How SoftBank Lost $70 Billion

In 2017, Masayoshi Sohn convinced someone to invest $45 billion into his SoftBank Vision Fund. And he did it in just 45 minutes. Who was this mysterious investor? What can his eagerness to invest tell us about the Vision Fund? And what did Masa say to convince him to invest so much money? Today, the insane story of the rise and fall and rise and fall of Masa Sohn, Softbank and the Vision Fund.

There are two kinds of people when you make mistakes. One kind of people don't want to ADM that you have made a mistake. And those people try to make all kinds of excuses. And the other group accept the mistake. I would rather accept my stupidity, my ignorance, so that I can learn.

Masayoshi Son was born on 11 August 1957 in a city in the southeast of Japan called Tosu. If you think Son is an unusual Japanese family name, you're right. Masa is a third generation Za' enichi Korean, the name given to people of Korean descent whose families came to Japan during the colonial period. Zaanichi Koreans are the second largest ethnic minority in Japan, but many, like the Sohn family, were discriminated against. Masa grew up in the kind of poverty that is totally unrecognizable from his wealth today. His childhood home was a shack illegally built on land that was owned by Japan National Railways. He shared it with six siblings. Masa's father scraped together a living for the family by raising pigs and chickens on this tiny parcel of land. Eventually, he started an illegal sake business. The business was successful and the family was able to buy a car and move to a new neighborhood closer to better schools. Masa's energy and eagerness to learn were obvious from a young age. His business career began after he met his idol, Den Fujita. Now, Den Fujita was a fascinating guy in his own right. His main claim to fame was bringing McDonald's to Japan. After first eating one of their burgers in 1967, Den became obsessed. He believed that if Japanese people eat McDonald's hamburgers and potatoes for thousands of years, we will become taller, our skin will become white and our hair blonde. Kind of crazy to say that. He overcame deep skepticism that McDonald's would ever succeed in a country like Japan and built a network of thousands of restaurants. Masa was captivated by Den's ambition and his ability to bridge Japanese culture and Western culture. Den urged Masa to study English and learn about the rapidly emerging computer industry and to do so in America. Masa had a burning desire to overcome adversity and elevate his family name to the position he believed it deserved. Later, when he was an established entrepreneur, Masa's colleagues would cite his outsider complex as a key to understanding his approach to investing in. More on that later. At the age of 16, Masa decided he wanted to move to California, and he told his family he was going by himself. His mother was heartbroken. How come you're leaving us and going all the way to the United States? She asked in disbelief. It's a bunch of barbarians who live in that country. Masa's father was more circumspect. He knew his son had a strong will and that he was stubborn. If this was his decision, no one was going to change his mind. So he knew the best thing he could do was to provide him with some money. Masa flew to Oakland. There was a Catholic university there called Holy Names College, which had a special program for foreign students to learn English. Because he'd already spent three months as a freshman in Japan, Masa entered high school as a sophomore. After one week, he was promoted to a junior. After another week, he became a senior. After half a week of being a senior, he took an exam and graduated. Masa Sohn graduated from an American high school in a language he had been learning for only a few months, and in two weeks he returned to Holy Names College for his freshman and sophomore years. They were actual years this time, before transferring to Berkeley to study economics. But he didn't forget the advice of his idol, Den Fujita, so he made sure to also take some computer science courses. For many people, college is a time to learn about yourself and meet other people. But for Masa, college was an opportunity to try out the hundreds of different business ideas his relentless mind had come up with. Inspired partly by Den and partly by his own reading, Sohn became convinced that computer technology would define the next commercial revolution and that it would yield him his fortune. Masa decided he would generate one entrepreneurial idea a day. He wrote them down. Soon he had more than 250 ideas. One of those ideas would wind up making Masa his first million. But he needed some experts to create a prototype. Masa chose the simplest way to achieve his goal. He looked through the faculty directory, found the names and details of some microcomputing staff, and convinced some of them to form a project team with him. You should already be getting a sense of how good he is at convincing other people to do stuff for him. He told them he didn't have any money. He was 19, but that they shouldn't worry. After Masa got the money for his patent, he would pay them. And that's exactly how it panned out. Masa sold a patent to Sharp Electronics for a translating device. Then Masa did what a