In October 2014, the Italian economist Mariana Mazzucato unveiled the findings of her now legendary analysis of the iPhone. With the aim of challenging the idea that innovation is the preserve of the private sector, Mazzucato had traced back the smartphone’s components to the organisations that had funded them. She revealed, in a pamphlet published by the think tank Demos, that nearly all of the hardware within the device could ultimately be sourced to initiatives not within Apple, but national governments and their agencies.
It was a powerful pitch. As the effects of the 2008 financial crisis continued to be felt, Mazzucato argued that major economies couldn’t simply rely on the private sector to power the next wave of economic growth. Instead, she suggested, the most effective way to boost productivity was through ambitious, state-funded R&D initiatives of the kind that were seen during the space race and that ultimately led to the iPhone’s creation. Rather than being motivated by the need for short- or medium-term financial returns, governments could capitalise on ultra-low interest rates to make ambitious bets on innovation. They would invest in technologies such as AI, quantum computing and advanced semiconductors that would define the next century.
The idea was especially well received in Brussels, where EU officials commissioned Mazzucato to produce a paper elaborating on her proposals. But while the European Commission heeded some of her advice, it is another government, that of the Kingdom of Saudi Arabia, which has arguably made the most significant recent impact on the tech industry. Since 2017, Saudi Arabia has poured tens of billions of dollars into the world’s largest tech investment fund, betting on innovation to boost government coffers. That gamble, however, is yet to pay off.
The fund that Saudi Arabia’s ruler, Mohammed bin Salman, chose is managed by SoftBank, the Japanese telecoms giant-turned-investor which has funded many of the world’s fastest-growing tech companies, from Uber and WeWork to the chipmaker Arm and robotics company Boston Dynamics. SoftBank released its quarterly results earlier this week. Collectively, poor performance of the shares in tech start-ups held by its two Vision Funds, launched in 2017 and 2019, has led the company to record a $23bn quarterly net loss. That drop followed a further $26bn loss in the last quarter. The funds have driven some profitable periods in the past, including a $37bn uplift in the first quarter of 2021. Yet the two latest losses amount to more than the original sum of money funnelled into the first fund by Saudi Arabia, its biggest backer.
The 64-year-old Japanese-Korean billionaire who runs SoftBank, Masayoshi Son, acknowledged earlier this week that he should have been more selective about the investments he has made. “I am ashamed of myself for being so elated by big profits in the past,” he told reporters as SoftBank’s earnings report was published. “We were in a kind of bubble on valuations. If we had been more selective and invested better, we wouldn’t have received this heavy blow.”
Son went on to criticise “unicorn companies’ leaders” for “still [believing] in their valuations” and complained that they wouldn’t “accept that they may have to see their valuations [go] lower than they think”. But what Son neglected to mention is that he, to a larger degree than arguably any other individual, is responsible for those valuations.
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Having earned his fortune from telecoms and an early investment in the Chinese online retail giant Alibaba, Son reportedly refuses to put less than $100m into the businesses SoftBank backs. By pushing more cautious investors out of the market, he has reshaped the tech investment landscape, convincing both his backers and entrepreneurs that companies such as Uber and WeWork, which manage cars and offices, can scale in the same way as businesses which manage software and data, but only if they take enough of his money.
As pandemic restrictions ease, Uber has returned to profitability in recent weeks and SoftBank has now sold its stake in the company to offset other losses. WeWork, meanwhile, isn’t expected to be cashflow positive until the second quarter of 2024, 14 years after it was founded. But developing profitable businesses has never been Son’s overarching aim. Instead, he pitches himself as a member of the modern-day gentry, presiding over an ever-expanding empire of technologies, from semiconductor design software and advanced robotics to shared working spaces and dog-walking apps, that he believes will reshape the world.
For a long time his investors bought into this philosophy too. “SoftBank had exactly the same strategy before the dotcom bubble,” says Hussein Kanji, a partner at Hoxton Ventures, an early stage VC fund. “Muscle out other investors and put in a tonne more capital than companies need in order to scale. But that strategy only works in a bull market.” It is, Kanji says, essentially “the greater fool theory”, which suggests there will always be a more gullible, greedy investor willing to buy the stocks when an investor wants to cash out. “But those markets have all changed. There is no more ‘greater fool theory’ because we hit the top and we’ve come down.”
