What does it mean for American innovation to be backed by oil wealth?
|Sep 16||Public post|| 6|
Vicki’s Note: I actually wrote this before I even went on maternity leave and originally had this scheduled to go out on Tuesday, but due to recent events in Saudi Arabia, it seems more relevant than ever.
Uber. WeWork. Flexport. Slack. MapBox. DoorDash. What do all of these hip American companies have in common, other than appearing regularly in tech headlines (and, now, being leading indicators of a tech bubble)?
In recent years, SoftBank has massively disrupted start-up investment in Silicon Valley and beyond with its $100 billion Vision Fund. Masa Son has become a key force behind all of the fund’s investments, meeting with every founder in person before a deal is signed. To put the fund’s magnitude in perspective, its size is almost double the investments made by U.S. venture firms last year. PitchBook data shows that VC fundraising in the U.S. totaled $53.9 billion last year across more than 200 funds, and that was the largest annual raise in at least a decade.
Of the 49 companies in which the Vision Fund has invested, "most are unicorns and are involved with artificial intelligence in some form," Son said, using a term for privately held startups valued at $1 billion or greater. "I believe AI will bring about the greatest revolution in human history," he continued, saying the technology would "redefine all kinds of industries, from automobiles to health and real estate."
What many articles don’t say about SoftBank is that a key contributing partner to the Vision Fund has been the Kingdom of Saudi Arabia.
But in the past few years, Son has increasingly focused on investments in technology companies through a $100 billion fund known as the Vision Fund. Saudi Arabia is the biggest investment partner in the fund. Its sovereign wealth fund -- the Public Investment Fund, or PIF -- has committed $45 billion and plans to put the same amount into a second fund. SoftBank has also said it will support PIF’s $200 billion solar power project in Saudi Arabia.
[Crown Prince Mohammed bin Salman] controls the PIF, which is at the center of the 33-year-old crown prince’s push to modernize the kingdom’s economy and diversify away from oil.
The American press has been breathlessly speculating on the Trump administration’s relationship with Russia for the past two years.
But only recently have they started to dig into what it means for America’s primo Silicon Valley startups to be tied indirectly to the Saudi government.
What does it mean for relentlessly forward-looking companies like Slack, who publish effusive blog posts about diversity and collaborative leadership, to be fueled in part by money from a government that only recently allowed women to drive, and has a record of flogging bloggers who disagree with the regime?
Even probably more importantly, what does it mean for members of the Saudi Public Wealth Fund to be on the boards of these companies and directly calling the shots?
As I’ve written about before, being on the board, particularly if you have money, has influence.
Jack owns quite a bit of Twitter, and he sits on the board. As of 2017, he owns 16.6 million shares, just a bit less than Evan Williams, formerly of Twitter, now of Medium fame. That’s about 2% of the company. Not insignificant. For all intents and purposes, Jack is the company, and he can do whatever he feels like doing - going on retreats, tweeting about Square, and RTing of articles about global warming and healthy food.
Uber CEO Dara Khosrowshahi was one of the first to pull out of Saudi Arabia's Future Investment conference in October after the murder of Washington Post journalist Jamal Khashoggi, but the kingdom's now 10% stake in the ride-hailing company could cause problems as it races to go public.
The company's board held a "marathon meeting" last week, Bloomberg News reported, with all directors in attendance, including former CEO Travis Kalanick and Saudi official Othman Al-Rumayyan, who manages the kingdom's Public Investment Fund.
Because of the degree of separation between the fund, its backers, and constituent companies, this doesn’t seem to an issue that’s ever covered in the mainstream media, and, aside from the case of Uber,which is now squarely involved in geopolitics, it’s hard to parse out exactly what kind of pressure Saudi investors can apply.
But of course, it doesn’t hurt that Mohammad bin Salman (MBS), the Crown Prince of Saudi Arabia and the one who made the decision to pledge $45 of the initial $92 billion into fund, is making all the right noise in Silicon Valley.
MBS has been making a ton of noise lately about modernizing Saudi Arabia, including starting a long-term investment project out of oil, restricting the power of the religious police, and giving women the ability to drive.
On the surface, it all looks great, particularly when he engages with Silicon Valley. Here he is, meeting with the hottest guys in tech:
And here he is at Apple:
And, at Google, with Sergey:
There’s seemingly no one he hasn’t met in Silicon Valley, and no company he hasn’t given money to, either through SoftBank, or on his own.
