This is extreme. Adam’s self-dealing is abundantly disclosed. There is no evidence he is acting in bad faith. (Versus being deluded himself.)
Lots of businesses leverage paper-thin margins. Lots of businesses borrow short and lend long. Lots of businesses, particularly real estate businesses, feature self-dealing and family control galore. American corporate law goes out of its way to avoid criminalising stupidity.
There is a chance WeWork attains enterprise lock-in sufficient to let it weather a storm. There is a chance it expands cross-selling to bring its books into the black. These chances are slim. But they’re clearly disclosed.
Self-dealing, as in how the founder leases his building to his firm, or how he owned and sold the We trademark to his own firm? I wouldn't call that 'stupidity'. In fact, it sounds very smart, for the founder. And unethical bordering on criminal.
In this case, the builds are the low-multiple assets and they're being separated out from the high-multiple asset which is the management company.
I’m not saying WeWork isn’t a fraud. I’m saying we have no evidence it is one.
People can reasonably disagree about whether a business model is sustainable. A bunch of people have bet one way. A bunch will bet the other. I don’t like WeWork, but I don’t like this idea that if outsiders disagree with the sustainability of a business model the government should shut it down.
If WeWork can realise cross-selling opportunities or unique leverage, through scale, over its lessors, it could work. It’s one thing to say something is stupid. It’s another to shut down the debate.
It's a despicable fraud and would be completely illegal if we had a functional SEC. They are just amping up the Uber-style con game to the next level.
There will be dozens more scam companies like this until someone finally cracks the whip, so get used to it.
Last I checked, being up shit creek without a paddle isn’t illegal.
The problem with criminalising stupidity is differentiating genius and idiocy is often only possible ex post facto. We let investors take informed risks with their own capital. The SEC’s main job is making sure companies selling securities truthfully represent themselves.
There are many business models I never thought would work but which, due to scale, clicked. I’m sceptical about WeWork. But the way for them to die is for them to starve to death. If the Saudis (and Kazakhs?!) want to give them money, so long as they aren’t creating negative externalities, I don’t see the problem.
The SEC used to prevent companies from listing that were obvious scams. They simply need to start doing their jobs again, it's not a tricky differentiation problem or moral quandry that we need to bust out latin to explain.
The VCs went into this with their eyes open and probably information rights.
The public has been told this stock features a CEO who scammed his own company out of licensing fees for the name, and features abundant self-dealing for leases of buildings he owns. Anyone who invests has been warned.
So, I can understand how a company like Theranos is fraud, because they are lying and have no product.
But, I've used wework successfully, I know a lot of people using wework successfully. They have a product that works and that people pay for. How can such a company be a fraud?
Fraud, put simply, is lying with material consequences. If Apple said their iPhone can fly you to the moon, and you bought it on that basis, you were defrauded. That the product does a bunch of other useful things is irrelevant.
That said, I agree with you in us having insufficient evidence to label WeWork a fraud. They’re aggressively disclosing their weaknesses. No evidence of deception.
Disclaimer: I am not a lawyer. This is not legal advice. Don’t toe the line with fraud.
If you bought it to go to the moon, it doesn’t work as promised. If the lie was wilful, that’s honest-services fraud.
Less facetious of an example: you sell a company that makes lots of money but has a material liability on its books. The liability can’t kill the company. But you intentionally hid it from a buyer. The company still generates all those dollars. But your hiding this material fact from the purchaser is fraudulent.
Disclaimer: I am not a lawyer. None of this is legal advice.
Investments can be shoddy without being fraudulent.
It’s up to you to evaluate the investment in question and decide whether you wanna invest.
Or possibly, if you sued Apple for that, your suit would be dismissed because Apple's statement was "mere puffery": an advertising claim so outlandish that no reasonable person would be expected to take it seriously.
A famous example is Leonard v. Pepsico, Inc., where a Pepsi TV commercial showed some of the things you could get by redeeming Pepsi Points that you earned with your purchases. It begins with:
T-SHIRT
75 PEPSI POINTS
HARRIER FIGHTER
7,000,000 PEPSI POINTS
John Leonard wanted that Harrier, so he sent PepsiCo a certified check for $700,000, minus $1.50 for the 15 Pepsi Points he already had, plus $10 shipping and handling.
When PepsiCo returned the check instead of sending his jet, he sued. Here's the commercial and the rest of the story:
https://www.youtube.com/watch?v=ZdackF2H7Qc
https://en.wikipedia.org/wiki/Leonard_v._Pepsico,_Inc.
https://en.wikipedia.org/wiki/Puffery
(I'm not commenting on WeWork, only on the lunar iPhone example.)
Agreed. The example was facetious.
The underlying point, that a company producing a useful product can still commit fraud, to customers and/or to investors, stands.
