistently building in AI, telco, software, and smartphones for decades. He is not a one hit wonder.
So he’s a very successful tech guy despite being really bad at tech analysis (in my opinion). I’ve struggled with that for a long time.
But I’ve been coming to the conclusion that Softbank has a really smart strategy. That Masayoshi Son has basically hacked the luck vs. skill question and is doing what I would describe as luck-based tech investing at scale.
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Here’s my take.
The Luck vs. Skill Question
Investors are always talking about luck vs. skill. When you win at poker, is it because you outplayed the other person? Or is it because you had better cards? How much of winning at poker is skill vs. luck?
You can actually quantify this in some situations. If a student learns 80% of the 100 facts presented in a lecture, and then takes a test with 20 questions, he/she may get a score higher or lower than 80%. If the student gets 90% on the test, you could say that score was 80% from skill and from 10% from luck. I talked about this in my podcast about the internal vs. external view and regression to the mean.
- What Ant Financial Tells Us About the Future of Square. Plus, Why The External View Is So Hard in Digital. (Jeff’s Asia Tech Class – Podcast 61)
In that podcast, I described studying a specific company or set of competitors as the internal view. While studying the average performance of large numbers of similar companies is called the external view. And as an analyst, you really want to do both. But we tend to like to focus on the internal view and all the details of a couple of companies. Generally the internal view tends to be more important for businesses and activities that are about skill. The external view is better when it is more about luck.
This skill vs. luck question gets really interesting when you start looking at tech. Because in this space, a little bit of luck can result in dramatic returns. If you have a hot run as an insurance underwriter or CPG stock picker, you might be up 30-50%. But if you start or invest in one tech unicorn, you can get a 1,000x return. Skill is how I approach looking at tech companies. But a little bit of luck can also really change the numbers. Venture capital firms are designed to take advantage of this asymmetry in tech returns. A successful fund can lose on 9 investments as long as it hits 1 out of the park.
And here’s the twist. A little bit of luck in tech can not only get you big returns, it can also be perceived as skill. Some examples:
- Early Mark Zuckerberg was mostly about luck. Yes, there was solid execution but his success was mostly about doing the right type of business (a social network) at the right moment in history. Note: when a 20 year old college drop outs does really well, it is usually about timing, luck and the willingness to take risks. Skill is not usually the major factor.
- For example, when Elizabeth Holmes dressed up in Steve Jobs-like turtlenecks and built Theranos, everyone called her the wunderkind of medical testing equipment. But biotech is almost entirely about skill. And it requires advanced training in biology, chemistry and other fields. There are no 20 year college drop-outs who have created new drugs and medical equipment. In retrospect, the Theranos fraud should have been obvious (like always).
So how much of Masayoshi Son’s story as a tech investor and entrepreneur has been about luck vs. skill?
My conclusion, as mentioned, is he has a strategy for luck-based tech investing at scale.
Which brings me to Tom Cruise and Jamie Foxx.
SoftBank and Jamie Foxx “Spray and Pray” Investing
In the 2004 movie Collateral (which is awesome), Tom Cruise plays professional hitman Vincent. The movie is about how Vincent goes to Los Angeles to kill 3-4 people in one night. And he forces taxi driver Max (Jamie Foxx) to drive him around to his assassinations. Vincent is the highly trained professional killer. Max is the bumbling taxi driver with no experience in violence.
Eventually, the two face off (with guns) in a subway train. As Vincent closes in on Max, he yells “Max, I do this for a living”. Vincent fires as he comes through the subway car door. And just as the lights go out, Max closes his eyes and fires back until empty. When the lights come back on, Max is unhurt but Vincent has a bullet in his chest. And he sits down and dies.
The video of this scene is here.
I think Softbank has been doing a version of Jamie Foxx “spray and pray” strategy for like 40 years. This is what it looks like to me.
- Masayoshi Son identifies a really big tech trend. Something truly transformative. Something global. A tech trend that could potentially create unicorns and 1,000x returns.
