Investing in e-commerce

Lydia, I've been really looking forward to doing this with you for a few months now. I know we've moved it around once or twice. Maybe to begin, it would be helpful to just sort of introduce you to the audience. You've got a really interesting set of background and growth equity now with SoftBank. Maybe you could describe what has united every major career stop that you've had so far. Or another way of asking the question is what curiosity have you been pulling on thus far in your career?

First, thank you for having me. I started listening to this a couple years ago and have found it just to be incredibly informative as to how people think in the random walks we've been on. I'll address the question in terms of what linear path has driven where I am with a little bit more of an admission that's been a little bit of a random walk. I've spent my entire career in finance that was haphazard. I graduated from college knowing nothing and having no particular connections and really struggled to figure out how to land in a place that felt fulfilling. It took me a year post college to land. But I ended up at J.P. Morgan right in the back half of the last crisis back in 2002. And I felt really lucky to be there. I was on the capital market side of the business, focused on debt capital markets and really understanding capital structure and risk and how do companies optimize how they structure and fund their businesses. After a couple of years, I had the opportunity to go lean into the investing world and launched into investing in 2005 and have been here ever since. We spent about a decade focused on more private equity style investing that really is understanding the risk factors of the business, because fundamental growth of the underlying assets isn't big enough to support big misses relative to the debt that you have on the balance sheet. I take a step back and I look at that period of time and it was 100-page decks talking about all the potential risks that businesses might run into. And now we get comfortable that we have mediated those risks. In 2015, when I leapt over to join the SoftBank platform first as a member of the SoftBank group investing team which was seven of us launching the very first growth equity efforts. In many ways I felt like a wild place that I just couldn't understand. I'd had a decade teaching me that you had to be really disciplined and focused on downside. And all of a sudden, I ended up in an organization where you really had to do the opposite, which was just make sure that you had tailwinds driving your business and then identify the couple big things that had to go right to win. Then that transition took a while. I will admit, I think I called my husband my first night at SoftBank and I said, "I'm not sure I can do this." The methodology, the style of thinking's just so different from how I've grown up and where my head sits. Then over the last seven years at SoftBank, I've really been pulled in that direction and can see the beauty of the optimistic thinking and the identification of what really matters.

I love the idea of shifting from what could go wrong to what could go right. In the actual day to day process of those two different extremes, highlight for us the things that are most different. The brand itself in my mind is the sort of what could go right, make huge bets on massive potential outcomes even if some people are saying it's a little bit silly. And we'll get into what makes SoftBank so unique later, but what are the biggest felt differences for you of 10 years doing it one way, and now seven, eight years doing it the other way?

I just think there is such a crystallization of a couple things that really matter. And I'll never forget Masa really distilling the fact that it is tailwinds that fundamentally provide protection for businesses. So we should only ever be investing in businesses with tailwinds. So he's sort of iconic for talking about what are the big fundamental technology changes. Those are tailwinds we're talking about. We spend a lot of time talking about market position and what sustains market position. It's why I've spent a lot of my career thinking about how do you actually define a moat and what does that look like around a business. How do you keep your market position in a volatile changing market with a lot of cash around you? And this has not always been something we've been great at, but we're making sure that we are funding business models that are fundamentally improving through automation and technology, as opposed to just decaying the economic curve of what businesses have been on. I think a lot about FinTech or the financial services industry is one where you've just had a big, broad decay of fee streams into these organizations, which is what technology has brought. I've tried to focus a little bit more on making sure that companies can actually extract some of the economics to their own balance sheet as opposed to passing it all back to customers. So I bucketed into the three things. Are you on the curve of growth, have you identified your position in market, and are you fundamentally improving your business model over time are the three areas that I spend a lot of time on in sort of broad abstract terms.

How do you learn about tailwinds? I guess I'm curious what you think the predominant tailwinds are today that maybe even specifically the businesses you're involved with are riding. But even more generally, like if you're looking at a business today, what are the major tailwinds that you think are sustainable? I'd love to go a little bit deeper on each of these three dimensions starting with tailwinds.

At SoftBank, I've really focused my career on e-commerce because I fundamentally believe that it is a beautiful economic flywheel that the consumer globally today is not well served by a really fragmented long tail of offline retail, and that the economic pact we're making with each other that we are transitioning into an online world does drive great efficiencies. Now, how do I think about getting more product to consumers and longer tail of skews at a lower set of prices? I think Masa has historically really been very focused on technology improving efficiency and therefore driving down the total cost of producing goods. The economic impact has certainly equated enterprise value as we've seen across the technology sector. When we spent time over the years debating whether or not we should be investing in companies at valuations in countries that didn't have public market cap that would support those valuations, we kept coming back to although there are no companies bigger than banks and mineral companies today. But we do believe the transition of value will be clear because the consumer benefit is so much greater. We're willing to make those fundamental bets that the technology companies should be bigger than what we've seen in traditional industry before.

How far along do you think that e-commerce transition is? I'm especially interested maybe by geography and where you think the biggest remaining opportunities are, because it seems like obviously it's a huge trend. There are huge businesses in the category of some of the best known companies in the world, I want to dig into competitive dynamics. But how far along is this transition? How much room left to go is there?

I tend to be very, very bullish on this topic. It is incredibly dependent on the specific economies that we operate in. When I first started working on e-commerce assets at SoftBank, I had this really naive perspective that you could just take models that worked in the US or in China, and you'd transplant them to India or Korea, Indonesia, and you'd see very similar curves. I realized really quickly the obvious statement I'm about to make, which is that countries are very different from each other and are driven by different factors. I think we can all agree that we expect upward penetration to continue even though their rates are dramatically different today. If you look at China or US which have very meaningful penetration today. Korea comes up next. India, Indonesia, very low on the list. Russia, very low on the list. Across the board, I do believe the economic benefit to the consumer is significant enough. It should continue to drive penetration. There's lots of different factors that overlay into this. I look at Korea as a very under retailed geography. I look at the US as one where we have big dispersion across big geographic swaths of land and have very different experiences in terms of access to goods. I think that the question to me is not are we done, but how much more value can we continue to add. I don't see a stopping point realistically. Now I don't think you see traditional retailers seeing a stopping point. Walmart was actually one of my first customers when I started my career in banking. It was the first corporate I worked with. They were the big fundamental retailer that was innovating around the box structure. But it's really exciting to see how much they're doing today in terms of thinking about how do they bring digital to a customer base. I think we're so far away from our conclusion here to be precise about it as sort of impossible for anyone to do with any confidence.

