RT..FWIW...
World's largest Netbatsu
Company: Softbank Venture Capital
Summary: Early-stage Internet venture capital firm
Representative portfolio companies: Webvan, Yahoo! (YHOO), E*Trade (EGRP)
Prior investments: GeoCities (acquired by Yahoo!), Firefly (acquired by
Microsoft)
Cyber-Venture Capitalist: Gary Rieschel, Executive Managing Director
Just four years ago, the name Softbank Venture Capital was largely unknown by
most investors outside of Japan, although times have certainly changed for the
software distributor. These days, no one can scan the prospectuses of some of
today's hottest Internet IPOs without finding Softbank's name on them. After a
serious of gutsy moves that were viewed as largely reckless just three years
ago, Softbank is now the largest shareholder in Internet powerhouses ranging
from Yahoo! (YHOO) to E*Trade (EGRP) and ZDNet (ZDZ). All told, Softbank and
its parent company now hold stakes in over 100 Net-related companies such as
Webvan (WBVN), Buy.com, E-Loan (EELN), Net2Phone (NTOP) and TheStreet.com
(TSCM).
Driven by the vision of Softbank's founder and Chief Executive Officer,
Masayoshi Son, the company has attempted to create a keiretsu of synergistic
Internet companies, which Son today creatively calls his own "Netbatsu."
[Editor's note: the term "keiretsu" refers to the unofficial alliances and
"families" that Japanese corporations, especially ones in completely unrelated
industries, form to ensure their survival and fend off rivals.]
The task of creating this Netbatsu and Softbank's U.S. venture capital presence
fell into the hands of Gary Rieschel, who was personally recruited by Son back
in 1995 to start up Softbank Capital. While Rieschel has largely stayed out of
the spotlight the past few years, he has been instrumental in initiating a
number of the firm's more high-profile investments such as Yahoo! and USWeb
(USWB), and has recently established joint Internet ventures with media giants
Vivendi and News Corp. (NWS) in Europe. We recently caught up with Rieschel to
chat about a variety of Softbank's portfolio companies, as well as his views on
some of the Net's future trends.
Cyberstock: What did you think of the Internet back in 1995 when you became
involved with Softbank and Softbank Technology Ventures?
Rieschel: I had the sense it was a sea change. I had the sense it was going to
be very important, but at that time everyone was saying this could be big, but I
don't think anyone - [Jim] Clark (founder of Netscape, Silicon Graphics, and
Healtheon) or [John] Doerr (venture capitalist with Kleiner Perkins) -
understood how big. At the end of 1995, I had a dream first day for a venture
capitalist. I met Yahoo! in the morning and met USWeb in the afternoon. I went
home to my wife and said, "I don't understand what's so hard about venture
capital." Later, we found out exactly why it's hard. But that was kind of a
blessed start.
Cyberstock: That may be the understatement of the decade. I've noticed
Microsoft (MSFT) pops up quite frequently with Softbank in a number of overseas
deals lately, such as joint ventures with Global Crossing (GBLX) and Tokyo
Electric. This is somewhat ironic, since Microsoft's MSN and Yahoo!, one of
your portfolio companies, compete directly in the U.S. Is more partnering with
Microsoft likely in the future?
Rieschel: I think one of the strengths that the entire group has is
organization, broadly defined. I think Softbank is an excellent partnering
organization. The distribution heritage of the company means that they've
always been business partners with people; the publishing heritage, which means
you've always been business partners with people. I think that culture still
exists very much in the ventures group, it exists very much in the corporate
side, and I think even the late-stage fund has that component. I think the
fundamental philosophy is one of influence, not control. I think that goes
across the venture group and the corporate side. Now, if you look at what have
been the strengths of Softbank, one of the things people tell us - I'm assuming
they're not making it up - it's hard to find people who wouldn't work with us
again. I think we've done a really good job of making sure we have good
relationships with Cisco (CSCO), and good relationships with Microsoft, and good
relationships with Oracle (ORCL).
Cyberstock: With everyone, basically.
Rieschel: So when we were going out and first out raising the funds, limited
partners would call and say, "I want some reference on Softbank." I would say,
"Well, Softbank is the only company in the world you could get an equally good
reference from Larry Ellison (CEO of Oracle), Bill Gates, (CEO of Microsoft),
John Chambers (CEO of Cisco Systems), and Rupert Murdoch (CEO of News Corp.).
They're kind of all tough, tough folks, but Softbank has been able to be a good
partner to them. I think that will continue. Now, with Microsoft, I think that
the Softbank relationship with Microsoft is extraordinary. It's with Son and
Gates, [Steve] Ballmer (President of Microsoft), [Ron] Fisher (Vice Chairman of
Softbank Holdings), Greg Maffei (Chief Financial Officer of Microsoft) and
myself. There's a group of us that... I wouldn't say we're best friends
because I don't think we see each other that much, but there's a lot of respect.
