Interview with Eric Savitz of Barron’s.
In this week’s episode, we speak with Eric Savitz of Barron’s about some of the recent stories he’s written on the effects of the pandemic on the financial markets – as well as on companies that are innovating and creating technology to better enable us to work more effectively from home.
TRANSCRIPT
Jeffrey Freedman: Hello and welcome to the RP HealthCast by Rooney Partners. I’m your host Jeffrey Freedman. The RP HealthCast is a weekly podcast series on the stories around the latest news and innovations in medicine and healthcare. To learn about these stories, we hand over the microphone to those who are actually building and writing about the future. Therefore, we either speak with leaders of companies behind the latest breakthroughs in medicine and technology or with journalists to discuss their stories on important issues surrounding the healthcare ecosystem.
Everyone and every product has a story to tell. The goal of our podcast is to help tell that story and to tell our listeners why that story matters. Our guest this week is Eric Savitz. Eric is associate editor for technology at Barron’s. He’s also worked for Forbes, The Industry Standard, Smart Money, the Brunswick Group, and Roku. Today we’ll be talking to Eric about some recent stories is written on the financial effects of the pandemic in relation to the financial markets, as well as his stories on companies that are innovating and creating technology to better enable us to work effectively from home.
Eric, welcome and thank you for joining us today.
Eric Savitz: It’s my pleasure. Thanks for having me.
Jeffrey: Eric, as a journalist for Barron’s, you’re located in Silicon Valley, and your coverage is technology. With this pandemic, almost all companies have been getting crushed. But one of the few financial or Wall Street darlings during the pandemic has been Zoom. And for those that don’t know, Zoom is a video chatting software and technology; it’s been around for a long time. A lot of people didn’t know they needed it until they were quarantined and stuck at home.
You’ve written a lot about the company and some of the issues that they weren’t prepared for during the massive growth opportunity right now for them. You also just wrote that Facebook and how Facebook’s going to try and compete against. Can you talk a little bit about Zoom and Facebook and this technology?
Jeffrey: So Zoom is a fascinating story. Zoom came public last year. The time they came public they were growing close to 100% per annum and were profitable. They had a lot of appealing characteristics as an investment. But what’s happened in the current crisis is that everyone has shifted meetings to the web and there are some characteristics of Zoom’s platform – the simplicity of it makes it very powerful. And then the other element is that it has some nice features, like the, let’s say, 25 faces at the same time, which is something that some of the other platforms don’t have, is a nice feature. So what’s happened is Zoom was really originally targeted at small business and then enterprise businesses, but it’s been widely adopted by students and people using it for virtual cocktail parties and things like that. So a lot of consumer use.
It’s a little unclear whether Zoom in the long run is going to be able to monetize a lot of that additional traffic. A lot of the users are using free versions of… I think the entry of Facebook into this market, they’re offering a product that you know will do up to 50 simultaneous users and with some security controls things like that, is interesting. I think it’s mostly a consumer-driven product at this point, even the way they’ve positioned it so far, like, “This is a great way to do your book club,” and things like that. It remains to be seen whether that’s going to have a big impact on Zoom.
So far, nothing is stopping Zoom. Zoom, maybe a week or so ago, announced they had hit 300 million users. That was up from 200 million at the beginning of April. The growth of this thing is unbelievable. I think the really interesting question here, though, is what happens when we return to what’s next, right? I think they say we go back to normal in the sense that it looks like the world before COVID-19 isn’t realistic, but we are going to go back to something a little less restrictive. I think one of the things that happens is people will rely on those kinds of tools much more than they did before, but we’ll see how it plays out. I do think that a large chunk of that extra traffic that Zoom is seeing is coming from consumers and students and people who eventually will just probably not use it nearly as much as they are. That is a fascinating situation. Their stock is up like a hundred and fifty percent year-to-date. It’s been an amazing, amazing ride for their investors. And I hope the listeners have all bought it a long time ago [chuckle].
