WeWork Parent Weighs Slashing Its Valuation in Half | Hacker News Reader

WeWork Parent Weighs Slashing Its Valuation in Half

wsj.com

294 pointsjason_zig218 comments

This is the same bollocks Softbank played with Uber. Buying secondary shares at X, making a tiny investment at 2X, and then claiming the company is worth 2X. (It wasn't and it isn't.)

"Slashing its valuation in half" means reverting to X, the price around which WeWork last bought back shares. Even this reduced value is likely twice as high as it should be.

At least they tried to clean up Uber before the IPO. This thing just seems really sloppy on multiple fronts.

Yea the ceo seems a bit of an egotistical guy, and felt we work was so awesome the “retail” markets would look past the shenanigans. He was wrong, and he’s back pedaling to salvage it. First the trademark payment, now this. Hopefully he will also clean up the corporate structure and his voting power (but prob not).

He already sold $700M worth. [1] I'm not sure he cares anymore.

[1] https://techcrunch.com/2019/07/18/wework-ceo-adam-neumann-ha...

>and the over $100 million that Mark Pincus took off the table ahead of Zynga’s offering.

Damn, I know someone who got screwed over by the IPO lockup there.

It's not ego, it's greed.

I mean they put in $2b in the last round, that's not exactly chump change!

https://www.reuters.com/article/us-wework-m-a-softbank/softb...

They almost definitely have liquidation preferences on that 2B.

> They almost definitely have liquidation preferences on that 2B

Automatic conversion clauses typically force convertible pref to convert to common in the event of an IPO. This makes liquidation preferences generally irrelevant to public offerings.

You can define arbitrary preference rules. For example, the conversion doesn't have to be 1-to-1.

In the case of Square's IPO, Series E preferred had a provision giving them extra free common stock to make up the gap if it IPO'd below $18.55 (which it did).

You can, and I may be wrong here, but I seem to recall that one has to call out these sorts of options in the S-1. It is material to people investing in the IPO.

Well that's a different thing than what the OP claimed (marking up an investment with a tiny secondary round). They marked it up with a giant round!

>marking up an investment with a tiny secondary round

Maybe a $2B round is tiny in the face of annual losses of $1.9B which was 2x the loss from the year before.

Who really knows anymore, maybe doubling your losses is just another metric VCs can spin as positive growth. After all the Unicorn IPO mantra seems to be, but we can stop our billion dollar losses whenever we want and then its all profits.

So basically a huge pump and dump

But did they break any laws? Can SEC or AG cone after them? AFAIK they dont even have US presence right? Its all China owned??

Softbank is a Japanese holding company.

Organizations making large investments in US companies and US markets are absolutely subject to US securities laws.

Not accusing them of breaking laws. Just manipulating the valuation knowing it's not supportable.

> So basically a huge pump and dump

Softbank have been transparent from the start. When Uber did its split round, even on HN, a number of commenters were convinced the spread was legitimate. That the top-of-the-stack pref was actually worth 2x the next-in-line pref. The media fetishised the post-money valuation, and the details got lost in the conversation amongst uninformed investors.

> Buying secondary shares at X, making a tiny investment at 2X, and then claiming the company is worth 2X.

It should be possible to figure out the formula for how much an investor needs to invest in a given round, given a previous investment into the company, such that the downside of investing at an increased valuation exceeds the upside of the existing shares being valued higher than before.

In other words: How much would SoftBank need to invest such that it wouldn’t benefit from bluffing on the valuation?

I believe it would depend on the liquidation preferences and the preferred stack. This would allow them to potentially own most of the company in the event it was acquired for a worse valuation, went bankrupt, etc.

Softbank has $12b+ up so far into WeWork. (a)

So are they better off supporting the IPO price by exposing themselves another $3b (20%), writing down the IPO by 50% which likely is at least $3b in losses, or delay?

And muddying their view, as I commented yesterday, is the fact that there is a huge debt contingency surrounding this IPO.

EG if WeWork does NOT raise at least $3billion in this IPO they will be in default of a contingency with lenders that will WITHHOLD a committed $6billion credit line. This huge credit facility is their growth engine forward (b).

(a) https://www.reuters.com/article/us-wework-m-a-softbank/wewor....

(b) https://www.bloomberg.com/news/articles/2019-08-01/wework-se....

In case of a default, what would happen to all the companies who could on WeWork operating for their office to remain functional?

tbtf. fed will step in

No chance this will happen.

Unlikely.

Why?

The Federal Reserve only steps in when there is 1) system wide risk, and 2) when the company they are interfering with owns enough assets to guarantee the fed loans.

* Bear Sterns had healthy assets, Lehman Brothers did not. AIG had enough healthy insurance premiums to guarantee the loan to fix the unhealthy insurance products. Fannie Mae and Freddie Mac owned the home mortgages assets.

---

1) WeWork doesn't have a substantial enough real estate position to bring down the entire real estate system.

2) WeWork doesn't have any assets to guarantee a fed loan.

should have put an /s

They will be in Regus/IWG the next week, and a week after that will have forgotten that WeWork ever existed.

