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    SoftBank fails to live up to its lofty tech promises

    November 2019

    If you decide to invest in a company at a valuation of 47 billion US-Dollar one week, and find yourself conducting a rescue financing at a valuation of 8 billion US-Dollar the next, then something was badly wrong with your original decision. That is the situation SoftBank finds itself in with respect to WeWork, the shared office provider. It should prompt reflection from Masayoshi Son – the storied Japanese entrepreneur behind the group – about whether he is pursuing a vision of the technological future or just a fever dream of financial engineering.

    Following the failure of WeWork’s attempt to go public, SoftBank has cooked up a scheme that will see it inject 6.5 billion US-Dollar through a combination of debt and equity, while paying nearly 1.7 billion US-Dollar to buy out founder Adam Newmann. The deal in my opinion has a strong odor of throwing good money after bad. It also raises important questions about the accounting value of SoftBank’s stake. Given its proven inability to value WeWork correctly, SoftBank’s auditors should make their own judgment, not accept whatever price it pays as an indication of value.

    The bigger question raised by the WeWork affair is in my opinion whether SoftBank and it’s 100 billion US-Dollar Vision Fund, backed by Saudi Arabia and Abu Dhabi, are truly technology investors at all. Mr. Son says he wants to be “the conductor of the artificial intelligence (AI) revolution” and all the entrepreneurs he backs are the orchestra. He says “AI is the biggest revolution in human history” – I agree with that – and vows to grab every opportunity that comes up: Aside from the grabbing, these proclamations seem to have little connection with how the Vision Fund behaves.

    WeWork is an obvious case in point: it subleases office space. There is in my opinion no major technology involved, let alone artificial intelligence (AI). Although the Vision Fund’s vast investments in ride-hailing companies such as Uber, Didi, Ola and Grab are enabled by mobile communications, their existing business uses little AI, and a lot of regulation-skirting drivers in mini vans. Chips made by Nvidia are widely used for AI, it is true, but SoftBank quickly flipped its investment. Mr. Son’s main contribution at UK chip designer ARM, Meanwhile, has been to hive off a controlling stake in its Chinese arm to local investors.

    The strategy to me seems to be less about technology and more about hoping every industry will turn into a winner-takes-all competition that can be won by the player with the most capital. It is a dispiriting way to deploy 100 billion US-Dollar. Peter Thiel, the venture capitalist, once complained: “we wanted flying cars, instead we got 140 characters.” A reference to the original character limit on Twitter, Mr. Thiel was becoming the tendency to invest in incremental software improvements, rather than transformative technologies. With access to such a vast amount of capital, Mr. Son could have pursued the kind of engineering projects – in aerospace, nuclear or AI research – that are normally beyond the reach of any investor but a government. Instead, he has assembled a portfolio of mainly “140 character” companies.

    The fiasco at WeWork will make the public markets sceptical of future Vision Fund offerings, but as a businessman, Mr. Son is not to be counted out. Compared with his troubles in the wake of the internet bubble, he recently said, “the small crises that pop up here and there today are mere child’s play”. SoftBank and the Vision Fund are big enough to weather even WeWork-size losses if some of their other bets pay off. To restore confidence, what is needed most of all in my opinion is some evidence that the vision Mr. Son describes is in some way reflected in investment reality.