WeWork says will file to withdraw IPO
reuters.com
reuters.com
Has been an incredible learning experience for me on the unicorn class in general. Looking forward to unicorn report for 2019 [1].
[0] https://www.profgalloway.com/wewtf-part-deux
[1] https://corpgov.law.harvard.edu/2019/03/20/the-unicorn-ipo-r...
It seems Kara Swisher's entire reason for existing is for expressing disdain. In any organization she'd be that political person who adds no value to projects but rises due to her expertise at networking and name dropping.
I much prefer the journalists on the Economist podcast and the people on The Weeds (Vox) and FiveThirtyEight.
The a16z podcasts are way better - I can't recall the name of the ladies who generally host that but they are much more effective interviewers and analysts.
https://www.profgalloway.com/every-seven-years
Market was at 21,600 (very roughly) on the approx. date of that post and now is at close to 27,000. It did not go lower than 22,400 in the interim.
To wit (that post):
> There are several hard metrics for why we may be nearing full-monty bubble, including things my NYU colleagues spend a great deal of time thinking about, and understand much better. But you don't need a Nobel to see the similarities between 1999 and 2017. (Btw, NYU Stern has three active Nobel Prize winners… We. Rule. But that's another post.)
Very generally if you are predicting a collapse ala 1999 you need to be a bit more accurate than that.
I didn't do a great deal of work to find that post either, it was linked in the post you gave.
Edit: Also love his being so proud of the anointed 3 active nobel prize winners. Would like to remind everyone that until recently the game in business was making money or a great product or being loved by your customers not winning academic awards and platitudes.
But he's also made some really bad calls. For example he predicted that Spotify was going to be the next FANG and that the stock price would double last year. That's not a crime, nobody knows what is going to happen in the future, but it's the arrogance and condescension and air of certainty that bothers me.
He was so adamant about the dominance of voice and how Alexa was going to take over and largely disrupt touch screens. That was the call that I never agreed with and made me more skeptical of what he says. More than once I saw him on tv talking very condescendingly to people who questioned that call and in the end, two years later, I still don't know a single person who has ordered anything using Alexa. To this day it remains a cooking timer and a way to control audio equipment (if I'm really lazy). Galloway called it the most transformative device in ten years. Really?
My favorite so far has been the bulk-order of travel size bars of dove soap. Why is that even a thing? Surely anyone who could fit 12 travel bars in their suitcase could just as easily fit a regular bar?
... why would you assume someone would take all of them at the same time? Instead of maybe multiple family members using them, keeping a stockpile at home (so they don't have to order an individual one every time they need one), keeping them on hand for guests, ...
I was being facetious... taking it literally à la Amelia Bedelia.
Sure he's wrong a lot, but at least he's never half-right half-wrong
Where's the technology in WeWork?
"Technology is at the foundation of our global platform. Our purpose-built technology and operational expertise has allowed us to scale our core WeWork space-as-a-service offering quickly, while improving the quality of our solutions and decreasing the cost to find, build, fill and run our spaces. We have approximately 1,000 engineers, product designers and machine learning scientists that are dedicated to building, integrating and automating the complex systems we use to operate our business. As a result, we are able to deliver a premium experience to our members at a lower price relative to traditional alternatives."
https://www.sec.gov/Archives/edgar/data/1533523/000119312519...
Okay, I'll bite: what is the core of their value-proposition? A cultural aesthetic? Cheap rent?
Since it's very easy to set up a competitor (at least in my area, since numerous knockoffs have been created in the last few years) their margins are low at best, and they have almost no customer lock-in, I have no idea what their value proposition is for investors.
A few days ago I moved into a WeWork clone called JustCo. The spaces are much larger, look virtually identical and are in a neighbouring building. Price difference per month was $2300 vs $1600 + a month free. WeWork's best offer was 5% off if we signed for 12 months. No free beer here, but I've got a beer budget of $700 a month with the savings.
It seems WeWork's sales guys here in Sydney have very little freedom to discount.
Tech my foot. The printer software is an abomination.
...that's a surprise....
[0] https://www.vox.com/2018/10/26/18029008/pivot-kara-swisher-s...
[1] https://www.youtube.com/watch?v=m58YkxEjzT4
____
Edit
Linked to a better resource.
For example, he predicted both Amazon and Google would be 'losers' back in 2015.. oops:
https://www.forbes.com/sites/stevedenning/2015/04/09/the-fut...
Macy’s Stock https://g.co/kgs/8KZ1Kj
Prediction is a hard business.