IWG is tiny (a mere $3b in revenue; $4b-$5b market cap), they'd never land all of WeWork's customer base or WeWork itself. They'd trivially be outbid. SoftBank would acquire WeWork and continue operations before they'd let the business go to a small company like IWG or watch WeWork get acquired for ~$500m-$1b (which is all someone like IWG could afford).

Far larger players like SoftBank, Blackstone or KKR would be all over scooping up the bones of WeWork. There's certainly no scenario where WeWork doesn't end up in the belly of a private equity company, or a large real-estate holding company. The next recession will destroy them. They'll be lucky if they survive even outside of a recessionary environment.

IWG is tiny

This analysis looks very different if you do it not in dollars but in sq ft, or in desks. IWG is much bigger than WeWork, but realistically valued.

IWG has 10x the total square feet to rent that We Work has.

WeWork is on pace to hit ~3-4b revenue this year

Does Regus/IWG have the capacity to absorb the demand?

Apparently the two companies are roughly the same size in terms of square footage under management. (IIRC IWG is a little bigger.)

So not likely IWG could absorb significant percentages of WeWork customers on short notice.

If WeWork goes under there are going to be large amounts of co-working space going cheap.

...so short CRE REITs, am i right?

I don't advocate active trading unless you have substantial non public information, and I don't think this meets my non-public criterion

Stay out of REITs anyway; once they have your money they essentially never have to give it back. I can't imagine how something so illiquid could be shorted in the first place.

Aren't REIT mutual funds the most likely vehicle for a retail investor to invest in REITs?

That's a good problem to face.

Since they don’t own any buildings I bet we see the WeWork ceo sell the buildings and or move to establish small clones of WeWork with local contracts.

Depends on just how bad the default is but they'd likely go into some kind of managed bankruptcy. Since WeWork doesn't actually own the buildings companies could wind up making deals more directly with the CEO who does own the buildings to at least maintain the space so they'd just lose the other services provided by WeWork and wind up in a more normal relationship with the building owner. Hard to know without it happening because it depends so much on the details of how it happens and the reaction of so many parties.

I wouldn't even worry about having a place to work out of. VC funding has been drying up and a massive down round or a default is going to close that right up.

> In case of a default, what would happen to all the companies who could on WeWork operating for their office to remain functional?

Giant rate hike.

If WeWork shuts down or defaults, smart landlords/property managers will take over operations. They're stuck with the space, and WeWork has already done the hard work of getting the short term tenants. Transition the tenants to "leases" directly with the landlord, keep the wifi on, the coffee brewing, and the place clean. In the near term does the tenant care if WeWork is running the place?

That $3b in "losses" would be paper losses, but would also improve any ratios that are based on the total value of the company. In doing so, it would reduce some of the pressure on WeWork to produce higher revenues.

Unless there are expected revenue targets that aren't ratios.

Paper losses that trickle up to parent SOFTBK stock which has been pledged as collateral for loans.

Both of your links are broken.

"Among the possibilities they discussed was SoftBank serving as an anchor investor in the IPO by buying a significant portion of the roughly $3 billion to $4 billion the company is expected to raise. They also discussed whether SoftBank might invest a chunk of money that would allow We to delay its IPO until 2020, people familiar with the conversations said."

This is a real mess.

It's weird how the people who are best-informed here seem to be the latest to the party as far as that realisation goes. Why did they (by that I mean, We), even decide to kick the whole IPO process off? Surely they didn't need to do this now?

They didn't anticipate the meddling kids.

What I mean is, they thought they were going to get away with it.

> They didn't anticipate the meddling kids.

Nor their dumb dog![1]

[1] The parent reference is to the catch line in Scooby Doo, for those that aren't familiar. And quite well fitting to the situation. https://youtu.be/mbXxgQLlF08

Scrappy was the biggest meddler...always mucking up the works.

Yup, which to an outside observer is pretty shocking, given how grossly deficient the S1 is. Another commenter in a different thread posted this informative Jason Calacanis podcast about WeWork:

https://thisweekinstartups.com/e969

One part that really resonated is when Calacanis is arguing that, once you become super rich, you need to rely on your authentic, pre-rich friends to give you candid advice (because after you become super rich, you can't really trust new friends when so many folks want a piece of your wealth). Calacanis' idea, which makes sense to me, is that Neumann didn't have a strong enough social base, so that he didn't have anyone candidly telling him stuff like "Umm, you know, this We trademark licensing deal is completely batshit insane and analysts will see this as a giant, bedazzled red flag" before he went ahead and did it.

Insightfully, Calacanis predicted Neumann would walk back the licensing deal, and actually talks about Masayoshi Son being one of the only people that can give Neumann the harsh dose of reality he needs.

I think this is all kind of a moot point, though. It's like WeWork jumped out of an airplane without a parachute and is now going "How do we fix this??" I'd put money down on some form of either (a) a restructuring or (b) essentially being taken over by the major lenders/investors as inevitable.

Softbank cannot let either scenario S or B happen. Masatoshi-san needs the plates to stay in the air for his second fund to come together. He is a man who doubles down until broke. It is both what has made him so successful, and also why I do not buy softbank stock.

I'm not sure what you mean by late to the party. They were the first ones at this party. WeWork has grown through the charisma of its CEO. Based on past performance, it has worked every time.

They're on the extreme end of "startup realizes public markets will call them on their shit" but you can see why they'd be confident they could pull it off.