- He closes his eyes and empties his guns at the trend.
- When the lights come on, he hopes he got lucky. If he did and one investment hit, SoftBank makes a killing.
- The losing or flat investments are written off, sold or he does deals with them.
- And everyone assumes he must be an amazingly skilled investor. Everyone concludes Max is really skilled with guns.
I think this is mostly a luck-based strategy. And his important skills are not in investing. I think his important skills are in:
- Identifying the biggest tech trends and paradigm shifts (which is definitely a skill).
- Being aggressive and totally fearless in going after them. Perhaps to the point of appearing, and maybe being, delusional. Note: I always ask people who have met Masayoshi Son, “Is he crazy? Is this just a crazy man doing tons of deals?”
- Being really good at private deals and financial engineering. He knows how to find deals, structure them to reduce risks and exit them.
He started doing this strategy as an entrepreneur. He launched lots of companies and did lots of deals as a frenetic young man. And he gravitated to software early on. These early companies morphed into SoftBank, where he continued doing this as corporate venturing. And later it joined with an investment vehicle (Vision Fund), which is where his strategy eventually failed (probably, but not clear yet).
Look at the Softbank history and I think you can see the pattern:
- In the 1980’s, the big trend / paradigm shift he targeted was the adoption of personal computers and software. He made his first big fortune distributing packaged software in Japan. He expanded this into publishing and media related to PCs.
- In the 1990’s, the big trend he focused on was the shift from PCs to the internet. During this period, he invested in Yahoo. And he launched Yahoo Japan (still a major holding of SoftBank corporate today). And he then bought Alibaba in 1999, arguably the greatest investment of all time. That $20M investment became $60B.
- In the 2000’s, he focused on fixed line broadband and mobile telecommunications.
- He bought Japan Telecom and turned it into Japan’s leading broadband provider. Today, this is SBG’s #1 source of revenue (sort of).
- He later bought US Sprint in 2013. He merged it with T-Mobile in 2018. Today it is the #2 source of revenue for SoftBank (Sort of. It depends if you count sales of businesses and investment returns)
- In the 2010’s, he focused on AI, IoT and pretty much every other tech sector.
- He bought ARM Holding in 2016, which is a pretty amazing business.
It looks to me a frenetic deal guy firing blindly at the biggest tech trends and paradigm shifts. And I can’t deny that it has resulted in a handful of really big hits, whose returns have overshadowed everything else. That offends me as an analyst. But I’m slowly accepting that analysis may not be the best (or at least only) strategy in these spaces.
I think there are (at least) two problems with the Jamie Foxx “spray and pray” strategy: deal advantages and scale.
Value Point and Why the Vision Fund Failed(?)
Masayoshi Son is overwhelmingly a private deal guy. He is not sitting at his desk every day going through company filings and searching for mispriced value. He is flying around frantically meeting people. Building his network. Building his reputation. And hunting for deals. My old boss Prince Alwaleed was like this as well. Analysts and deal junkies really have different personalities. And different lifestyles and habits. In one, you are searching for value. In the other you are searching for the opportunity to add value. Here’s my summary.
In value investing, you can have certain advantages as an analyst, such as in analysis, information and psychology.
But you can also have advantages in private deals. It is about being able to bring value to a company at the time of buying. This can accomplish a couple of things:
- You can open the door to companies that others cannot access. Top quality companies usually don’t need money. So you need to add another type of value.
- You can increase the economic value of the company, which means you can pay a higher price and still make money.
- You can eliminate competing bidders. Especially those only offering capital.
So my three most common questions are in a private deal are:
- What is the company quality?
- What is the price vs. value?
- What value can I add?
And analysts and deal people have different advantages at these stages.
I generally think you can have 5 types of advantages and value add at the deal level.
- Capital: Money that is larger or deployed fast or invested for longer is an advantage. So is the reputation of the investor.