Eric Vishria at Benchmark has this beautiful idea of what he calls a competitive frontier. So for any given industry, there're being a couple variables or battlefields, however you want to think about it, that sort of determine or sort winners from losers in a certain space. What do you think the competitive frontiers are today in e-commerce as sort of variables on which one firm will beat another?

Experience has been the very obvious one. It is really hard to compete against speed. I think that is generally true across every region I look at. But I think if you start to dive down into micro levels, there are economies which are much more value driven. I would argue India, Indonesia have been much more value driven. I think it's one of the beautiful aspects of e-commerce that I've seen evolve over the last couple years as we've started to bring in much lower cost assortment into geographies. So how do you actually bring down that cost for customers and allow a higher quality of living? I think the really obvious ones that we've seen have been speed, they've been cost of product. And those have been big curves that have compacted very fast. It's hard to build these operationally intensive businesses where you're repeating pretty rote actions, millions, if not billions of times in a specific year. We are very thoughtful about the fact that we're not trying to overengineer the complexity of what we're doing, but how do you strip it down to a very base level to make sure that we're really nailing that customer value proposition from speed as well as increased value on assortment.

And maybe what's behind speed? If you just focus on that dimension, what drives those that are faster? Why are they faster?

I think that is very dependent on markets that you sit in specifically. In economies like the United States, you have an established set of supply chain operators. You've got your FedEx and your UPS, your USPS to provide a lot of last mile. You have your 3PLs which do a lot of the fulfillment for your long tail e-commerce assets. The question that we have been asking is how do you start to integrate more of that supply chain and drive through technology in a way that can just shave some of the handover between these separate operators, can shave time off a transaction. I think our best example of that has been Korea where you have a fully integrated supply chain in the context of Coupang. You have the same very similar setup in India with Flipkart and with Amazon India. You don't yet have that in the United States. You don't have it to the same degree in other established economies that have more traditional existing footprints already standing up.

Speed is a fascinating one. It's like hard to argue that it's an advantage. And it seems to have been one of the key advantages for technology companies in general. Alex Rampell has this great idea of sources incumbents being about whether the startup can achieve scale and distribution before the incumbent can achieve innovation, who can surpass the other one faster. In what areas do you think there is the most innovation today then in e-commerce? I guess I've been conditioned to just think like in Amazonian terms, better, cheaper, faster are the dimensions that matter of online retail. What do you think the areas that the most innovative companies are focused on?

There's no question that that's right and it has provided the model for the rest of the world in terms of how we think about what matters. But I do think excitingly for all of us, what we saw in the pandemic was Amazon not capable of fulfilling that promise that they've been really good at fulfilling. It provided a really nice opportunity for others to step in and make significant investments. I was listening to your interview with Tobi from Shopify recently, and thinking about the investment he's made and trying to be that full stack provider to e-commerce suppliers. Walmart stepping in and thinking about how do they use their fulfillment differently. I think this is a less obvious point in time that Amazon is going to be everything to everyone. I think it is a more interesting time to think about how you can innovate. I think one of those areas we've been watching really closely and I still sit somewhat on the fence on is live and social commerce innovation that's happening across the Eastern world. I think there's very explicit reasons why that has been so powerful. I think there is a lack of the high quality physical retail and there's a lack of trust with existing brands. I think there's a culture of people selling to you in markets that we don't have in the US. So maybe we can suggest all of those things are reasons why live shopping won't come to the US. But on the flip side, I think there is really no question that the engagement levels are much, much higher with video based content. And so we see that in platforms like TikTok, they have just taken off like wildfire. You see that with a younger generation that really prefers to consume content in that video based format. We recently made an investment in a company called Firework because we believe that there will be a significant transference to video as the format of consumption for commerce in the US. We haven't seen it in meaningful scale yet. We've been watching very closely for it. What we do see when we look at the underlying customers that firework works with is just a big ramp in conversion factor relative to existing websites. And so what does Firework do? With any individual company anywhere from the PGA, to Muji the Japanese retailer, to your grocer, they allow these partners to integrate video very easily and quickly and affordably into their stack, whether it's web or out based. The conversion rates that we're seeing are significant multiple of what they're seeing for the non-video based purchasing. Do I think we're going to see the incredible velocity of video commerce in the US that you've seen in China? Not to the same degree. I don't think they're forcing factors are the same. But I am really excited about the fact that there is a lot of optimization to come when it comes to conversion and engagement, particularly in this point in time where Apple's security changes and Google security changes are impairing a customer relationship. I'm really excited that we'll be able to make up a lot of that last round and surpass it from a conversion level when we introduce video.

Are there unique characteristics or attributes of people leading these kinds of businesses relative to all the categories that you've invested in through your career? But if you just think kind of generally of the prototypical qualities of a great CEO, are the things in commerce specifically that you over select for when considering the founder or management teams?

I've been thinking a lot about SoftBank and the founders that we tend to back. I have a pretty myopic view. I do our consumer e-commerce investments as opposed to across biotech and enterprise and other categories. But in my world, we certainly do have a bent to a founder that more often than not is an immigrant, does have a wider world view, perhaps has actually come from China or India and has a more natural tendency to look outward and look at innovation. If you look at the list of companies that we've backed over the last couple years, it has been a really international cohort of people who are very curious about different trends around the world and trying to think about how to model them to our home country here in the US.

If you had to send some Western investor you cared about, an American investor let's say, to one country to have their socks blown off, where would you send them?

It would be hard to argue any place other than China to have your socks blown off. I'm constantly thinking about what a gift it was to join this wild organization in 2015, 2016 time period when the US investor base was really myopically focused on Silicon Valley. That wasn't that long ago, and yet it was pretty strange to be spending time internationally. I think the thing that knocked my socks off was just the scale and velocity of company build that happened in China. When I joined in 2015, we really didn't have a China strategy. We believed that we would accrue the value of China through our position in Alibaba. And we thought between Alibaba, Baidu, and Tencent. That would be most of the Chinese technology market. And man, were we wrong. And so it has been really fun to just watch the scale of innovation on a consumer side stand up. There are so many examples of how different, the scale of ambition and the velocity of build is over in China. I think obviously the last year has been very complex and hairy and has caused a lot of investors to rethink their thesis there. But I do think it is a really beautiful testing ground for really turning everything you now upside down.

