THE WOLF STREET REPORT: How the SoftBank Scheme Rips Open the Tech Bubble

The biggest force behind the startup bubble in the US has been SoftBank. But the scheme has run into trouble, and a lot is at stake (12 minutes).

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  71 comments for “THE WOLF STREET REPORT: How the SoftBank Scheme Rips Open the Tech Bubble

  1. Bobber says:

    They tried to shoot the gun at hapless investors, but it blew up in their face. How fitting.

    • raxadian says:

      By that you mean stupid investors, Wolf has literally been warning about this for YEARS.

      The problem of playing musical chairs with money eating unicorns is that no one believes he will lose their chair, but most do.

      See, people believes that if you feed enough cash to unicorns they will magically start to make gold, but beliefs and reality are two different things.

      If Netflix isn’t making money, what can you expect from the rest?

      • Unamused says:

        If Netflix isn’t making money, what can you expect from the rest?


        And gains. Sometimes enormous gains. All these companies make money – but only for insiders, at the expense of everybody else, and not just investors.

        The historical concept is that businesses are chartered by the state because they benefit society, providing employment, products and services, and taxes to support infrastructure and governance, in exchange for a normal profit returned to the owners.

        That concept has been thrown out in favor of one where businesses are formed to provide a vehicle for predators who are out to simply exploit society. The pretense that they provide any real ‘benefit’ to anybody but themselves is little more than a way of excusing their existence.

        So the ‘win-win’ scenario has been replaced by the ‘I win – you’re screwed’ scenario, and ‘disruption’ regains its normal negative connotation. The Adam Neumanns are happy, but what about everybody else?

        As usual, when capitalism is unregulated or deregulated it becomes destructive predatory capitalism, which proceeds until you end up with a blighted economy dominated by state-sanctioned organized crime where most of the population are victims. Broadly speaking, that’s why you have government in general and regulations in particular: because really, really bad things happen when you don’t.

        Predators like it though. And they’re running the show. These days they’re gorging.

        • lisa says:

          Great summary!

        • Wolfbay says:

          What if government is corrupt (repub and dem)and as it regulates with people who came from corporations it supposedly regulates all you get is crony capitalism.
          I once told my children that at least with capitalism When a company really messes up it disappears vs government that seems to get bigger no matter the mistakes. Obviously I was wrong. Government and corporations are now one.

        • intosh says:

          “I win – you’re screwed”

          It’s called the “hustle economy”.

        • Javert Chip says:


          These companies are private, so they’re somewhat but lightly regulated (primarily to control the class of direct investors). If/when companies go public, they become much more regulated.

          The proximate cause here is the thundering herd of ‘wanta-get-rich-quick” greater fools who willfully suspend disbelief in whatever fundamentals there might be (GAAP profit and positive cash flow are usually good ones), and knowingly work around what ever regulatory protections might exist.

          It’s difficult to protect greedy, actively stupid people from doing stupid things. Yea, regulators bear some responsibility for this steaming mess, as does the Fed, but 75% of the fault lies with
          that segment of the market that demands exactly this sort of pie-in-the-sky opportunity.

          Without dangerously greedy stupid individual investors, SoftBank & Adam Neuman couldn’t exist.

      • c smith says:

        If central banks worldwide had not been cranking trillions of $/yen/euro into the system for a decade, none of these scams (like Softbank) would even exist.

        • Kent says:

          Meh. Those scams existed in the late ’90’s even without central banks pumping money into the system. Scams are just part of the nature of the beast.

        • Steve says:

          They are cranking trillions to support government programs…

      • IslandTeal says:

        Netflix did make money with the DVD business and then the Hollywood mentality took over and the rest is history as they say… So much for the quality of the current content.

        • Harrold says:

          I think the name ‘Netflix’ shows that DVDs were always a going to be temporary part of their business plan.

        • Vespa P200E says:

          Indeed Netflix had a huge workforce in the bygone days opening and stuffing DVDs to mail out. And like other SillyCON valley companies binged on easy money to expand at all cost exponentially since that metric only mattered (so much for profit..).

          Hollyweird is like a sinking hole siren call to companies to salivate yet lose their shirts like Sony, Wanda and few other Chinese companies, Netflix and even Amazon. Their forays will be proven to be folly and enrich Hollywood players.

