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No-sweat risk-taker Arora lets ¥60 billion ride on SoftBank’s future

by and

Bloomberg

It’s a fall evening in Tokyo, and Nikesh Arora is supposed to be in two places at once.

This is a common dilemma for the 47-year-old president of SoftBank Group Corp., who splits his time between Silicon Valley, Japan and India. Arora is scheduled for dinner with his boss, Masayoshi Son, but he keeps talking. He has a story to tell.

Arora is explaining how he came to make one of the largest executive stock purchases ever. It began late one night this year when he and Son were talking about people’s tolerance for risk and how it tends to decline over time. Arora took a chance as a kid by leaving India for the U.S. with only $200 in cash, but he had since gone on to a lucrative career. So Son prodded him.

“Masa said, ‘How much risk appetite do you have?” ‘ Arora says. ” ‘Do you believe you can transform SoftBank into a company two, three, five times its size? Now is the time to take the risk.” ‘

A week later, Arora came back with a plan to buy ¥60 billion ($483 million at the time) in SoftBank shares, more than any insider purchase by an executive in Japan in at least 12 years, according to Bloomberg data. He would become the company’s second-largest individual shareholder and borrow heavily to do it.

“I took him seriously,” says Arora, wearing an untucked white shirt, jeans and navy loafers on a caramel-colored leather couch in the executive suite of SoftBank headquarters. “As long as I can protect my family, I have no problem taking the risk.

Arora says investors don’t yet appreciate what SoftBank is becoming. The company has been battered recently because of struggles at two major holdings, the China e-commerce powerhouse Alibaba Group Holding Ltd. and the U.S. wireless operator Sprint Corp. SoftBank is still valued at less than the public shares it owns, meaning investors deem its operating businesses practically worthless.

Arora professes not to be worried. He says investors will come around once the company makes progress in reviving Sprint, lets Alibaba recover and demonstrates that it’s more than a Japanese telecommunications company with a spotty investment record.

“I’m very relaxed,” Arora said. “I’m here for at least the next 10 years.”

Team Nikesh

Arora was hired last year after a decade at Google Inc. and promoted to president in June. Since then, he has been quietly building his own operation within SoftBank, an investment arm that will take stakes in technology companies around the world. Though SoftBank put money into startups for decades, including a tumultuous foray during the dot-com bust, the effort had dwindled in recent years to what Son called a “hobby” next to his wireless and broadband businesses. Arora is reviving the venture push and making it much more ambitious.

He is hiring a team of 15 to 20 outsiders and plans to put about $3 billion into startups each year. Arora’s recruits, from companies such as Google and LinkedIn Corp., are hand-picked for the expertise they can offer startups in key areas like personnel, product development and acquisitions.

He says SoftBank will hold a competitive advantage by operating at a financial strata few can reach. He plans to make five to 10 investments a year of $100 million to $1 billion. The idea is to back startups that have proven products and need to expand — the rapid phase of growth Arora helped manage at Google.

“What SoftBank does is unique,” said Nizar Tarhuni, an analyst at researcher PitchBook Data Inc. “They have the brains of Silicon Valley VC guys in the way they pick these companies, but they operate almost like a Warren Buffett-esque conglomerate.”

Arora has significant advantages. SoftBank has access to billions of dollars in capital and, unlike even the top venture firms, it’s not raising the money from limited partners so it doesn’t have a 10-year fund limit to compel cashing out. Arora calls this “permanent capital,” and it has appeal for entrepreneurs who don’t want to be pushed toward an initial public offering.

Alibaba’s Jack Ma is a prime example. SoftBank invested $20 million in 2000 and waited 14 years for the initial public offering last year. The stake is now worth more than $60 billion.

Still, Arora’s timing is less than ideal. He’s committing himself, and SoftBank, to the startup ecosystem at the exact moment when many people wonder whether valuations are getting out of hand and a shakeout looms.

