SOFTBANK IS PIVOTING TO AI. IS IT ALREADY TOO LATE?

SoftBank, the venture capital firm that came to epitomize the hypergrowth era of startups, is--like many players in tech--pivoting to AI. The Japanese investment giant has been writing down investments and selling shares in many of its portfolio companies, presumably to cut losses that have piled up over the past few years, according to various reports in The Wall Street Journal and Bloomberg. The timing may be fortuitous, as the refocus is fueling SoftBank's plan to hitch itself to the generative AI rocket ship. The Tokyo-based VC firm saw the net value of its assets climb to 27.8 trillion yen, or $177 billion, at the end of the past fiscal year, Yoshimitsu Goto, SoftBank's chief financial officer, said on an earnings call Monday. The surge was predicated on the performance of its marquee asset in AI--the chipmaker Arm, which has surged since it reentered the public markets in February. The release of its AI chips is hotly anticipated, though it won't release them until next year. The chipmaker's shares are now trading at $115, up 90 percent from last September. Now, SoftBank wants Arm to lead its efforts in the AI era. "Arm and portfolio companies should create a new ecosystem going forward. That's our expectation and that is reflected in this portfolio," Goto said on the call. Softbank seems to be putting a lot of eggs in one Arm-shaped basket. "Everything is all about edge in investing. You want to figure out what's your edge," Steven Kaplan, a professor of entrepreneurship and finance at the University of Chicago, explains to Inc. "And now the question is, do they have any edge in AI? And it's not obvious." SoftBank didn't return Inc.'s request for comment. Arm was founded in 1990, as a venture between Acorn Computers, a now defunct British tech company, and Apple. It originally operated out of a turkey barn in Cambridgeshire, England, according to the company's official history, and became a key player in the development of mobile phone technology. Historically, Arm has made blueprints for chip designs, and not physical chips, like Qualcomm or Nvidia. It plans to start producing AI chips next year, however, financed by SoftBank, a report in Nikkei Asia revealed Sunday. Arm's potential as an AI chip designer became apparent during the AI boom, as demand for computational power grew among the firms employing the tools. "Arm is riding on the coattails of demand for Nvidia's technology, particularly its data center systems," Susannah Streeter, head of money and markets at Hargreaves Lansdown, told Reuters in February. SoftBank is piling into the generative AI gold rush following years of losses. In 2023, SoftBank reported net losses of 227 billion yen, or $1.46 billion, for the fiscal year ending in March. That was an improvement from 2022, when the firm was out 970 billion yen--or roughly $6.2 billion--as its flagship Vision Fund, known for splashing on WeWork, Uber, and FTX, posted losses of $32 billion. The firm's P&L statement is inching from red to black, however, as SoftBank netted a $1.5 billion profit in Q1, Goto told investors. Speaking of the previous year's losses, he explained: "For us, it was not big, but if you look at the change from the past year, net income improved." SoftBank invested $32 billion into Arm in 2016, taking the U.K. company private for a time. Goto praised Arm's potential to provide highly sought-after computing infrastructure for the AI boom, noting it could service a new "ecosystem" of AI startups bankrolled by SoftBank. Goto mentioned GreenBox, which makes AI-enabled warehouse technology, and Berkshire Grey, a robotics startup, as marquee companies in SoftBank's new AI portfolio, worth around $5 billion. The investment giant's founder and CEO, Masayoshi Son, has lauded the future of AI, saying last October that AI capable of surpassing the total sum of human knowledge--or general artificial intelligence--is only a decade away. SoftBank helped catalyze the VC boom in the days preceding the pandemic. Through its Vision Funds 1 and 2, SoftBank made two separate $3 billion investments into the now bankrupt WeWork, netting a paltry return of $120 million, PitchBook data shows. "In 2021, they helped push the market by putting lots of money to work at crazy valuations. And it actually helped ruin some companies," Kaplan says. There are indications that years of losses, predicated on some of the era's blockbuster failures, has put SoftBank in a bind. "I don't have any insider information. But I would not be surprised to learn later that SoftBank has a liquidity crunch," Ilya Strebulaev, a finance professor and economist at Stanford, tells Inc. Of course, jumping in after the initial wave just might be SoftBank's preferred mode of operation. WeWork was around for six years before SoftBank invested. "I don't believe SoftBank's ever been a first mover," Strebulaev explains.