Uber is SoftBank’s No. 1 bet in the world, CEO Khosrowshahi says

Uber CEO Dara Khosrowshahi said SoftBank’s head “doesn’t throw good money after bad” and that the company and its financial backer’s interests …

Uber CEO Dara Khosrowshahi said SoftBank‘s head “doesn’t throw good money after bad” and that the company and its financial backer’s interests are aligned as the Japanese conglomerate rolls out another megafund.

Khosrowshahi, appearing on CNBC’s “Squawk on the Street, ” said Uber and SoftBank CEO Masayoshi Son are on the same page as the SoftBank’s Vision Fund 2 prepares to invest in companies that could become competitors with the ride-hailing giant.

“I think that Masa is a businessman. He doesn’t throw good money after bad. When he puts in money into companies, it’s because he believes in them and he thinks they’re going to be category leaders. We are their single largest investment on a global basis, so I think our interests and Masa’s interests are very much aligned,” Khosrowshahi told CNBC’s David Faber and Jim Cramer.

SoftBank launched its second megafund last month, contributing $38 billion of its own money. The fund is expected to total $108 billion and will invest in technology companies working with artificial intelligence.

This new round of investments could increase competition for Uber, which is trying to expand offerings such as food delivery service UberEats as it works toward profitability.

“The eats market continues to be very competitive,” Khosrowshahi said. “There’s a lot of capital coming into the category, because it’s growing, and I think eats is going to be a battle this year and next year.”

A new round of investments in startups could expand the total market for Uber’s services and be beneficial for the company, even if it creates competition, Khosrowshahi said.

“They know everybody, they understand the markets, and I’m very, very happy to have them as an investor, and I consider Softbank a very good actor in this marketplace. They’re going to put money against the markets, but that’s going to expand the markets, and we have been one of the cheap beneficiaries of that,” Khosrowshahi said.

Uber missed analyst expectations on the top and bottom lines in its first quarterly report since its initial public offering, sending its shares tumbling. The transportation company lost $5.2 billion in the quarter, due in part to stock-based compensation.

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SoftBank’s AI-Focused Vision Fund 2 May Actually Be Dangerous for AI

… venture capital going into AI companies globally, per calculations by The Wall Street Journal and the MoneyTree report from PwC and CB Insights.
Masayoshi Son

Masayoshi Son, chairman and CEO of SoftBank Group Corp. Alessandro Di Ciommo/NurPhoto via Getty Images

Common sense tells us that when something grows too fast, it’s usually not a good thing. And that’s exactly what the bubbly space of artificial intelligence looks like right now.

In the past five years, the number of privately-owned AI companies that received venture capital funding have grown more than 500%, and the average funding size has almost tripled. And despite industry insiders’ repeated warning of a forming “AI bubble,” the frontrunners in this cash-pumping game have shown no signs of slowing down.

SEE ALSO: What Microsoft’s $1 Billion Investment in OpenAI Could Achieve

Last month, Japanese investment powerhouse SoftBank Group, which turned Silicon Valley upside down in 2017 and 2018 with its $100 billion Vision Fund, announced that it was ready to launch a second Vision Fund and already had $108 billion secured from upstream investors.

Unlike the first Vision Fund, which touched private companies in a wide range of industries, the Vision Fund 2 will focus exclusively on AI companies.

At $108 billion, that commitment would be equivalent to the total VC dollars raised by U.S. companies in all industries last year and five times the amount of venture capital going into AI companies globally, per calculations by The Wall Street Journal and the MoneyTree report from PwC and CB Insights.

While it’s one thing to have the money ready to fuel an emerging technology like AI, it quite another to know whether the pace of technological advancement will actually catch up with investors’ untamed enthusiasm.

Riding a wave of media craze over AI, businesses increasingly label themselves as AI companies to woo customers as well as investors.

“It’s very clear that [AI] has become a marketing thing,” Philipp Gerbert, a Germany-based AI expert with Boston Consulting Group, said in a recent interview with the Journal.

Earlier this year, a study of roughly 3,000 companies in Europe found that only half of the self-described AI companies actually had valuable AI technology. Similar findings were seen in China, too, where A.I. was thought to be a core component in the Chinese government’s “Made in China 2025” mission. Former Google executive-turned-venture capitalist Kai-Fu Leetold local media that he’d seen extreme cases such as an underwear manufacturer branding itself as an AI company, which he said was “abnormal.”