He also gave a glowing take on Smile Direct Club the day before the IPO, which has tanked 50% in a few weeks and had the biggest IPO flop in a decade, so YMMV.
https://www.indeed.com/viewjob?jk=cf0378114e63aeb4&from=tp-s...
Sort of a "Never attribute to malice that which is adequately explained by stupidity" kind of thing . . .
Or maybe he's just a bit gullible. It's hard to be sure.
"It'll do a bunch of deals that'll crater the company within 3 years, but I'll cash out $700mil on the way and be long gone before everybody who stays is trying to climb out of the glowing hole in the ground..."
Hanlon's Razor needs a strong caveat that it should never be uncritically applied when strong financial motives are at play.
I think Hanlon's Razor became popular in earlier days of the Internet, when dumb technical decision might happen ... people are dumb. Today, with money riding on everything, the situation can be much muddier, with dumb technical decisions happening because people are greedy ... and dumb.
I think this just shows how hard it is to be objective when there are so many cultural/financial/etc influences affecting your judgement. Obviously their team bought the hype (and as a sad Browns fan I can totally sympathize with buying into hype then being disappointed!)
or nobody wanted to rock the boat. If you had pointed out this as a legal grunt or rank & file finance guy, you would have looked bad for "ruining" the exec's payday. Better to let the market decide and just keep your head down and receive your pay check.
The Emperor's New Clothes is not just about rulers and their fashion choices. I've caught myself doing the same thing with much smaller investments that are rolling over tits up. I wanna believe, because the alternative is most unappealing ("You were wrong, Mr. Mikestew, and you are going to lose money on this. Most of it, in fact.") So I'm guessing when reviewing the S-1 when your financial testicles are lying on the block, you can easily skim right over the uncomfortable parts.
Of course, the rest of us with no financial stake, or other incentive to look at the S-1 with only one eye, look and ask, "WTF?"
Powerful incentives are a hell of a drug.
Some people are experiential learners.
http://nymag.com/intelligencer/2019/09/what-happened-at-we-w...
Is there a way they can walk away from all these commitments? I understand they have a SPE structure which potentially allows them to do that, but I imagine there must be some costs or downsides to it, otherwise it isn't much of a lease commitment from WeWork's PoV.
"We came to market and public investors informally expressed some skepticism and its private backers were immediately like “wait this company isn’t profitable, why did no one tell us, burn it all down.” I am not saying that the public markets are wrong, but I kind of wanted there to be a difference of opinion; I kind of wanted the people who bought WeWork at a $47 billion valuation to act like they meant it."
Are you thinking of any in particular? Attention toward IPOs (especially on HN) go almost exclusively to bad IPOs. Fair offerings seem to get ignored.
Edit: Peloton is one that comes to mind. Nearly $1 billion in sales, up 40% YoY. Although even they are posting a net loss of a quarter billion.
[1] https://news.ycombinator.com/item?id=19465860
Is it not possible that both investors and the public will find the shine off the apple of pairing two independently somewhat unattractive things--a stationary bicycle and a hefty monthly fee--as used models start to hit the secondary market?
Have you ever tried to sell a used stationary bicycle? It ain't easy! The evidence of the gulf between good intentions and regular use is right there.
This is a significant value drop, but not huge given the logistical difficulties of this specific resale market (shipping these things is hard.)
We go in cycles; I use the bike much less frequently in the summer when I ride outside more, and more in the winter. I'm around 300 rides on it, my wife's closer to 100. (I ride more/she runs more).
We bought the treadmill in the spring after she got injured (again) trying to run in short morning daylight hours, or waning evening daylight hours, so we haven't used it as much, but it will definitely get a lot more use as the darkness descends on us again.
We're both pretty active, so I guess maybe we don't represent the average of the addressable market, but maybe we represent more of an average of CURRENT owners.
Peloton could really have a home run, market-wise, if they could sell expensive equipment AND subscriptions that people don't want to let go of because they want to keep thinking of themselves as people who work out. (The same way people keep paying gym memberships because they want to believe they're going to work out more).
Now obviously, in this case, it was too blatant and stunk bad enough that even retail investors shied away.
Retail investors shying away had nothing to do with the IPO getting pulled. And even if this wasn't the case it's still not fraud: if retail investors have all the data (which they did) but still want to buy something, it's not deception.
Not "fraud" in technical sense; more like "generous marketing".
Running an ad of a bunch of thin, attractive people drinking Coke is not fraud. It's also not very accurate either.
Yes, Softbank and others will lose a lot of money, and Neumann made money off them, but they’re all grownups who knew what they were getting into.
