The tech bubble may finally be bursting, though it may be more accurate to refer to it as a foam of tech bubbles: an advertising tech bubble, a pandemic-boosted tech bubble, a cryptocurrency bubble, a bubble of firms that style themselves as tech firms when they aren’t, a profitless growth tech bubble—the list of assets and corporations with inflated values is endless. Some are large, others old, and others still are more fragile than the rest, but all of them are part of the same froth that attracted investors who pinned their hopes on their ascendance.
These past five years, the largest contributor to that froth has arguably been Masayoshi Son—the billionaire chief executive and founder of Japanese telecommunications giant SoftBank, who tells anyone who will listen that he will usher in the next stage of human civilization: life mediated by artificial intelligence. He’s made moves for years in this direction, directing investments to take control of or consolidate industries key to his strategy. Along the way, his investments propped up the "gig economy" and, notably, Uber and WeWork—two companies that are now seen as so emblematic of this era of money-burning startup capitalism that they're the subjects of their own prestige TV series.
Back in 2019, I warned that SoftBank’s $100 billion Vision Fund was a doomed venture for everyone but investors: it might achieve returns, but at the cost of propping up inefficient monopolies whose survival seemed unlikely. Familiar names like Uber, DoorDash, and WeWork, but also Indian hotelier Oyo or now-defunct construction company Katerra, all were given large hoards of capital to use as weapons against competitors in their respective markets. But for many of its portfolio companies to earn their first profit, or to sustain those they were beginning to enjoy, they’d need more than cash to burn—they’d need to restructure society to realize profits that were previously illegal because of basic laws protecting workers and consumers.
Things turned out even worse than I anticipated. SoftBank and the Vision Fund have become a disaster for everyone including investors, marking the decline of a calamitous era.
In 2017, Son announced he would be creating a $100 billion venture capital fund dedicated to his vision: the aptly-named SoftBank Vision Fund. It's now been five years since the "goose that lays golden eggs" was launched, and it's lost much of its luster.
This time last year, SoftBank was riding high on the pandemic-fueled tech rally, the company reported a record profit of $46 billion for the fiscal year ended March 31, 2021, with a record $37 billion coming from the Vision Fund alone—a far cry from the $12.7 billion loss the company recorded for the previous fiscal year, its first loss ever. It was even able to raise more capital for Vision Fund 2, tripling investment pledges to $30 billion.
Son claims he was able to attract its largest investor ($45 billion from Saudi Arabia’s sovereign wealth fund) by promising $1 trillion in ten years if given $100 billion. SoftBank was also able to attract $15 billion from a United Arab Emirates sovereign wealth fund, a few billion from tech companies like Apple and Qualcomm, and equity stakes it held in previous investments.
Malcolm Harris, author of the upcoming history of Silicon Valley, Palo Alto, told Motherboard that it's worth remembering that venture capital has a global role, and Silicon Valley has long been one of the many places capitalists can safely park their wealth and forget about it.
"The U.S.-controlled Third World is becoming increasingly unequal, where capital and value is concentrated in the hands of very few people. Those people have to invest somewhere," Harris said. "If what you're looking for is growth, period, and you don't care what happens or whatever, you can just bet on Silicon Valley as an environment. So for the past 50 plus years, capitalists throughout the world have siphoned off their resources and sent it to Northern California and the Silicon Valley tech sector."
As the Wall Street Journal reported, the fund is vastly underperforming and an investor might’ve been better off simply investing in the stock market. At the end of 2021, the Vision Fund was valued at $138.5 billion, giving it a 40 percent return over those four and a half years. Over the same period, the S&P 500 went up by 72 percent while the Nasdaq Composite (a tech heavy stock index) doubled.
In May, SoftBank revealed it had lost $13.2 billion overall last fiscal year, with the Vision Funds suffering a nearly $27 billion loss. Some of the largest hits came from its crown jewels: Its investments in Uber, DoorDash, Chinese ride-hail giant DiDi, and South Korean e-commerce Coupang, all plummeted, as well as previous investments on its books such as Alibaba and British semiconductor designer Arm. The company also warned of further losses, saying its Vision Funds had lost another $13 billion since the start of the new fiscal year on March 31.
These problems didn’t appear suddenly, nor have they been limited to the Vision Fund. WeWork's implosion in 2019 featured cultish IPO filing documents that invited a flood of scrutiny and revealed a self-dealing executive using the company to enrich himself, an unprofitable business model that burned billions to grow, and a laundry list of scandals that nearly killed the firm. At the same time. a slew of SoftBank investments were performing poorly and threatening to implode as well: Uber, Oyo, Kattera, Wag, among others, threatened ruin for SoftBank and for Son again―during the dot-com crash, Son personally lost $70 billion while SoftBank shed more than $170 billion―as SoftBank’s value was nearly cut in half over the span of two weeks.
Arpita Agnihotri, a professor at Penn State Harrisburg, and Saurabh Bhattacharya, a professor at Newcastle University Business School, wrote a case study of SoftBank's investment strategy in 2021 that painted the picture of a flawed investment strategy concerned with rapid growth of questionable business models and "aggressive" entrepreneurs who would grow the company at any cost.
"Currently, Son's investment is in firms that leverage exploitative technology and are not explorative," the pair of professors told Motherboard in a joint email.
For years, Son has talked about his vision for a 300-year investment strategy to anyone who has listened, and up until a turnaround in late 2020, it sounded like a fairy tale because it was one. It was then that the stars aligned for SoftBank to retake its place as the center of the tech bubbles it helped nurture. The Vision Fund’s investments were skyrocketing in valuations, SoftBank’s balance sheets were healthier than ever, and its stock price kept climbing. So how did SoftBank mount such an impressive comeback in 2020, carry the steam forward into half of 2021, then enter another death spiral just in time for the new year?