Mark Suster of Upfront Ventures in Los Angeles wrote a blog post last month pointing out the number of unicorns, or startups worth at least $1 billion, has gone from 30 to 80 in 18 months.

“Either we’ve discovered magical beans and elixir or perhaps we’ve gotten ahead of ourselves,” he wrote.

Arora’s approach echoes SoftBank’s strategy of 15 years ago, when it invested billions of dollars in several hundred Internet companies. Son talked about creating a Netbatsu, a play on the old zaibatsu corporate networks that worked together to succeed.

He had successes such as Alibaba and Yahoo! Inc. but many more of the startups went out of business. He saw SoftBank’s stock drop a stomach-churning 99 percent from its peak in 2000 to ¥277 in 2002. The current share price is about one-third the dot-com high.

Arora agrees valuations are exorbitant for some startups, but says there is still money to be made. “The question is are we good enough to pick the winners and help them grow?” he says.

Speed dating

One of Arora’s first moves at SoftBank was to look for opportunities in his native India. He and Son borrowed an office from Sunil Mittal, the billionaire chairman of Bharti Airtel Ltd. who is friends with both, and organized pitch sessions with more than 40 companies. It was speed dating for startups.

“We decided to understand the Indian market in the span of a week and looked at everything above $50 million to $100 million,” Arora said. “It’s such an early market, the whole thing was available and most people were willing to raise money.”

They cut two deals right away, investing in e-commerce provider Snapdeal.com and the ride-hailing service Ola Cabs. They later added investments in the real estate website Housing.com and hotel-booking app Oyo Rooms.

Arora has also invested $1 billion into South Korean e-commerce operator Coupang. Last month, SoftBank said it led a $1 billion fundraising round for U.S.-based online lender Social Finance Inc.

Arora likes to think he provides more than money. He and his team give advice when needed, letting their startups tap industry veterans they otherwise couldn’t afford. That could mean a consultation on employee stock-ownership plans with Liane Hornsey, who used to run Google’s human resources, or hatching a mergers-and-acquisitions strategy with Alok Sama, who founded Baer Capital Partners and worked at Morgan Stanley.

Ritesh Agarwal, the 22-year-old founder of Oyo Rooms, has seen the benefits. He was trying to figure out how to let Oyo customers in 10 hotels get Wi-Fi from an Indian wireless carrier. Arora got him a meeting with Bharti Airtel’s chief executive officer and, in less than a month, he had a deal covering 1,000 hotels.

“He thinks about things at a completely different scale,” Agarwal said.

For Snapdeal founder Kunal Bahl, one of the big challenges in building an e-commerce site in a developing market is figuring how to let people pay for purchases since most don’t have credit cards. Arora encouraged him to spend aggressively to solve the problem, including a $350 million acquisition. That helped Snapdeal draw 10 million customers for its digital wallet within 33 days of launch, though it remains behind rival Flipkart in India.

“When your largest shareholder and key strategic partner says ‘Go for it,’ that gives you a great sense of confidence,” Bahl said. “I don’t think this would’ve been possible without the backing of SoftBank and, especially, Nikesh.”

Such input isn’t always welcome. Housing.com‘s CEO clashed over strategy this year with investors, including SoftBank. Rahul Yadav said he didn’t think his board was “intellectually capable” of helping him and resigned. A few days later, he withdrew his resignation, though he was fired soon afterward.

Arora frequently draws on lessons from his days at Google. He left Deutsche Telecom AG to join what was then an unproven search company just after the IPO in 2004. He started in the Europe sales operation and helped develop business strategies that became the global standard at Google.

“He decided early on that Europe was going to be much more than a sales outpost,” said Dennis Woodside, a Google colleague who is now chief operating officer of Dropbox Inc.

Arora and team won over advertising agencies that were originally resistant to embrace online ads and helped persuade them to train digital-oriented staff, who could help customers. They developed tools so that, say, an auto insurer could find out which days of the week were best to advertise for customers and which terms would be most alluring. Many of those strategies were adopted throughout Google.

