Masayoshi Son’s secret to running his $100 billion fund: Telling start-ups to treat each other like family

Key Points
  • SoftBank founder Masayoshi Son, the key force behind all of the Vision Fund's investments, meets with every founder of every Vision Fund investment in person before a deal is signed.
  • Son holds dinners every few months with the CEOs of his investments to encourage them to partner with other companies he has invested in and conduct status checks on their businesses.
  • Son told the CEOs that the first year annual return for the Vision Fund was 60 percent.
SoftBank Group Corp. Chairman and CEO Masayoshi Son speaks during a press conference on May 9, 2018 in Tokyo, Japan.
Tomohiro Ohsumi | Getty Images

Two weeks ago, Masayoshi Son, the Japanese billionaire who has become the talk of Silicon Valley over the past 18 months, held a dinner at the Chinese restaurant Yomeiden in Tokyo's Prince Park Tower.

The meeting took place during SoftBank World, an annual conference for the Japanese telecom giant's customers and suppliers, but this was a particular audience of start-up CEOs. Each one of them had taken money from the $100 billion Vision Fund that Son administers.

Son had a message for the executives staring back at him: you're now part of a family. That means you're expected to help each other out.

According to people who attended, Son encouraged his investments to work together, including cutting favorable deals with each other to grow faster. The dinner then turned into a networking event, with founders talking to one another and planning future deals.

Son also announced that the Vision Fund had achieved a whopping 60 percent return on investment in its first year, according to two attendees. (That number is a back-of-the-envelope calculation and hasn't been vetted with the fund's legal and compliance teams, according to a person familiar with the matter.)

Earlier in the day, Son and various members of his Vision Fund team had met with many of the CEOs individually for 45 minutes to an hour. He got a status update from each one, then pushed the executives on scaling as quickly as possible.

What is Softbank?
What is Softbank?

Son has been holding these gatherings almost quarterly in various locations in the U.S. and in Japan, said Stefan Heck, founder of Nauto, which retrofits commercial trucks with cameras and AI software to improve driver safety. Heck took an investment from the Vision Fund last year.

Heck couldn't make the recent gathering in Tokyo but did meet with Son and attended the CEO dinner in New York at The Four Seasons on the weekend of March 26, where Son made similar comments about working with other firms in the Vision Fund family, he said.

The Vision Fund officially closed a little more than a year ago with $93 billion, and has since added the last $7 billion to get to $100 billion of capital under management. It's invested in about 30 companies. The smallest investments are around $100 million in companies such as Nauto and Brain Corp, which is building self-driving "brains" for robots. The largest was a nearly $10 billion investment in ride-hailing giant Uber.

The driving force behind the investments is Son himself. While Son has built a team of about 200 people who help him find targets and perform months of due diligence on potential targets, the 60-year old founder of Japan's third-largest wireless company (and 82 percent owner of Sprint) meets in person with every founder of every Vision Fund investment -- sometimes several times -- before reaching an agreement on a deal. This frequently involves last-minute trips to Toyko for founders who get the call -- "Masa wants to see you tomorrow."

While the initial meetings vary from person to person, there are some common themes driving Son's discussions and investments, according to six founders who have taken money from the Vision Fund. The conversations also illustrate how the billionaire differs from his venture capital peers in both strategy and style.

Meeting Masa

Those who know Son comment about his remarkable energy and desire for accomplishment. One acquaintance said his personality can be traced to growing up as a Korean in Japan, where discrimination is rampant. Growing up bullied, Son developed "an I'll show you approach" that he's carried throughout his life.

Son has had some giant hits and misses. He was briefly the richest person on Earth in 2000 before losing 90 percent of his wealth when the dot-com bubble burst. Aided by an early investment in Alibaba, Son has built himself back and is again one of the world's wealthiest men. SoftBank, the company he founded, has a market capitalization of nearly $100 billion.

