Season 2, Episode 4 SoftBank, Fortress and the Vision Fund

In season two, episode four of Acquired, hosts Ben Gilbert and David Rosenthal discuss the transformative impact of SoftBank's acquisition of Fortress and the subsequent creation of the SoftBank Vision Fund. They explore the fund's role in reshaping venture capital, private equity, and the landscape for emerging technology companies. The episode also includes the announcement of David's new venture, Wave Capital, and features sponsorships from companies like Pilot, emphasizing the importance of outsourcing non-core business functions. Additionally, the hosts delve into SoftBank's history, its founder Masayoshi Son's visionary approach, and the company's strategic investments, including the monumental $20 million stake in Alibaba that yielded a $60 billion return. The episode culminates with an analysis of SoftBank's broader ambitions to become the world's largest money manager, leveraging management fee streams from its vast capital under management.

• Hosts Ben Gilbert and David Rosenthal introduce the episode topic: Softbank's acquisition of Fortress and the creation of the Softbank Vision Fund.
• They discuss the significant impact of this acquisition on the venture capital, private equity, and technology sectors.
• David Rosenthal shares personal news about the formal announcement of Wave Capital.

"Today we are covering an acquisition that has forever changed the world of venture capital, private equity, and emerging technology companies. Forever. I think I said forever twice there. Softbank buying Fortress." "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."

The quotes highlight the episode's focus on a transformative acquisition in the investment world and Rosenthal's new venture, Wave Capital, which he can now openly discuss.

• Pilot is presented as a key partner for startups and growth companies for accounting, tax, and bookkeeping needs.
• David Rosenthal emphasizes Pilot's growth from a startup to a billion-dollar company with notable backers.
• The hosts discuss the philosophy of outsourcing non-core business functions, aligning with Jeff Bezos's axiom.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US." "Pilot both sets up and operates your company's entire financial stack. So finance, accounting, tax, even CFO services like investor reporting from your general ledger all the way up to budgeting and financial sections of board decks."

These quotes underscore Pilot's comprehensive financial services for startups and its significant growth, positioning it as a trusted partner in the startup ecosystem.

• Softbank, a Japanese conglomerate, is not a bank but focuses on telecommunications and was originally a PC software distributor.
• Softbank's purchase of Fortress and the establishment of the Vision Fund are discussed as game-changing events.
• The Vision Fund, at $93 billion, is the largest fund ever raised and has invested in major companies like Uber, WeWork, Doordash, Slack, and more.
• Softbank's influence in Silicon Valley and the global investment landscape is emphasized.

"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." "The vision fund is currently $93 billion, 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."

The quotes highlight Softbank's origins, its transformation into a global powerhouse, and the unprecedented scale of the Vision Fund.

• Masayoshi Son, also known as Masa, is the founder of Softbank and a key figure in its success.
• Born in Japan to a Korean immigrant family, Masa faced cultural challenges but was driven by ambition and encouragement from his parents.
• Masa's early ventures included a language translator sale to Sharp and importing Space Invaders arcade machines, making him a multimillionaire by graduation.
• After the dot-com bubble burst, Masa focused on cash flow and profits, pivoting Softbank towards infrastructure and mobile, including a pivotal meeting with Steve Jobs.

"Indeed. We might just get into might." "So he was born in 1957 in Japan, not in Tokyo, but on the island Kyushu in the south of Japan. His father was a fisherman, and they were relatively poor, the family." "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."

These quotes provide insights into Masayoshi Son's upbringing, his entrepreneurial spirit, and the early success that laid the foundation for Softbank's future endeavors.

• Masa from SoftBank seeks to collaborate with Steve Jobs on mobile carrier partnership for iPhone.
• Masa orchestrates the acquisition of Vodafone Japan without initial funds, raising capital through debt financing.
• SoftBank Mobile (formerly Vodafone Japan) secures an exclusive deal to carry the iPhone in Japan, significantly boosting its market share.

"And Steve's like, this is hilarious. Nobody knows we're working on this, but we are." This quote indicates the secretive nature of the initial discussions between SoftBank and Apple regarding the iPhone, highlighting the strategic planning behind the scenes.

"So he goes back to Japan and he orchestrates a deal to buy Vodafone, Japan." The quote describes Masa's strategic move to acquire a major mobile carrier in Japan as a preparation for the iPhone launch, showcasing his foresight and business acumen.

• SoftBank's history includes a significant loss of money but recovers with strategic investments.
• The company invests in Sprint, gaining a major stake in the U.S. mobile market.
• SoftBank's investment in Alibaba results in a massive return upon Alibaba's IPO, laying the groundwork for the Vision Fund.

"SoftBank owns Sprint here in Sprint." This quote confirms SoftBank's ownership of Sprint, emphasizing its expansion into the U.S. mobile carrier market.

"That $20 million investment might be the single best investment anyone's ever made." The quote reflects on SoftBank's investment in Alibaba as potentially the best investment in history due to the enormous return on investment.

• SoftBank and Yahoo both invest in Alibaba, contributing to Yahoo's market cap.
• Yahoo sells half its stake in Alibaba before the IPO, missing out on the peak valuation.
• Masa's conviction in his investments is highlighted as a key factor in SoftBank's success.