He moved to the Mountain View, California, headquarters in 2009, becoming the top sales executive and later chief business officer. Arora was the polished salesman in tailored Armani suits amid a sea of introverted, rumpled engineers, but he earned respect.

“This was a company that was driven by product and the business side was almost a necessary evil,” said Henrique De Castro, a longtime colleague at Google. “The product guys and the engineers changed their view on the sales guys for two reasons: One, Nikesh hired very capable people. Secondly, he made decisions that won respect.”

Barry Diller, whose IAC/InterActiveCorp. was both a Google competitor and customer, said Arora could anticipate changes, like the rise of mobile advertising, and build the business capabilities to capitalize on them.

“He had perfect pitch about the market conditions,” Diller said.

For startups to grow quickly, Arora said it’s important for them to experiment with business models and technology, and to make sure they have the right people in place. He also encourages them to use the vast quantities of data available online to sort through where to invest and where to back off.

“Snapdeal, Ola and Oyo, they all have similar scenarios,” he said. “They have a huge number of transactions, some are profit-positive, some profit-negative. How do you cultivate those that are profitable?”

No easy days

Arora is in a reflective mood these days. He just had his second child, a boy, a few months ago. At the same time, his father is seriously ill. Arora, who mostly lives in Silicon Valley, has been spending as much time as possible at his father’s side in a New Delhi suburb. “All he wants is another happy day with his family,” he said.

When Nikesh went to the U.S. with $200 for school, his father gave him a check for $3,000 to help him get started. To make ends meet, Nikesh flipped burgers, worked as a security guard and taught at a community college.

“At the time, $3,000 was his entire retirement fund,” he said. “I was so focused on paying my father back and not failing. There was no going back.”

Compared to that, he said the pressure now is manageable. If he loses the money he has in SoftBank, he’ll manage, and if shares soar, he plans on giving the profits to charity, anyway.

Though it hasn’t been publicly announced, Arora’s SoftBank stock purchase is complete. He set up an agreement with two banks that began buying shares within a predetermined price range 45 days after the announcement. More than 25 percent of the money is his own equity, with the rest borrowed. He said there could be a capital call if a market crash wipes out his wealth.

Arora has been well-paid in recent years, though not enough to cover the purchase. He made $80 million in his last three years at Google and received $135 million during his first half-year at SoftBank, including a signing bonus.

Arora has more than money at stake. Son, 58, has said Arora is the most likely person to succeed him when he retires sometime in his 60s. Arora’s venture strategy may well determine whether he ends up taking over the top job.

“Nikesh is great,” Son said after an event in the city of Kochi this month. “He has shown deep insight and balance. He’s not afraid to try difficult things.”

Son has had strong lieutenants in the past who faded from view. Yoshitaka Kitao, Son’s right-hand man during the dot-com era, left the company after the bubble collapsed. He wrote a blog post this May saying, “Nikesh Arora is not necessarily secure” and “it’s too early to appoint his successor.” Kitao declined comment for this story.

Arora said he and Son talk almost every day about investments and strategic issues. Arora comes to Tokyo every four or five weeks, usually for board meetings or other formal events.

“I try to spend about 10 days a month with Masa,” he said. “Ten out of 30 is not bad. Same amount I spend with my wife.”

The change at SoftBank has been dramatic, even for a company with a history of seismic strategic shifts. After getting most of its profits from a relatively steady telecommunications business in Japan, Son’s company is taking on more risk through Sprint and its growing venture bets. Power is shifting beyond Tokyo, making SoftBank more international and less Japanese.

Sprint has continued to struggle, even as Son holds late-night conference calls from Tokyo to work with the U.S.-based team. Investors fret that losses there could swamp successes elsewhere at SoftBank.

“The market is saying: ‘Prove it,’ ” Arora said as his handler tells him he really does have to get to the dinner with Son. “Our task is not to talk about it but to get it done.”