$45 billion is an awful lot of influence to have. To give some context, Venture capital investments in 2018 were $100 billion.
Fewer companies are raising money, but round sizes are swelling. Unicorns, for example, were responsible for about 25 percent of the capital dispersed in 2018. Those companies, which include Slack, Stripe and Lyft, have raised $19.2 billion so far this year — a record amount — up from $17.4 billion in 2017.
To give some further context, Google’s market cap is over $800 billion. So in theory, $45 billion is not that much.
But, if we do some major, major rounding, and assume that the tech industry is the sum of its top companies, at $1 trillion/year, $45 billion is about 5% of the industry.
So, what happens when 5% of any industry is controlled by parties that are not direct shareholders? And, what, in general, does it mean for high-profile American companies, particularly in an important area of important strategic growth like high tech, to be backed by foreign governments that potentially sanction the assassinations of journalist?
The real heart of the question: What kinds of decisions do they make that they otherwise would not have?
Hopefully we’ll find out more as Uber and friends come under the public spotlight for their poor financial performance.
And, also, part Two of the Vision Fund has recently been announced, valued at $108 billion. MBS has so far been a bit more reticent than the first time around (although a decrease from $45 to $39 billion is not chump change).
Whether this is related to the cooling of US/Saudi relations after Khashoggi’s murder, or whether this is related to the fact that We and Uber, flagship Vision Fund investees, are losing money hand over fist, is unclear.
But where he’s stepped down (even if only marginally), others are stepping in.
Some prominent corporations that are expected to participate in Vision Fund 2 include: Apple, Microsoft, iPhone assembler Foxconn, Standard Chartered Bank, Japanese financial giants Mizuho Bank, Sumitomo Mitsui Banking Corporation and MUFG Bank.
Others include the National Investment Corporation of National Bank of Kazakhstan and investors from Taiwan.
The sovereign wealth funds of Saudi Arabia and Abu Dhabi, which were major backers of the first Vision Fund, were notably absent from SoftBank’s list of expected investors on Friday.
The Wall Street Journal on Wednesday reported, citing unnamed sources, that Saudi Arabia and Abu Dhabi had indicated they were re likely to invest again, but Riyadh’s commitment will be less than the $45 billion it put into the first fund.
Some other interesting national parties are coming into play, namely Kazakhstan. Usually no more than a punchline thanks to the Borat movies, the country has been, for years, really thirsty to divest from heavy industry, and to be seen as a prominent, forward-thinking, totally non-Soviet country for years. It’s even gone so far as to move its capital. This is already backsliding as it changes Astana’s name in honor of its former, dictatorial president and muffles protesters during its elections.
So this doesn’t seem like good news for Silicon Valley, either, but again, it’s unclear what that amount of influence the new investors could have that goes beyond technology, to politics.
TL;DR: it’s very ironic that, for all of Silicon Valley’s noise about moving fast, breaking things, accessibility, equality, and good old-fashioned American innovation and Freedom, a not insignificant part of it continues funded by foreign governments whose values are fundamentally at odds with what Silicon Valley claims to promote.
Art: Jacek Yerka, Desert tram, 1997
Instead of what I’m currently reading, I want to recommend a few books on the countries mentioned here:
A Hologram for the King by Dave Eggers - A fantastic novel about an American businessman in Saudi Arabia, economic downfall, and consulting
The Girls of Riyadh by Rajaa Alsanea - A touching peek into the lives of Saudi women from a Saudi women
The Prize by Daniel Yergin - Goes into detail about the start of the oil industry in Saudi Arabia and the US/Arabian relationship over time
Apples are from Kazakhstan by Christopher Robbins - Amazing book about the heart of the country, its struggle for modernization, and its history
Chasing the Sea by Tom Bissell - Not exactly about Kazakhstan, it’s more about Uzbekistan, but it’s one of my all-time favorite books and a great glance into Central Asia
About the Author and Newsletter
I’m a data scientist in Philadelphia. This newsletter is about tech and everything around tech. Most of my free time is spent wrangling a preschooler and a newborn, reading, and writing bad tweets. I also have longer opinions on things. Find out more here or follow me on Twitter.
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