That said, SoftBank founder and CEO Masayoshi Son is too much of an optimist to be distracted by those worries.

“Within 30 years, definitely, things will be flying,” Son told CNBC in March. “Things will be running much faster without accident. We will be living much longer, much healthier. The diseases that we could not solve in the past will be cured.”

Also speaking to the Journal, San Francisco-based entrepreneur Chris Nicholson, CEO of deep learning startup Skymind, said he’s excited about the technological progress SoftBank’s new mega fund could bring about, but he’s doubtful on how fairly AI companies would be valued from a business standpoint.

“Now we have $100 billion that are set to chase and support AI, and they obviously won’t be investing in Google and Microsoft. So this will create new centers of AI progress. And that’s healthy,” he said. “I have no doubt this new fund will accelerate the development of AI. The question is, who is going to value these startups higher than SoftBank? What’s the exit plan?”

SoftBank’s AI-Focused Vision Fund 2 May Actually Be Dangerous for AI

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SoftBank cuts Japan tax bill to zero with Arm transfer to Vision Fund

TOKYO — SoftBank Group paid no tax in Japan last year thanks to a series of complex paper transactions to transfer a stake in its U.K. chip designing …

TOKYO — SoftBank Group paid no tax in Japan last year thanks to a series of complex paper transactions to transfer a stake in its U.K. chip designing subsidiary Arm Holdings to the near $100 billion Vision Fund.

The world’s biggest tech investor accumulated tax benefits worth billions of dollars from the reshuffling of its Arm assets just before its year end, drawing the attention of tax authorities who launched an investigation into the transactions. As reported by Nikkei in June, authorities found no wrong-doing but SoftBank was forced to revise its tax filings after they demanded that some of the tax losses recorded on the transactions should be booked at a later date.

The actual savings are hard to quantify. But based on SoftBank’s effective statutory income tax rate of about 31% in the fiscal year to March 2018, and on declared tax losses of 2 trillion yen as a result of the transactions, the theoretical tax savings potentially totaled more than 600 billion yen. The group recorded a consolidated net profit that year of more than 1 trillion yen.

News that the company, which last month launched a second $100 billion Vision Fund, has cut its tax bill to zero thanks to loopholes in Japanese tax rules is likely to fuel calls for tighter regulations. The taxation of large multinational companies has become a global issue with the Organization for Economic Cooperation and Development estimating that some $240 billion is lost every year in tax revenues due to legal tax avoidance.

SoftBank said it “carried out appropriate procedures in accordance with the tax law.” The transactions were “intended to realize an optimum capital relationship in overseas operations.”.

The transactions involved the restructuring of its ownership of Arm Holdings, acquired for 24.3 billion pounds ($31 billion) in September 2016, in a bid to satisfy commitments to the Vision Fund worth $8.2 billion.

Arm’s value largely resided in an operating subsidiary, Arm Limited. On March 23, 2018, the parent Arm Holdings, now renamed SVF Holdco, transferred 75% of its shares in Arm Limited as a dividend in kind to SoftBank, according to U.K. filings and people familiar with the matter.

Under Japanese tax law, 95% of dividends from overseas subsidiaries are exempt from tax. That meant SoftBank paid little tax for the transfer of Arm Limited shares.

On the same day, SoftBank transferred about 78% of SVF Holdco — which now only held 25% of Arm Limited — to entities including the Vision Fund. The remaining stake was transferred at a later date.

As a result of the dividend payout, the market value of the Arm parent was some 2 trillion yen less than the book value, resulting in a “transfer” loss under Japanese accounting rules, people familiar with the matter said. The loss was only partially offset by income generated elsewhere. As a result, SoftBank was able to offset the remaining losses against any tax due for the year ended March 2018.

It is not clear how much of the tax loss was used in the year to March 2018. Tax losses can also be used to offset income in subsequent reporting years.

Analysts said the transactions highlighted vulnerabilities in Japanese tax law, such as a lack of flexibility on adjusting book value. Even though a big chunk of Arm Holdings’ value was shifted to another SoftBank entity, the book value at the time of acquisition had to be maintained. When the remaining Arm stake was transferred to the Vision Fund, the difference between the book value and the market value was recorded as a loss.

“The current law does not have provisions that require the book value of [Arm Holdings] to be adjusted appropriately,” said Norimasa Yamada, tax specialist at Ampersand, the accountancy firm. “As a result, an inappropriate transfer loss was produced.”