Maybe give an example of upside down. I know there's lots of examples here. And I'm also curious what barriers there are to life shopping, or whatever the example is, not getting to Western hemisphere for some of reasons. What are those things that are most upside down that they've tried that's worked that we haven't done?

I'll never forget actually heading to Indonesia in 2015. I was working with a colleague at SoftBank who had a product background and he looked at the app this Indonesian e-commerce company was operating. And he said, "Man, that's a mess. How messy it is. It's so distracting. It's so cluttered." And he's right. From an American perspective, I think we have really veered to a very clean UI in terms of what we build in the US. You've seen the exact opposite in China, in Indonesia, in India. You've seen countries really establish a consumer preference in a single landing page that offers them all of the consumer services that we might in the US fill our homepage with. So I do think there's a very different aesthetic that was way too easy for us to suggest was the right way. Maybe right for our culture, not right for other cultures, but I think it's a really stark example of just how different these countries are in terms of consumer preferences.

As you're focused on consumer e-commerce online sounds specific, but I know there's lots of subcategories, what subcategories do you spend the most time in? And maybe this harkens back to the tailwind question specific to this area. What are those sort of sub sector, subcategories, whatever you want to call them, that you find yourself most drawn to or spending the most time on today in 2022?

I'll just flip back to 2021 because that wasn't that long ago. We spent a lot of time thinking about the least penetrative categories of commerce. I think this wasn't terribly different from a bunch of the crossover investors who have historically looked at the world in a much more top down macro oriented way. We really looked at food and said we feel like this is an area that has meaningfully taken off in other parts of the world, where the economics of the businesses have been proven in other parts of the world, where we have figured out hybrid, if not fully digital approaches to food in the US. We've really only done that in the construct of prepared food delivery, i.e., DoorDash or Uber Eats. So we spend a lot of time in 2021 trying to think about how will food consumption and purchasing change in the new forward 10 year economy. We spent a fair amount of time trying to think about e-commerce enablement. I think because we have such strong established high quality retailers because we have such dominant online retail platforms in the US, we haven't really seen as much innovation trying to figure out how do we actually get that next layer of providers in front of customers. We spent a fair amount of time thinking about how do we support innovation, whether that is through helping bring best NextGen, best breed tools to e-commerce companies to reach customers. So companies like fabric or Firework as I mentioned earlier. And we spent a fair amount of time thinking about healthcare. I think that's a complicated one for me. My parents are actually in the medical field and I grew up believing healthcare was really complicated and ugly. The incentive systems aren't logical in any rational way. There's not only regulation of course, but there are payer provider dynamics that are just messy and hard to find our way around. So we tried to stay away from that payer provider relationship and think about how do we actually solve fundamental based needs like loneliness in this country. And then we spent a fair amount of time thinking about, is there a new creator economy being scaled by technology that we could participate in? There's a lot of buzz around the concept of a creator economy. There are a lot of companies that have been funded, but I think the big question for us is, is there an economic model that supports a really long tail fragmented set of creators in an exciting way? And we ended up making a pretty significant investment in that category as well.

Say a bit more about the models that maybe don't work that you've encountered there. I think there's been lots of, I don't mean to go from that phrasing of the question to an example which is Substack, but this idea of providing a platform toolkit that monetizes by taking a percentage of the commerce that's enabled in much the same way that a volume based payments company or Shopify or someone else might participate in the upside of what it enables. I'm just so interested by these kind of relatively low permission or permissionless creator models that monetize and align their success with the success of the creator, the limits to that, do they graduate from that. All the lessons here would be so interesting because it seems like literally everyone wants their version of whatever it is that they're building in e-commerce shop, a content property, whatever. Everyone wants to do this, even very established people. So what have you learned about those business models?

I think it's another great example of something in which we are very much trailing the east. There are large companies in China in particular in Southeast Asia that have really been set up to accommodate providing customers with the trust that they need in brands. And so just taking a big step back, we in the United States have brands that we trust. You trust the retailer that you shop from because you know returns will be processed. You trust the brand that you purchase from because you know the quality of goods will be high. There are celebrities and trusted individuals in America that can stand up and speak to product quality and have for a long time. What we saw developing across Asia, which was a very different model, was this long tail of influencers. It was effectively taking people who were just good at sales and putting them in front of consumers with product to authentically speak about the quality of that product. So for a long time, we looked for this in the United States and really struggled to find scaled business models because there are structural reasons why I think it is a little bit less relevant in the US. Where we ultimately got very excited was finding a large scale platform that not only provides the economic wherewithal for creators to build a real business out of utilizing their voice, but also as a very significant partner to some of the biggest retailers in the country. We invested in a company called LTK or LIKEtoKNOW.it, which is very under the radar Texas based company founded by a creator herself and her husband. Then they have become some of the biggest distribution partners to retailers like Nordstrom's, big partners to Walmart, big partners to big retailers who are fundamentally thinking about how do we in a more authentic, trusted way reach a new consumer base. I actually think it's been the pairing of both those models, the model that you mentioned at the beginning, which is how do you take a small cut, very small cut, almost the infrastructure layer like FinTech assets have established, from creators that allows them to build their own small businesses become economically viable on their own, but to also be a distribution partner to retailers in a way that provides advertising budget as well to work with. It's through matching both sides that we've found an economic model that we're very excited about.

Does that functionally turn into or start as a marketplace? Can I think about this if I'm Nordstrom let's say, that I get to go to this marketplace and sort of pick and sort through a number of people that I might want to have these partnerships with and then I rely on them to do it in whatever channel they do it in? Is that kind of conceptually right.

When I started my career, the media outlets in America were pretty consolidated. It was your traditional offline TV, terrestrial radio. You had big consolidated breach that maybe is myopically as could get down to a city level through some sort of regional network. What these new networks allow is for you to actually quantify and qualify what you're looking for in the influence you work with. These networks allow you to come to LTK and say, "I'm looking for a voice from the south, someone in this age, a set of parameters, someone of this demographic." Looking for that individual who really resonate to a specific audience base. They will then work with those influencers to get their product in front of that influencer's own owned base of consumers. And so those own bases of consumers of course come through big social platforms, but also reside on the LTK app as well.