SoftBank’s most significant backers grew tired of this approach long before the start of the latest downturn. Both Saudi Arabia and the Abu Dhabi investment fund had backed the Vision Fund 1. But in February 2020, Reuters reported that neither would commit to the second fund until Son could turn around the performance of the first. Stepping in to plug at least some of this shortfall were incumbent tech companies, such as Apple and Microsoft, but the largest is Softbank itself, which continues to invest a significant amount of its earnings, including those from Alibaba’s share price rise, into its own funds. As scrutiny of Son’s approach intensifies, there is increasing speculation that he will take the company private – a tactic commonly employed by businesses which are expecting a run of negative earnings reports but ultimately believe they will survive and grow again.
SoftBank’s pockets are deep enough that it may ultimately profit from the downturn. But the effects of the unsustainable growth the company creates reach far beyond its headquarters, the sovereign wealth funds of Gulf states and cities such as London and New York, where metropolitan lifestyles have been financed by SoftBank for years. By convincing oil-rich nations to diversify their revenues using tech funds, Son has become one of the most influential business leaders worldwide. Since the first Vision Fund was launched in 2017, it has been SoftBank, working alongside Saudi Arabia, Abu Dhabi and the Silicon Valley giants, that determines which industries are disrupted, which businesses will fail and where the brightest minds will apply their talents.
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With the tech stock bull run in full force, Western leaders welcomed this arrangement. In one of his final foreign trips before stepping down as chancellor of the exchequer, Philip Hammond visited Son in Tokyo in 2019. After the meeting, Hammond tweeted that he had “promoted the UK as a world-leading FinTech hub, and welcomed the Vision Fund’s recent investments in UK tech and the expansion of their London office”. As Brexit imperilled already sluggish productivity growth and risked deterring inward investment, the UK, Hammond suggested, remained a tech powerhouse, and one that was open to the world.
But political leaders in nations such as the UK may now come to regret entrusting overseas investors with the power to determine which industries and technologies are fast-tracked and who controls them. As investors, such as Son, take a more conservative approach and prioritise profit over growth, innovation in the West is at risk of slowing. This is a threat across a range of fields, but particularly in those that were previously funded by governments and which require high barriers to entry and are particularly audacious, such as space-tech, from satellite systems to geo-imaging, which may have both commercial and military applications.
In China, meanwhile, where Xi Jinping has made technology a key part of his 100-year plan and the state keeps a tighter grip on the private sector, innovation in fields of emerging tech is less likely to slow, because it is less dependent on the whims of corporate investors such as Son. Concerns over the pace of Chinese technological progress relative to the West had already been growing in Washington and Brussels for several years. They were central to the Trump administration’s campaign against Huawei, which has only strengthened Xi’s resolve to develop a more self-sufficient tech sector, and the European Commission’s tech agenda. But as the fallout of the tech downturn sinks in, these fears may become more acute.
As the Huawei saga proved, post-Brexit Britain is caught in a bind, seeking to appease the US, without alienating Beijing, while also weighing the potential productivity benefits of being one of the first nations to adopt a nascent foundational technology such as 5G. For some time, however, the Johnson administration did at least pay lip service to concerns over technological sovereignty and even appeared to be following some of the guidance Mazzucato shared in her Demos pamphlet in 2014. Downing Street launched an £800m Advanced Research Innovation Agency (Aria), inspired by the US Defense Advanced Research Projects Agency which funded many of the technologies that, as Mazzucato noted, are now in the iPhone. No 10 also introduced the National Security and Investment Act, to screen foreign investments.
Progress on both fronts seemed to slow after Dominic Cummings left Downing Street, however. Aria took two years to appoint a leadership team and the government has postponed its decision over whether to retrospectively intervene in the sale of Newport Wafer Fab to a Chinese-owned company. Meanwhile SoftBank’s planned listing of Arm, the world-leading semiconductor firm, on the London Stock Exchange has stalled due to the UK’s political instability.
These issues have remained largely absent from the race to appoint the UK’s next prime minister. But Liz Truss, who appears increasingly likely to secure the keys to Number 10, has provided some insight into her stance on innovation. In a tweet referencing the kinds of companies SoftBank funds, she said in 2018: “Every generation wants their own version of freedom – freedom to shape their own lives. This is about choice, destiny. This generation are Uber-riding, Airbnb-ing, Deliveroo-eating freedom fighters.”
In Liz Truss’s world, unregulated private sector investment empowers consumers to decide which companies fall and which thrive. As Masayoshi Son’s SoftBank reminds us, however, this power has increasingly become the domain not of consumers or elected politicians, but of tech visionaries and their investors. We are only starting to discover just how damaging Son’s approach may have been.
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