In the early 1980s the radical German musician Blixa Bargeld was being interviewed for TV in his squat in West Berlin, yards from the Berlin Wall.
“Have you been to the other side?,” asked the interviewer. “No,” replied Bargeld, his glazed eyes beginning to rotate in opposite directions. “But I have been to… The Other Side.”
From Vincent Van Gogh to Syd Barrett, we’ve tended to confer genius on troubled artists, imbuing them with visionary skills. Unfortunately, since the advent of the internet, markets have begun to think that some investors have similar, uniquely shamanistic insights too.
At the Poundland end of the technology futurology market we find the likes of Shingy, AOL’s former “digital prophet”, whose extravagantly bedraggled mullet suggests a close encounter with aliens. But at the very serious end is the gravity-defying Softbank founder Masayoshi Son, whose investments move markets.
In 2017, Son’s $97bn Vision Fund became the largest technology investment vehicle ever assembled, with half of the capital contributed by Saudi Arabia’s Public Investment Fund in a wild, oil-fuelled bet on national transformation. (The utopian new tech city Neom is also part of this strategy). The Saudis therefore find their fate lashed to Son’s beliefs – which are quite strange.
Son is an exponent of The Singularity, a quasi-religious eschatogical rapture which posits that technology is about to advance so rapidly it fundamentally changes humanity, most likely enslaving us. Son even gave a year for this: 2047.
Vision Fund investor material is larded in whimsical metaphors. He invokes a “goose premium” – something to do with golden eggs, apparently – and promises “information revolution – happiness for everyone”. Multicoloured unicorns gambol across growth curves (or last year, tumble into a ditch labelled “coronavirus”). Investors are assured that Vision Fund staff “think til our brains crush”.
But the choices that Vision Fund has made may simply reflect an era of froth and desperation – one that may be about to come to an abrupt end.
For years, too much money has been chasing too few good ideas. This is a problem for Mr Son, who hopes that his winning bets turn out to be the kind of emblematic, transformational companies that capitalise on an underlying shift in technology or society, and become market leaders.
Even if eight out of 10 such bets fail, the logic goes, the profits from finding the next Microsoft or Google should more than compensate for the failures.
The problem for Son and his backers is there are no underlying structural changes as profound as the microcomputer (Microsoft) or the Internet (Google), despite what proponents of the blockchain and machine learning hope. These can be modestly useful technologies but their limitations are typically glossed over.
Vision Fund has another handicap: it tends to enter the bidding process late, leading to vastly inflated valuations.
Son’s most notorious failure has been WeWork, whose charismatic founder Adam Neumann prompted the Vision Fund to advance billions in backing. Son valued the company at $100bn. It confidently trademarked the name ‘We’. But WeWork was really a very conventional business that did little more than buy up office space on long leases, and sublet it in hamster-sized portions.
Wall Street balked at its proposed IPO, and its profligate founder Adam Neumann, and derailed both. WeWork continues to lose billions every quarter. With city centres deserted, the company is frantically renegotiating contracts on property which is in all the wrong places.
Uber was another ‘unicorn’ bet that now looks shaky, contributing even more (at $5.2bn) to the Vision Fund’s $18bn quarterly loss a year ago.
Uber essentially took advantage of a pool of casual labour, arbitrage wages and outdated regulations, as well as easy auto financing, with Son and the Saudis subsidising every trip we made. Given enough investment, the belief was that Uber would see off private hire firms, and then jack up its fares once it had reached a near-monopoly position. Uber’s problem today is that President Biden is paying Americans to stay at home, which is more lucrative than the earnings they may make by driving. So why drive?
Of Vision Fund’s enthusiasm for Lex Greensill, the less said the better, but it’s notable how this too was another old idea (reverse factoring) given a shiny coat of paint. And Greensill continues to haunt Son. Katerra, one of the Fund’s bigger investments, recently filed for bankruptcy protection citing the “unexpected bankruptcy filing” of its biggest lender – widely believed to be Greensill Capital.
With so many old and rum ideas, we might conclude that Son is besotted more by the wrapping paper than the gift.
Whilst these are touted as transformational companies, no problem is being solved, no neglected asset is being utilised, and in truth, there’s almost no technology involved either. And what novelty exists does so in a form where the ideas are very easily copied.
Son’s latest market mover Klarna uncannily follows this pattern. The Swedish company enables buy-now-pay-later (BNPL) transactions (at zero interest, so long as punters pay up in time), earning revenue from the retailer and from interest on late payers. Extraordinarily, the Vision Fund’s backing has resulted in a $46bn valuation for Klarna. But it’s a service offering that can be easily cloned, and dozens are doing just that, including ClearPay and PayPal. In addition, people hate low cost credit (for others, not themselves), so regulators loom.
Now it’s emerged that Credit Suisse, once one of SoftBank’s biggest lenders, has stopped lending to Son and has reviewed its relationship with Softbank, after regretting its exposure to Greensill and Katerra.
So far Softbank has emerged largely unscathed – but trouble looms. Bipartisan support for antitrust regulation is united by the suspicion that windfall profits for one of Son’s ‘unicorns’ may mean extorting other businesses.
But the greatest fear of all for his disciples is inflation.
“This is one of the greatest valuation bubbles ever,” says fund manager Ralph Jainz. “Bubble tech valuations are built on DCF (Discounted Cash Flow) models, and rising levels of inflation are poisonous for them.” What this means is that the promised transformation becomes more distant – reaching to infinity.
“It’s pure mathematics,” Jainz explains. “Rising interest rates reduce the long-term value of high-growth companies when you’re projecting out twenty or thirty years”. Two Nobel Laureates, Robert Schiller and James Tobin, each point out how the market is wildly inflated; Tobin’s Q Ratio, a measure of how overvalued shares are with a mean average of 1, is touching 3 for the first time. Schiller’s PE ratio, another yardstick of froth, is higher than it was on Black Tuesday in 1929.
“You will not see who is wearing trunks until the tide goes out” says Jainz. Mr Son remains unrepentant, but the choice may be out of his hands. Son faced a grilling from unimpressed Softbank shareholders on Wednesday, who have seen a 21pc fall in the share price since March. With rate rises on the horizon, the moment of reckoning for Mr Singularity beckons.
First published in The Daily Telegraph.