> "they're on the extreme end of..."

Yes, and it caught up to them just a bit too soon for the IPO. Had the CEO been a little less brazen in his self-dealing, they might have pulled it off with more success.

I think losing $1.9 billion on $1.8 billion in revenue in 2018 (yes, I know it's more complicated than that) has made getting additional capital more difficult. At the same time a self-dealing CEO gives the appearance to investors that he might not be confident that his normal compensation/stock will be worth that much, hence the extraction of value in other ways, leading to concerns about corporate governance that makes private capital more reluctant still. So the IPO is necessary to raise capital, not just to give early investors a soft exit. Now its catching up to them a bit too soon for a maximal IPO, so they're rethinking and perhaps a bit desperately (my interpretation only) going back for more private money.

What is SoftBank's angle here?

With all the financial strangeness with WeWork and inside deals and etc I would think it doesn't look like a great investment anymore ... is SoftBank just "in too deep" and as far as they're concerned they have to double down?

My assumption has always been that they think over a long enough time scale their investments will become basic defacto infrastructure. Prob entirely wrong, but that's been how I've seen it

>their investments will become basic defacto infrastructure

If their end goal is having the profit margins of an electric company, then these valuations are pretty hard to justify...

They could just invest early into a low-margin yet large piece of the pie that will grow into a multiple of itself.

PS: not too fond of WeWork myself, but that's how I could see it.

Patrick McKenzie (twitter.com/patio11) has been relaying some of the bull case, though I don't know whether he's endorsing it, or just relaying it. I don't have time to find his tweets right now, but they're in the past few weeks of his timeline.

Basically: 1) if remote work continues to grow, they become an easy magnet because every company will pay for WeWork reimbursements more readily than some random local expenditure. 2) like AWS, they allow a big financial change: real estate moves from CapEx to OpEx, which is desirable for companies.

Edit: one tweet https://twitter.com/patio11/status/1161796809741627392

How many remote workers choose to pay for a coworking desk (reimbursed I’m sure) instead of just working from home though?

My completely personal experience hints that lots and lots now and more and more every year.

Personally, I haven't really seen this. People need to get together in conference rooms from time to time for meetings and they rent space for that. However, on the video calls I'm on more or less daily, essentially everyone is in a company location, traveling, or at home. I've know people who did rent a co-working office but it's been the odd exception.

To be fair, most of the remote people I work with are relatively senior and that may make a difference. They probably care less about having the social aspect of an office and they probably tend to have more room at home for, e.g., a dedicated office.

Remote workers can often get some budget for a coworking space. Not enough to work there every day. But enough to get out of the house every once in awhile.

There is also just the contingency aspect of it- I had a scheduled power outage in my building when I was working remotely, I could either take off that day, or just find a coworking or other space, but I chose to try a coworking space. Power outages may not be common, but there were also days when I had family in town and such, and just didn't want the distraction.

So I actually have a free wework pass from my online masters degree program. I live about 3 blocks from a large wework that was built in the last couple of years. My company let's me work from home whenever I want. I have a 45 minute commute so I usually WFH on fridays or anytime I have an appointment.

I went a few times when it was novel, but after that I really only use it less than 1 in 5 of my work from home days. And on some of those WFH days, I'll walk to the coffee shop accross from the wework to get an espresso and then go back and work at my house.

Point being, I don't find wework to be a compelling remote work offering when it's free. So it seems unlikely to me that there's very much room to grow in that market.

every company will pay for WeWork reimbursements more readily than some random local expenditure

But why would they? Even wealthy companies now insist that most business travel is done in economy class. Big airlines can’t sell business-class seats just by making expense claims easy to file. So why does WeWork think it can sell flashy office space?

Following your analogy, wouldn't WeWork want to be the economy class of office expenditure, rather than the business class?

One of the points of uncertainty though is whether they can keep up the flashiness, ie, they might be selling business seats at economy prices.

Indeed - they can’t have their cake and eat it, in other words. A high valuation can only be justified by a high margin.

They are economy class. I don't find them flashy at all. Their offices are tiny, glass enclosed, like fish bowls. I can't imagine working in one of them, and I've heard nothing but terrible feedback from others.

I like my wework office space ...

Yeah this is the argument I don't get. Tons of companies just give employees who travel a per diem for travel expenses. A per diem for remote work expenses to spend on whatever shared office space you want is not that hard. Filing expenses is trivially easy now and there are tons of apps/services out there that do text recognition on receipts and credit card statements to make the value addition of something like this very close to zero.

Imagine you work for, say, IBM, and your badge grants you a desk, on-demand, at any WeWork office. Or, let’s pretend that you, still at big blue, want a dedicated space for a small project, you work with your WeWork rep to secure a secure dedicated space for the timeline.

At no time in those examples did I have to exchange funds, pass my corporate card, etc.

Speaking as a home remote worker (Salesforce/Heroku not IBM or WeWork) that likes to visit offices sometimes and travels quite a bit, having the option of on-demand access to working spaces with other humans, and a facility-access processes I can rely on, and a facility I can mostly assume will work would be a pretty great upgrade to my work experience.

Expense reports suck. It’s not just the process burden, but making that the norm rather than an exceptional process means that today’s automated-scanning systems will probably put more false-positive-powered issues onto your already full plate.