          BTW – did meet Wanda’s big boss at a fancy bar in LA with friends in the business 2 yrs ago and was impressed by his modesty.

        • alex in San Jose AKA Digital Detroit says:

          I’m old enough to remember the old Columbia Record Club and when I first heard of Netflix I figured it had to be a scam. They’d mail me a DVD, claim it lost, and I’d have a debt of $40 + 39% interest, forever. Or something like that. I stayed far away and I still do.

          Think this sounds far-fetched? The local library will happily charge $100 or more for a DVD that was returned but they claim is lost. Yeah, I no longer borrow materials from the library. I’ll buy books at their book sales, and if I really need to read something I’ll read it there.

        • Javert, Chip says:

          Vespa P200E

          Highly inaccurate to pigeon-hole Amazon in the crippled-stupid loser-class with Netflix, et al.

          In 15 years (as far back as I can easily research on net) as a public company, Amazon has lost (GAAP) money in two years (2014 $241M; 2012 $39M). In all that time, Amazon has never had negative Shareholder equity. Total long term debt has always been significantly less than cash on hand.

          Amazon IS NOT a cash burning Unicorn – it reinvests almost every dollar of profit to fund its spectacular growth of 2,640% over 13 years.

          As an investor, what’s not to like? Maybe, if in the future, Amazon growth stalls and Bezos fails to share profits with shareholders.

      • c1ue says:

        Netflix isn’t making money now, very true.
        However, can they make money?
        That question is a lot less obvious.
        If they increased prices, how much of their customer base would they lose? Because right now, I suspect unit profitability is terrible due to the nature of TV and movie right costs (much like Pandora with music rights costs).
        In this light, Netflix making their own content is an interesting play: with sufficient users and/or users coming on due to said content, Netflix can both get around the rights costs of others’ IP and would create a competitive advantage much as HBO has with its content.
        Again, I’m not saying this is their strategy – I don’t know what it actually is. Taking “free” or “cheap” money to scale and/or try a risky business model is not necessarily a bad decision, if the alternative is getting locked into a Pandora death spiral due to the fundamental nature of cost to broadcast music.

        • Ethan in NoVA says:

          Netflix is going to be releasing some of their upcoming movies in theaters first. That could be interesting. Retail price of a movie ticket is a months subscription to Netflix.

          As an ex-“Panda” … true. IIRC Pandora is one of the largest single sources of income to the music industry, and was the largest streaming service in the USA. Too humble though. SiriusXM will be a powerhouse if they really do acquire both UMG and iHeart. Wish the stock would really jump.

        • Vespa P200E says:

          I became a Netflix fan years ago after watching many good foreign and especially Korean movies. The suspense, gripping and great storytelling albeit with lots of blood. But they throttled back a lot and replaced with ho-hum Netflix originals many of which are NOT their original especially foreign movies and soap operas. I canceled it but signed up again because of family pressures.

          BTW – my Netflix acct was hacked by Russians but kudos to their CSR for help me undo the back job. Suspect they somehow got into the acct info while we were in Ireland last year and watched it on hotel TV.

  2. Qaa Yen says:

    There is a glut of cash out there and investors are looking for the lottery ticket to turn that cash into gold vs the alternative (.e.g., negative rates or weak global economy). Hence, Softbank came to the fill in that gap. The bubble will burst but will build up again in a few year ( or it may never burst now) so long the cash is abundantly available.

  3. Keith says:

    Excellent, always worth my time. Thank you.

    When Softbank re-invests at inflated values – it mark’s up the book value of it’s holdings – but I don’t understand why that is a profit. A profit occurs if they sell the shares, yes? If they had a magnificent profit from the $47B valuation of WeWork would they not have had a magnificent tax bill for all the profit they ‘earned’?

    • Jon says:

      They invest money at high valuations and then they search for the next sucker ie. Mom and pop retail investors.
      That’s how they make money

    • I’m outside my expertise, but I think accounting rules allow them to value their shares at the most recent sale price. Clearly a book markup is not a profit, you are correct on that.