But it's the Vision Fund -- $100 billion from sovereign wealth funds of Saudi Arabia and Abu Dhabi and global corporations including Apple, Hon Hai and Qualcomm -- that has taken the world of technology by storm since its inception last year. The fund's rapid deployment of cash has already begun talk of a Vision Fund 2.

Masa Son: This the beginning of a new ecosystem for high-tech manufacturing back in the US
Masa Son: This the beginning of a new ecosystem for high-tech manufacturing back in the US

Son often meets founders in his mansion in Woodside, California. Son made headlines in 2013 when he reportedly bought the house for $117 million, making it one of the most expensive homes ever purchased in the United States.

Son's estate can't be seen from the street. Founders -- and even other members of the Vision Fund team -- describe waiting outside the gates and being escorted into his home by a security guard. Once at Son's door, a second security guard escorts the visitors into Son's house, where all guests change out of their shoes and into slippers.

Son then greets his guests with a traditional Japanese bow and leads them into one of at least two conference rooms in his house.

Mohit Aron, the founder of enterprise storage company Cohesity, said his conference room was designed with ornate woodwork and very large TV on which he presented his pitch to Son.

"It felt very elite," Aron said.

Aron had already gone through about two months of thorough due diligence on his company, including speaking to executives, analysts, board members and customers. Now, he launched into a presentation that lasted about an hour. Son mostly listened but asked a couple of questions about how big Aron felt Cohesity could get.

"I actually stopped myself before I jumped to answer and thought, 'what is he really asking me?' before I answered," Aron said. "I think there was a question behind the question."

Aron guessed Son was looking for a leader of a company with very big ambitions. Fortunately for Aron, Son was satisfied with his answers. He slapped the table and said "sort of said, 'let's do it.'" He then shook Aron's hand — which was more than just a courtesy goodbye, Aron said.

"I sort of didn't understand the significance of the handshake in Japanese business culture," Aron said. "But after, I was told the handshake means we have a deal and let's figure out the details later."

Aron had already discussed a range of potential investments with other members of the Vision Fund, but the numbers were finalized in short order. When Aron met with Son again at SoftBank World last month, the billionaire was much more animated and full of suggestions about how Cohesity could work with his other portfolio companies.

"He was bubbly, giving advice about how SoftBank's own sales team can help us through a partnership and telling stories about how Alibaba turned itself around after being run very poorly," Aron said. "The meetings were exhilarating. Most investors are a little bit cautious, a little bit greedy. With Masa, he may liquidate some of his investments but for the most part he wants to stay in the company as long as he believes in it. It's refreshing to hear."

Aron declined to comment on how much Son invested, but a person familiar with the matter says he sold the Vision Fund a 15 percent stake in his company as part of a $250 million round.

SoftBank president Masayoshi Son and Cohesity co-founder and CEO Mohit Aron
Source: Cohesity

Until recently, Son was not widely known among the Silicon Valley start-up set. Nauto was one of the first companies Son invested in, before the Vision Fund was closed. Heck heard Son was interested in his company through mutual acquaintance Andy Rubin, the former Google executive who created Android mobile operating system and is now a start-up investor.

"I'd vaguely heard of him," Heck said of Son. "I get this call from Andy at like 4 in the afternoon. He tells me I should drop everything and fly to Japan tomorrow. I've got a calendar full of customer meetings. I'm like, 'Is this something I should do?' Andy says people wait their whole lives to get a meeting with Masa. So I canceled everything and jumped on plane. I met Masa an hour or two after after I landed."

Like Aron, Heck wasn't totally familiar with Son's style of doing business. He made a mistake of wearing a suit jacket, even though Rubin warned him to wear jeans.

"Masa comes in completely casual, wearing slippers with a cup of tea," Heck said.

The two proceeded to have an hour-long discussion in large conference room. Son pushed Heck on the microeconomics of his business and how quickly it could scale, drawing upon successes and failures of previous business ventures from Son's history.