Jeffrey: To me what’s also incredible is they were able to change vocabulary and what that means to me is… Like the word ‘Band-Aid’ right? Band-Aid is a brand, you know what is, and you know you need a Band-Aid. Six months ago, we all went on WebExs, right? Business. For our business we’re going to do WebEx, and everybody knew what that was. It was going to be a video meeting or a shared meeting or whatever. You don’t hear that anymore. Everybody’s going on a Zoom, right? So not only did they come out with the technology, but they changed our way of thinking.
Eric: Yes, you know you’re doing something right when your company name becomes a verb, right? It’s like making Xerox copies. It’s funny because a lot of companies get irritated when you do that, right? Like don’t call it Kleenex, call it tissues – that’s an old marketing problem [chuckle]. I think in this case, they’re having a truly remarkable marketing moment. I’ve written about this a little bit. The the idea that you are a relatively small, relatively obscure technology company and suddenly everyone on Earth is using the name of your company as a verb is astonishing. And that’s a gain in perception that won’t wear off, right? That’s a permanent change in the way we think about that.
You’re right, it is fascinating that it’s not WebEx and it’s not Skype. It’s not Microsoft Teams. There’s a bunch of other perfectly good platforms by which you can do this, it’s not even Google Hangouts, right? There’s a lot of options, but this is the one that has really caught fire. And again, I think a lot of it is about user views.
Now I think part of the problems that they’ve had on security are kind of related to the views, right? So I think what they’ve had to do is take a platform that was really targeted an enterprise user and that has been adopted in widespread with the consumers, and that adoption has brought with it some unexpected sort of security issues – the Zoom bombing and things like that that they’re having to deal with. But it doesn’t seem to have slowed their growth, so it’s a remarkable story.
Jeffrey: It really is and it’s a great product. So another topic that you write about that I’m very interested in talking about – it’s been in the news all over, you did a great job and we’ll talk about why you did such a great job – It’s the SoftBank Vision Fund. Alright, for those that don’t understand. From a very high level, let’s start out. Can you explain the SoftBank Group?
Eric: Sure. SoftBank Group is a Japanese company, it’s really a holding company. They own a bunch of assets, so the things that, they own a lot of assets, but just as a few key pieces, they own about a quarter of the stock of Alibaba, the large Chinese e-commerce company; they own about two-thirds of a Japan-based wireless company, which is also called SoftBank; they own Arm, which is semiconductor design company that they bought a few years ago; and a few other things, they own a Japanese league baseball team, various other things. They also created in 2016, so really about three and a half years ago, they created a venture fund called the SoftBank Vision Fund, and they did it in a sort of spectacular style. They raised about $100 billion – that is an amazing thing on its own because a hundred billion dollars, that’s about what the venture capital industry invests in an average year, so that’s a huge amount of money. They raised most of that money from two Middle Eastern country wealth funds – one from from Saudi Arabia and from Abu Dhabi put in about 60 billion dollars of the total, some of the money came from SoftBank itself, and then there’s a few other, a few billion here and there from a bunch of tech companies.
What you ended up with is what is by far, by an order of magnitude, the largest venture capital fund ever. And their philosophy here has basically been, first of all, they’re huge believers in– Masayoshi Son, it was the founder of SoftBank, and the CEO of the company, is a big believer in artificial intelligence. He’s a big believer in technology. He’s also a big believer that you think big and you plan far into the future. And he’s making some unbelievably outsized bets. Part of their philosophy is flood companies with money to accelerate their growth and then you will reap returns faster and get bigger returns. Now the problem is, and one of the reasons they’ve been in the news a lot, is they’ve made some unfortunate bets, most famously they are the largest investor in WeWork. Not only are they large investor of WeWork, but they they basically rescued WeWork from financial oblivion after the WeWork IPO failed to close. They’ve also made big bets in other things that have been troubled. Some of them in the ride-sharing business – they are the world’s largest investor in ride-sharing, so they own a big stake in Uber and big stakes and three other ride-sharing companies around the world, including DiDi, which is the Chinese ride-sharing company, it’s probably the largest one in the world, but that’s a terrible business right now. You only have to look at Uber’s stock to realize in a world where there’s basically no one traveling, the need for ride-sharing services is a lot lower than it was.
