Comment by cs702 | Hacker News Reader

Comment by cs702 | Hacker News Reader

It's remarkably easy to make fun of WeWork, given the company's high-as-a-kite ambitions, its largely conjectural business model, its dependence on fresh capital for survival, its charismatic CEO’s new-age antics, and its disregard for conventional norms of ethical corporate behavior.[a]

But if the IPO of a company as prominent as WeWork fails and the company is unable to raise the fresh capital it needs to stay afloat, we should view that as a warning sign that capital markets are shifting from "grow at all costs" to "show me the profits."

The last time we had such a shift, in 2000, it was sudden and cruel. Many fast-growing companies found themselves unable to raise capital. Down-rounds became common. There was a wave of failures. The startup ecosystem went through a long, cold winter.[b]

If you are at a money-burning startup, please make sure your company has a viable plan for survival in the event that access to fresh capital is suddenly cut off.[c]

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[a] https://twitter.com/shiraovide/status/1161601877517246464

[b] https://en.wikipedia.org/wiki/Dot-com_bubble#Aftermath

[c] Here's a good first-hand account of a fast-growing, money-burning company that managed to survive the post-2000 environment, while most of its competitors went bankrupt: https://a16z.com/2010/03/17/the-case-for-the-fat-startup/

Framing the entire market as “either you buy into this single obvious scam or everything falls apart” is extreme. WeWork has been a gamble throughout, and the latest antics just pushed investors from “yes its a bad investment long term but short term I’ll make a profit” into straight up “this bag is on fire and I’m sure it’s filled with shit so I’ll let someone else step on it”. Wework failing is not going to trigger a complete market collapse. When Theranos blew up the next Monday was business as usual for every single other company.

There are a lot of big startups without a good business model who have been surviving on copious amounts of easy capital.

...and a healthy market must make bad ones go under. Some of those companies should have been stopped way earlier.

For me as occasional observer, the first shot across the bow was the Uber S1. It seems to have made a lot of people pause and question the business models of other companies as well. Nobody jumping ship, but caution in the winds.

To throw caution to the winds means to be careless (you're throwing caution away). Is "caution in the wind" an actual phrase?

Pretty sure they just meant that caution is the order of the day.

Now do Uber.

I don't know, by the time you get to a series G, "show me the profits" is a fair demand that the capital markets should never not be making.

Your post seems to say "if you don't prop up WeWork, good luck raising money for your startup." I think it's a little disingenuous to project that guilt onto startups that are in reasonable early and growth stages. Every company has a viable plan for survival by that stage. And that plan is: show the market the profits.

WeWork coming back down to earth doesn't mean that suddenly we will see drastic tightening from seed-stage to growth-stage VC.

>Your post seems to say

I think it clearly does not. It was descriptive, not prescriptive.

Shouldn’t “show me the profit” have been the basis for investing all the time? It’s the growth at all cost that’s dangerous.

Agreed. Grow at all costs is what incubates the "fail fast" approach, which I, personally, disagree with. There's a reason why you need to spend most of your time designing and architecting and jump to implementation only when the viability of the solution has been justified. And part of this justification has to be a solid business model that has a clear road to profits. And a path to profit that's not decades away. As things stand, it looks like most startups want to exit through an acquisition and not ever have to talk profits.

Huh? If investors demand immediately profitability, wouldn't that push companies to "fail fast" even more? The point of failing fast is to spend as little time as possible working on the wrong ideas, i.e. to find 'market fit' as soon as possible.

Time spent designing and architecting isn't free either and, for a lot of people, 'implementing' is the only viable means of testing designs and architecture, and more importantly whether there are any (potential) customers.

An "exit through an acquisition" is a perfectly sensible goal if acquisitions are common or expected. It's pretty common in (some) other industries, e.g. pharmaceuticals.

> Time spent designing and architecting isn't free either and, for a lot of people, 'implementing' is the only viable means of testing designs and architecture, and more importantly whether there are any (potential) customers.

That's exactly the problem I see. We're going about it backwards. Shouldn't you start something because you have a customer need and not start something and then find a customer?

Some business models don't work unless they're a decent size, like marketplaces and social networks. Beyond that I generally agree. E.g. MoviePass, huge growth but no revenue. There are probably some good companies mixed in with the lemons but with the inverted yield curve etc. it's clear the tide is going to to go out sometime.

There are valid reasons to invest in a company that doesn't make profit now, but will in the future. Almost every business has this phase - it could be short (a lawnmower company that goes 5k in the hole for equipment) or big (a company with an idea to revolutionize the DVD to consumer marketplace, that starts operating at a loss until they build up the required customerbase).

Now, the big issue is that everyone thinks they're the company that's just operating at a loss right now, until they get the big break and start pulling in gigantic profit. That's simply not true for every startup, and right now I think we see VC is far too optimistic. But we don't want all the VC money to dry up, as then those companies that truly do have an amazing idea, that really will revolutionize their industry, will not not be able to get the necessary VC money to get past the unprofitable phase.

I think the problem is less companies that don't make profit and more all the companies that have raised a lot of capital without making that much revenue.

Not really, if you have access to capital it's easy to fudge revenue by selling dollars for ninety five cents, which is more or less what many of these companies are doing.

As long as the investor can make money by selling to the greater fool it's all good. I think that's the current strategy with the companies that keep losing money. Pump up validation and then dump it on the public markets.

The basis for investing should be connecting companies that actually need money with the money they need.

