Masayoshi Son’s Hail Mary moment: Can he save SoftBank and the global venture capital industry?

When Masayoshi Son founded Japan’s SoftBank in 1981, he admits he had no money, experience or talent. But less than 15 years later, the University of California graduate would control around 50 percent of the market for PC software in Japan.

The following decade would bring even more impressive growth as SoftBank (TYO: 9984) became the world’s largest tech investor.

In 2021, SoftBank’s record net profit of $45.88 billion topped that of Warren Buffet’s Berkshire Hathaway in the same period ($42.5 billion).

Son, through SoftBank’s funds, invested feaverishly as the technology sector soared. During Japan’s lockdowns in 2020/2021 he reportedly made 60 investments from his Tokyo mansion in just three months, as Softbank’s total investments reached almost $100 billion between 2016 and 2021.

Some of the Japanese giant’s investee companies include the likes of Uber, WeWork, ByteDance (owner of TikTok), Ola Cabs, Didi, Door Dash, NVIDIA, Plenty, FTX, to name a few.

The list above might give you a hint about SoftBank’s fortunes post-2021.

SoftBank’s latest results

As financial markets and the global economy underwent a tectonic shift in 2022, the world’s venture capital poster child has seen its investments and profits crater.

SoftBank posts quarterly results in line with the Japanese financial year, which ends on March 31.

SoftBank’s latest results released on November 11, cover the six month period to the end of September 2022 – essentially half year results for FY 2023.

During the period it lost close to US$950 million. This compares to a profit of around US$2 billion in the corresponding six month period in 2021.

Analysts are now tipping SoftBank’s losses will continue widening in the second half of the Japanese financial year.

And what about the valuations of its investments? For the July to September quarter, the valuation of its investments in its two ‘Vision Funds’ and its Latin America focussed start-up Fund, fell by close to US$10 billion.

This $10 billion loss on investments (in just three months) included an approximately $100 million write-down on its investment in failed crypto exchange FTX.

Masayoshi Son’s ‘hail mary’

The technology rout, and the devaluation of SoftBank’s investments in unprofitable tech haven’t just led to the demise of SoftBank’s balance sheet and share price, the personal finances of Masayoshi Son are also under fire.

In November, the Financial Times revealed Son personally owes Softbank US$4.7 billion, which he borrowed from the company to use to invest in the firm’s funds at the height of the tech bubble.

Here’s an excerpt from the FT.

The billionaire’s ballooning personal liabilities, discovered through a Financial Times analysis of SoftBank’s recent filings, comes as the world’s biggest tech investor was hammered by plunging tech stocks and valuations in private companies over the past year.

The widening losses in SoftBank’s various investment vehicles have also added billions of dollars to the tab that Son owes the group in relation to its technology bets. This is because SoftBank fronted him the money to invest in its technology-related funds, which he is under no obligation to repay for many years.

But it now appears Son sees one way out of this potentially catastrophic Softbank collapse – the only way most VC’s know – an IPO.

In recent weeks, Son announced he’s stepping back from the day-to-day operations of Softbank to focus on taking the company’s semiconductor chip designer subsidiary, Arm Limited, public.

“Arm’s field of activity will expand explosively,” Son declared in a briefing for SoftBank’s Q2 2022 results.

“The current climate is such that the companies, those listed or unlisted, that we have invested are being hit so hard, that their results have almost been wiped out. This has given us a lot to consider.

“The question is what path should Softbank Group take now? I will concentrate on Arm and the fields surrounding it. This is the most useful thing we can do for shareholders of SoftBank Group. This will be my last message for the time being at an earnings results meeting.”

Softbank acquired UK-based Arm Limited for US$32 billion in 2016. Arm’s chips are widely used in smartphones, including the Apple iPhone.

Softbank collapse
Masayoshi Son at Softbank’s Q2 2022 earnings results briefing in November 2022, where he revealed he’d be stepping back from SoftBank to focus on the IPO of the Group’s chip design business, Arm Limited.

SoftBank is said to be seeking a valuation of US$60 billion – almost double the original purchase price – when Arm IPO’s in London in 2023.

But Son will have his work cut out. Plans to IPO have reportedly been delayed to due to global economic and market volatility, particularly in Europe where Arm is based.

While in February 2022, a $US40 billion proposed acquisition of Arm by chip giant NVIDIA was terminated due to “significant regulatory challenges”.

If the Arm IPO fails… SoftBank will bring down the venture capital house

Hedge fund management veteran, Chris MacIntosh, has been warning of Softbank’s demise since 2019.

“I think SoftBank is potentially the Lehman of venture capital. Not in the too big to fail bracket, but in the ‘bring down the house’ bracket,” he says.

“That has ramifications not just in VC, but across a broad set of asset classes, so it cannot be ignored by investors.”

MacIntosh compares the state of the Venture Capital industry today to that of the US housing market just prior to the 2008 Financial Crisis.

“We all know about the Global Financial Crisis, which was an excess in the housing market. That was a 2008 affair.

“Purely from a timescale perspective, we’re due around about now. We sure as hell are pretty damn pregnant. Take a look around yourself today and tell me what’s crazier than WeWork, Uber, Lyft, Alibaba, Tesla, and yes, SoftBank?

“I’m 100% certain that this time around it’s going to be VC.”

A classic ‘ponzi scheme’

If Son can pull off a liquidity windfall through the Arm IPO and save SoftBank, MacIntosh says it will be “like making love with a crocodile”.

“It’d be a heck of a story to tell but only because the odds of coming out alive are so slim.

“It’s the classic Ponzi scheme. You always need fresh new capital to pay off the old capital in order for the scheme to continue. When there is no fresh new money, everything reverses and folks quickly realise the value of positive cash flow.

“Softbank accounts for half the outstanding Japanese corporate bonds. It is by far the biggest issuer of retail bonds.

“Now, if this wasn’t bad enough, consider that this is a company as opaque as Casper. What we’ve got here is a gigantic entity with questionable financing arrangements that hold an isht ton of negative cash-flowing assets and is loaded to the eyeballs in debt.”

More than 40 years on from starting SoftBank with, quote, no money, experience or talent, today Son has it all. But never has it looked more vulnerable.

In the coming months, we’ll see if that money, experience and talent can prevent the Lehman moment of VC.

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