lot of suddenly rich 19 year olds would have done in the late 1970s. He imported a bunch of Space Invaders video arcade machines. He rewrote the software on the machines and installed them across the Berkeley campus in restaurants, dorms and cafeterias. That idea made him another million dollars. Before he graduated, Masa started a game software company called Unison World, which he would eventually sell for almost $2 million. But first, Masa did something unexpected. He he moved back to Japan to start another company. For a year and a half, he just did research and made business plans. He lived off the income he had made in America. But eventually, Masa's family grew concerned. It didn't look like he was doing anything. He was just reading and writing things down. But like an iceberg, most of the action was going on underneath the surface. Masa developed more than 20 measures of success to guide his thinking. His most important one was that he should fall in love with his business for at least 50 years. That way he would stick with it even when times were tough. He took a big sheet of paper and drew a matrix with all of his ideas and scores and comments for each. Then he picked the best the personal computer software business. Satisfied with his choice, Masa called his new company SoftBank. I think founding and building Softbank in Japan rather than America is one of the most fascinating decisions Masa Sohn made in his entire career. Think about it. He had made millions of dollars in America. Sure, Japan was home, but it had lots of unhappy memories. Masa was determined to go against conventional wisdom. And he had unshakable self belief. He believed SoftBank was destined to become a global success. Therefore, he believed it should be based in Japan. Why? Because even though it would be harder to get the business off the ground, being based in Japan would make it easier to win the loyalty of his employees. Japanese workers, Masa claimed, put in longer hours and stayed with their employers for decades. What they lacked in originality, they made up for in commitment to continuous improvement. Masa compared this slightly stereotyped view to American workers who he believed were more likely to jump ship to the next opportunity in a heartbeat. It's almost impossible to imagine someone making that decision or using that reasoning today. Founders based software companies in America for two reasons, access to capital and access to talent. When Masa made his decision, more than 40 years ago, the software industry was tiny compared to today. But he was also reasoning on totally different principles. By 1981, MASA had two part time employees and a small office. One day, he brought in a couple of boxes and stood on them to give a speech to his team. You guys have to listen to me, he said. Because I'm the president of this company. In five years, I'll have $75 million in sales. Sales. I'll be supplying a thousand dealer outlets. We'll be number one in PC software distribution. According to Masa, these two guys both quit on the spot. A year and A half later, SoftBank was supplying 200 dealer outlets. Ten years later, it was supplying 15,000. How? Well, like so much of Moss, career success was forged from failure. When Softbank was just a couple of months old, he reserved a boost at a consumer electronics show in Tokyo. He made sure that it was as big as the booths that big name companies like Sony and Toshiba had. Masa called all the software vendors he knew. He told them that he was going to pay for all the collateral and that they could set up in his booth for free. It was a big idea and a big failure. No sales, no leads, nothing. Or so Masa thought. A few weeks after the show, he received a call from Osaka. The guy on the phone said he was starting a big PC shop and that he needed software. And he asked Masa to come to Osaka for a meeting. Masa said no. Was this yet another example of him defying conventional wisdom? Not exactly. Masa just didn't have the money. The guy wasn't deterred. Do you know my company? He asked Masa. It's called Joshin Denki. Masa said he didn't, but he figured that he should ask around, so he called up Sharp. He still knew some guys high up there from when he sold them his patent while still a Berkeley student. Their reaction was unanimous. They immediately told Masa to go to Osaka. When the representative from Joshindenki called back, he threw Masa a life jacket. Oh, our president is actually coming to Tokyo for some other business. You could meet him. Masa met with the president of Joshindenki. The company already had some software and a direct channel with some vendors. But it needed more. Masa said, if you want to do business with me, you'll have to break off those relationships. If you want to succeed with PCs in Japan, it's my way or the highway. This was kind of crazy. We just heard that Masa didn't even have the money to travel to Osaka to meet with this guy. This is his only solid lead and he's setting the terms. Masa continued his pitch. I have very little money, he said, and very little business experience. I have no product. Okay, so what? Did he have the greatest desire to succeed? Masa freely admitted that the president of Joshindenki probably had more knowledge and more experience than Masa did. But he