In 2020, activist hedge fund Elliott Management made a $2.5 billion investment in SoftBank, along with a list of demands to rescue the company from the brink. Elliott Management called for independent board directors, more transparency into the Vision Fund's operations, and tens of billions of dollars worth of stock buybacks to push up the share price.
SoftBank got to work: it announced a $41 billion asset sale that would fund debt repayment and $23 billion of share buyback, funneled billions into options that helped fuel a NASDAQ tech stock rally, began posting record profits by fall 2020, and saw the Vision Fund returns balloon thanks to the wildly successful IPOs of food delivery giant DoorDash and Coupang.
2020 had not even ended yet before the Wall Street Journal reported that SoftBank was back from the brink. SoftBank even announced a $40 billion sale of UK-based rival Arm to US-based graphics card maker Nvidia in what was the largest deal in semiconducting history. Though some read it as a cash grab, Atsuo Inoue’s biography of Son sheds some light into Son’s long-term rationale for the deal:
If anything I want to hold more shares in Nvidia―which is why I’ve described the deal as a purchase kind of sale, a sale kind of purchase. Whatever happens these two companies are intrinsically linked and together they’re going to give birth to an AI computer platform. I absolutely think they’ll be able to make it happen, which is why I couldn’t care less whenever people assume we’re just some run-of-the-mill investment company. I’m completely convinced of the industry shifting towards AI. The AI revolution is the fourth part of the information revolution and I am going to get stuck in this time.
And then came the collapse. One piece of the puzzle was China’s tech crackdown: SoftBank’s net asset value dropped $54 billion thanks in part to its massive Alibaba and DiDi stakes taking valuation haircuts. After China halted the IPO of Alibaba’s financial affiliate and fined the company $2.8 billion, Alibaba’s valuation dropped by $400 billion. DiDi was subjected to a privacy probe, banned from China’s app store, and eventually delisted from the New York Stock Exchange.
Another factor was the threat of an American and European crackdown. In October 2021, the European Commission announced it was launching an investigation into whether SoftBank's proposed merger of Arm and Nvidia violated antitrust law. In December, the Federal Trade Commission announced it was suing to block the merger, claiming it would "distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals."
The looming threat of antitrust crusaders, a slow deflation of some tech valuation bubbles, and the failure of SoftBank’s portfolio companies to achieve sustainable profits have all contributed to an IPO market too weak for SoftBank to realize gains on investments. And all this has also led to a growing amount of debt on SoftBank's books as SoftBank takes out loans against its assets and issues bonds to pay investors in the Vision Fund. Investors have started to doubt whether SoftBank is actually good for that debt: on Tuesday, Moody’s downgraded SoftBank’s credit rating from “stable” to “negative”—the second downgrade in as many years.
SoftBank has tried and so far failed to salvage the situation. It announced another $9 billion in stock buybacks in 2021 on top of the $23 billion it completed the year before, but shares are still over 40 percent down from this time last year. The options bets proved to be a huge mistake: though they temporarily rallied the tech stock market, they generated $7 billion in losses for SoftBank and personally cost Son $1.5 billion. With the collapse of the Arm-Nvidia merger, SoftBank has set its eyes on an IPO of Arm that could go as high as $45 billion.
All this brings us to the main point: the Vision Fund invested in firms that depended on directly or indirectly achieving monopolies, which they failed in doing, even as they successfully altered regulations, consumer behavior, and daily life to be more hospitable to their business model.
“The investment philosophy of aggressive growth and monopoly is not ethically appropriate because, even if the firm is a true disruptor and achieves monopoly, the chances that it would exploit consumers by raising prices are high,” Agnihotri and Bhattacharya told Motherboard. “Overall, consumer welfare may suffer if they do not have ample choices.”
Even though Uber has failed to establish a monopoly, it's still being forced to raise prices on consumers. SoftBank bankrolled a company that not only has no hopes of ever earning a profit, but has also wasted eye-watering sums of capital ($31 billion as of February, according to one estimate) and subjected society to the needs of a corporation that wouldn’t be able to survive without such a friendly environment.
That doesn’t capture the full picture however. The desperate attempts of Uber and other app-based labor platforms like it to realize profitability have real consequences: experiments over the years have locked out tens of thousands of drivers, left tens of thousands more to fend for themselves in persistently declining working conditions, unleashed racist algorithms that discriminate against drivers and riders, and restructured life in countless cities.
"Here's a different way of thinking about it: you have large international investors who have funneled billions of dollars into these business models and a core part of their logic was that the only way they were ever going to get any return on their investment is this effort to fundamentally restructure regulatory structures around work,” Veena Dubal, a law professor at UC Hastings, told Motherboard. “They were banking, literally, on doing what capitalists have attempted to do for over a century: evading, lowering, or getting rid of the minimum wage. This was an investment in deregulation.”
Years ago, I anticipated that this investment would largely be successful because it fit snugly into a well-observed historical pattern rooted in the origins of venture capital. What I underestimated, however, was that it doesn’t actually matter—to capital at least. The venture capitalists that direct capital flows from oligarchs abroad and at home fancy themselves as central planners directing the next stage of technological development, but they’re no more rational or far-seeing than anyone else. When the bubble bursts, they’ll look at the wreckage and devastation their investments have wrought and shrug.
Where will the capital they allocate go next? Well, there's always the metaverse.