They are really struggling to make this fund to success and downturn is not helping them. They’re also a big investor in DoorDash, which is trying to go public, but is really finding it difficult in the current environment. They’re a big investor in a company called Oyo Rooms, which is basically a hotel business based in India that is having big problems. And then they’ve made I think even hurting the more, although maybe a little less financially, they’ve invested a few things that just seemed silly. They did an investment in a company called Wag, which is basically a dog-walking service. They lost about $90 million on their investment in Wag, and they’ve had a few things that have just folded. They were invested in a company called Brandless, which was a personal products company, cosmetics kind of thing, and that company just simply folded and they lost their whole bet there.
They’ve struggled and fairly recently, they’ve announced they have very large write-offs related to the holdings in their funds. They’ve now basically lost money for the life of the fund, which is not something you want to do as a venture capital fund. It’s raised real questions about their approach and Masa’s decision making and in the future of SoftBank, so it’s a tough situation.
Jeffrey: Your article you wrote, I think your words were, “The fund has been the subject of a series of headlines about strategic missteps and failed investments.” Now, what’s interesting to me, it’s most of those missteps and failed investments, you were able to tell that even before the pandemic. Now with the pandemic, everything is just compounded. The whole WeWork thing was before the pandemic. The ride-sharing, the Uber – before the pandemic. Now, everything is like falling off a cliff, it seems, for these guys. The write-off that you talked about was about $17 billion. Now that’s a hell of a lot of money just to vanish. I mean 17 billion gone. So what do you do? You call those investors the next day and you say, “Got some bad news.” What are those conversations like?
Eric: Those are tough conversations [chuckle]. I think there’s a couple of offsetting elements. One is they had previously returned about $10 billion in capital to investors from some more successful investments that they’ve made in the past, they had a stake in Nvidia that paid off pretty well, they owned a big position in an Indian e-commerce company called Flipkart that was acquired by Walmart. So there have been a few things they’ve done that have really worked out. But you’re right, that’s a tough situation. I think one way that it’s hurting them is they had intended to raise a second fund, the Vision Fund 2, which Masayoshi Son famously said was going to be even bigger than the first fund, and that is now not on the cards. There are a few investments that they’ve made through what they call Vision Fund 2, but all the money is from SoftBank, they have no investors, and clearly their Middle Eastern partners are not eager to provide them with more capital.
Now, I think one thing that SoftBank will say is this a long-term bet. This is a 10- or 12-year lifetime on this fund and we think there are going to be some huge exits out of the portfolio. And they’ve had some good exits, a few of them in the healthcare space. There’s a company called 10x Genomics that has done very well. There’s a company called Vir Biotechnology that’s been a hot stock lately. But those things are not making up for the problems they’re having in some of their other holdings. And I think there’s a certain risk that they’ve painted their brand in a way where having an investment from SoftBank, whilst it’s nice to have a capital, being associated with them hasn’t been one of the keys. That makes them angry when you say that, and I think there’s some truth in that. They’ve angered a lot of people in the Valley, right? The rest of Santa Road, the rest of the venture capital industry tends to look at them as having warped pricing in the market, that they over inflated prices, and that they’re now reaping what they sowed, so there’s a little bit of schadenfreude. I think people are happy to see them have problems. But to your point, that’s a tough thing.
It’s not so easy to hit the undo button on a venture fund. You can’t just decide, “Yeah, we’re done. This didn’t work out, so we’re just going to shut this thing down.” That’s not an option. So you own stocks, I think they currently have 88 things in the portfolio, some of which will end up doing fine, some of which won’t, but you kind of have to play it out. Their investors in SoftBank are going to live with each other for a while and we’ll see where it goes. Now I would say there is one other odd element which they are venturing, which is that SoftBank Group, the parent company’s shares, traded a fairly steep discount to the value of their assets. The value of SoftBank Group’s stake in Alibaba alone – again, they own about a quarter of Alibaba – that’s a [inaudible], and that’s kind of weird. The company is trying to do something about that, they’ve promised to sell off a bunch of assets and buy back stock and pay down debt and do some things to try and fix that problem. But I think among other things, it’s just a reflection of the fact that the market’s not entirely trusting of Masa right now. That’s going to take some time to fix. He did some damage along the way with some of the things that have happened in the fund.