said, I will dedicate all my time and effort, all my energy, my entire spirit, exclusively to PC software. If I do that, who do you think will be more of a specialist a few months from now? If you want to be the number one PC dealer in Japan, you have to find the number one guy in software distribution. That's me. I have no evidence, but I strongly believe in myself. I'll admit it. I. I think this is a genius pitch. Masa didn't want to fake his knowledge, his experience, or his list of clients. So he opted for the approach that was already becoming his signature style, faith in himself, and infinite optimism about the future. It worked. The president gave Masa exclusive purchasing rights for all of Joshindenki's PC software. If you thought you recognized Masa's pitch that got his foot in the door with Joshindenki, then you'll definitely recognize his follow up, because it's the first real example we have of Masa Sohn applying the thinking that would come to sum up his approach to investing, Masa said to the president, I will get you every software product I have, the contacts. What I don't have is the money. If you want all the software, you'll have to pay for it, and you should. Having all the software is critical. Some of it won't sell, but you'll make up the loss because word will spread that you have the biggest range. When he said this, Masa was looking into the future. He had total belief that computing technology would become widely used, which meant that overall investing in software made sense. Even if some of the products flopped as an overall asset class, it was a great investment. Remember, Masa became convinced that software was the future while at Berkeley. He may not have had all the evidence on hand, but he had the most important belief. Masa went around to department stores and electronics stores. He'd ask executives if they'd heard of Joshin Denki and if they knew why the company was the biggest PC dealer in Japan. The answer, according to Masa, was that they used Softbank for their software procurement needs. Within a year, Softbank's monthly revenues went from $10,000 to $2.3 million. And they just kept going up from there. SoftBank went public in 1994 at a valuation of $3 billion. Masa Sohn was a rich man. He could have cashed out and not worked another day in his life. But his ambition burned too bright and his belief in himself and the future was too strong. So he did the most Masa thing. He went back to America. This time to conquer it. Let's pick our story back up in 1995. At this point, SoftBank was 15 years old and worth billions of dollars. Masa Sohn had become a self made man. So. So why did he move to Silicon Valley, a place with dense networks that were hard to crack for an unconnected outsider? Because Masa saw the future. He saw how brightly it gleamed. And he believed he was the person who would capture it. The future he saw was built on top of the first wave of the dot com bubble. Today we remember the bubble because of how spectacularly it popped. But we forget the revolution too easily. The dot com bubble inflated for two reasons. One was the the increasing popularity of the Internet. The release of early browsers like Mosaic, coupled with the emergence of Windows as the default home operating system, meant that more and more people were surfing the web. Between 1990 and 1997, the share of American households with computers increased from 15% to 35%. Computer ownership went from a luxury to a necessity. And lots of companies were poised to take advantage. One of them was Yahoo. Masa Son new all of this because in 1994 SoftBank had bought the trade show division of a company called Ziff Davis, the leading organizer of computer conferences in the United States. He described the acquisition as a way to get a map and a compass for a voyage into the center of the booming technology industry. In early 1996, with his map and compass in hand, he strode into Yahoo's new office in Mountain View and proceeded to casually take the Silicon Valley arms race to a whole new level with a $100 million bid for a 30% slice of Yahoo. It was unprecedented. At the time, top flight venture partnerships usually raised around $250 million. There was just no way any one investor would put 40% of their resources into a single 100 million dollar wager. But Masa wasn't playing by anyone else's rules. After sitting in silence for a while, Jerry Yang, one of the co founders, said he was flattered, but he didn't need the capital. Jerry Masa quickly replied, everyone needs $100 million. He was right. Yahoo needed to build its business and put its product in front of more consumers. The normal path for a young company looking to raise millions of dollars was to go public. But here came Masa, casually offering the kind of investment that usually required an IPO with none of the complicated public ownership. He was ready to shake hands then and there. Yahoo's founders and Mike Moritz of Sequoia Capital needed some time to respond. Masa's offer was tempting, but Yahoo was already working with Goldman Sachs on an ipo. And if Goldman Sachs made good on their prediction, a public listing would value the company twice as highly as Masa's offer and make them all a lot richer. Masa sensed that the deal was on the verge of slipping out of his