Cyberstock: It's definitely very interesting to watch it unfold.
Rieschel: There's great deal of respect among those teams that are running
these organizations. I think Microsoft clearly understands that some of
Softbank's investments, such as Yahoo!, could certainly be competitive with some
of their properties. On the other hand, CarPoint Japan, which is a joint
venture we did, is going to be successful largely because of the traffic that
Softbank Japan built with Yahoo! Japan. So I think within Microsoft there is a
bit of an awareness that at least in the pure Internet business models - not
software distribution, not network access - that there is a need to partner.
I'd say that's probably a recent phenomenon. It's probably not ten years old.
It's probably within the last two years.
Cyberstock: Let's switch topics a little bit to e-tailer Buy.com. I have
trouble grappling with this company and the entire "at cost" e-tailer
phenomenon. It seems to me it's a lot of hard e-commerce work in the end to
simply drive traffic and build a customer base just to sell banner ads as your
profit driver.
Rieschel: Let me tell you how to look at Buy.com. I have to be a little
careful, because I don't think they've filed [for an IPO], but they're getting
close. If you look at all the companies in e-commerce, look at their net
margin. In other words, take the product margin less marketing spent, and
you'll find that the only one better than Buy.com is Amazon.com (AMZN), and it's
only better by a point. Amazon is running negative 5% net operating margins.
Buy.com is probably running negative 6% or negative 7%.
Cyberstock: Is that because Buy.com is outsourcing so much of its business,
such as fulfillment?
Rieschel: Well, the reason is that they spend money on advertising, but [not]
nearly what Amazon spends. So if you look at the marketing dollars spent by
Amazon, it's on the order of hundreds of millions of dollars. The reality is
that Buy.com was using the price as a different customer acquisition mechanism.
So when you net it out at the end of the day, they are now able to change prices
four to six times a day. They can change prices every hour. So they're still
driving to the lowest possible price on the Net for their clients. But at the
same time, they have the capability to really adjust prices and check elasticity
on a daily basis, which I don't think any other company has. So the goal long
term, they're not going to be selling all their products at a loss. If you go
into Fry's Electronics, a third of the products that are on sale, they're losing
money. So I think that there is always going to be the loss leader category.
But if you look at their business model in general, you'd say they're going to
get to break-even and positive gross margins in the near future.
Cyberstock: Looking at the e-finance space, with investments in portfolio
companies like E*Trade, Morningstar, InsWeb (INSW), CyberCash (CYCH), and
E-Loan, I can't think of anyone that has been more aggressive in this online
finance segment.
Rieschel: Yes, we're going to continue to be very aggressive there. The idea
in the first place for Softbank was to strategically go after receiving the
eyeballs. Then you want the money. Then you want a piece of every transaction
that occurs. So that's kind of at the 100,000-foot level, the strategic
progression that is going on. So we're going to continue to be very aggressive
in financial services.
Cyberstock: It seems to me that e-finance is one of the ultimate business
models tailored for the Web, since you are transferring basically digital bits
to complete transactions with customers and not having to ship physical goods.
Rieschel: It clearly lends itself extremely well to the Net. Publishing will
as well. Software distribution (also). Anything where you can actually deliver
the product as well as just do the transaction, I think will, over time, be very
significant.
Cyberstock: What's your thoughts on the MP3 revolution and how this all plays
out with the traditional record companies?
Rieschel: I am not what I would say knowledgeable about that. But looking at
it from our view, I think it's absolutely the first wave that's going to wind up
cutting across the newspaper business; it's going to cut across magazines. It's
going to cut across everything, because in the past the artist needed the labels
to get the shelf space. That's gone. It's going to happen with movies. I saw
a demo this week of someone embedding a full-length motion picture in an e-mail
and sending it over their high-speed network, and it took four seconds.
Cyberstock: Wow...
Rieschel: So I think we're right on the verge. Now, movie production is
extremely expensive. So that's always going to require extraordinary amounts of
cash. I don't think the stars or the individuals can actually fund that. But
in music, a guy can rent a studio with a band for five hours and knock out half
a dozen tracks. I'll tell you, I think the record labels are in real serious
trouble.
Cyberstock: Would it be hard for you to imagine some certain portals or other
aggregation and distribution points.
Rieschel: No, it wouldn't be hard to imagine that at all.
Cyberstock: I don't think it would be either, although some people would
question that and think I'm crazy when I've suggested that portals could become
their own record labels in the future. It seems likely to me down the line.
Rieschel: What will be interesting is when people start taking MP3's to
distribute music and using that on playlists and radio stations. If that
happens, it's over.
Cyberstock: Looking at e-tailer stocks as a group, they've really been beaten
down this year. What do you look for right now when you look to make an
investment in an e-tailer?