Jeffrey: As I read, you know in your article, over 40% of the portfolio is in logistics and transportation. So that’s not necessarily coming back so quickly during this pandemic time, so it will take a while and that that could probably be some of the discount as well. Now you mentioned that the the leaders of the fund, they’re visionaries, right? They’re thinkers of the future and what’s going to happen down the road. You would think that would lend itself to more healthcare and health-related companies and stories, but according to your article, about 6% or less is in the healthcare industries. Why do you think that is? Why do you think they’re kind of staying away?
Eric: Clearly, I’m pretty sure they would rather have more money in healthcare right now than car-sharing services given their options, right? But I think part of what’s at play there is when you talk to people in the venture capital industry, what you tend to see is there are a few funds that do both biotech and software and hardware businesses, conventional technology businesses, but they tend to involve different partners in different disciplines. And for whatever reason, this is a fund that reflects Masayoshi Son’s history and he has been an investor in the technology business for decades. He’s owned lots of things, he was an early investor in Yahoo, he at one point owned COMDEX, the old trade show business. During the bubble period of ’99 to 2001, he owned pieces in almost every brandname internet business on Earth, including a lot of them that didn’t do very well. So his expertise is intact. And I think the fund reflects that. They have had some good exits in biotech, but their commitment there is much lower, and I think it reflects Masa’s focus. He’s a big believer in AI, and he thinks AI, artificial intelligence techniques, are going to solve a lot of the world’s problems. Now that includes in healthcare, but he’s made a much more limited investment there as you say, and I think that was probably miscalculation. I would say that that is probably typical of many Silicon Valley venture funds: most of them tend to do just it or consumer kinds of technology businesses and don’t do a lot of biotech. There’s some specialists that do more, but it certainly looks like a misallocation of assets right now.
Jeffrey: Now, forget about on the SoftBank side, and focusing more on technology, let’s say Barron’s and your writing. You’re technology-focused. Do you think in the future, based on our learnings now on the pandemic, do you think you’ll see a lot more stories or cover more stories and health tech or med tech type of thing.
Eric: We spent a fair amount of time covering, pharma and biotech and medical device companies and other companies in the healthcare business. I think one thing that you’ll start to see is technology businesses are going to look for more ways to go here. So you’ve seen a little bit lately on– there’s some controversy around contact tracing, for example. I think for all of these businesses, so think about Apple, for example, which had really tried to push both the Apple watch and to some degree even the iPhone more and more as a medical device, or at least a health device, tracking your steps or tracking your sleep patterns and things like that. So I think you’ll see more and more of that. I think from a Barron’s point of view, we and and everyone else in the business journalism world are going to spend a lot of time – have spent and will continue to spend a lot of time trying to figure out how this plays out, who the beneficiaries are, both in the healthcare business and on the tech side and beyond, obviously. Grocers and also some other people benefit.
There is a lot of opportunity there. I think that for me, most of my core coverage involves the large technology companies – the Microsofts and Amazons and Alphabet and companies like that. While they are not on the surface purely healthcare businesses, they are going to have to play more and more of a role, and sometimes it’s indirect. Sometimes they might be taking dollars from healthcare. And, again, in the case of Apple, could be app-related. They’re all trying to figure this out and how they should play a role, and I think we’re going to have to write about all of it. One thing is true is we’re we’re not going to run out of topics to write about COVID-19 any time soon.
Jeffrey: No, unfortunately, we’re not. This has been incredible. Thank you so much for your time today. I’m hoping that we can get you back on with us in the very near future and we can explore further.
Jeffrey: We hope you enjoyed this week’s podcast. If you have any questions, comments, or future story suggestions, please reach out to us on social media or email us at rphealthcast@rooneyco.com or visit us on our website at rphealthcast.com. Additionally if you like what you hear, please follow us, review us, and share us with your friends and colleagues. Thank you, and we hope you enjoyed the RP HealthCast.