Removing the process makes it a tool that more people will use. That’s the value prop I see.

The problem is WeWork would end up being just one of a ton of possible vendors who do this. The only thing that's hard to replicate about that business model is the up-front cost of acquiring the properties, but if it turns out to be a thing people value then CBRE and every other big commercial real estate company will dive in. In that environment where your IBMs now have competing products to choose from I don't see WeWork able to pull much in the way of margins.

I agree with you. Which is why I find the companies valuations to be, uh, silly.

Your business is still putting you on AA/Southwest/Delta/Etc. though, they're not putting you on some random regional airline. That's the argument as I read it.

I'm not sure flight paths really work as a comparison. There's a limited number of routes and flights. Regional airlines tend to have fewer flights and very specific routes.

Office space seems a bit more eclectic.

Perhaps a better analogy is that your company is giving you a Dell/HP/Apple laptop, not a clevo or ibuypower (or even an inspiron vs a latitude)

Maybe but for expense type stuff... I've done a fair amount of travel and they didn't really care what car rental place I used, airline, etc.

Not taking a position for or against WeWork but I'm not sure that they are particularly flashy, especially when it comes down to the actual office space away from the common areas stocked with beer. What they do offer is some level of consistency and predictability, and there's something to be said about that.

As a side note: The airline analogy isn't correct. Business and Premium Economy products are doing quite well with growth of those two offerings having been quite robust over the last 20 years. I'd say belt tightening did happen, but with respect to first class fares. Easy fix...just rebrand your old first as business!

just rebrand your old first as business

BA’s first class is on a par with Emirates business class, actually...

The problem isn't the business concept; Regus/iwg make money, but it's 100m on 2b.

The problem is that wework is just some combination of shady and awful at business, and there's no reason to think they'll get any better with scale.

Regis has been around for a lot longer than WeWork and does the same thing for less.

Their offices are also more professional, because they're designed for people to do actual work and not just be look like they're working.

Are you saying that having beer on tap is either unprofessional or not conducive to actual work? Color me shocked!

Didn't wework have to switch to kombucha after someone realized that a place where you pay money to hang out all day and drink is in fact a bar and you need a liquor license?

I thought that was only in certain jurisdictions. Maybe it was universal though.

I'd assume it'd be certain jurisdictions. You definitely don't need a liquor license to serve beer and wine universally[1].

[1]: Which leads to insane decisions like restaurants that make "Bloody Marys" with beer...

> Are you saying that having beer on tap is either unprofessional or not conducive to actual work? Color me shocked!

>> Didn't wework have to switch to kombucha after someone realized that a place where you pay money to hang out all day and drink is in fact a bar and you need a liquor license?

A "liquor" license and a "beer and wine" license are 2 different things. A beer and wine license is a few hundred bucks (depending on your location), and just requires some paperwork. A liquor license can be over $100k depending on your location.

In California, you do not need a license to "give away" beer or wine for free or in exchange for something like a ticket.

The WeWork spaces I've been in have been more professional than most tech company offices I've been in. I'm not a fan of WeWork but I don't think this is at all a fair criticism.

All the WeWork spaces I've been in advertise a happy hour. In the office space. Starting at 5 or 6, before most professionals are out of the office.

Meanwhile, Regis has quiet facilities, with dedicated offices, cubicles, and conference rooms. It may not be sexy, but it's not trying to be.

The WeWorks I've been also have quiet facilities, with dedicated offices and conference rooms --- in fact, on a smarter, better tiny-office plan than open-office and cubicle offices. I don't like WeWork, but again, this isn't a valid criticism.

We must have been to different facilities. The dozen I've been to are all primarily open-office spaces with a small handful (literally countable on one hand) of offices and conference rooms.

For Regus, the opposite is true--most of their spaces are cubicles/offices with only a handful of locations offering "open-office" style spaces.

The space we rented from in Chicago had an open-office first floor and then several stories of small private offices --- where the majority of the tenants worked. Everyone I've ever conf-called with who was in a WeWork, including our NY team, when they were in a WeWork in NY, was also in private offices†, or the WeWork phone booths, which are also better than what most private-office startups have.

I don't know what WeWork you're seeing, but the startup employee experience in WeWorks is generally better, from a professionalism and productivity perspective, than typical startup offices --- if only because they've found a way to scale up cost-effective small private offices.

We ultimately moved to a fairly large private office in Chicago (Chicago commercial space is cheap), and I like it more than I like WeWork, and I don't like WeWork the company at all. But the notion that WeWork isn't providing professional office space is just false; the space they provide is, by a wide margin, more professional than tech industry norms provide.

Unless WeWork outside of NY and Chicago is starkly different than WeWork everywhere else, I don't see how this is even a viable argument. I'm eager to see the counterexample you'll provide.

† (I'm not talking about the WeWork conference rooms, which are excellent and highly professional, so much so that people I knew in Chicago would borrow our WeWork conference credits to hold client meetings in even though they had their own non-WW offices)

I'm remote but my company works out of a WeWork and happy hour is a great time to have business development meetings. We also have an office for those that need quiet.

As others have said: Regus.