This is not the first time SoftBank and its group companies have run into a tussle with tax authorities. In 2009, SoftBank affiliate Yahoo Japan bought data center operator SoftBank IDC Solutions from SoftBank. SoftBank IDC losses were used to offset Yahoo profits but the Tokyo Regional Tax Bureau rejected the move. It ordered SoftBank to pay back taxes. Yahoo contested the decision but eventually lost the case in a Supreme Court ruling.

SoftBank has maintained that like many multinational corporations, tax planning is part of doing business. The conglomerate has historically been hungry for cash to make its huge bets in the telecommunications and IT sectors. It is currently on a spending spree buying stakes in the world’s leading technology companies through the Vision Fund, which is managed by SoftBank subsidiaries and in which it is a major investor.

In May, Yahoo Japan announced that it would buy back its own shares from a wholly-owned subsidiary of SoftBank before issuing new shares to SoftBank Corp, the recently listed mobile arm of SoftBank. While the deal was in effect a sale of Yahoo shares to SoftBank Corp, the two-step process gave SoftBank a major tax benefit as the majority of the proceeds from the buyback were tax exempt.

“It is important to give back to the many people in Japan, and it is also important to contribute to society,” SoftBank founder and CEO Masayoshi Son said during a shareholders’ meeting in June. “On the other hand, investors around the world, according to rules around the world, also save tax legally. While considering the balance between the two sides, we will try to save tax within the legal boundaries.”

SoftBank’s shares were trading at around 5,200 yen on Tuesday, mostly unchanged since Nikkei reported in June 19 that SoftBank had revised its tax return. Investors were unlikely to be overly concerned by the tax investigation, one analyst said. “Its current stock price is more influenced by the external environment” such as the U.S.-China trade battle, said one Japanese equity strategist.

However, the global controversy over corporate taxation could prompt SoftBank to change its approach, another analyst said. The greater scrutiny “might make SoftBank more cautious in how it recognizes gains etc from Vision Fund.”

The latest case could spark debate over current rules. In the past controversy over corporate tax avoidance has prompted change. IBM Japan’s use of share buybacks through a holding company to minimize its tax bills led to reforms that in effect banned such practices inside the country.

SoftBank’s transaction may raise questions over restructuring practices. Western countries have general anti-avoidance rules (GAAR) that allow the tax authorities to react to excessive tax avoidance. “Japan also needs discussions on the introduction of a GAAR, and the conditions for applying such a rule should also be made clear,” said Shigeki Morinobu, chief research officer at the Tokyo Foundation for Policy Research.

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SoftBank hires Nomura for bond sale to raise ¥400 bil.

BloombergTOKYO (Bloomberg) — SoftBank Group Corp. has tapped Nomura Holdings Inc. as lead manager for a domestic bond sale to raise as …

BloombergTOKYO (Bloomberg) — SoftBank Group Corp. has tapped Nomura Holdings Inc. as lead manager for a domestic bond sale to raise as much as ¥400 billion ($3.8 billion) in what could be one of the biggest in the local corporate bond market, said people familiar with the matter.

The Japanese conglomerate is preparing to sell ¥300 billion to ¥400 billion of seven-year notes to individuals, and may set the bond’s marketing range as early as this month, for issuance in September, said the people, who asked not to be identified because the matter hasn’t been made public yet. SoftBank, which last month unveiled plans for a second enormous technology fund, has a ¥400 billion bond due Sept. 12.

Spokesmen at SoftBank Group and Nomura declined to comment.

Founder Masayoshi Son has transformed SoftBank into a technology investment juggernaut in recent years, and the company said last month it will commit $38 billion of its own capital to a second Vision Fund, following its first unprecedented effort. The main purpose of the planned bond sale is for refinancing, and SoftBank has already hired several underwriters for the deal.

SoftBank is also considering a bond offering to institutional investors that may include seven-year and 10-year notes, according to people familiar with the matter. The company registered to sell yen bonds at the start of last month, according to a regulatory filing.

The Vision Fund injection is unlikely to affect the company’s current rating, even if financed entirely with debt, according to S&P Global Ratings last month. Both S&P and Moody’s Investors Service rate SoftBank with their highest speculative-grade rating.

The new investment vehicle, which is targeting $108 billion of fundraising, is a “manifestation of an extremely aggressive growth strategy and underlying financial policy that are likely to continue to restrain its credit quality,” S&P said in a statement on July 26.