    • Snydeman says:

      Yep, pretty much. The only wealth gained when the valuations in your holdings increase is the wealth you feel you now have (wealth effect), or the new loan money you can gain by leveraging it against the increased value of your holdings. You don’t actually make profit – as in, earn money after accounting for debt – until you sell assets. Where this whole “market” has gone haywire, imo, is the degree to which rising asset prices has caused the wealth effect, which in turn led to leveraging on the leverage we leveraged against someone else’s leverage. But when people/entities begin trying to cash in their assets in larger numbers, we’ll discover just how little true value was out there.

      Should be fun.

      I could be wrong in my synopsis though.

      • rhodium says:

        All these people point at the unemployment rate and say look how good the economy is doing, there is no labor demand problem. Sure, only in this world of bizarro unicorn finance where perpetual red looks like rainbows. What happens when it all ends? It’s back up to 25% unemployment. There are jobs, just not sustainable ones for everyone. Our modern economy is fueled on insanity.

        • Frederick says:

          And you’re telling me that you actually believe the true unemployment rate is 3.5% are you? Well I’ve a bridge for sale too Interested?

        • Dave Chapman says:

          rhodium – The real unemployment rate is closer to 14%.

          The biggest adjustment is the vary large number of people who are on SSI disability. This is well-known as “unemployment for old people”. Last time I looked, there were something like 9% of the working-age population collecting. You should figure that half of these people could hold a job, if anyone would hire them.
          You also need to add people in prison. (“but they’re not really unemployed.” Yeah, right.)
          Finally, we come to the category of”discouraged workers”. Perhaps they are discouraged because they can’t find a job???

          This is a fifth-grade math problem. If employment is 65%, then unemployment must be 35%. Even if you factor in full-time housewives, people who won the lottery, and those with serious medical problems, I strongly suspect that reality is a lot close to 35% than it is to 3.5%

          Your mileage may vary.

    • autoantonym says:

      As an accountant once said to me: “Profit is a concept, cash is a reality.”

      • Shawn says:

        Gold is the only reality? Until they figure out how to remove 3 protons from Lead’s nucleus to manufacture the stuff.

      • Trinacria says:

        Indeed ! Enron was great at booking accrual basis profits but these did not translate into meaningful cash flow which is where the financial rubber meets the road. We all know how the Enron story ended. Staggering sums of money are being thrown around and burned. When this things blows up, should be worse than the dot-com…or should I say dot-BOMB fiasco. Mr. Market will exact his revenge at some point and it won’t be pretty. I have been wondering about Soft Bank for a while and their investments in this hair-brain stuff….I think many of their investors will also go “soft”… once reality takes hold.

    • Petunia says:

      When an investor steps up the value of their investment with a new round of funding it increases the value of the investor’s company. Now they have more assets more collateral to borrow from their banks. They can pledge shares in the stepped up value of their company for new loans. You can think of it as manufacturing collateral, or Fake Collateral.

      • robt says:

        It’s like the myth of ‘cornering a market’, which results in you being the only buyer. As long as you can afford it, anyway.

    • c1ue says:

      The concept is called a liquidity event.
      Generally speaking, investors don’t want to see their investments change in value unless there is a factual reason – as changes have tax implications.
      Raising a sufficiently large new round is one such reason: even if the holdings aren’t sold, they are legally revalued because of the new money coming in.
      Wolf has alluded to this: at the point Softbank is at with WeWork, it is worth substantial cash in the short term to keep the WeWork valuation from changing dramatically, as it would not only hurt Softbank’s reporting in the next few quarters, it would also likely kill Vision II.
      Think of this in comparison to a classic Ponzi scheme: the perceived value held by everyone in the scheme is that the value keeps going up, so long as the promised returns keep getting paid.
      A classic Ponzi – the returns are dividends or commissions on sales in a MLM.
      Replace the dividends/commissions with paper stock value, and replace the multitudes of suckers with a handful of large sovereign wealth funds, and you have an interesting parallel.

  4. Art says:


    • Vespa P200E says:

      Tanin no fukō o yorokobu (Japanese translation of Schadenfreude) for Son-san who has done quite well but lost his common sense bearing enamored by SillyCON fairy tales (just like late 1999 internet craze) of only revenue increase matters despite horrendous losses flushed with OPM – Saudi and other high-roller’s money.