For some reason, Cameo is popping to mind of something sort of as an analog. Obviously it's producing something very different. Is that roughly what it feels like? Cameo's challenge of course is to sign up great supply over and over again. Is that conceptually a useful analog?

I think it's a really interesting analog. Now, Cameo of course is a one to one model to my understanding where they're producing content on a singular basis for a singular fan that has purchased it. The question we keep coming back to for scalability is how do you reach a broader audience than a one to one model, where in LTK you are that influencer is speaking to their entire network of audience. I think similar but slightly different in terms of less targeted on individual basis.

What should Western investors know and understand about Coupang?

It's such an interesting reflection as I look back at the course of our time with Coupang. When I got involved with Coupang, we had just sold Flipkart to Walmart and that journey had been taken to an end much faster than I anticipated, but I learned how much I really loved that model of owning the entire customer experience in a way that previously had not been shown by competitors in market. When I spent time with Coupang, they'd actually met a lot of Western investors. And I think most Western investors had passed on the opportunity with the fundamental belief that Korea just wasn't big enough. It's why you see Coupang today talking about how big Korea is because they had heard, they'd learned over and over that's what Western investors care about. Western investors also tend to look at a pretty developed economy where you have meaningful commerce penetration, e-commerce penetration, and you have some large conglomerate and large retailers. But my experience with Coupang was just this beautiful unwrapping of all of the nuances why Korea doesn't look the way Western investors expect them to look like. So the big offline retailers aren't retailers in the form of a Walmart. They're not making one people purchasing with purchasing power and long assortment. They're more like real estate companies that are leasing space to small merchants. You have a really under retailed economy with a very limited skew count with very high prices, which is almost just a perfect setup for e-commerce. I believe that Korea and e-commerce penetration should be higher than it will be in other parts of the world because the offline experience is not sufficient to support a competitive product. Then you turn to the online world and there are a handful of e-commerce marketplaces that look akin to an eBay in terms of the experience where it is a long tail of assortment listed by merchants and they don't handle the fulfillment experience. That is fundamentally a subpar experience to a fully owned channel like Coupang has built and invested and developed in. They developed for a large number of years. I'm a believer that I think this company will continue to compound market share because it is offering much faster speed with much larger assortment with better pricing than I think Western companies experienced as they look at other economies around the world and try and pattern match, which is what we're all trying to do.

Can you tell me everything you've learned about vertical integration in this world. Because it's just so interesting that we're talking to Tobi recently at Shopify about a Shopify fulfillment network, which is obviously just like a crazy hard thing to build. And we talked about how hard it was to build, but that almost it's an imperative. If ultimately you're serving merchants and enabling commerce, you kind of have to control maybe down to the person that's dropping the package at the front door if you really want to make it better. And it just seems like a lot of the... There's Coupang, Amazon now, Shopify. Some of these monsters are all realizing that more and more vertical integration might make sense. What have you learned about all of this? Because it affects the business model, it affects margins. I just love to hear your lessons.

The vertical integration that Coupang has pulled off. I put it that way because this is not an organic build that I think could have... It, of course, was an organic build, but one that was prefunded very significantly by SoftBank. We had $3 billion of capital put into the ground on the thesis that it was the right thesis and it was worth making that upfront capital investment into it. I don't think you can do it successfully unless you throw all of your attention and focus as an organization against it, because it is so hard to do. I think we're going to see a lot of examples of companies in the Western world where they are building fulfillment and logistic networks from the ground up, but haven't figured out the efficiency required to operate them. And that is something that Coupang is just exceptional at. They really drive towards efficiency first before they scale, as opposed to scale and then try and figure out how to push efficiency through a big organization, which is next to impossible. I think the benefits of that vertical integration are exceptionally clear because it has allowed them to be very creative and innovative in terms of how they think about utilizing the advantage they have. We like to talk about some pretty simple advantages, but how do you rethink packaging in a way that increases density that you can get into the form factor of a van? How do you eliminate the context of needing boxes? How do you think about a returns network? I think these are all really interesting applications that continue to improve density and therefore economics of your business that require just an explicit focus on rethinking aspects of your business. That's very hard to do when you're not spending your full attention focused on it. As we have been trying to think about how do we mimic some of the examples of that in the US, we have found it really hard to do if we're focused on a specific point, if we're focused on just last mile delivery, if we're focused on just sortation, if we're focused on just fulfillment. It really is that integration that allows you to rethink form factor, it allows you to rethink experience that is pretty radically different. And that just requires a big capital efficiency and a big capital investment both at the same time.

What's everything that you care about or have learned about? And this could be gross margins, it could be operating margin. I don't really care. It just seems like margins is such a key component of a successfully scaled up e-commerce business. What have you learned about margins?

I actually love this pivot that we're in now from a market that was focused on growth to one that's focused on margin because I think we have made a mistake, those of us in capital provider seats, over the last handful of years in focusing companies too much on revenue growth. Because in that process, you end up building large companies that are very inefficient and it is incredibly hard to move backwards and improve margins from there. It just requires too much of a cultural shift. It requires a personnel shift. Just take a step back and think about how do we orient ourself with these operationally intensive businesses. It is first and foremost, can we prove out margins on small scale? So can we prove it out in a specific geography? Can we prove it out against one specific customer? What does that margin base look like? Because fundamentally, it should only get better from there as opposed to worse. I think when we look at businesses and we say the economics don't make sense today, but we can improve them by layering on adjacencies and other services, we're setting ourselves up structurally for a lot of pain. We have to prove out that core business model works. And that's where we spend a lot of time looking at contribution margin.

Not just in e-commerce, but in just so many businesses is you hear this thing of, "When we get to X or Y our margins will be Z." Well, the whole strategy is we're going to mature into higher margins. And then very often that just doesn't happen, or it takes longer, or they don't quite get to where they were projected. And sort of the whole investment decision was riding on this steady state eventual margins. How do you evaluate a younger company and it's potential to drive margins, understanding that they're going to be worse at the beginning and they're going to get better over time? How do you even begin to wrap your head around how something might work even if it's really young company?