Rieschel: What we're really doing is that we're taking a really careful study
of the distribution system of that particular product set. The reason is... let
me use two examples. If you look at books, lots of people write books and lots
of people publish. So in the book industry, the idea of having an Ingram Books
as a super aggregator actually made a lot of sense. So you can go out and
partner with someone like Buy.com. Why do you want to replace Ingram? I think
Amazon is making a terrible mistake by building out its fulfillment capability,
but time will tell. So in the computer industry, it's the same thing. There
are lots and lots of people. The hard thing to replicate in the computer
industry is Ingram Micro (IM) or Tech Data (TECD). So what we're doing is
saying, in that case what we should do is, we should invest in a very aggressive
e-tailer like a Buy.com or a More.com, which is doing the same thing in
drugstore products. So More.com did a deal with Bergen Brunswig (BBC), which is
one of the two largest wholesaler distributors of drugstore products. So
they're doing the same thing - a Buy.com model - by partnering with the largest
distributor. What that gave them is 100,000 SKUs from day one.
Cyberstock: So you're saying back an e-tailer that's really just a strong
marketing force.
Rieschel: Right. So for some product categories, the marketing play is the
right one. Sporting goods is totally different, because there is no super
aggregator in sporting goods. So you have to decide one or two things. Either
you go directly to manufacturers and aggregate maybe a lifestyle set of products
like "adventure sports" and put that together in a retail offering, or you wind
up creating individual retail stores. And I think that you might try Global
Sports (GSPT), which is a Softbank Capital investment. I think Global Sports is
doing one of the super aggregation plays for a category of products, and I think
that they might be successful. But that [super aggregator] didn't exist at the
time when you're looking at sporting goods today.
Cyberstock: Okay. Time to talk about e-grocer Webvan. Looking at Webvan's
model, let's put groceries aside for a moment. Isn't the real end game for this
company to become kind of the FedEx (FDX) of e-commerce and the critical "last
mile" into the home?
Rieschel: I think that the business model as it's playing out now clearly lends
itself. What you need to do is find something that people do every day.
Cyberstock: And you can build a relationship with them.
Rieschel: Exactly. And what that does is gives you the cash and the business
to basically build out the distribution infrastructure. But there's no question
that I think they potentially could be the largest home delivery vehicle in the
world. Part of the reason is that I think FedEx and UPS are really struggling,
because I think that they lose money delivering to someone's home. But I think
right now, they have to think really hard about it, because if Webvan... and I'm
assuming they'll have a very successful public offering. They'll wind up
raising.
Cyberstock: Let's say gazillions.
Rieschel: They get established really well in 50 cities, and it's pretty
interesting. We've only begun to scratch the surface of what Webvan can do
returning from the home. Think about that. That hasn't even been touched. So
picking up laundry is one capability, but there's a thousand things to do with
that system if it gets established fast enough.
Cyberstock: I've got to say, a Yahoo! on the front end with a Webvan as the
back-end fulfillment could be a very enticing combination for investors.
Rieschel: Yes, well, look, we'll have E*Trade and everyone managing your
checking. Basically we'll have your money, we'll have your groceries, we'll
have everything you need. You just go online.
Cyberstock: In other words, we take care of your life.
Rieschel: Yes, we'll have to steal General Electric's (GE) "We bring good
things to life."
Cyberstock: Yup. Sorry, Jack Welch. Looking at Softbank's huge Net portfolio,
I really don't find any broadband plays. No cable, satellite, or relationships
with RBOCs are readily apparent. That's one thing that kind of sticks out in my
mind.
Rieschel: We're starting. You see, what we've done in the past is that we've
focused 100% on the services side and not on the infrastructure. SpeedNet in
Japan and Global Crossing were the first two big plays in what I call "tier
infrastructure." I think you'll see more. We're not going to compete with
Qwest (QWST), right? That would be silly. But I think that the idea that we're
going to increase the investment in communications services is absolutely going
to happen. We're going to get increasingly aggressive about at least
structuring broadband relationships for our portfolio companies. Forget what
AT&T (T) is doing, which is keeping ExciteAtHome (ATHM) closed.
Cyberstock: Good point. How do you think the entire ExciteAtHome and AT&T
ownership and cable access exclusivity mess will play out?
Rieschel: I think they're absolutely shooting themselves in the head, because
at this point if I was [C. Michael] Armstrong, (Chairman of AT&T), I'd be
thinking, "How do I absolutely maximize the use of my pipe so that other people
don't have an incentive?" Instead, he's creating an incentive at a time when
there is endless capital to build out competitive products, whether it's optics,
whether it's DSL. I think he's put himself in the position where I think that
he may have wasted a good piece of this $100 billion he just spent. Somewhere
there is a lack of strategic.
Cyberstock: A definite lack of strategic thoughts over at Ma Bell for the
moment.
Rieschel: I'm not very impressed with that. But we'll be playing more and more
in broadband over the next year or two.
Cyberstock: Thanks again for your time today. That about wraps it up.
Rieschel: Thanks. Bye. |