What is being missed though: WeWork have actually built out a fairly comparable level of capacity to Regus. The difference is that WeWork are heavily concentrated in major cities, whereas Regus is diversified (they have locations in Mongolia and Nepal, I believe).

The reason why is simple: Regus made the mistake of overbuilding in major cities last time round. The US business went into BK, they aren't making that mistake again. In fact, even taking this very capital investment strategy, you can see that they still have substantial swings in their business.

WeWork have built out massive capacity which cannot be filled (in London, they actually have a meaningful market share of new office space). They did this because you can show great short-term results. BK is inevitable.

I would go as far to say: anyone who believes this isn't bullshit has identified themselves as an idiot too (at least, in terms of investment knowledge). This isn't remotely difficult.

sorry, what is BK? Bankruptcy I guess.

I thought Burger King. As in, they couldn't afford to eat anywhere else.

Though they could afford to eat at MD as well.

The Free Dictionary lists "Bankruptcy" as the meaning within the banking industry:

https://acronyms.thefreedictionary.com/BK

>they still have substantial swings in their business

Not really surprising. Some uses--like a conference room for a big customer meeting--are pretty much business necessities. But things like an office for remote employees who mostly just prefer to get out of the house but not work out of free space somewhere are the sort of discretionary expense that companies will chop pretty quickly if they're tightening their belts.

On #2, how does this change from CapEx to OpEx? Unless there's actually a transfer of ownership involved, generally at the end of a lease, traditional releases are already considered operational expenses, not capital.

It’s less a move from capex to opex and more a move to short term leases.

I’m skeptical that’s a moat that will defend WeWork but it’s certainly a handy feature.

The accounting standards are changing and long-term (i.e. longer than 12 months) leases are now included in the balance sheet:

https://www.iasplus.com/en/publications/global/thinking-allo...

Okay, that makes sense, so it's less of a shift and more of a way to continue or return to business as usual.

How many of WeWork's customer's are individuals?

I was curious and looked them up a while back, it was EXPENSIVE compared to other options.

I'm not at all sure how many companies filter "We'll pay for an office for you to work at WeWork... but not elsewhere." In fact most remote work that I've seen isn't interested in paying for any local office space... they want to save on that, not spend more / manage it.

I’m into this thesis but last time I checked for a sizable office they wanted a 2x-3x premium vs comparable long-term lease market rates.

That type of premium felt irresponsible as compared to the possibility of increasing FTEs.

My own gut is they can price at a 1.25x-1.75x vs. market.

I like Patrick but in a few cases his inexhaustible optimism makes him overlook stuff that he shouldn't overlook.

The issue with SoftBank is that there is only one possible angle: they corner the market, and sell out to everyone else at a higher price.

This implies that yes, they have to double down.

The only issue is that SoftBank appears to be unaware they need an angle. They are unaware that geometry exists. They are unaware that maths exists. They just seem totally unaware.

In my experience, it is often a complete waste of time to look at someone doing something stupid and think: "They probably know what they are doing".

In 95% of cases, near 100% in financial markets, that person is just an idiot.

The follow on question is, how did an idiot get so much money?

Luck. Invested in Alibaba and Yahoo JP (and he funnelled money into the latter pre-2001 from other projects to boost revenue). Got money from banks that didn't close him out when they should have (this would have happened anywhere in the world bar Japan and, possibly, Germany).

Son's record as a VC is horrible. He raised something like 6 VC funds before 2001. None produced anything but busts. And he actually invested more capital on the way down.

His only quality is zealotry. This the absolute worst possible trait for an investor (he isn't an investor, he is a salesman).

SoftBank is raising a second fund that has many overlapping investors from the first fund.

Interesting SoftBank fact:

SoftBank accounts for half the outstanding Japanese corporate bonds. https://www.ft.com/content/24c4a8a8-7885-11e9-bbad-7c18c0ea0...

They account for half of the bonds issued to retail investors which is significantly smaller than the overall corporate market. Half of all corporates makes little to no sense for anyone who has a cursory knowledge of this space.

I don't really know the vc game. Is this a bit desperate or is it just another day at the office for these guys? To me it sounds like they're really getting nervous

This would seem to be a huge red flag. The fact that they'd use additional funding to potentially delay an IPO indicates that the IPO may be necessary to raise money for operating expenses rather than just as a vehicle to allow early investors a profitable exit. If they don't get that funding and need to do an IPO at a significantly decreased valuation, they may not have a good short-medium term path to staying solvent.

I think it's premature to predict collapse yet, but it does point toward that possibility of a house of cards falling. It would also help explain why its CEO is so eager to publicly & brazenly self-deal to extract as much value into his own pockets as he can before the collapse. Which ironically, playing into the concerns about corporate governance, could be the tipping point that causes or hastens collapse.

Road show going that well?

WeWork highlights why I am still skeptical of pure index investing. This company seems rotten, and I would not deliberately buy their stock. But there's a big pool of index fund money that will be thrown at this company's stock no matter how poor their governance is or how much self-dealing they do... just because it's public.

https://www.bloomberg.com/news/articles/2019-09-04/michael-b...

You probably saw that yesterday but yes I am beginning to feel the same.

I did. It was also brought to my attention a few months ago with this article[1]

Question is, where to put money? Factor funds?

[1] - https://www.wsj.com/articles/wave-of-index-money-is-about-to...

