In Saudi Dealings, SoftBank Faces A Tricky Situation

(Bloomberg) -- The disappearance of the journalist Jamal Khashoggi sent a jolt through the international community. It could also mark a turning point in the relationship between the Saudi government and foreign business executives —in particular, SoftBank Chief Executive Officer Masayoshi Son, who has a lot to lose.

Saudi Arabia is the biggest investor in SoftBank’s $100 billion Vision Fund, which has poured heaps of cash into startups like Uber Technologies Inc., WeWork Cos., Didi Chuxing and Slack Technologies Inc. Saudi Arabia’s Public Investment Fund has committed $45 billion to the current SoftBank Vision Fund and another $45 billion to the next one.

Crown Prince Mohammed bin Salman, who had been hailed as the modern leader to transform the kingdom, controls the sovereign wealth fund and has a strong personal relationship with Son. His father, King Salman, removed a key adviser to the prince over the weekend, when the government finally acknowledged Khashoggi was killed at the Saudi consulate in Turkey. If Prince Mohammed is implicated in the Khashoggi case, the deal with SoftBank would be in question.

Though SoftBank could find other investors for its fund—which already includes Apple Inc. and Qualcomm Inc.—it’s unlikely any single entity would be willing to hand over as much as Saudi Arabia. “We are the creators of SoftBank Vision Fund,” Prince Mohammed said in an interview with Bloomberg early this month. “We have 45 percent. Without the PIF, there will be no SoftBank Vision Fund.”

Son had been planning to raise $100 billion every two years. If he doesn’t, SoftBank won’t be able to fulfill one of the primary theses behind the Vision Fund: that unlimited capital can push fast-growing startups into dominant positions.

Potentially even more detrimental is how the entire situation taints SoftBank’s reputation. Son has yet to pull out of Saudi Arabia’s “Davos in the Desert” event set for this week, despite nearly every prominent business executive, including some of his own portfolio companies like Uber, refusing to attend. Bloomberg has also pulled out of the Saudi event as a media partner. SoftBank’s publicly stated goal is to “contribute to people’s happiness through the information revolution.” Well, people aren’t happy right now.

In hindsight, ethical debates around doing business with the Saudi royal family should have taken place long ago. “Saudi Arabia has a long track record of awful behavior, none of which impacted startups taking their investments,” said Lane Kasselman, a former Uber communications executive who’s now managing partner at consulting firm Greenbrier. And Ben Lerer, partner at Lerer Hippeau, suggests corporate introspection should extend beyond dealings with Saudi Arabia. He said there’s probably a lot of money “people might be uncomfortable with” in technology companies. “People just don't want to talk about it,” he said.

If they didn’t before, SoftBank and other recipients of Saudi largesse are certainly taking a moment now to weigh their moral obligations, and the optics of associating with authoritarian regimes, against the benefits. And there sure are some benefits. There’s the money, of course, but also access to a foreign market. Several SoftBank-backed companies, including construction startup Katerra and indoor-farming business Plenty, have made plans to expand into the Middle East. Both were scheduled to speak at this week’s conference.

Meanwhile, SoftBank has declined to respond to multiple requests for comment. At a recent tech conference in San Jose, California, Marcelo Claure, chief operating officer at SoftBank, is pulling out, according to a person with knowledge of the matter.

Prince Mohammed’s rosy image as a progressive reformer has been shattered. Whatever Son decides to do next will ripple across the technology industry. If SoftBank stands by him, the fund could become a toxic asset. If it walks away, there may be no more funds to speak of.

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To contact the editor responsible for this story: Mark Milian at mmilian@bloomberg.net

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