grasp, so he upped the stakes. So he asked the men on the other side of the table from him what Yahoo's main competition was. Excite, they said, and Lycos. Masa was quiet for a moment. Then he said to the founders, if I don't invest in Yahoo, I'll invest in Excite and I'll kill you. It was a threat and it showed that Masa understood something important about Internet enabled startups. In most industries, there would be only one winner. So the investor who could write a $100 million check could choose who won the race. Just like the Godfather, Masa made Yahoo's founders an offer they couldn't refuse. They decided to take Masa's money, but to also proceed with an IPO. Yahoo went public in April of 1996. Its share price closed at two and a half times higher than where it began the day and Masa made more than $150 million. But he was just getting started. He followed up his Yahoo windfall with a dizzying spree of investments. He barely paused to separate the trash from the treasure. He was just moving too fast. It's believed that between 1996 and 2000, SoftBank invested in around 250 Internet startups, an average of about one per week, 10 or 20 times as many as the average VC fund. MASA was everywhere. He raised a new fund focused exclusively on late stage companies, the precursor to what is today called growth Investing. He launched Japanese subsidiaries of Softbank portfolio companies like Yahoo and E Trade. He raised funds in South Korea, Japan and Hong Kong. He partnered with Rupert Murdoch to invest in Australia, New Zealand and India. Opened venture offices in Mexico, Brazil and Argentina. It's estimated that Masa Sohn increased his personal wealth by about $15 billion in the second half of the 90s. Masa didn't care about Alpha, the premium, an Investor earns from the appreciation of an individual asset. He was all in on beta, the yield from just being in the market. And so long as the tide was rising, it was lifting all the boats. He combined one central insight, the surging popularity of the Internet and the wave of startups it created. With massive scale and a ruthless determination to get what he wanted, he wasn't deterred by paying extremely high prices. Other VC funds did more due diligence. They deployed capital more carefully. But they didn't make as much money as Masa. And he was about to make a lot more. In January of 2000, a little known Chinese entrepreneur was desperate for more capital. His name was Jack Ma and his company was called Alibaba. His bank, Goldman Sachs, was hesitant about investing more. The bosses instructed Shirley Lin, the leader of their Asia focused private equity arm, to try and find outside investment for Alibaba and a bunch of other Chinese startups. Lynn spoke to her colleague Mark Schwartz, the chairman of Goldman's Asia Pacific division. He was also on the board of SoftBank. Which company is most desperate? He asked Lin. Alibaba, she answered right away. Alibaba is very, very desperate. It wasn't long before Masa was in Beijing meeting with local tech entrepreneurs. Masa took an immediate liking to Jack Ma. He said he saw a glint in his eyes. The two shook hands, hands on an investment. And Masa whispered, some spend the money fast and expand rapidly. Deals need more than handshakes. So the pair met again, this time in Masa's Tokyo office. Shirley Lynn, the biggest incumbent shareholder, was there too. She suggested that SoftBank invest $20 million for a 20% stake, valuing Alibaba at $100 million, 10 times what she and her co investors had paid three months earlier. She might have thought this was just an opening gambit, the first step in a delicate dance of haggling over a deal. Not for Masa. He said yes right away. In fact, he ended up taking a 34% stake. Why? Did he just get good vibes? That's part of it, but that's not the whole picture. You know by now that Masa paid attention to his intuitions. But his huge holdings and many board positions gave him a massive access to information. Masa was on the board of the tech conglomerate Cisco. Through that, he knew that router sales to China were taking off. That could mean only one thing. Personal Internet use was about to explode. So he should seize every opportunity to invest in companies that would benefit the most. When Masa shook hands with Jack Ma, he ensured that SoftBank's valuation would peak at more than $200 billion. And at the same time, without him even knowing it, he had saved SoftBank because the bubble that took SoftBank to the top of the world world was about to burst. The dot com crash wiped out tons of startups that wanted to exploit the new popularity of the Internet and, because of low interest rates, had easy access to capital. But easy money doesn't create lasting value. Concerned about an overheating economy, the Federal Reserve raised interest rates. The stock market nosedived, and all the companies that kept accepting investor cash without spending the time to develop a sustainable business model failed. The crash didn't just affect startups that were never going to succeed. Cisco, where Masa was a board member, lost more than 80% of its value. Amazon lost more than 90% of its value. How did SoftBank fare? Well, it lost about 99% of its market cap. And what about Masa? He lost more than $70 billion. It's believed that no person