"Both Jerry Yang and Yahoo and Masa and SoftBank invested in Alibaba." This quote ties together the pivotal investments made by both Yahoo and SoftBank in Alibaba, which would later become a significant part of their valuations.

• Masa becomes the richest person in Japan and a significant global business figure.
• After Alibaba's IPO, SoftBank has considerable capital for tech investments, leading to the creation of the Vision Fund.
• SoftBank's investment strategy includes hiring key executives and making large-scale investments in technology and infrastructure.

"Masa is the richest person in Japan." This quote underscores Masa's success and influence in the business world, particularly in Japan.

"They now have all of this capital." The quote explains the influx of capital SoftBank received from the Alibaba IPO, which enabled them to pursue further ambitious investments.

• The Vision Fund is established with significant contributions from SoftBank and Saudi Arabia's sovereign wealth fund.
• The fund targets large-scale tech investments with an unusually long time horizon for returns.
• The fund's first close includes investments from major global entities like Apple and Qualcomm.

"They're targeting $100 billion for the total fund size." This quote reveals the ambitious scale of the Vision Fund, aiming to be the largest of its kind.

"It explicitly has a longer time horizon than anything else." The quote highlights the Vision Fund's unique long-term investment strategy, differing from traditional funds.

• SoftBank acquires Fortress, an asset management firm, which confuses market observers due to its non-tech focus.
• The acquisition is part of a broader strategy to manage diversified funds and secure consistent management fee revenue.
• SoftBank Financial Services is created to oversee the Vision Fund and other funds, totaling nearly $140 billion in capital.

"SoftBank makes a really curious announcement. They announced that they're going to buy an investment firm called Fortress." This quote introduces the unexpected acquisition of Fortress by SoftBank, which was initially puzzling to the market.

"SoftBank Financial Services, has almost $140,000,000,000 in capital under management." The quote sums up the scale of SoftBank's financial services division post-Fortress acquisition, showcasing the company's significant presence in asset management.

• SoftBank aims to become the world's largest money manager, already close to surpassing KKR.
• KKR has $168 billion under management, while SoftBank Financial Services has $140 billion, aiming to double in five years.
• SoftBank's rapid growth in financial services contrasts with KKR's decades of operation.

"They want, and Masa wants to become the largest money manager in the world. And they're already pretty close."

This quote emphasizes SoftBank's goal under Masayoshi Son's leadership to dominate global money management, highlighting the company's rapid growth in the financial sector.

• The structure of SoftBank's financial contributions and management fees is questioned.
• General partner commitments in funds typically do not incur management fees but receive full profits.
• SoftBank's financial services may not charge fees on SoftBank's own $25 billion commitment but could profit from the capital.

"I suspect there is no management fee on that. But then they get 100% of the profits."

This quote suggests that SoftBank's own investment in its financial services might be structured to avoid management fees, allowing SoftBank to reap all the profits from this capital.

• SoftBank Financial Services' identity as a venture fund, private equity firm, or corporate venture is debated.
• The firm has large limited partners, including SoftBank itself, contributing significant capital.
• The structure is unprecedented, blurring the lines between traditional investment models.

"Is it a venture fund or PE fund, or call it a private equity firm that has one very large LP called SoftBank?"

This quote questions the nature of SoftBank Financial Services, implying it operates in a unique space not clearly defined by existing financial entities.

• The new major division of SoftBank is expected to be highly cash flow positive.
• Assuming a 2% management fee on capital under management, excluding SoftBank's own investment, the division could generate substantial annual fees.
• The acquisition of Fortress is seen as a strategic move to enable SoftBank's vision fund operations.

"This is a new business line within SoftBank that is a asset management business line that is going to be extremely cash flow positive regardless of the outcome of any of the investments."

This quote identifies the new division as a strategic business line designed to generate consistent cash flow, independent of individual investment outcomes.

• SoftBank's Vision Fund aims to invest in companies driving global shifts in AI, transportation, food, work, medicine, and finance.
• The Vision Fund's approach is to take significant control in companies with large data sets, aligning with SoftBank's vision of a data-driven, autonomous future.
• This strategy is seen as ambitious but follows a pattern of successful past investments by SoftBank.

"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."

This quote outlines the Vision Fund's strategic goal to invest in sectors that are expected to be transformed by AI and other technological advancements, indicating a broad and forward-thinking investment approach.

• SoftBank's acquisition of Fortress is not only a financial move but also a strategic acquisition of talent and infrastructure.
• The team from Fortress provides the necessary back-office support for large-scale fund management.
• This acquisition is seen as integral to SoftBank's ability to operate its financial services effectively.

"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."

This quote highlights the importance of the Fortress acquisition in providing the human and operational infrastructure necessary for managing SoftBank's large financial ventures.

• The Vision Fund offers a unique investment vehicle for large investors like sovereign wealth funds and corporations with excess capital.
• Traditional investment avenues like Sequoia's venture funds are too small to accommodate the scale of capital from these investors.
• SoftBank's Vision Fund provides an opportunity for these entities to invest in technology's future at a scale that matches their capital reserves.

