How $100B of 'Free Money' Could Transform Tech
A partnership between Saudi Arabia and Japan's SoftBank could accelerate technological breakthroughs, but it could also artificially inflate the values of new startup companies and cause another bubble.
Oil is so last century. With oversupply and lagging demand holding down the price per barrel, even Saudi Arabia, one of the world's largest producers of petroleum, is moving away from its dependence on crude.
The Saudi government recently struck a partnership with the Japanese telecom giant SoftBank to create a massive capital fund that will invest in tech ventures around the world, with the Middle Eastern kingdom contributing as much as $45 billion. The aim is for the SoftBank Vision Fund to collect upwards of $100 billion, amounting to three-quarters of the global total raised by venture capital-backed companies in 2015. It's a staggering figure with the potential to profoundly shake up the tech industry.
"In the long run, this could be transformational," said Veljko Fotak, a University at Buffalo finance professor who focuses much of his research on sovereign wealth funds and corporate and international finance. With so much extra cash earmarked to underwrite tech enterprises, the array of possibilities is dizzying.
But Fotak doesn't expect the fund to invest in early-stage startup companies. Not at first, anyway.
"Most of the strategic investment so far from Middle Eastern Gulf countries has been aimed at established firms," he noted. "I suspect that will be the model here as well, at least in the early stages."
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Such was the case when Saudi Arabia garnered headlines this summer by dumping $3.5 billion from its sovereign wealth fund into the ride-sharing provider Uber, giving the company its single-largest cash investment by far. Companies that need seed capital may have to look elsewhere.
Charles Kane, a senior lecturer in global economics at the MIT Sloan School of Management, suggested that the Saudi strategy will involve other major investments in American tech hotbeds like Silicon Valley, Boston, and Austin, as well as financial plays in the U.K. and other parts of Europe. The impact on bolstering the development of new technologies could be immense, but of greater importance to the kingdom is the prospect of leveraging its influence to encourage companies to establish offices and operations within Saudi Arabia.
Apart from diversifying its income stream, the Saudi government's wider objective is to foster more private-sector jobs at home and reduce the amount of money it pays to subsidize education, health, gas and water. But if it's striving to create the next Silicon Desert in Saudi Arabia, the realization of that ambition will be a long time coming.
"You don't magically start Silicon Valley in Saudi Arabia," Kane remarked. "You won't have the people to implement it."
Engines of innovation like Boston and Silicon Valley are driven by local research universities that graduate resourceful entrepreneurs and attract the venture capitalists looking to fund them. This combination doesn't exist in many countries and certainly not in Saudi Arabia, where most students attend religious schools and the talent at private companies is typically imported, said Andreas Schotter, a professor of international business at Canada's Western University who has focused on the Middle East.
To help reform the Saudi economy, the government is pursuing a strategy of shifting educational priorities toward engineering and technology, but this will take time to bear fruit, according to Zubair Iqbal, a scholar at the Middle East Institute and the former assistant director of the International Monetary Fund's Middle East and Central Asia department.
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"Meanwhile, dependence on external sources of skills and technology will continue," he said, "perhaps for another ten years before a discernible shift to domestic sourcing."
An entrepreneurial environment also requires the right kinds of laws to foster invention.
"It takes a legal system that rewards success, protects intellectual property, and treads softly on failure," said Fotak.
In any event, the money will be there. Although it's impossible to predict which companies the SoftBank Vision Fund will invest in, it's not too difficult to predict what it will invest in. In a word, happiness.
Back in 2010, SoftBank chairman and CEO Masayoshi Son outlined the company's 300-year plan to investors. That's right. A 300-year plan.
In the presentation, slide after slide reinforced a vision to "focus on information revolution and contribute to people's happiness," "comfort people in sorrow," and "increase people's joy." The idea is to advance technologies that "bring brain-computers to life" and produce a future where people live to be 200 years old, translate foreign languages automatically, communicate telepathically (even with dogs), and coexist with intelligent robots.
"They're very clever and highly successful on the technology front," said Kane of SoftBank, calling the company "a big risk-taker for big technology."
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An injection of billions of dollars into such radical ventures could accelerate breakthroughs in these technologies by 10 or 15 years, said Schotter.
"It's free money that wants to invest in these opportunities," he said.
But the sudden availability of so much free money could also cause instability.
"It's ginormous compared to anything folks have seen before," explained Tom Ciccolella, who leads Bay Area venture capital and private equity assurance practices at PricewaterhouseCoopers. "It would put a really big stress into the system."
Among the possible shortfalls of such a massive fund, throwing billions of dollars at various tech startups could artificially inflate their value and produce a sector bubble - a concern that has already been raised about the current state of the tech market. And unlike the dot-com era of the late 90s and early 2000s, where executives longed for the initial public offering that would make them overnight-millionaires, today's big startups are staying private longer, which can have the effect of weakening oversight and transparency.
But with all of that money, what worry does Saudi Arabia have of a bubble bursting?
"They may lose money on a bubble bust, but if they've created some sort of influence within their country with technology, then mission accomplished," said Kane. "Even if it's not a good investment as far as the money goes."
For a country focused on sovereign success, shaking up the economy may be the least of their concerns.