- Political Access: This can be very important in real estate, telecommunications, banking and many other sectors. Especially in certain countries. Political access can mean faster regulatory approvals, government contracts, land rights and many to other things.
- Management. Turn-arounds, activist, etc.
- Local Capabilities. Adding expertise like brands, technology, partnerships, local resources, etc.
- Foreign Capabilities. Adding foreign expertise like brands, contracts, overseas customers, etc.
When Warren Buffett does private deals, his main advantages and value add are related to capital. He can inject very large capital, which few companies can do. He can also do it quickly, often within days. And he has a reputation that is very different than, say, a PE firm. He says most of his private deals happen because:
- A company needs a large amount quickly. (say $5B in two days because they are going bankrupt). He can make those types of decisions, as he did during the financial crisis. This is speed, size and length of capital.
- The founder is of a great company is retiring and wants a good home for their company. Not a PE firm. This is where his reputation is a big advantage.
My old boss Alwaleed was a master of this type of value-added deal making. He could deploy all five advantages in a single big deal.
Back to SoftBank and their problems with access and scale.
When I look at the Vision Fund, I see an attempt to create a powerful advantage at the deal level. Masayoshi Son’s biggest problem has always been getting access to the best companies. Getting into proven great tech companies that everyone wants to invest in. You can either go very early stage and try to identify the great companies before everyone else (which he did with Alibaba). Or you can go later stage with a big capital or other advantage, which is the Vision Fund.
For the Vision Fund, he raised approximately $100B, making it the largest tech fund ever seen. And he was then able to call up all the established, proven tech winners (Didi, Grab, Uber, etc.) and make them offers they couldn’t refuse. Take $5B from me or I will give it to your competitor.
And it worked. He got access to all the best tech companies. And within two years, he had invested in 70 companies in the US, Asia and EMEA. This included companies in transportation (Uber, Grab, Didi), logistics (Doordash, Koubei), fintech (Paytm, ZhongAn), frontier tech (Arm Holding), health tech, real estate (WeWork), consumer (Oyo, Tokopedia, Bytedance) and enterprise (Slack). It was a crazy deal-making spree. And he distorted the entire private capital market for technology.
But it worked. He solved his access problem. It was Jamie Foxx with a machine gun.
But it had a fatal flaw. If you are doing luck-based strategy at scale, you may not have enough unicorn winners to make it work. There may simply not be enough of them out there. At a small volume, like an entrepreneur or a regular VC, you can get away with some skill and some luck. But luck-based strategies might not scale beyond a certain point.
And the vision fund is showing tons of losers. Massive losses in companies like WeWork.
Financial Engineering Is the Final Piece of the Strategy
However, I think he has a solution to this scale problem as well.
I mentioned has one other skill I really like, which is financial engineering and deal-making. He appears to be incredibly good at structuring deals. Accessing other people’s money. And I suspect he is going to deal away the losing bets. Or push those losses to others, while keeping the upside (i.e., financial engineering). It looks like the Vision Fund is set up this way.
What if you can do a luck-based strategy at scale where you are pushing the losses to other investors? What if you can write into the fund and deals, terms that reduce or remove your risk? So even if you scale up and do luck-based strategy at scale, any increased losses get pushed to others?
When the dust settles with SoftBank, I think they will end up holding the crown jewels. But we shall see.
So for luck-based tech investing at scale, I think the important skills are:
- Identifying the biggest tech trends.
- Being aggressive and totally fearless in going after them as an investor.
- Being really good at private deals with a powerful value-add. Knowing how to find deals, structure them (to reduce risk) and exit them.
- Be really good at financial engineering to reduce risk.
That’s it. Cheers, jeff
- What Ant Financial Tells Us About the Future of Square. Plus, Why The External View Is So Hard in Digital. (Jeff’s Asia Tech Class – Podcast 61)
From the Concept Library, concepts for this article are:
- Value Point
From the Company Library, companies for this article are:
- Masayoshi Son / SoftBank
- #36: Value Add and Financial Engineering (Ques 5)
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