"There's really no other way to try and generate returns on that amount of capital without doing something like this."

This quote explains the necessity of the Vision Fund as a means for large investors to achieve significant returns on their substantial capital, which cannot be effectively deployed through traditional investment funds.

• The Vision Fund's existence may influence whether high-growth companies stay private or go public.
• The fund's long-term horizon and large capital allow it to support companies that would otherwise need to seek public investment for growth.
• SoftBank's approach differs from traditional private equity by focusing on growth investment rather than extracting profits through cost-cutting or leverage.

"Are we entering this new era where with funds like the Vision fund, is it possible to sustainably stay private?"

This quote raises the question of whether the Vision Fund's model could redefine the trajectory of high-growth companies, potentially allowing them to remain private longer due to the availability of substantial private capital for growth.

• Vision Fund may allow companies to stay private through growth years until profitability without going public.
• This limits the ability of retail investors and the general public to access profits from innovation.
• Concerns arise about wealth polarization and economic power shifting towards large corporations over individuals.

"And 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 onto it for the cash flows, and then there's other younger, high growth companies in there."

This quote highlights the structure of the Vision Fund and its potential to segment companies based on their growth and profitability stages, affecting public investment opportunities.

• Alibaba's private value creation before going public is seen as a model for the Vision Fund.
• The fund aims to capture a large scale of value privately, similar to Alibaba's growth before its IPO.
• Concerns about the distribution of profits and the impact on companies not at the top of the power law.

"Yeah, well, in many ways, I have to imagine that for the Vision fund, the model for the Vision fund is Alibaba."

The quote suggests that Alibaba's significant private market value creation prior to its IPO serves as an inspiration for the Vision Fund's strategy.

• Vision Fund's structure could contribute to wealth polarization by channeling late-stage growth profits to large shareholders.
• Sovereign wealth funds and large corporations as limited partners in the Vision Fund may exacerbate the concentration of wealth.

"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..."

This quote expresses concern that the profits from late-stage growth may be increasingly directed to large institutional investors rather than the broader public.

• SoftBank, the parent company of Vision Fund, is publicly traded, allowing public investment.
• This provides a contrast to traditional venture capital funds, which are inaccessible to the average investor.

"But SoftBank itself is a public company. So anybody, you and I can go invest in Softbank right now..."

The quote clarifies that despite the Vision Fund's private nature, the public can indirectly access its returns by investing in SoftBank's publicly traded shares.

• The rapid deployment of capital by Vision Fund could be value destructive in some scenarios.
• Silicon Valley VCs express concerns about the impact of large funds on company behavior and market dynamics.
• Excessive capital inflow can lead to inefficient spending, particularly in customer acquisition, driving up costs without sustainable growth.

"The scenario in which this is value destructive is I view as having been in VC for a while and observed companies."

This quote acknowledges the potential negative consequences of the Vision Fund's investment strategy from the perspective of a venture capitalist.

• Vision Fund's investments could drive up market valuations, potentially to irrational levels.
• The size of the market opportunity is a factor in determining whether valuations are justified.

"Do you think it irrationally drives up valuations or unjustifiably drives up valuations?"

The quote questions the impact of Vision Fund's investments on the rationality of market valuations for companies receiving its funds.

• SoftBank and Amazon both seek to diversify and expand their business models.
• SoftBank acquires other businesses, while Amazon tends to build internally.
• Both companies aim to create new revenue streams and leverage predictable cash flows for future growth.

"What he's done is the same thing that Bezos is doing with Amazon, which is adding more legs to the stool of Softbank."

This quote compares the strategic approaches of SoftBank and Amazon in expanding their respective businesses and revenue sources.

• SoftBank's focus on external innovation through investments contrasts with Amazon's internal product development.
• The control SoftBank exerts through its investments can have reputational implications.
• Amazon's complete control over its internally developed products and services presents a different innovation model.

"There's two models of innovation. There's internal and external for big companies, and SoftBank is doubling hard on the external."

The quote contrasts the innovation strategies of SoftBank and Amazon, highlighting SoftBank's preference for external investments over internal product creation.

• SoftBank's acquisition of Fortress is evaluated for its contribution to SoftBank's future and the role in creating a new financial services division.
• The premium paid for Fortress and its essential role in establishing SoftBank as a money manager are discussed.
• The acquisition's justification is weighed against the potential for future growth and the ability to raise subsequent funds.

"I think it's Masa is he created a brand new product which is a vehicle for these very large pools of capital to credibly invest in growth and in the future."

The quote credits Masayoshi Son, the CEO of SoftBank, with creating a new investment vehicle that allows large capital pools to invest in growth opportunities.

• The episode concludes with a reflection on the comprehensive discussion about SoftBank and the Vision Fund.
• Appreciation is expressed for the listeners who have followed the conversation.
• The hosts share their personal recommendations for further reading and listening.

"Well, listeners, before we jump on to the next part here, thanks for bearing with us over this very long episode."

This quote thanks the audience for their attention throughout an extensive discussion on the complexities of SoftBank and the Vision Fund.