[sangkancil] [sk] Master of the Internet (Forbes Cover Story)

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Date Wed, 30 Jun 99 18:29:29 -0500
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Softbank's Masayoshi Son has created an Internet empire in a blaze of
dealmaking. He's just getting started on what he calls a 300-year business

Master of the Internet
Forbes, July 5 '99
Source: http://www.forbes.com/Forbes/99/0705/6401146a.htm

By Neil Weinberg

Venture capitalists scoffed when Christos Cotsakos hit the road in the
spring of 1996 to round up $9 million for his fledgling on-line brokerage,
E-Trade. It took Masayoshi Son's venture firm just 30 minutes to agree to
fork over the funds.

When Cotsakos returned last summer to seek $400 million more to bankroll
losses in building a brand name and customer base, Son sent the money after
a single phone call—and didn't even want a board seat for his trouble. (He
took one only after Cotsakos insisted.) Wall Street caught wind of the plan
and lopped two-thirds off of E-Trade's market value, but not for long. The
$400 million Son invested one year ago is now worth $2.4 billion.

That's vintage Masayoshi Son: Get in early, place bets others shrink from
and get out of the way to let the managers do the managing. "Masa is the
master of the Internet universe," says Cotsakos. "He has a clear vision of
how technology is going to connect everyone globally in the next 50 years
and doesn't let daily, weekly or monthly fluctuations get in the way."

Internet stock valuations may indeed be some kind of bubble, but there is
no denying that the technology is transforming the economy or that Son
stands vindicated against his many doubters over the years. Son, the
41-year-old founder and president of Softbank Corp. of Japan, is not as
famous as his pals Bill Gates of Microsoft or Jerry Yang of Yahoo, but he
has carved out a larger chunk of the Internet economy than either of
them—larger than anyone else on the planet, he claims.

All told, Son has invested $1.7 billion in more than 100 Internet
companies. Softbank and its venture capital arm have sunk $906 million into
eight Internet firms that have gone public, an investment now worth $14.1
billion. Son is now about to invest at least $1.2 billion more in the next
few months.

By Son's count, Softbank holds 7% to 8% of the publicly listed value of all
Internet properties (he excludes from this calculation hardware makers like
Cisco Systems and service titan America Online). The Softbank empire
includes a 27% stake in E-Trade, 28% of top Web portal Yahoo and 85%
ownership of ZDNet. Back home, Yahoo Japan controls 80% of portal traffic
and boasts a $4.5 billion market cap. Softbank owns 51% of Yahoo Japan;
Yahoo itself owns 34%.

Now Son aims to create a public market for hot startups. Softbank and the
National Association of Securities Dealers just announced plans to jointly
set up a Nasdaq market in Japan. Its goal: List promising local firms and
give Japanese investors easy access to global markets.

Masayoshi Son's golden touch in Web investing has made him fabulously rich.
His 42% stake in Softbank gives him a personal worth of $6.4 billion. The
$6.4 billion question: Is he really that much smarter than everyone else—or
is he just lucky?

Just about anyone who bet on Internet startups in 1995 has been riding a
monster wave. And given that Son threw more money into more ventures than
anyone else, some success was inevitable. Son, soft-spoken but assertive,
disputes the notion that luck has anything to do with it. "I don't like
accidental success," he says. "It's what Bill Gates calls 'random,' a term
he uses with the opposite of respect."

He envisions a wired world and a digital revolution that will continue
improving people's lives and create wealth over the next 300 years. In that
context, he says, the Internet is undervalued (see sidebar).

His grand scheme, to keep Softbank in the vanguard long after he's gone,
involves mixing religion and science. Religion, Son explains, because its
reliance on doctrine rather than individuals has made it the most durable
human institution. Science, because in most things on this planet, logic

"My philosophy is that the digital revolution will make mankind happier and
more productive, and that won't change over the next 300 years," Son says.
"If you don't stick to that original philosophy, even perfect control of a
bunch of companies isn't going to do you any good."

Son is slight, barely 5 feet tall and brimming with competitive passion for
business and leisure alike. An avid golfer, he can't resist citing his
recent 74 at Augusta (and pointing out that AT&T chief C. Michael Armstrong
came in around 90). From the time he was 10 years old, Son believed he
would one day become Japan's top businessman. He was the second of three
boys born to an ethnic Korean father who ran a pachinko parlor in a small
town on the southern Japanese island of Kyushu.

As a teenager, Son was fascinated with things American and with a local
hero, Den Fujita, who methodically turned McDonald's Japan into the largest
restaurant chain in a land of mom-and-pops. Intent on getting a look at his
idol, Son called Fujita's office dozens of times and flew to Tokyo to press
his case. Fujita met with the youngster and encouraged his interest in the

At age 16 in 1973, Son—who dropped his family's adopted Japanese name,
Yasumoto, in favor of the ancestral Son—arrived in Berkeley, Calif. to
study English. He was smitten with the place. "Everything was huge and very
systematic," he recalls. "I decided this was the country I wanted to learn
more about."

Son transferred to a Berkeley high school the next year, entered a small
college in 1975 and jumped two years later to the University of California,
Berkeley, to study economics. He devoted five minutes a day to pondering
new inventions. At age 19, he designed a pocket translator and hired
professors to make a prototype. Son then patented it and sold it for $1
million to Sharp, which used it as a model for the Wizard organizer.

A grand dreamer even then, Son mapped out 40 potential startups and devised
a 50-year plan to start a business, amass capital, and eventually hand the
creation over to a chosen successor. And at this point he didn't even know
what industry he would be in.

Choosing one became easier when, leafing through a science magazine at
Berkeley, Son came upon a photo of a microprocessor. "My hands went numb
thinking about its potential to become cheap and plentiful enough to affect
the lives of everyone on the planet," he says.