The technology company raised ¥500 billion in April, a record amount in the domestic debt market, by selling bonds at a coupon of 1.64 percent to individual investors in Japan. The issuance was fully subscribed on the first day of a planned two-week sales period.Speech

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What Do VCs Look For In An AI (Artificial Intelligence) Deal?

Recently SoftBank Group launched its latest fund, called Vision Fund 2, which has $108 billion in assets. The focus: It’s primarily on making …

Masayoshi Son, chairman and chief executive officer of SoftBank Group Corp., speaks during the SoftBank World 2019 event in Tokyo, Japan, on Thursday, July 18, 2019. The founders of Southeast Asian ride-hailing giant Grab, indoor farming startup Plenty, Indian hotel chain OYO Rooms and payments service Paytm took the stage at an annual SoftBank conference to explain how artificial intelligence helps them stay on top in their respective fields. Photographer: Akio Kon/Bloomberg

© 2019 Bloomberg Finance LP

Recently SoftBank Group launched its latest fund, called Vision Fund 2, which has $108 billion in assets. The focus: It’s primarily on making investments in AI (Artificial Intelligence). No doubt, the fund will have a huge impact on the industry.

But of course, VCs are not the only ones ramping up their investments. So are mega tech companies. For example, Microsoft has announced a $1 billion equity stake in OpenAI (here’s a post I wrote for Forbes.com on the deal).

The irony is that—until a decade ago—AI was mostly a backwater, which had suffered several winters. But with the surge in Big Data, new innovations in academic research and the improvements in GPUs, the technology has become a real force.

“I’m convinced that the current AI revolution will be the largest technology trend driving innovation in enterprise software over the next decade,” said Jeremy Kaufmann, who is a Principal at ScaleVP. “The magnitude of this trend will be at least as large as what we observed with cloud software overtaking on-prem software over the last two decades, which created over 200 billion dollars in value. While certain subfields like autonomous driving may be overhyped with irrational expectations on timing, I would argue that progress in the discipline has actually exceeded expectations since the deep learning revolution in 2012.”

Given all this, there are many AI startups springing up to capitalize on the megatrend. So then what are some of the factors to improve the odds of getting funding?

Well, in the AI wave, things may be different from what we saw with the cloud revolution.

“Unlike the shift from on-prem software to SaaS, though, progress in AI will not rewrite every business application,” said Kaufmann. “For example, SaaS companies like Salesforce and Workday were able to get big by fundamentally eating old-school on-prem vendors like Oracle and ADP. In this AI revolution, however, do not expect a new startup to displace an incumbent by offering an ‘AI-first’ version of Salesforce or Workday, as AI does not typically replace a core business system of record. Rather, the most logical area for AI to have an impact in the world of enterprise software will be to sit on top of multiple systems of record where it can act as a system of prediction. I am excited about conversations around the likelihood of sales conversion, the most effective marketing channels, the probability that a given credit card transaction is fraudulent, and whether a particular website visitor might be a malicious bot.”

Data, The Team And Business Focus

An AI startup will also need a rock-solid data strategy, which allows for training of the models. Ideally this would mean having a proprietary source.

“At the highest level, a lot of our diligence comes down to who has proprietary data,” said Kaufmann. “In every deal, we ask, ‘Does this startup have domain-specific understanding and data or could a Google or Amazon sweep in and replicate what they do?’ It’s one of the biggest challenges for startupsin order to succeed, you need a data set that can’t easily be replicated. Without the resources of a larger, more established company, that’s a very big challengebut it can be achieved with a variety of hacks, including ‘selling workflow first, AI second,’ scraping publicly available data for a minimum viable product, incentivizing your customers to share their data with you in return for a price discount, or partnering with the relevant institutions in the field who possess the key data in question.”

And even when you have robust data, there remain other challenges, such as with tagging and labeling. There are also inherent problems with bias, which can lead to unintended consequences.

All this means thatas with any venture opportunitythe team is paramount. “We look at the academic backgrounds,” said Rama Sekhar, who is a partner at Norwest Venture Partners. “We also like a team that has worked with models at scale, say from companies like Google, Amazon or Apple.”

But for AI startups, there can often be too much of a focus on the technology, which could stymie the progress of the startup. “Some of the red flags for me are when a pitch does not define a market target clearly or there is not a differentiation,” said David Blumberg, who is the Founder and Managing Partner of Blumberg Capital. “Failed startups are usually not because of the technology but instead from a lack of product-market fit.”

Tom (@ttaulli) is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction.

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