How are they going to raise more money for opex? Go back to Softbank and get another pile of cash at even higher valuation? Because it would be incredibly dumb for Softbank to do that as they have no serious competitors on the next round. So is softbank going to say 'This will be the down round and, we will now own 95% of the company and all of you, previous shareholders, get whatever is left? It is a down round with a wipe out, take it or leave it?'
$6B to get the seat at the table.
$10B now as a down around for a wipe out?
1. They want some turkey.
2. WeWorks is a turkey that already exists, in a good enough form and, should non-wanker management be installed, fat trimmed and the co being returned to real estate business rather than technology business, it seems to be a pretty tasty and immediately available one.
3. Buying it outright would have been a lot more expensive.
Is it any different from Softbank investing in Sprint? They could have invested in smaller company and built it themselves but instead they dumped money into someone who was already there and slowly reshaped the management
1. It can buy Regus. Regus does not need money to survive, has poisoned pill and does not have a brand recognition. With 3B yearly revenue. Anything below 8x the revenue probably won't get a board's automatic stamp of approval and anything below 10x won't get a board's enthusiastic "Yes, please!". So that's 35B. Regus with Softbank money would definitely crush everyone. It will take a long time just to get the 35B back.
Pro: Definitely a solid play Con: Really expensive.
2. They can create their own competitor - it will take 3-5 years or longer to assemble the entity comparable to WeWork with the same level of name recognition. It will also cost more than WeWork already burned. During that time Regus may restructure and become a real competitor ( they are in a different market now ) and whoever picks up a corpse of WeWork could become a competitor in the juciest markets.
Pro: cheapest Con: longest, and most unclear -- Regus may pick up WeWork corpse making it the undisputed leader.
3. Basically do a hostile takeover of WeWork. If that was the play, it seems to have worked very well. It was as if a biker was taking candy from a baby: neither VCs nor C-suite, not ibankers seemed to have caught on.
Pro: No WeWork corpse for Regus to pick up cheap, no other competitors show up from it. Cheaper than buying Regus. Con: ~10B spent already + 10B to buy the rest.
> what would be their exit strategy from that?
They may not be looking for an exit at all. At those sizes cash equivalents without good investment prospects aren't a good asset.
But they have to. Like all VC funds Vision Fund has a set lifecycle. In their case they have 5 years to invest (starting on the day the fund closes to new investors, which has already happened) and then 7 years until maturity at which point it dissolves and returns capital to investors. The clock is ticking.
And what exactly is wrong with their business model? That's not clear to me from the article. It says they take long-term leases and sell short-term leases. That seems straightforward and potentially lucrative if they're adding value, making it easier to find suitable short-term office space, etc. Is it just that they're not making money doing this? Why not?
We work could have existed with an army of secretaries taking phonecalls and it would have cost less
When times get tough the startups go back to their parent's garages or basements and don't renew their short term leases. WeWork is stuck with their long-term leases.
Of course WeWork doesn't operate financially like this. The business model is sound in principle, but WeWork's execution seems ill conceived (except for the personal enrichment of the CEO).
They are considered a tech company (by the people who consider them a tech company) because they say they're a tech company. And they say that because tech companies get higher valuations.
> And what exactly is wrong with their business model? [...] It says they take long-term leases and sell short-term leases.
Right. So in the good times, you can make a fair bit of money doing this, but in bad times you'll lose a lot of money, as all the short term leases drop off.
Traditionally companies in this space work around this by buying their own buildings, by having fat margins in the good times, by not making very much money, and by occasionally going bankrupt. :) It's a perfectly valid business model, but it's not super attractive to investors; it's capital intensive and not very profitable. IWC (formerly known as Regus) has about 5 times the locations WeWork does, and is worth about $3B. $3B is a lot of money, so there's nothing wrong with the business model, but it's also a lot less than the $47B people were talking about for WeWork until very recently.
WeWork is trying to find a way to do something different or cooler, in the hopes of finding a reason they should be values completely differently than IWC, but so far that's translated into renting buildings, thin margins, no profits, and no story for why what they're doing is fundamentally better or more valuable than what IWC is doing. Yes, they have a live DJ in one of their London buildings and IWC does not, but IWC is making money and WeWork is not, and I mean...you can hire a DJ if that turns out to be the critical feature missing from other office space.
> That seems straightforward and potentially lucrative if they're adding value
Right. Especially now that Adam Neumann has stepped down, there's no reason WeWork can't find their niche as another IWC. The problem is, as another IWC, there's no real reason they'll be worth even $10B (again, IWC is much larger and only worth $3B), and Softbank backed them at much higher valuations. Just because WeWork has a profitable niche doesn't mean their investors will be okay. For Softbank the difference between a $5B valuation and a $0B valuation is minimal, when they were expecting something more like $60B.