in history has ever lost more than he did during the dot com crash. Today, he wears it like a badge of pride. It's almost like a boast. But back then, there was no time to boast. He had an empire to rebuild. Alibaba was crucial to SoftBank's recovery. So was Masa's decision to restructure Softbank into a telecoms firm. It established Yahoo broadband in 2001 to harness the growing popularity of home Internet. In 2004, it acquired Japan Telecom. In 2005, SoftBank actually bought a Japanese professional baseball team. They're called the SoftBank Hawks and SoftBank still owns them today. In 2006, it bought Vodafone Japan and rebranded it to Softbank Mobile Corp. It turns out that the year before the release of the first iPhone was a smart time to get into mobile. Were these lucky bets? I don't think they were, because Masa was showing the world the same thing over and over again. He was buying stakes in lots of companies, but he was actually placing bets on what he believed the future would look like. To dive deeper into just what that means, we need to fast forward to June of 2010 to SoftBank's 30th shareholder meeting and a very interesting PowerPoint presentation. The 133 slide deck is about Moss vision for the next 30 years of SoftBank. It shows some of the things he wanted to focus on, like solving loneliness, which he called the saddest thing in people's lives. It showed SoftBank's performance over the first 30 years. And some of his predictions for the future, such as his firm belief that processing power would dramatically exceed the power of the brain. Or that our average life expectancy, at least in Japan, would reach 200. Or that we would find all new ways to communicate with each other. According to Masa, SoftBank's commitment to the future is to achieve the information revolution leading to happiness forever. Everyone. It's easy to laugh at this. Some of the slides are pretty eccentric. So why is this an important part of his story? Because when Masa expresses his beliefs about the future, you have to pay attention. By 2010, he had a 30 year track record of getting the most important predictions right. And even if they weren't right, they offered an insight into SoftBank's investment strategy. Besides, ideas like artificial general intelligence and life extension extension aren't that radical in the tech community, Masa's slide deck revealed his vision for the future. That vision was about to come true. Literally at the start of this video, I said that in 2017, Mahsa Sohn convinced someone to invest $45 billion into the SoftBank Vision Fund in just 45 minutes. So who was it? It was the Crown Prince of Saudi Arabia, Mohammed bin Salman. And how did Masa convince him to put in so much so fast? You come to Tokyo for the first time. I want to give you a gift. I want to give you a Masa gift. A Tokyo gift. A trillion dollar gift. You invest $100 billion into my fund and I give you a trillion dollars. Even though he actually got less than half of what he asked for, Masa still secured a massive investment from Saudi Arabia's public investment fund. Not bad. For less than an hour's work. Masa sought out MBS because he knew that the Crown prince, technically the deputy crown prince at the time, wanted Saudi Arabia to be known for something other than just oil. And because he knew that the Vision Fund would give him that legitimacy, the Vision Fund was born. A year earlier, in 2016, Masa was on a flight to pitch investors in the Middle East. He wrote down the number that he was targeting for his new $30 billion. He thought about it, crossed it out, and replaced it with a bigger number, $100 billion. Life's too short to think small, he told a deputy sitting near him. The Vision Fund is the world's biggest bet on the future. And it's the culmination of Masa's entire career and philosophy. Masa took the same approach he had throughout his career. Begin by understanding deep technological trends, then invest as Much as possible to make that future a reality. Of the hundred billion that made up the Vision Fund, almost half came from Saudi Arabia. The rest was provided by the Sovereign Wealth Fund of the United Arab Emirates. Qualcomm, Apple and Foxconn. Softbank put in $28 billion, about 12% of its assets. The Vision Fund was set up to make massive investments in companies that bring about the information revolution that Masa had predicted back in 2010. The revolution that would create happiness for everyone. The common thread that runs throughout The Vision Fund's 450 portfolio companies is that they are all in industries that can be disrupted and digitized by Google. That meant lots of investing in smaller startups across emerging industries like AI, robotics and the Internet of Things. But also massive investments in tech enabled consumer and workplace companies like Uber, WeWork, ByteDance and Didi. With enough leftover for investments in companies like Wag Uber, but for dog walking and Zoom, a robot powered pizza company. Maso wasn't afraid to back companies competing against each other in the same markets. This is interesting for two reasons. The first is that Masa wasn't afraid to lose money in the short term. I guess losing more money than anyone else in history makes you pretty resilient. But he knew he would only be losing in the short term because the Vision Fund leveraged a powerful reality of modern tech. Winner takes all competition enabled by network effects. The companies with the best business models that reached the most people and designed the best user experience would capture the biggest market share and use those compounding advantages to become monopolies. The second is that just like when Yahoo's founders were presented with an offer they couldn't refuse, the Vision Fund was simply too big to ignore. When it was raised, it instantly became the biggest VC fund ever. Five times bigger than the venture arms of Blackstone and Goldman Sachs. 