Wework isn't so much a fraud as the next pets.com waiting to happen.
* EBITDA or Earnings Before Interest, Tax, Depreciation and Amortization. It's pretty much the net (before-tax) income of the company (per year), but after expenses that are easy to calculate (like employees' salaries and rent).
* DJIA or Dow Jones Industrial Average. It seems to be an index of the stock market, meaning a number calculated from the price of a selected number of stocks (in practice, 30 large US companies).
* The Flywheel Effect. I guess to understand this one you need to understand what a flywheel is, it seems to be a pretty heavy wheel. The metaphor here is that building a successful company is like pushing a massive wheel for a very long time until it catches some momentum and roll by itself?
"Similar to the DJIA, last-round private valuations are harmful metrics that create the illusion of prosperity."
A lot of people just wish the DJIA 30 would disappear from popular use. It's a harmful metric that gives the illusion of prosperity.
Examples: I take a loan with 1 million a month in interest payments and I "invest it" and "earn" 1 million a month. EBITDA: 1 million a month. Amazing! Real world, net zero.
I buy a 20 million dollar piece of equipment that lasts 20 years. From it, I "earn" a million a year. EBITDA: great! Real world, net zero.
For instance, Companies A and B are competitors in the same market and both have a million dollars in annual revenue and earnings of $100K. Are they both worth the same? What if I told you that Company A has no debt, and is depreciating its assets at an accelerated rate (ie is "paying off" its capital investments rapidly) while Company B is loaded up with massive debt and is depreciating more slowly? That changes the picture a little bit, doesn't it? This is why you have different metrics. Think of them as clues in a detective story rather than horses in a race.
> although it has some uses in comparisons
So we agree about that. In terms of EBITDA's "other uses" your example proves my point? From an EBITDA perspective, those companies look the same, so if you want to paint a rosy picture and you're the company with lousy financials, EBITDA is your go-to metric for your talking points.
Dow jones compiles indices on several sectors, not just the Industrials. Hence the four letters in the acronym.
"The Dow" or "the Dow Jones" always means DJIA.
It comes up in their articles sometimes, and is probably why they prefer to refer to the DJIA as a measure of market price than the SPX.
We have lots and lots of words; I don't believe this BS phrase fills an otherwise unfillable gap.
Fraud is Theranos. We seems more of a BetterPlace - delusional, charismatic founder + too much money - sound business model.
It's not fraud until someone wins in court. And not all cases of fraud are pursued.
I have absolutely no doubt that I've missed some good ones, but that's how WeWork made me interested in something that I'd put off for so long -- really nice looking interiors in great parts of town/great buildings. They are in no way a tech company, however their aesthetic and values do more closely mirror tech companies than a lot of their competitors that are low cost satellite office providers for low-tier organizations.
This is all nice for customers, but makes for a shitty investment.
WeWork doesn’t have any real competitive advantage when you want to turn it into a healthy, profitable company. Then it will just be any other coworking space; perhaps a more fancy one, but also more expensive.
Starbucks has no real competitive advantage over Local Coffee Co. other than great location, decor and brand appeal too. Thats what OP argues were the deciding factors for them. To attribute nice decor as being nothing more than a sunk cost is erroneous at best.
Clearly Wework has at least some economies of scale, but as for purchasing power not so much. The mass importation, distribution, and sale of a perishable agricultural product is a whole different kind of thing.
WeWork has 10-15% gross margins.
"Gross margin is a company's net sales revenue minus its cost of goods sold (COGS). The gross margin represents the amount of sales revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells."
WeWork is an international brand. Can you name another coworking space in nearby [state/country]? On the other hand there’s prob a WeWork there with a certain consistency wrt quality that you’d expect.
But the lack of examples doesn’t support the argument the way you think it does.
That means it’s very much an open question if this model could ever be successful. Unlike chain food/beverage which is a highly proven business model.
Good for them, but what’s that worth exactly? Having brand recognition is not at all the same thing as a barrier to entry of a market, or a network effect.
The market for shared or managed office has very low barriers to entry and modest network effects. Thus making the concept of a monopoly in this market more than implausible.
If Starbucks spends less money buying coffee, that means they can afford to spend more money on nice decorations (and better real estate, more ads/PR to increase brand presence, etc.) than Local Coffee Co. The real estate/furniture is presumably a relatively small portion of the operating costs of a coffee shop, so e.g. buying 10% cheaper coffee beans could mean getting a location that's two times as attractive to customers.
WeWork might not be able to do that as easily because for them, the real estate and furniture is their only product.
WeWork won't be able to maintain their venture-capital-fueled level of spending forever. Starbucks' economies of scale aren't a one-time "build the brand" thing, they're a constant source of capital that allows them to continually build and maintain storefronts better than Local Coffee Co can.