Maybe I would ask, does anything ever happen unintentionally? Just as a starting point, I could give you a large number of companies, arguably all of the companies we've invested in where we have had to improve margins over time, where the fundamental unlock came through improving margins. And I am a believer that with scale amassed, you have more power to extract margins, that sort of undeniable truth that that should be true. The question is, how do you make that true? We have had to make big bets. I think Coupang was a very obvious big bet, Flipkart was a very obvious big bet of companies where the unit economics were not positive at our time of investment. And we had to believe the operating efficiency would get better to support positive unit economics. And I think what we were ultimately surprised by, and maybe this is obvious in retrospect, as you amass scale, your negotiating power gets better in combination with the operational efficiencies which are core to the heart and lifeblood of these companies has actually been a bigger lever in getting that unit economics positive position that you need to be in. This is a funny job because you are making bets about things that do not exist today. Generally speaking, I find myself getting irritated when people say they look for big TAM, I can't even think of a big consumer company that had a big established TAM when it got started. It doesn't logically make sense. If there was a big TAM, somebody would've eaten it. I look at the great list of consumer companies around the world. They all lived the experience of investors telling them that TAM was too small. I think the question that we spend a lot more time thinking about is, what would have to be true? What levers do you have to be able to pull to either improve a customer experience by a factor of five or 10 times? Because a consumer isn't going to stick with you because you're marginally better. So how do you make it significantly better? Or how do you meaningfully change the economic value proposition? Think about those two factors in the, what do you have to believe landscape of what really matters back to where we started this conversation. Those are the big bets that we end up making and then tracking very closely. But I will tell you, in every great investment, the underlying drivers and how they have operated have not mapped to the forecast that we built at investment. We've been surprised in every case.

I love the example you gave of the van and how that could drive weird efficiencies of package sizing or things like that. What is the most extreme or insane version of an efficiency game or pick up that you've seen any company employ in your history?

I like to frame these in terms of, when you look at a P&L and you look at unit economics, which was something we spend a lot of time looking at, we think about what are the really big buckets in any particular set of unit economics, which is basically your P&L stripped down to a unit basis. If you asked me what is the most extreme pickup I've ever seen, it has been in extracting further margin on product. It's just negotiating leverage when you gain scale. That's because the businesses I work with fundamentally, their COGS end up being the majority of their cost structure. The second level efficiencies are always those operating efficiencies of how do we actually take a dramatically unit economics negative business, because we are subscale in six regions that we have determined to have the ultimate ability to become scalable. And we've decided these are our six hubs that we've got to get to scale. And then we're going to rationalize along the way. I think those wins are very hard fought because they're on a unit level. It's every day you're dealing with the crisis of human capital, of inflation, of not having people show up to work with COVID. You're dealing with these crises every day. And so they're not the big needle movers that negotiating a new contract is a big immediate needle mover. In my world, there are actually very few things that kind of blow your mind because something happened. It is the cost, the hard one cost of every day getting incrementally better in very small ways and then getting to look back at a 48 month period and say, "Wow, look at how radically different my business is than it was." But I don't know that they'll blow your mind in terms of the unit variables.

Having talked to a lot of founders that have met with SoftBank and even with Masa specifically, one thing you always hear is, or a consistent piece of feedback for companies SoftBank invested in and didn't is, you're not thinking big enough. It's such a fascinating thing because usually these companies are thinking pretty big and moving pretty fast. And I know this again harkens back to the tailwind concept, but is the external perception of SoftBank, which I would sort of sum up by that, think bigger, think longer, think more, is that right? Is that brand that sort of slides that sometimes people make fun of Masa for putting up which are overly simplistic and often hilarious and the golden gooseling, the golden eggs or something like this? How much does that square with reality inside of SoftBank versus being sort of an oversimplified take on something much more nuanced inside?

The first thing I'd say is I've had the advantage of working on three different investment platforms and have been in this world for a very long time. There are so many ways to build a great company, and SoftBank is just not the right fit for the vast majority of companies. And I don't think venture capital necessarily makes sense for the vast majority of companies. So knowing who you are and what you're targeting and having a clear visual of who you want to be is important because once you jump on this venture capital ride and once you jump on a SoftBank ride, you're committing to something very different. You're narrowing your set of options. I do think that perspective is broadly speaking right. I think that Masa has this incredible ability to clarify and to boil things down to a very base level. And that's why we all get to kind of chuckle when we look at the slides because they're so simplified. The thesis is right. He really believes in an aggressive style of build. One that moves faster than other traditional sources might tell you to move. That's obviously not going to work for every business. It's not going to work for every business that we've built, but I think it is instinctually aligned with how do we generate returns as a fund. And you can't build a fund of this diversified set of companies without believing that you're going to generate more than two to three times return on each individual company. It very much is core to how he has built his own business in terms of enormous ambition and aggressive style of build, but also in terms of how do we think about driving returns for LPs?

Well, one of the things I saw you talk about, and I think it was like a 2018 interview, something around then, you made this reference to maybe having a $6 billion pool of capital and then that became $100 billion dollar pool of capital. I'm sort of staggering to think about deploying that much money into companies that are relatively young. Just tell me what you've learned about that size. The pros, the cons. The cynic would say you can't possibly deploy that much money at high rates of return in young companies. Obviously, you just outlined why it's a very specific kind of company that becomes a SoftBank back company. What role does size of assets, does raw assets play, in your life relative to your expectations coming into SoftBank?