      We learn history so as not to repeat it and afraid the bubbles got bigger since 1999/2008 with the rise of repos is siren’s song of dark days to come as who thought AIG/Lehman/Bear Stearns, too big to fail, would fold in summer of 2008?

  5. Tang says:

    yeah. Venture capitalist, angel investors etc etc? Right behind a whole lump of shit. Nothing new. Behind the shop front where the shit is stirred and stirred. The Potemkin eco-system. Get someone willing to stick his ass out. Get him to do something so visionary. Even if he shits with his ass sitting forward the bowl. Promised him his stake both if the venture fails or is successful. Pour money in. Pay the bullshit singers like bloomberg, cnbc etc well to continue singing how great the shit is.
    Line up like minded folks with money to spare like goodman sucks. Use their credentials as well. Like Sati Arabia swf. Next go to the big bankers. Tell them the shit is worth hundreds of billions if IPO and you owe half the shit. Ask them for billions in loans and let them hold the half shit as collateral. When one agrees look for the next.
    Soon you have a nest of beholdens to your success. You fail they die. What more. Look around the well coin names the We, the bama, the …… you think they are the work of one person?

  6. peter lum says:

    Back to basic, investing has always been base on cashflow. This time is not different.

    • RD Blakeslee says:

      More basic than that: “invest” only in yourself and your own enterprise. Own all your capital debt-free. Enjoy your life.

  7. Rashaverick Overlord says:

    Accurate report, thank you.

  8. Michael says:

    From one scam to another. Thank you Federal Reserve for removing the risk premium

    • Javert, Chip says:

      The Fed is only minimally culpable, and it wasn’t involved in the 1990s flame-out.

      Don’t give stupid and dangerously greedy individual investors an easy way out by blaming the Fed. This weapons-grade stupid crowd will do stupid things with or without the Fed’s help.

      Every sucker wants a free lunch.

  9. CreditGB says:

    Have all the actually profitable companies, paying their investors with dividends, all gone private?

    Used to be you invested, shared in the profits, and the building stockholder equity. If Mr Son can set the value of WeWork at $47b, why not $67b? Just create equity to sell shares. Maybe that is his plan?

    These vapor firms are just beyond what I can understand, but someone must be making money on them.

    • Prairies says:

      Short selling all these unicorns is likely going quite well. Not much risk in gambling some 10% dips these days, just as long as you know when each press release is coming out.

      • Javert, Chip says:

        Very problematic to actually short pre-IPO unicorn stock due to highly restricted class of pre-IPO investors. While technically possible to short bonds, private company debt can come with various undisclosed “guarantees” that may cause bonds to perform materially different (including moving in opposite directions) than the stock.

        Shorting a post-IPO unicorn (Uber) stock is much more straight-forward.

  10. breamrod says:

    When the FED suspended mark to market accounting in march of 2009 that’s when we entered lala land. No way they can stop it or will stop it until they destroy the currency. It may take a while yet but destroy it they will

    • Unamused says:

      It may take a while yet but destroy it they will

      The Fed is aware of that. It’s why they’ve tried to raise interest rates and unwind QE. Slowly, so as not to break the system. It’s not working for them because the system has become dependent on these severe distortions of Fed policies, and besides, lots of profiteers like things just fine the way they are. The best the Fed board can do is to try to delay and hope the inevitable doesn’t happen until after they retire. There’s a lot of that going around, in areas other than finance, but greed feeds them all.

      Meanwhile the billionaire class is investing heavily in abandoned missile silos, underground bunkers, and fortified enclaves in New Zealand, the Alps, and British Columbia. Also automated systems, particularly security, knowing they won’t be able to trust their own people when the SHTF. They know perfectly well what’s coming, and they know it’s going to be ugly. They won’t do anything about it because they like their money and their privilege, and they can’t do much about it because the system is on automatic. Castigate them as you please for their greed but you have to give them some credit for not being stupid about the consequences.

      • BarSteward says:

        Welcome to Hotel New Zealand, you can check in but you can never leave, once TSHTF. 2.5hrs flight to Australia, 10hrs to Singapore, 14hrs to LA, 26hrs to UK. Sailing time..good luck. Better play nice and be respectful to your neighbours.