I’ll probably get lots of downvotes because HN seems to hate it but I’ve been putting a lot in Bitcoin. It seems like a nice investment totally outside of the normal financial system that I’m losing faith in.

You'll certainly get downvotes if you ask for them. That aside, what makes Bitcoin an investment? It's certainly outside the normal financial system, but what's the reason to expect it to retain or gain value?

Why are you losing faith in the normal financial system?

Hah, so I was a total housing bubble head in 2005 (though I was to naive to understand the debt instruments that would amplify it).

And I've been telling my economist spouse for over a year that passive investing boom is going to distort things (and they roll my eyes at me, b/c they hate it when I dabble in armchair economics).

That said, I believe much of tech is crazy over valued, but I think we are in a new paradigm since SO MUCH capital has flowed in private markets (NY Times article about "More Money Than We Ever Imagined" really shows this well). But I am far far from being proven right on that.

What major index will it be in? Not the DOW or S&P 500. Not VFINX, not NASDAQ 100. Almost all non-Asian indexes disallow dual-class share structures.

CRSP's total market indexes, which many of the large total market funds follow. Its interesting to note that his index has historically outperformed the sp500 by like .2% a year too...

The comment you reply to didn't say WeWork is in an index. It's not public yet.

What the comment says: "But there's a big pool of index fund money that will be thrown at this company's stock no matter how poor their governance is or how much self-dealing they do... just because it's public."

Some indexes have filters that prevent really awful companies from being included. For example, I don't think Snapchat was allowed into the S&P 500 because the stock was so crappy.

Vanguard's total stock market fund is Snapchat's #1 mutual fund holder

https://finance.yahoo.com/quote/SNAP/holders/

AFAIK, most "target date" retirement funds use total market passive investing. Maybe instead of "index investing", I should have said "passive investing".

Worth pointing out that the number in that table (which doesn't break things out by fund) for "Vanguard Group, The"'s holdings in SNAP seems to only be about 1% of the total of VTSMX https://investor.vanguard.com/mutual-funds/profile/VTSMX

The table below the fold breaks it out by fund

Good lord. Vanguard has 5% of Snap!

Vanguard must own a significant share in so many companies right now. I'm starting to believe the narrative that the next crisis is passive investing.

Well they also have a significant share of invested funds ($5.3 trillion under management!), it would be really weird if they didn't have a significant share of many companies.

I guess the risk is that if people withdrew funds in a recession/crisis, they would blanket-kill every company out there, even companies doing really well.

As opposed to all the recessions/crises before indexing where stocks didn't go down? Sharp people will scoop up great names at a discount just like always.

Its not the same: someone unwinding broad positions could sell anti-cyclical stocks that did not fall too hard and keep the ones lowest.

Someone with index funds has no choice: has to dump the good and the bad.

Sure, which also happens every time there's a big down move in the market. Actually per prospect theory it is often the best performers that get sold first:

https://en.wikipedia.org/wiki/Disposition_effect

Regardless, my point is smart stock pickers will come in and bid up companies that get oversold. No damage done unless you tried to time the market in your IRA and sold at the bottom. People who continue automatic purchases of broad indexes will be happy (at some point!) for the discount.

There are plenty of value stock ETFs out there. You don't have to go with an index fund.

Nobody has to, but too many have, thats the whole point.

Value stock ETFs are index funds.

Many are index funds, but some are directly curated by the fund creator without mirroring any pre-existing index. Though they still function similarly to index funds in that they have low expense ratios, unlike traditional actively managed mutual funds with their exorbitant management fees.

> Someone with index funds has no choice: has to dump the good and the bad.

But they can be rebalancing instead of going to cash as well; Such as moving from SPY (S&P 500) to SPYD (S&P 500 dividend stocks)

The good news is that tanking stocks don't actually hurt a company - except possibly if it's in dire and urgent need of more capital, but then the problem is that the company wasn't doing well to begin with.

Remember when that kid was calling on a Vanguard boycott because it was the largest holder of gun stocks?

Wow, a whole $86m or .4% of SNAP!

Well not because it was a crappy stock, but because of their dual-class share structure. (Meaning minority shareholders can retain majority voting rights.)

https://www.cnbc.com/2017/08/01/snapchat-excluded-from-sp-50...

The S&P 500 has a requirement for inclusion in the index that keeps out lots of crappy companies: positive earnings in the most recent quarter and the last twelve months.

WeWork is not in many indexes.

Index funds pick every success story. Every one without fail.

An important aspect of the big index funds is that they are weighted by market cap. If my lemonade stand IPOs, the market will not value it highly and very little index fund money will flow into it.

Indeed. I work in finance, and it does appear that we may already be in a place where an unhealthy amount of capital is in index funds and ETFs. How this will all play out is not really clear to me, but its somewhat concerning.

I have been favoring funds over ETFs the last few years because they have a bit more leeway in what they choose to hold and the friction in getting in/out of them should lead to less chance of pricing dislocation that could cause a lot of unnecessary drama and price volatility.

In the end though, I tend to believe that passive investing may continue to grow until it gets to the point that there is so much "dumb" money out there chasing the same companies that active investing can show real returns above passive.

Is the money dumb as long as it's pursuing greater returns now?