First thing I'd say is we've learned a lot. I've lived in three pretty explicitly different SoftBanks. I lived in SoftBank Group before the Vision Fund was started. And our strategy was actually much the same as it was for Vision Fund 1. Let's just establish clear market leaders and let's aggressively capitalize them to continue their pace. In Vision Fund 1, we were writing $1 billion checks into companies. We were just writing them very, very infrequently. I think our asset selection was probably pretty good then. I think it was astonishing to the outside world to understand how you could put a billion dollars into a company. Just astonishing. When we launched Vision Fund 1 and had $100 billion, it allowed us to continue the same strategy but increase the velocity of the number of companies that we were investing in. And I think that just... I don't know if that terrified people or made people want to laugh until they couldn't laugh any further. There was a fundamental belief that probably by the way is largely correct. Too much capital causes a lack of discipline, which causes fragile businesses. It causes bloat. It causes a lack of focus that keeps you from reaching the end of your journey. There were so many lessons learned by the entire technology investor ecosystem over a long period of time that supported that you couldn't put this much capital to work in the technology industry. And Vision Fund 1 was really hard for people to comprehend. In Vision Fund 1, we backed north of 80 companies and had an average check size of $600 million. And I just don't think that the world understood at that point in time that companies could absorb this much money. We can talk later about absorbing it smart, but I think just can companies take that much money? I think what was really astonishing to see for me almost the watershed moment was when Ant Financial raised $14 billion back in 2018. That was the first time I'd seen a list of investors that was more than a page long who could write a $200 million check. That really didn't exist in '16, '17 when we launched the Vision Fund. So the worlds got really excited by the concept of technology being bigger than we thought it would ever be and being able to put this much capital to work. And I think a lot of different factions got excited to put money to work. You had the crossover funds start to come to being public markets oriented investors who started to go into the private world. You had corporate investors, you had LPs, you had the launch of individual investors and syndicates and SPVs felt like everyone was coming into this market. The last couple years have basically been the Vision Fund in distributed form, meaning we were all playing what Vision Fund 1 did together, but with hundreds of players around the world. What were my lessons from that period of time over the last seven years? There have been so many lessons and I hope that we're all paying attention and we're all learning and listening along the way. It is really hard to put a check of that size into an early stage company. There are just so few companies that are set up to absorb and smartly deployed. I think the original instinct is to just go as fast as you can to think about expansion, but the core reality is smart capital allocation matters a lot, and it's really hard to do that if you haven't even built up a strategic finance function within inside, within the business that doesn't partnered with the CEO. As I look back at Vision Fund 1, there were many instances of companies that were over capitalized and therefore weren't good deployers of capital. I think we learned that it's really hard to put debt on the balance sheet of a fast growing early stage business. Their businesses are still too volatile. And to ask them to subscribe to a set of covenants most likely is going to put you in a situation where you have a default on your side. We learned about asset heavy businesses or capital consumptive businesses. When we launched Vision Fund 1, we asked ourselves the question historically ventures never been able to fund capital consumptive businesses, but why not? Look how much money we have. Should we test the laws of physics on that? So we backed some companies that were very capital intensive and realized really quickly without very strong operational controls, it is a beautiful way to consume a lot of capital fast. And I think in retrospect, so many of these lessons are very obvious. I think we did feel the need to test the bounds of what was right because a market was constrained, versus what is just fundamentally right. And hopefully we've learned a lot of lessons. I do think a lot of our investments were very spot on. We've talked a little bit about Coupang and about the fact you couldn't build that business unless you were willing to prefund an equity, the entire infrastructure build that no bank would touch. We haven't talked about Fanatics, which was one of our first investments in the Vision Fund where we put almost $900 million into the company. And that is an extraordinary mature management team that has built an extraordinary set of assets and a real moat around that business. There is a long list of companies that have been very strong performers. I think that is a validation of a lot of the core strategy. It's important to talk about the mistakes. It's important to talk about what we got wrong and try and figure out how not to replicate it. I think maybe that's more important than talking about what we got right in the sense, but I do think a lot of things we did get right. And they were fundamentally questions about how do we attack industries with capital that people have written off either because the market is too small, the TAM is too small. How do we get the structural things right and make sure we have a disciplined enough team that we're really thinking smartly about capital allocation with that capital?

You said something earlier that was so interesting, which is that a common mistake is building the scale and then trying to drive efficiency when it should be the other way around. Is that the cleanest way to sum up the lesson of digesting that much capital? That you need to focus on efficiency first and smart capital allocation first, and then go for scale, versus if you're Uber, trying to open every city all at once before perfecting the model of a city to city? Is that kind of like the core lesson do you think?

I think Uber is an extraordinary example that it's going to be very, very hard to replicate. People love to use examples of Uber or Alibaba or Amazon, but the reality is, it's a very special set of circumstances in time that allow to build those companies. And in a market, a wash in capital, it's just a different environment than Alibaba was in or Amazon was in, than Uber was in at their orientation or their launch. So I have seen so many companies get big before they have figured out operational discipline and then realize too late that there is just no time to course correct. I really am a believer that you need to invest as a founder. You need to invest in a really smart, financially oriented right hand person who can help you see around corners on that capital allocation, who can help you understand your balance sheet. So often as I sit around board meetings with founders who are these beautiful visionary optimist surrounded by their venture capitalists who are beautiful visionary optimist, no one knows how to read a balance sheet, no one's paying any attention to the balance sheet of these businesses. I think it is incredibly important to make sure that you have visibility into the financial aspects of your business and are really thinking about capital allocation from the beginning. And that at its very core is thinking about operational efficiency. I think it's a really interesting transition as I look, this is independent of the market we're in, but what we did with Vision Fund 2 is we started to invest in earlier stage assets. We said, "Vision Fund 1, we backed all the big companies in the world and we'd like more diversification. And we think we can go slightly earlier." The smaller checks. So Vision Fund 2, our average check size is maybe a quarter of what it was with Vision Fund 1. And we were backing series B companies. The biggest differential in my mind between the series B and the series C companies, series B companies had only ever really raised in the past by off the basis of that founder's charisma and our ability to recruit and on the basis of some early inclination of what a market might look like in early product. But at that point, most of these founders have not really learned that they are making financial contract with those later stage investors that here is a financial plan they're expected to hit. But it really comes down to an under investment in that financial aspect of your business, understanding that financial aspect of your business. We spend a lot of time talking about how do we work with companies to strengthen their financial organizations, to help them understand strategic finance and operational finance, because it is understated as you get more mature. And I think it is fundamentally necessary to raise capital from growth investors.

I would love to talk a bit more about this because I think thinking of companies as products that investors and employees buy is a really powerful way to think about a business. Everyone's focused on product and distribution rightfully so. Obviously those are the real drivers. Without those, you're definitely not going anywhere. But I think the lesson that founders are learning now as capital becomes a little bit more expensive and scarce, is that your company is a product and investors are the buyer in many ways. So what does great look like here? Is it hiring a CFO earlier is one thing you could do? But as you dig a layer or two down, what does great look like for those series B companies that understand this earlier than most? What actions do you consistently see them taking or recommend they take as they think about their later stage investors?