Son graduated from Berkeley in 1980 and returned to Japan to polish his
business plan. He soon decided to jump into the software distribution
business. Using $80,000 from his Sharp windfall, he set up Softbank in 1981
at age 23. By the mid-1980s Softbank was Japan's top distributor of PC
software (and still has 70% of the market) and published a dozen computer
magazines created to educate consumers and hype Softbank products.

Son took Softbank public in 1994, raising $140 million. The 1.8 million
shares he sold at a split-adjusted $22.25 are now worth $150 apiece. After
the offering, Son went on a buying binge: $803 million for the Comdex
trade-show group; $3.1 billion for the Ziff-Davis computer magazines and
trade shows; $1.2 billion for an 80% stake in the world's top memory-board
maker, Kingston Technology Corp.

In 1995 Son discovered the Internet. At the time electronic commerce was at
only $300 million (it's now at $111 billion, says International Data Corp.)
and there were just 177,000 Web site domains (.coms, .nets and .orgs—now
totaling 4.2 million, says Network Solutions).

Son, already saddled with $3 billion in debt, had to scrounge for capital.
He set up Softbank Technology Ventures and hired Gary Rieschel, a Cisco and
Intel veteran, to run the limited partnership from San Jose, Calif. With no
track record in the U.S., the firm drummed up $170 million in Japan and
Softbank threw in $60 million. The focus: Internet services. "Microsoft,
Intel and Cisco are all makers of digital technologies," Son says.
"Softbank has always been a service firm, and, with the Internet, services
became the center of the technology industry."

Son's first target was a killer: Yahoo. Using Ziff-Davis' magazines as a
reference, his team built a profit-and-loss model that stripped out
printing, mailing and other distribution costs, forecasting 30% pretax
margins for Yahoo (close: Yahoo was at 21% last year).

But Yahoo was already well known among venture capitalists. Buying in meant
writing a big check. Softbank tested the waters with a $2 million stake in
Yahoo in November 1995. The following March, as paint dried on the walls of
Yahoo's new offices, Son shared cold pizza with Jerry Yang and made a new
offer. Though Yahoo was still a piker, inhabiting quarters the size of a
nice apartment, Son said he would pay $105 million for a 33% stake.

"Most of us thought he was crazy," says Yang. "Putting $100 million into a
startup in March 1996 was very aggressive, but I don't think it was luck.
Masa looks ahead in 15-to-20-year chunks." Yahoo went public just two
months later. Softbank has invested $250 million since then, bringing its
total bet to $355 million. Nice gamble: It has reaped $450 million selling
off tiny parts of its Yahoo stake, and its 28% stake is now worth $8.4

In a frenetic first year Softbank Technology Ventures invested its $230
million kitty in 55 firms. A model began to emerge: Invest broadly at early
stages at many outlets, then cherry-pick the top prospects and double up
bets. That's not to say everything scored. Softbank backed American
Cybercast, but the on-line soap opera producer folded. Ditto with OnLive
Technologies, which had a cool 3-D chat-room technology; chatters didn't
care. "We learned not to get too far ahead of behavioral changes or
technological availability," says the venture arm's Rieschel.

With GeoCities, Son got it right. Softbank put $52 million into the host of
free Web sites in late 1997. GeoCities knew how to build traffic, even if
it didn't know how to make money on it. In May Softbank partner Yahoo
bought GeoCities for $4.1 billion in stock. Softbank's 22% stake was now
worth $900 million; it was swapped for more Yahoo shares.

Son wants to be number one in "eyeball traffic, finance, e-commerce and
content"—not by controlling a single behemoth like Amazon.com, but by
taking sizable stakes in top players in myriad niches. (Amazon itself does
the same, recently buying a piece of Drugstore.com.) "It would take
enormous expertise for Amazon to win in every category. Do you think
McDonald's could be number one in hamburgers, seafood and Chinese food?"

Son does lead in "eyeballs," if you count all the people visiting Yahoo,
ZDNet, GeoCities and Yahoo Japan, four of the world's 20 most popular
sites. In finance it has stakes in E-Trade (stocks), InsWeb (insurance) and
E-Loan (mortgages). In e-commerce it owns 10% of Buy.com, which aims to
make money not by selling goods but by selling ads. To identify Web sites
with the most potential, Softbank's venture arm has deconstructed the
distribution channels and profit margins of 30 industries.

Son looks at investments not as one-time transactions but as the start of
alliances. Son invites his partners to technology forums each year in San
Francisco and cultivates informal contacts nonstop. Softbank figures its
affiliates typically have four to five ties to one another. One-third do
business with Yahoo or Ziff-Davis.

"Our partners negotiate like hell, but the probability of doing exciting
deals increases because we have frequent lunches and dinners," Son says.

In Japan, where Softbank is the favored partner for U.S. high-tech firms,
Microsoft introduced CarPoint, its Internet auto locator service after
offering 50% to Softbank and another 10% to Yahoo Japan, where CarPoint
will be the exclusive car-buying service.

To extend its reach, Softbank has cashed out a 2% Yahoo stake for $400
million. It will contribute the cash to two venture pools totaling $1.2
billion, which it will run with the help of a big slug of outside capital.
Softbank's venture arm will open a startup incubator in September. The
40,000-square-foot site in Mountain View, Calif. will host 10 to 15 nascent
Internet firms. "We're drinking from a fire hose," says the venture arm's
Rieschel. "There are more good opportunities than we can pursue."

If Son is to leave a legacy, it might be this: A way of managing via
influence rather than control that is as logically connected as hyperlinks
and as serendipitous as Web surfing. It is part venture capitalism, part
Jack Welch (be an industry leader or get out), part Warren Buffett (do your
homework and then bet big)—and pure Masayoshi Son.

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