The money is dumb because it does not speak. It's mute.

Outpeforming the market during a bubble doesn't make your money "not dumb". It just means there's a bubble.

WeWork will not be in either the S&P 500 or the Russell 2000/3000 because last year they adjusted their qualifying criteria to exclude companies with multi-class share structures.[0] They didn't kick out any existing companies (why google, facebook et al are still in these indices) but no new companies will be added with multi-class share structures.

[0] https://fortune.com/2019/08/20/wework-ipo-s-and-p-500/

is that an honest concern? What index would touch the rat infested WeWork IPO?

Looking at an ambitious, high-concept, money-burning endeavor like The We Company[a] from the outside, one would assume "there must be at least some adults in the room, in control of the situation; no one would have signed up on this otherwise... right?"

Apparently, no.

[a] I'm not sure it can be called a "business." Judging by the financial details in the S-1, if the We Co. doesn't raise gobs of capital soon, via the IPO or otherwise, it will quickly run out of cash: https://www.sec.gov/Archives/edgar/data/1533523/000119312519...

If Theranos has taught us anything it should be that the "adults in the room" very frequently are not good judges of anything.

Time for my Old Man Moment: if my years on this earth have taught me anything, it's that most of the time the adults aren't nearly as in control of the situation as we'd like to think. And even if that rare adult realizes the weight of the situation, no one wants to be the one to pull the emergency brake cable when the brick wall looms ahead of us.

It’s a valid question: what could we do if we had unlimited money? One answer to that question was “put a man on the moon and return him safely to Earth”. SoftBank has the means but seems to have no “vision” at all. I mean you have literally $100Bn and all you can think of is... that?

For most people and organizations with effectively unlimited money, the answer to “What should we do?” is “Do something with least effort and just barely within the law to make even more money.”

In other words we have actual investment fraud happening here, because the only way you agree to -50% re-valuation is to admit you grossly inflated the valuations to begin with.

If I lied to a bank that I had assets worth $x as collateral for a loan and it was later revealed to be a lie, I would be headed to the slammer in no time. These guys had every intention of dumping this garbage onto the public markets for the rest of us to be left holding the bag.

WeWork didn't decide their own valuation. Investors did.

You mean the banks who wanted to make gobs of money fleecing investors.

Softbank's investment inflated WeWork's valuation. How does Softbank win in this scenario? How does the "fleecing" work?

They certainly didn't win in their Uber investment.

This company will never achieve profitability, it will have burned through literally Billions of investment money. It will have done this whilst buying its own brand off the CEO, self-dealing from the CEO and literally buying a wave machine for the CEO. It's going to absolutely crush the landlords that rented to them.

...And the CEO is going to walk away with $700m cash.

Seems like a smart guy!

WeWork never achieving profitability does seem entirely possible, maybe even the most likely outcome. However, I'm not sure that leads to the conclusion that it will crush their landlords. All of those landlords are sophisticated parties who could understand the counterparty risk involved in their choice of tenant. They should be prepared to deal with making money from WeWork for the time being and then finding a new tenant.

With regard to Neumann walking away with $700m, I've got to say if you are going to make a bunch of money off schmuck investors, it would be hard to find a list of investors I have less sympathy for than the Vision fund investors.

It would be wild if they pull this IPO. I consider the WeWork leadership team to be entirely unethical and wouldn't want to invest in them myself, so I'll admit to feeling a bit of schadenfreude.

The schadenfreude when this one fails is going to be great. Not as gratifying as Theranos, but how can you top those clowns? The only thing that would make these flameouts even better is if the arrogant wealthy swindlers actually lost their fortunes and ended up in the soup lines, but unfortunately it never happens.

I don’t see how they can have the ipo under these conditions. Who would buy into it after their early backers decide they don’t want to invest more at half the price.

Twilio at IPO was a good investment, Twilio at 23 was even better. PagerDuty, Elastic, Fastly, Datadog, CloudFlare... there are lots of great stocks to invest in. This certainly isn't one of them.

Well, now that it's leaked that they were weighing it, they basically have to do it, or something similarly drastic, right? Because now expectations are lower.

Probably, but arguably all the negative news may have made the IPO plans untenable as it is.

Granted it is hard to measure investor interest but I'm not sure it was viable to just go along with the IPO, meeting leak or not.

well Softbank can come up with some profit of the shorts angle.

What is up with Softbank? It seems to be throwing a lot of its money into overvalued late stage funding rounds for companies that don't really have growth potential left in them.

Hypothesis: they have been given more money than they have good investment targets for, among others by Saudi Arabia after they postponed the Aramco IPO. They had to invest that money somewhere, so they gave companies like Uber and WeWork 10x what their most generous investment should have been.

Disclaimer: I don't have any inside or expert knowledge about Saudi Arabia or Softbank. But they seem to have been stuffing billions of dollars into companies that can pretend to be "tech", but aren't really.

> they have been given more money than they have good investment targets for

Why not give the money back?

I'm not saying you're wrong, but I'm not surprised that they didn't.

Lol, because they probably already spent their fee.

The tech companies going public after the last recession are all like this. They squeeze out as much funding they can from investors and when that dries up or when the investors demand their money back the company dumps their stock on the unsuspecting public and makes money. Most of them don’t make money and have terrible balance sheets but still somehow are “great” “unicorns”. I don’t invest in any one of them.