"We got up and white-boarded together," said Heck. "He grilled me for an hour. He wants to go as fast as you can and be number one."

Heck said Son wanted to invest more, but he bargained Son down to "a little less than" $100 million as part of a $159 million Series B financing round with Greylock Partners.

Unique hybrid investing model

Son's focus on how companies in his portfolio can share technology makes him different from nearly every other venture capitalist, said Dave Grannan, co-founder and CEO of software-defined camera company Light, who took $100 million from the Vision Fund as part of a Series D round announced in July.

Venture firms typically place a lot of bets and hope a few strike gold. Son's strategy with the Vision Fund appears to be a hybrid approach between venture capital and a diversified corporation — similar to SoftBank itself.

"You've got traditional investment funds that think one or two of their companies will make it and the rest will wither and die," said Heck. "The Vision Fund is trying to make every company work well. Masa has created a new kind of entity. They can quickly deploy capital to accelerate individual bets but they're also creating a portfolio of synergy."

For Grannan, that means eventually getting his high-resolution cameras in autonomous cars that could operate through Uber, Ola, Grab and Didi Chuxing, all of which are partially owned by the Vision Fund. It also means getting in smartphones that connect with Sprint and SoftBank's mobile network in Japan.

For Aron, Son encouraged "cross pollination" between Cohesity and Brain Corp., co-founded by CEO Eugene Izhikevich, which enables existing machinery for autonomous use.

Izhikevich says Son hasn't limited his evangelism to other Fund companies. Nearly every time Son has a conversation with anyone and the discussion turns to robotics, Son will bring up Brain Corp., Izhikevich said.

"He is our best business development person," Izhikevich said. "The first time I heard he brought up Brain Corp. to someone I was just flattered he remembered us. Then I kept hearing it from different people. He remembers everything. Honestly I'm afraid to talk any numbers with him because six months later he's quoting them back to people as if we just spoke hours ago. He remembers how much we charge our customers. It’s extraordinary. I wonder, is he like this with every company?"

Brain Corp CEO Dr. Eugene Izhikevich and Masayoshi Son
Source: Brain Corp. 

Pushing to get bigger

Every founder interviewed for this story said the most unique characteristic of Son's personality was his long-term vision. He tells founders he has no interest in exiting his position in their companies and has a decades-long time horizon. This may not be surprising for someone who is famous for his 300-year plan.

"SoftBank thinks longer term and bigger," Brandless Co-founder and CEO Tina Sharkey wrote in a Medium post this week after accepting Vision Fund money as part of a $240 million funding round for her online retailing company. "They are investing in founders that are building new industries, not just fixing broken systems. When Ido [Leffler] and I shared our vision for Brandless, our progress, and our dreams, they smiled and began to sketch the possibilities with us."

But there's a tension with this long-term view. Son also pushes his founders to expand as quickly as possible, as though they have no time to lose. This is driven by a specific strategy -- to make kings of his investments, said Michael Marks, who founded construction start-up Katerra and participated in a pitch at Son's mansion in Woodside.

It's common for Son to ask for a larger stake in a startup than founders want to give up. The Vision Fund attempts to own about 15 percent of most companies, although some investments have gotten as high as 30 percent, according to people familiar with the matter.

In Katerra's case, Son wanted a 15 percent stake in the company. While Marks didn't want to give up that big of a stake, he eventually relented, and the Vision Fund led an $865 million round of financing earlier this year.

But what's happened since has surprised Marks. Taking the money has made customers more secure in doing business with Katerra, Marks said. A major hotel chain that had agreed to allow Katerra to build "a couple of hotels" got much more comfortable with the company after it announced the large funding round, and has since changed its order to 40 hotels, Marks said.

"It’s a part of their strategy," Marks said. "We’ll come in with enough money that the customers, suppliers and competitors will know that this is the best company -- that this is the company that will win the industry."