      • NBay says:

        ALL security is measured in TIME, and it always has been.

        “It’s them what dies will be the lucky ones”
        -Long John Silver

    • economicminor says:

      I’m not sure if a reset of debt from massive defaulting destroys the currency. I think not. Just makes those with liquidity (cash) kings and queens.

      It just seems to me that at some point recognition of risk will return to the market place. A point where people decide to take what they have and run for their lives. There has to come a point where servicing and or rolling over all this debt becomes such a problem that it just stops. Sort of like WeWorks.. and most of those other failure IPOs.. When the majority realize that this is a Ponzi market and they all run for the door at the same time.. The door isn’t big enough.. At that point, there isn’t enough liquidity in the world to keep this Ponzi going. It will just collapse. And for a time, chaos will reign..

      I don’t think this means the end of the world. Just a changing of the guard.. Out with the old and in with the new (after a long period of reflections and licking of the wounds).

      • Kenny Logouts says:

        Who’ll have safe liquidity? Cash especially? Paper cash at best?

        Chances are gov and banks will be bailing in with customers deposits.

        If it gets really bad, who knows what gov and banks will start taking off the plebs.

        I think you’re best in fully owned assets.
        It’s just picking the ones which will be easily liquified and in demand at the time you need them.

        • BarSteward says:

          That’s the dilemma of this age.

          Physical gold has some appeal. So does Crypto. They may only be a temporary hedge though. It depends entirely on what the new ‘base’ will become for people at various levels in the worst scenario. At the moment we don’t know what the scenarios will be at almost any level. Insanity prevails.

          If you own productive land in a temperate zone on the other hand, even if you can’t utilise it fully yourself, someone would be willing to utilise a part of it especially if it is mutually beneficial. That sort of utility is going to create a lot more alliances than a bunch of of 0’s & 1’s on a computer or a lump of metal when people are hungry.

        • Frederick says:

          Kenny Cash is good, Gold and Silver better

      • robt says:

        Much of the time it’s best not to invest in visionaries who lead cults.
        It does work for a while though, but timing is everything. When the WeWork guy was considerate enough to cash out before the IPO even hit just to ensure there were enough shares for everyone to buy (don’t they just print what they need?), that was the endgame signal.
        You do stand a chance of missing a winner occasionally, but the best result you can usually hope for is a wipeout, or at least, greatly diminished assets.

    • sierra7 says:

      “When the FED suspended mark to market accounting in march of 2009 that’s when we entered lala land.”
      I’ve been trying to say that for years.
      Most people’s eyes just roll up and in!
      It’s remarkable when that event happened the “market” was continuing to go down; as soon as that rule was obliterated the markets escalated and have NEVER looked back.
      What a SCAM!!

    • Javert, Chip says:


      Caveat Emptor: as a retired CFO, I’m at least 7 years out of date, but mark-to-market is still used for non-banks: Berkshire Hathaway’s most recent earnings were severely impacted by mark-to-market of it’s huge stock portfolio.

      I believe the Fed’s 2009 ticket to la-la land was for banks (unsure what happens with non-bank financial firms), and still requires quick write-offs on it’s mortgage portfolio.

      The current Fed ruling is poor in that it does not disclose what is currently hidden by failing to mark-to-market. The trick is to do it in a way that does not artificially crater the bank, and that’s tough.

  11. David Hall says:

    SoftBank is an 82 billion dollar Japanese conglomerate. They had been growing earnings up to this year. Perhaps they made some bad investments. On the other hand, they may have retained some profitable investments too. They are listed as having telecom interests.

    • Unamused says:

      Perhaps they made some bad investments.

      They’ve made several investments which are so stupid you have to wonder what their real strategy might be. Ripping off their biggest investors with flashy flim-flam comes to mind. Nothing novel there.

      • intosh says:

        The strategy is a simple belief: for every 50 tech unicorn investments, there must one that will yield a 1000% return.