And that companies always turn and ask what specifically are you looking for, what specific metrics do you want us to hit. The reality is, there is just very rarely a magic number that we're looking for. We are looking at a company in the context of an overall picture. We're looking at it in the context of the team and product. But really, where we as growth equity investors start is an understanding the core economics of the business. So we are always spending time looking at unit economics. We are always spending time looking at cohort retention. We're always spending time looking at how does engagement change over time. I think that requires that your organization is collating data and parsing it and starting to think early about what are those things that your growth equity investors are going to be looking for so you're prepared to have those conversations. So does that mean to have a CFO onboard versus a VP of finance? No, but I think it really does mean that you need a strategic finance person. You need someone who can help you think through key KPIs that are going to be the most obvious set of KPIs and help you understand them. You can't just put them together. But you have to have a real view on them. And so that's why I do think of it as a partnership that needs to be invested in early. For every company we work with, we sit down and we say, "What are the most important levers of this business? How are we tracking them? What does that trajectory look over time? And how are we hitting that trajectory on an actual basis relative to forecast?" And that's just an expectation that we have, that our businesses are capable of talking through that. Not every business is capable of talking through it at the close of investment, but I think they have to show indications that they are numerically oriented in a way that gives us confidence that they will be able to build a business that will generate the type of returns that will compare to any other asset we look at, because we have the distinct advantage of being able to look at a lot of different companies and compare them to each other. So you have to help us build confidence that you are going to be a better capital allocator than those around you.

What do you think about the danger of premature optimization around a set of KPIs? Like anything, you start measuring something, you tend to start managing and the number tends to get better, right? What you don't know is what the hidden cost of that are. Is the product not maturing in the right way at the expense of making this number go up into the right? I'm sure there's no one right general answer here, but how do you think about that delicate balance of, "It's not yet the time to start optimizing this KPI, we still need to make the product better"?

I think about that all the time, because one of the learnings that I've had is that every decision you make as a founder will have an unintended consequence in probably three. The really brittle businesses that get built are those where you aren't paying attention to understand what consequences are coming your way. To the specific question, business building is messy. Every single business I work with is a mess, including big corporate businesses, including SoftBank, including Amazon, including Google. It's really important to just acknowledge it and say it over and over again. Every business is a mess. And the question is, can you, as a business leader, identify what really matters and focus on making sure what really matters is happening. Are you going to get that wrong? Absolutely. I mean, this is a game of learning for all of us. For me, for you as an interviewer, it's for the operators who run businesses. If you form a static view and refused input new learnings, then I think you've already made a mistake. I think what we around the table hopefully as board members are doing are creating a safe space where you can say, "This was what I had conviction in. We went and tested it. This is what we learned, and we think it's time to change." And I think it's why it's so important to build a relationship of authenticity and trust because what I have found is, the founders who lean in and share the mistakes and the learnings and how they're changing are the founders that I build the best trust with. And those become the relationships that you get really excited to lean into as an investor. I think that the founders who feel the need to keep static and metric because that's what they told us they would do and aren't comfortable, aren't confident enough to tell me that it was wrong, that's where relationships don't develop in a way that you really need in a down market like this. I would encourage everyone to lean into the radical idea that everything is messy. It is worth really bringing that people, your constituency, around the table with you. Your investors, your employees, bringing them around the table, being really authentic and open about what's not working. And then making sure that you focus the attention on what you believe really matters most. And I think that is a good way to correct for all the learnings that we're amassing along the way.

I'm trying to think of a fun way of measuring this. The idea I'm getting at is how important this specific founder is for e-commerce businesses at the stage that you're investing in them. And I always think of the sports analogy of wins above replacement, where if you just put the average first basement in place of this great first basement, how many losses would the team give up or wins would the team give up? Is that number really high? Tony Xu is someone that comes to mind, where at DoorDash where if you took Tony out of the DoorDash story and replaced it with just a very good CEO, it just seems like it wouldn't work at all. He is just exceptional and right for that specific business and opportunity and how it's been built. Is that generally true? Do you think that maybe the leadership is even more important than we all kind of acknowledge that of this?

I sit in a camp where I think there are very, very few exceptional companies and very few exceptional leaders. I mean, I think if we walk away from this grand experiment with 20 exceptional founders out of a 300 founder portfolio... And if by exceptional, what do I mean? I mean, building a $20, $30, $40 billion company, I think we're all going to feel really good about ourselves because there just aren't that many people on the planet who can both be high enough to set a vision who can understand the thematics of setting the strategy and where you need to go, but can also dive deep enough to really understand the core drivers of the business. There are so few people who can do that high-low transaction transition on any given day. When it comes to these really operational businesses, I think you have to be someone who can dive deep enough to really understand the core of the business. I think you have to be analytically minded. You have to be able to run an organization with some quantitative framing. Because the economics of these businesses are so hard, you have to get them to massive scale to make the economics pay out or something has to change about the economics. I think DoorDash has shown that consumers are willing to pay far more than anyone thought they would for delivered food. I never thought that the consumer demand would stretch as far as it has so I think that has been an extraordinary learning there. But I also think Tony has been just a beautiful operator. You asked, are e-commerce CEOs different. I think they are. I really think you have to be extraordinarily disciplined because you are starting from a position of having impaired margins or an impaired economic profile. And the question is, how do you improve your economic profile to just match an offline profile? And then how do you support it getting better? It means you have to be really focused on a couple things that matter in your business as opposed to distracted by all of the other adjacencies you could lead into.

What are the major sources of that relative impairment? So why are e-commerce companies versus offline companies starting from a worst place? What drives that difference?

I don't start from a position that I so often hear in founder pitches about how traditional operators aren't good. I mean, I think we so often hear that insurance companies aren't good or retailers aren't good, but the reality is I actually think these companies are extraordinarily good. They've built very, very efficient businesses. Insurance companies have built very quantitatively adept businesses. I start from a position that I think if you try and compare yourself to a Walmart or a target as a retailer, you're competing against a really strong efficient organization. And what are the margin profiles on these businesses? You're talking about single digit margin profiles. When you know you're starting to position, once you get past product margin and then delivery margin is negative, you have to get to significant scale. You have to find ways to automate your processes in a way that can just get back parity from a margin profile perspective. And that's why we haven't seen a lot of digital businesses surpass the margin profile of the big offline retailer shop. We're still too human capital intensive. There is not enough automation in these businesses. Now, what these businesses have is growth. They're certainly eating consumer discretionary spend, but I think we all have to work harder to prove that we can have an advantaged economic profile relative to traditional businesses.