Son's bets are "an all-out play on scale," agreed Heck. Nauto hasn't changed its priorities since taking Son's money but has accelerated geographic expansion and pushed products ahead of schedule.

"Instead of doing things sequentially, we're now doing them in parallel," Heck said.

In Light's case, Son's meetings with Grannan actually altered the direction of the company. Light designs high-resolution cameras, but Son was more interested in the company's expertise in computational imaging to help build autonomous vehicles — a natural fit given Son's many investments in that area.

"We were not working on it at the time," Grannan said. But after taking the Vision Fund's investment, Light has begun designing products for self-driving vehicles.

"The nice thing about working with someone like Masa is he has a broad perspective. We're fairly narrowly focused in the field we’re working on. He saw a path to accelerate what we were already doing. It was Masa iterating with us and putting out his vision."

A one-man keiretsu

The Vision Fund has spooked many other VC firms, who are concerned $100 billion will spike valuations for tech companies and lead to another dot-com bubble. It's pushed funds to raise more money to compete for start-ups alongside SoftBank.

"The challenge is there's too much money at all stages," said Jeff Clavier, founder and managing partner of the venture firm Uncork Capital. "We don't have enough IPOs and exits in comparison to the dollars being invested. The whole increase of holding time and delaying of exits is really a bummer, because we need even more IPOs to return cash to limited partners."

On the plus side for the venture community, it's also become another exit option for VCs looking to liquidate, such as Benchmark's Uber sale to the Vision Fund earlier this year.

No other VC firm is pushing the narrative of frictionless partnership between portfolio companies (and with SoftBank itself) like Son, said Izhikevich. Theoretically, it's a win-win for Son and his investments -- portfolio companies can pick up customers and partners, and Son can reap the benefits as all of his companies flourish. He can also weed out investments based not only on performance but also on fit with the other companies in the broader portfolio.

This view of cooperation within business is derivative from the Japanese concept of keiretsu, where corporations own stakes in each other's companies to help with long-term planning. There are signs Son is building a keiretsu on his own. He has already pushed several of his investments together, such as Uber taking a 27.5 percent stake in Grab.

Keiretsu can have an ugly side. It can lead to price-fixing and the stifling of competition.

It can also limit a company's growth. Competitors to companies in the Vision Fund family could view Son's investments as working in tandem. Japanese auto suppliers, who counted Toyota as partial owners, ran into this problem when Toyota rivals wouldn't buy from them. It's possible taking money from the Vision Fund could isolate certain companies from future customers if they're seen as favoring rivals within the Son sphere.

Son originally thought the Vision Fund would be pursuing full takeovers but changed its strategy on the fly to avoid potential regulatory pitfalls, as U.S. agencies are far more likely to strike down acquisitions than minority investments. (Son did meet with President Trump in late 2016 and again in June in what some view as a tactic to befriend the administration. He will get his first regulatory question answered when Sprint's merger with T-Mobile is approved or denied).

Keiretsu can also link the fates of many companies together, leading to big swings in valuation. That's a major concern for a late stage investor like the Vision Fund that's investing at a scale that's never been seen before, said Lise Buyer, founder of Class V Group, a consulting firm that helps companies that are headed for the public markets.

"Underfunding is a problem, but overfunding is a problem too," said Buyer. "Companies that have too much money too soon often develop sloppy habits that come back to bite them years later when the money faucet runs dry. Valuations are going up more rapidly that what we've seen in the past. That makes a lot of these investments more speculative."

And while Son's Vision Fund strategy appears novel, this isn't the first time technology-focused VC firms have evoked kereitsu. Kleiner Perkins talked of it on its website back in 2000 -- right around the time the last technology bubble burst.

If a second storm does come, Son will be in the unique position of losing nearly all of his wealth twice. But if it doesn't come, Son could become more than a kingmaker -- he may become Silicon Valley's king.

—CNBC's Ari Levy contributed to this report.