I can totally see a world where WeWork, forced by the public markets to attempt to reach profitability, stops putting as much money into their buildings and furniture as they currently are. Then, the next real estate firm disguised as a tech startup can raise private money at a forty-eight million dollar valuation, build even nicer offices, and eat their lunch.
> They have the first mover advantage.
I am not convinced the first-mover advantage is very significant in the short-term office rental industry! WeWork got a lot of customers by selling nice offices at below cost, even though other players in the space had been around longer. Who's to say another company couldn't do the same thing?
Personally for me ability to order Starbucks coffee online and have it ready when I get to the store is a game changer + consistent user experience. Local coffee shops are always hit/miss.
We have private offices, better views, zero annoyance from fellow lessees (nobody leaning over to sell us insurance while we have headphones on, or harassing us about their recruiting services), pay half the rent (even less, now that we signed a long-term lease, previously we were month-to-month).
As far as I can tell, the WeWork across the street has a nicer interior and better coffee. That’s it. That’s all.
And it’s way more expensive and has a way more distracting culture.
I visted the WeWork office on Bloor last year, and it was more like a party than I would like. Seems like a great place to meet a future spouse. Not necessarily a great place for quiet, deep work without noise.
They have a lot of social events. Seems to be their big selling feature. So if you are looking to prospect for customers like a real estate agent or something, maybe it's worth it.
(I understand that most WeWork locations should look about the same, so…)
I still don't get how their "private" offices have glass panes for walls. That's horribly unconducive for work.
We ended up at iQ offices, much quieter than WeWork. Workplace One's new location also seemed pretty compelling, just not in as good a location for those of us commuting on the go train. If internet speeds are important, make sure to ask about that, because most of the offices we talked to had pretty shit speeds.
Moreso, the author's point is that other businesses that have these long-term depreciations trade their equity at a much smaller revenue multiple. He's basically saying, you can't escape the fundamentals.
you don't hedge against decreases in demand via financial instruments, instead you: 1. hedge against decrease in demand through diversification of services; if wework sells some property management software (for example) then that might be more recession-resistant than their actual leasing business. 2. hedge against decrease in demand through long-term contracts: getting IBM to sign a 10 year lease (for example) is usually a safe bet that you'll have a tenant through the recession; on demand hot desks are much less safe 3. hedge against cost increases using financial instruments: most corporations doing hedging are hedging against commodity price changes, e.g. airlines buying oil futures or mcdonalds buying beef futures. similarly, wework might buy kombucha or aluminum cup futures, but there is no derivatives market for on-demand desks :)
of course, there are different perspectives on this. matt levine has a really interesting column about the different philosophies of where diversification belongs, at the corporate level or at the investor level: https://www.bloomberg.com/opinion/articles/2019-04-09/ceos-l.... my finance classes were relatively recent so you might be able to tell my bias.
I don’t know if the math adds up, but I think it deserves studying.
I’m not looking to hedge against all kinds of customer flight with an instrument, that’s clearly foolish as you noted. But particular events can be hedged.
See: https://www.aqr.com/Insights/Research/White-Papers/Pathetic-...
If you could hedge a recession, we’d have no recessions :)
Hedging only works if you have short time durations (eg you wanna hedge specifically in October, because you have a big bill due then), or if you’re the one providing the hedge and capturing the Volatility Risk Premium.
"We Work" can have a built-in cushion against smaller recession events - long-term leases, being able to predict which percentage of short-term leases will dry up, cash reserves, some sort of counter-cyclical lease agreement (e.g. with repo companies), counter-recession marketing/education/etc program (e.g. "let's beat recession together by sticking together!" or some such).
Where the hedge is coming in is making sure that the company does not end up upside down if recession hits harder than the built-in cushion can absorb. They could be buying 12 month S&P500 options on a rolling basis - buy a new batch every month as the previous batch expires. The idea is not to get paid each time SPY drops 5% down, but to get paid when it drops 35% down signaling an actual market crisis and have enough time/money to survive the hit.
I don't know if it makes sense as I'm just making this up as a I go, but your criticism is selling the idea short. Ahem.
See https://www.aqr.com/Insights/Research/White-Papers/Pathetic-...
But no, you cannot hedge away risks of a recession - for cheaper than what a recession would cause.
On the other hand the fraud is wrapped in the most delicious of absurd flfftery that it's a pleasure to try to ape it.
A conversation about fraud often litigates whether or not omission is a form of lying.
since it looks like you've spent some time on this, would you care to take a shot?
The fact that you stated "The company is a fraud", before saying that this should be stated plainly. Since you didn't say something like "...from my point of view I certainly have the impression that..." or something like that. Since you spoke definitively, I assumed you have a definite opinion you formed somehow.