If I personally spend my time doing investing at the early stages now, went and shadowed Masa for a year, how do you think I would change or come away different? I guess that's another way of asking how you have changed or come way different by virtue of working with him.

It depends on the period of time. Every single one of us, whether we want to acknowledge it or not, are a product of the market environment we're in. What's so important for founders today, almost the first principle I lean into is understand the market you're in because you have to learn how to operate to it. This man has the ability to build very strong conviction in very big ideas. He really doesn't mess around with the small ideas. He doesn't get distracted by details. He builds a big vision that is supported by fundamental economic tailwinds, and he pursues it with a lot of clarity. But the other thing I think that he has, which I think is beautiful, is he can change on a dime and turn and do a 180. And as I look back at my 10, 12 year career before I joined SoftBank, for most financial institutions, for most investors, you can't do that. You've made a covenant with your LPs. You have defined your strategy. You said, "This is who I'm going to be. And I'm going to be this for the next three funds as I come back to raise my next funds. My strategy is what I will do." Organizations tend to be pretty sclerotic. You say, "This is who I am. It's how I do what I do." It's why you don't see that much change in venture outside of new entrance. Masa's the opposite. If he believes something is fundamentally changing, he can pivot a big organization so fast to follow that thematic. And I think it's why in this wild period of upheaval in the capital markets over the last five years, I've been in the capital markets for 20 years, I've never seen change the way I've seen it in the last five years, it's why SoftBank has been able to continue to stay in the forefront of headlines. Now, we can debate whether headlines are good or bad. Most of these headlines are bad. But it does really help to be able to orient your business as quickly as he is able to orient it with the big fundamental frameworks guiding his decisions. That's the sort of aspect one. I think something else that's beautiful about him is he really does operate in a high trust environment. This business is so hard in that it takes so long to figure out if anything you're doing is right. The feedback loop is just wild. And most people don't have the luxury of having a long time to prove out what they're doing. Their reality of partnership dynamics, around firm dynamics, dynamics with your LPs, is nobody really wants to give you 10 years of doing things that look wrong to everybody else to prove yourself out. I think one of the beautiful things about Masa is he is someone who grants a tremendous amount of trust to the people who work in the investing organization while there is of course accountability in every investment organization. I think he is really supportive of people doing what they believe in. And I think he is the first person to stand up when he makes a mistake and say "I was wrong." We see it over and over in our earnings calls. We saw it in the case of WeWork, we saw it last quarter. Masa stands up with humility and says "I was wrong. I'm going to change. Here's what I'm going to do different." But he really takes personal responsibility and grants trust very freely. And I think it allows organizations, it allows founders to think very big. Nobody's operating from a position of fear. People are operating from a position of optimism and excitement. As I take a step back and I say despite all the tough headlines we've had over the years, I feel like our brand has been extraordinarily strong with founders. Founders love the concept of SoftBank. They love the idea of Masa, they love someone who grants trust freely, who really believes in them, who is doing this not to make money but solely because he wants to work with founders and he wants to build big things. And that is sort of an intoxicating position to be in the middle of.

We've talked a lot about certain founders, but you have the benefit of having in different styles of investing. When you think about great investors, maybe especially outside of SoftBank, who comes most immediately to mind? And what about them is exceptional to you?

This almost harkens back to the earlier comment there are so many great ways to make money. The concept of great investor, I think you have to apply pretty broadly. The thing that is striking about the venture capital as a class is, it is so much more driven by luck and good fortune than traditional investing is, public market investing, private equity investing. These are very quantitative roles where you are really orienting yourself around math and understanding businesses in quantitative forum with an understanding that management teams can be changed in and out when they're not performing. It is a much more established, expected set of operations. Venture is just so different. Their reality is this is a people business. Big companies that are built, are built on the back of tremendous aggregation of talent, of people. And that in some ways is very hard to predict. In every way, it's hard to predict. I look at venture capital as a class, and I think that the people we term to be great investors often are the people who've been standing the longest. Now, do you have an ability to continue to amass capital to invest? Or have you been around the table for 15 years to be in and out of cycles? Have you been fortunate enough to be on a one or two or maybe three journeys that have worked? But there's so much luck involved and patience. I do think the beautiful thing about this industry is the longer you are in it, hopefully the calmer you get because of the reality that the impact you have on these companies is a lot smaller than you think it is going to be. When you enter any of them, it just needs to be a lot more grace and humility in patience, frankly, in the sector.

It's such an interesting place to close, this notion that the longer you'd spend doing this, the more humble you must become, and that survival is the name of the game. You may know my traditional closing question for everyone. What is the kindest thing that anyone's ever done for you?

I find the list on that is really long for most of us hopefully. I start with my mother who was just this extraordinarily hard charging leader in my small town in a way that made it acceptable for me to understand that that was a role that was open to me as well. And to my father who actually supported her version of events in all of that. I think a more tactical answer that I was thinking about is just the hundreds and hundreds of people who have given me feedback over the years. I was a pretty insecure person growing up. You kind of want to hide. You don't really know what value you have to add. Every person along the way who pulled me aside and gave me feedback, positive or negative, and a lot of positive feedback that made me feel like something I was doing was right, negative feedback that allowed me to learn and pivot, it makes me think all the time about who I am as a leader of my team and how do you make sure you take time out to give people feedback along the way that just helps them to establish confidence in what they're doing. I am just really thankful to all of the incredible people who have bothered to spend snippets of their time with me to give me feedback and what I'm doing.

Well Lydia, I've learned a lot today. I didn't really know what to expect from me, and I'm not an e-commerce expert by any stretch, but maybe above that, I think you probably meet your own definition of more nuance, humility, calm, whatever. Having been in this for a while, I've really, really enjoyed the conversation and so appreciate your time. Thanks so much for doing this with me.

Thank you.