20 times bigger than Andreessen Horowitz. When Uber accepted $8 billion from the Vision Fund in 2018, their CEO CEO said rather than have their capital cannon facing me, I'd rather have their capital cannon behind me. These CEOs just had two have SoftBank on their side or against them. The Vision Fund was absolutely massive. It invested in some of the world's most recognizable technology companies as well as hundreds of promising startups. An unusual structure meant it captured most of the upside. Tech company valuations were growing massively. So how did this all happen? Let's look at 2019. The Visions Fund losses can be summed up by a core investing portfolio is only as good as the companies in it. What happened in 2019, weworked happened. When Masa Sohn first met Adam Neumann, he gave him $3 billion. He also told Newman that while he appreciated how crazy he was, he needed to be crazier. Adam Neumann took this advice. A combination of public reports and about company mismanagement and investor doubts led to WeWork pulling its IPO, which had been planned for September. As early as January 2019, a massive Series G raise had valued WeWork at $47 billion. Masa tried to save WeWork, but it didn't work. By the time WeWork went public in October of 2021, it was valued at just $9 billion. Other failures like Wirecard, a German payments processor that engaged in a accounting fraud, made 2019amiserable year for Masa Sohn. Masa knew he had to change things up. He promised to push Vision Fund companies to actually generate profits, rather than constantly urging them to be crazier, faster and bigger. But it wasn't a change in philosophy that made the Vision Fund scale to all new heights. It was a global pandemic. You remember the early days of COVID 19 ordering food from your phone while being stuck inside working from home meme stocks. It was a perfect storm of events that rapidly accelerated the digitization of society and with it, the growth of tech stocks. Covid turned SoftBank into a giant ATM. It paid down its debts and paid out huge amounts to investors. In mid-2021, it posted an annual net profit of $46 billion, the biggest ever by a Japanese company. But then the macro environment changed, which dramatically revealed that Masa's biggest strength, the thing that helped him become so successful and made him so resilient when he lost $70 billion in the early 2000s, was also his biggest weakness. Masa has always been an optimist. He wouldn't have had the same success if he wasn't. But that optimism created big blind spots. Investing in 10 times as many companies as other VC funds came at the cost of due diligence, which meant Masa was slow. Slow to notice problems at portfolio companies like WeWork, Wirecard and Greensill, and too hasty to launch ill advised ventures like the North Star Trading unit. Investing almost exclusively in startups that never turned a profit in the belief that enough of them would become huge monopolies, meant SoftBank has always struggled to achieve significant cash flow and made it extremely vulnerable to high inflation, which has crashed tech stocks across the world. Other events, like the Chinese government crackdown on its tech companies, which destroyed most of the value in important. Softbank portfolio companies like Alibaba and Didi were mostly down to bad luck. But even bad luck can be hedged with the right strategy. The performance of the vision fund and SoftBank as a whole is fundamentally tied to the prospects of the tech sector. That's great when you're in one of the biggest bull markets ever, but bulls can become bears very quickly. In May of 2022, SoftBank revealed that it's too virtual. Vision funds lost $27 billion last fiscal year. Sometimes radical optimism has a high price tag. But Masa is keeping the faith. When asked about SoftBank's recent troubles, he simply said, when it rains, you open an umbrella. Masa Sohn grew up in an illegally built shack and became a millionaire in a foreign country. Before the age of 20. He went back home and built a business from nothing into one worth billions. Then he revolutionized the V industry by making the biggest investments ever seen. Yet today, he's remembered more for his failures than his successes. SoftBank is hard to understand and easy to criticize. Many of those criticisms, including about its structure and its governance, are fair. But beyond all the noise, SoftBank embodies Masa's most defining character trait, one that has stayed with him from the illegal shack in Khonsu to Berkeley, all the way way to the present. The belief that tomorrow will be better than today and that with enough effort, you can create the future you want.