If a company is already making enough money to fund its whole operations plus make a profit that it can use to grow, and it isn't trying to massively grow at all costs, then it has no reason to sell itself to an outside party for an injection of cash

If the market return on capital is mid to low single digits, then some new high growth opportunity will tend to attract capital just early enough that the money losing period cancels out the excess returns, if markets are efficient (neglecting the risk of failure). Otherwise, someone else takes the opportunity instead. No?

I'd take that as a signal that VCs need to do a better job of evaluating their bets. If a company make gargantuan losses year upon year despite getting billions in funding, the secondary markets don't have any obligation to bail out the CEO and his VC benefactors.

We Work has no place in anyone’s portfolio and Softbank was the greater fool.

It is a great story for founders and for closely held corporations. The investor disclosures came out and there is no oxygen here for investors.

WeWork best deleverage and just continue its rental business.

This can function in a vacuum.

Their grow with all revenue and no profits scheme has nothing wrong with it, its the governance structure and convoluted corporate structure that all but ensures investors are guaranteed nothing.

From [c] - “Here is my central argument. There are only two priorities for a start-up: Winning the market and not running out of cash. ”

This quote misses an important third option - don’t get so big that even if you win one hundred percent of the market, you still can’t generate a return.

Dumping a billion dollars into a company in a niche market is also a failure mode.

WeWork is in no way, shape or form a tech company. Thus I feel the comparisons to 2000 (or to other real tech businesses of today) fall apart at that point already.

I think it's important to not gloss over what the markets are looking for in companies they want to grow as fast as possible: monopoly.

IMO, the shift to "show me profits" could be as much about the growing societal and regulatory backlash to monopolistic tech, which, if materialized, drastically reduces the probability of achieving or maintaining monopoly.

It's only a warning if you are betting on the frauds. If you are betting on real businesses it's a relief.

Non-frauds can also have capital/cashflow troubles

That's survivor bias though, isn't it?

There are a ton of bad ideas and companies that sink all the time. WeWork isn't new or unique in this regard, for reasons you described.

Just because you see a boat sink doesn't mean the other floating boats are going to start sinking as well.

WeWork is VERY big though.

For instance, their market cap is 1.5x what Kodak peaked at.

Which market cap? The one that was set by investors during the last round and has already been more than halved?

>market cap

You mean their private unicorn valuation? Kodak is publicly traded, WeWork is not, so you can't compare them. WeWork isn't that different from most failing unicorns.

Market cap is almost never used as the valuation of a privately held company. Their valuation which since around $17B has almost solely been funded by SoftBank and the venture fund? SoftBank took them from a $20B valuation with others to solo pushing them up to $47B over the course of less than 2 years. That doesn’t count as a market cap.

So if we don't support the insider self dealing of management and complete lack of discipline or board governance then legitimate cos will all shut down?

Seems like a strange and skewed view.

I think that’s some truth to your statement about growth, but also would like to point out that most IPOs we see where growth at all costs are tech or primarily tech companies and WeWork isn’t. At all.

Outside tech, growth has rarely been the kind of Play you make at a great loss, and most ventures need some sort of grounding in reality.

Show me a tech IPO that seeks revenue and then we can debate a change in the markets.

> It's remarkably easy to make fun of WeWork

Exactly. I don't understand all the schadenfreude about this company. WeWork is a basically good idea that seems to fill a real need, they just couldn't make it work in the economic environment they found themselves in (which, to be fair, is mostly about the "funding environment", and thus sort of an own-goal given that they didn't "need" to take all that cash).

That said: I don't know that I agree with the 2000 crash analogy. My feeling at the time was that the venture investors were a lagging indicator. The crash started in the already-public stocks at time when angels and VC's were still desperate to make deals.

yea, no. It's simply an overpriced asset and the market is concerned that without an adjustment there isnt much room to grow in value.

I dont think anyone think WeWork is not a strong business model. Id even take it one step further in that it's not the cash burn thats really killing people, it's the valuation. I know theyre connected as a larger company should hypothetically be able to sell less of itself for more money, but at 1/3 of the valuation I think the market feels different about the biz. Although the social signal of being forced to cut does some real bad psychological voodoo.

I'm not sure that WeWork has a strong business model. WeWork is absorbing the financial liability of signing long-term leases, and not passing that risk onto their customers. So financial discipline is critical to their business plan. Customer growth without financial discipline will just increase those liabilities.

Naw fam, you're ignoring the growing trend of short term leases and the value of a consistent repeatable brand in the space. It's not an industry killer, but they still do have a strong product.

That is an interesting point, but I am not sure how big a factor that first paragraph is! I would think it is more against all the shenanigans of WeWork than the overall market forces.

> The last time we had such a shift, in 2000

Nah. This happened again in 2008.

Parent comment is a bit terse so let me explain a tiny bit more. While the 2008 financial crisis itself was precipitated by real estate mortgage shenanigans, as the dust was settling and thereafter, it became very difficult to secure funding, at least compared to before. Banks, under renewed scrutiny by regulators, became so risk adverse that the fed's lowered interest rates, which made money "cheaper", were nigh unwilling to lend money to all but the strongest borrowers. But then the strongest borrowers needed cash the least.

It's that wave of cheap money that we're riding, with banks having satisfied regulators and new regulations enacted in the wake of 2008, that has led us to where we are today. Companies with invented valuation and unconvincing financials going public, or trying to, in WeWork's case.

If we don't believe the emperor has clothes then we'll all lose faith in the gov't and it will collapse.

Wouldn't the market shifting to "show me the profits" be a good thing overall?

yea this is effectively "it"

softbank just called the top

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