      • robt says:

        Yahoo was stupid because there was the other one which I can’t remember the name of now, and Alibaba was stupid – just some guy in a basement that they gave 20 million bucks to.
        Between the two of them, SoftBank scored over 100 billion dollars.
        Then again, Mr Son lost 70 billion during the 2000 meltdown. Let’s face it – he’s a high roller and they’re on a different wavelength from the humans.

  12. Tim_O says:

    I always thought one reason Softbank’s Vision Fund overpays for its investments was to disguise Saudi Arabian payments to foreign officials.

    Softbank has made large investments in companies such as Mapbox, Compass, Lemonade, and many others which interestingly the Kushner family owned Thrive Capital owns large venture steaks in. All these investments began shortly after “Jared Kushner, President Trump’s son-in-law and Middle East adviser, dropped into Saudi Arabia for an unannounced visit to the desert retreat of Crown Prince Mohammed bin Salman, who was in the process of consolidating his power. The two men talked privately late into the night. Just a day earlier, Mr. Kushner’s younger brother, Josh, then 32, was flying out of the kingdom. Jared came to talk policy, but Josh was there on business.”:

    Josh Kushner and Jared Weinstein (who for three years served as President George W. Bush’s body man) together run Thrive Capital for its majority investor Kushner family. Things are apparently so good at Thrive that just this year Josh bought a private jet, and a stake in an NBA basketball team.

  13. nick kelly says:

    Cramer has gone right mental over this. His latest: ‘please no more IPO’s.’

    Are there no good ones?
    He’s mad at Netflix too. Wants the N out of the FAANG.

    • Frederick says:

      Cramer After his shenanigans in 2008 I’m really surprised anyone would listen to that shyster/carnival barker

  14. Marcus says:

    Who is Cramer?

  15. Keepcalmeverythingisfine says:

    I’m not one to defend Cramer, but he is entertaining at times and he really hates bear markets. So when he is out saying the market and economy are threatened by the collapse of Unicorn companies, he is actually being truthful. When there is a threat to a bull market, Cramer goes nuts. He is gearing up for another “they have no idea” rant he gave during the last implosion. I also think that he knows it is over, but can’t come out and say it.

  16. SaudiCash says:

    Softbank is a VERY WEALTHY company, they own the design on all RISC chips used today, every chip used in every cell phone on the earth, uses SOFTBANK technology, they own all the licenses for all the designs, and this includes the most complex devices in human history, some of these chips have 100’s of billions of transistors, and SOFTBANK owns it all.

    Sort of like SERCO-UK a company you never heard of, but owns all the ATC ( air traffic control ) on earth, designs all flight-control ( think BOEING BUAP ), and even got the Obama-Care contract for +1B to build/design the website. Serco also owns/controls most of the worlds private prisons, an old Nazi spin-off of RCA-UK from the 1930’s owned by the Bush Family ( yep, same family that worked with Saudis on 911 )

    Interesting tie on all this because that Malaysian plane that went missing had all the chip designers on board “Freescale” a Rockefeller company, and also tied to Softbank. They had gotten the Obama-Care chip contract to chip everybody in the USA with smart on-board human monitoring computers.

    Huge, my guess is they make so much money, they could afford to dabble in unicorns.

    Funny how a dance with Unicorns can bring out a discussion of ‘Softbank’, but little much of anything else. Yep, follow the Saudi money that is laundered through Japan ( think Kushner/Epstein/Bush )

  17. WSKJ says:

    Thought I heard in the first few minutes of this recording, that SoftBank is paying 7% (“dividends”, I think; or something like) on the money invested in SoftBank. If SoftBank is publicly traded, are these the preferred shares for the SPECIAL investors ?

    Did I get that right, Wolf ?

    If I heard that right (and given that they are not cash-flow positive; again, as I think I heard it), does this not tend to cast SoftBank in a Ponzi-scheme light? Kind of seems like this is what you implied above, Wolf.

    And as some of the commentary above has it, the easier it is to take on debt, the easier it is to do ill-advised things with the easy money. For instance, paying dividends with borrowed money.

    • Wolf Richter says:


      Yes, you heard correctly, SoftBank is paying 7% interest to some other investors that have put money into the Vision Fund. This is a very unusual structure. But apparently, it was needed as an inventive to round up this much money.

Comments are closed.