9 out of 10 times, when I ask someone about a woefully unprofitable business model, I get the same answer - seriously, almost every time:

"Yeah but look at Amazon, they had x unprofitable years"

"We're still in the growth phase, our business model relies on scale and market share."

Can confirm. To back test i sometimes ask those people on their opinion on juicero, just to be sure about who i’m dealing with.

The investors themselves aren't blameless in this. It's on them for believing that companies who literally torch money will somehow present them with gold nuggets in return.

It's succeeded for others in the past, but this is very clearly a high-risk field, with the inherent downsides that involved in it.

WeWork is not tech company, but somehow they seem to always be discussed in the same way as one.

I think the best argument you can make for them as a tech company is that their customers are tech companies.

Although I don't think We is a tech company, this is still true.

https://www.venturecompany.com/blog/2009/08/the-silicon-vall... ^ Voiced the same concerns as the famous Kaufmann Foundation report, but earlier.

At best venture capital seems to be a sexier, private way to fund R&D, which is often so unprofitable it requires public funding. I think there is social benefit, most obviously when venture-backed startups offer a useful service below cost to the public, but financially there are better investments.

This is the part that I believe is a bit deceptive to retail investors:

>> Over the past year, SoftBank committed to invest $4 billion in We at a valuation of around $47 billion. It also spent $1 billion to buy existing shares from We employees and investors at a valuation of around $23 billion.

It makes it seems like SoftBank believed the company is worth owning at a value of $47B. I don't know for sure, but I strongly suspect that they have a liquidation preference for their investment so that they get all their money back even if the company is much less valuable than $47B. That is unlike common share investors who may think they are getting the same thing at the same price. When they actually bought shares from employees they only paid half as much.

'My pen, which is accustomed to figures, is unable to express the march and rhythm of consonance; therefore I shall try to record only the things I see, the things I think, or, to be more exact, the things we think.

Yes, "we"; that is exactly what I mean, and We, therefore, shall be the title of my records.'

'We', by Yevgeny Zamyatin - https://mises-media.s3.amazonaws.com/We_2.pdf

It’s interesting how much SoftBank has interest in. A friend of mine’s company was given funding by Softbank, but those funds were delayed due to Saudi interests being held up by blocked wire transfers at the time.

A _lot_ of Softbanks’ money comes from Saudi Arabia and Iran, etc

So you're saying that Softbank is just a laundromat for ME oil money?

Source on Iran in the Vision fund?

That does seem unlikely. The whole point of basically all the violence in ME is that MbS and his silent partners hate Iran.

Then again, what sort of investment would one suggest for a hated enemy? Maybe Softbank?

That would still leave it massively overvalued compared to conventional players like IWG (Regus). Those players also don't have unusual corporate governance concerns.

With risk like this, people wonder why softbank would invest so much in the likes of WeWork and even Uber at such a late stage. But, I think it's no wonder, considering how low global interest rates, and future equity returns are. This is what happens in an ultra low interest rate environment. Desperate investors do desperate things, and thus increasingly risky investments start looking better and better against negative yield interest.

It'll be interesting how much of the confirmation & consistency bias forces SoftBank's hand here... will they throw good money after bad?

The board of directors at WeWork is crazy dysfunctional as well... Im guessing no one has a questioner tendency, they all just went along with whatever BS they were told by the management team and nodded in order to maintain group cohesion and avoid being labeled as "difficult".

Wow, now WeWork looks even more overvalued than it did when I wrote this list [1] of things it’s “worth more than”.

My favorite: At $47 billion, We would be more valuable than all the cash raised by every IPO in 2018.

[1] https://betterquestions.blog/what-is-we-worth/

Companies like Knotel are set to eat WeWork's lunch. I cannot fathom how WeWork's astronomical valuation is even remotely justified.

Relevant: https://stratechery.com/2019/what-is-a-tech-company/

Can anyone point me in the direction of good resources on how to short IPOs directly on the first day?

You can’t and probably shouldn’t. First days are super unpredictable and you could get margin called very easily on it.

WeWork and its parent don't hold the leases in the buildings. They have special-purpose entities for each building, so they can go bankrupt piecemeal. That will probably start when the recession hits.

That may provide them some short term legal protection, but the second one of these sub-entities plays that card it’s basically game over for the whole enterprise.

Why? Legitimately curious.

Never have a down round! This must really hurt. SoftBank just put in $5bn at a $40bn+ valuation. Imagine how that cash just loses half it's value (from an investor perspective) instantly..

anyone know what strike price WeWork employee offers were at? guessing anybody who joined since the last round is underwater

I'm feeling sorry bag holders to be. Raise awareness among F&F.

Finally a stock worth putting all my spare money into shorting!

That's a good start

This whole IPO is going so well...

EDIT: Removing it because have a lot more thoughts on this that do not get captured here properly.

How do liquidation preferences work when a company goes public? Presumably shares are then just shares, and have a market value... Or are they converted into preferred shares?

That is true -- most likely the preferences will go away, although who knows what they may negotiate.

> I like that no one in this reading of the situation is dumb

Well except the employees

Can people please stop putting this paywall crap up here on hacker news?

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