I'm more interested in the ramifications, and I don't just mean the obvious ones like "potential tech recession" (maybe, who knows) or "more due diligence" (unlikely, or if so likely to swing completely the other direction).
Given that "private markets are the new public markets" I wonder if this will just encourage more companies to stay private either indefinitely (e.g. MailChimp though obviously I realize they are an exception) or for a period far beyond the norm (AirBnB) to wait for a more favorable time to IPO. Maybe we'll see companies switch to RSUs instead of ISOs as this becomes more common.
[0] https://www.cnbc.com/2019/01/15/airbnb-sustains-profit-as-it...
Most (but not all, obviously) unicorns could easily be profitable if they chose to be. It would come at the expense of growth and R&D, but they would be profitable nonetheless. Growth is just valued much more heavily in the current market.
If you look at S-1s or even recent public unicorn earning statements, most of their losses stem from outsized increases in R&D/etc. expenditures despite healthily increasing revenues. The most recent example I can think of off the top of my head is Dropbox.
I wonder if having wework on your resume is a good or bad thing.
Uber is another story. They've got a sizeable engineering force.
IDK if making their own was the right solution, but it was driven by necessity and not boredom I assure you.
Anyway, HipChat was bought and killed by Slack. They avoided a dying product by accident.
At any rate HipChat was already dead prior to the sale. Atlassian made a new program from scratch called Stride which was its own little awful can of worms.
Build it, and they will come ... and do something you hadn't planned for.
> It was like 25k people in a single room iirc.
This never happened. I literally could not have happened. Uber ditched Hipchat when it was around 10k employees. The largest rooms I ever saw were outages or eng rooms with a few thousand, most with the room muted unless they needed something.
Seeing this behavior was as easy as doing a join in mysql for user ids and rooms. I mean it's likely you wouldn't have seen it, or the room, or had knowledge of it unless you weren't directly involved with whatever it was?
Most open-source and commercial software advertise that they can scale, but throw the first 500 or 5000 users and it's breaking apart.
Why not slack TL;DR - Uber, surprisingly, is cheap about off-the-shelf solutions. Cheaper than they are about balloons anyway.
Slack was trialed twice. Once in late 2015, and there were some bumps. Rather than stick with it, Uber ditched it citing it "couldn't handle their scale". Maybe that was true at the time, but I had a distinct impression that that's what the group in tech services at the time _wanted_ as well. Their lead on it was very much the type of person that would argue that there's no difference between hipchat and slack. If you asked the right person, you'd get the real answer: slack costs more than hipchat. Besides, the only person they had to convince was directors that didn't use chat anyway. All the executive leadership used Hangouts too. So they just needed to show the price graph comparison to justify, but as far as I know no qualitative productivity cost/savings/improvements measurement was made or factored into this.
Fast forward to the second try, late 2017. Supposedly when Dara came in he asked the same "why not Slack?" question. The UChat team was pretty intent on doubling down justifying their product, but a Slack pilot was done anyway. The pilot was a massive success by all accounts and basically everyone that made the switch was quite happy with it. Then tech services ended the pilot, sent out a survey, and were never heard from again. Would frequently give spiky answers when people asked for the results of the survey as well. Again - ask privately, and the answer you'll get is that Slack was just deemed as too expensive.
In both cases - tech services claimed that Slack was too expensive because of a price that was linearly extrapolated from their website. A lot of people didn't buy this, because that's just not really how enterprise contracts work. But tech services isn't accountable to UChat users, just the eng leadership they report up to.
In any case - everyone* else is still paying the productivity cost of using UChat/mattermost. It's more reliable than hipchat, sure. But is's miles away from being as useful as Slack. Especially the mobile apps - mattermost is a low quality, utilitarian react native app.
*Except ATG. ATG uses Slack because they actually don't fall under the CTO's jurisdiction. And executive leadership all still presumably use hangouts, because the UChat mobile apps are too crap.
I left Uber before the late 2017 Slack test, so I know nothing about it, but I think "It costs too much" is a very fair objection to using a chat app, especially for an unprofitable company that would have to pay for >30k seats.
At this point, I'm sure that Slack has resolved these performance issues for the sake of onboarding all companies that are Uber-sized or larger.
If that's the definition of a tech company, then Citibank, United Airlines and Fedex are also tech companies.
I don't think that's exclusive of the other types of company you can be.
To play devil's advocate a bit, isn't this how science works? If you're not checking the obvious, you won't discover that people actually drink more coffee on the afternoon, or what have you.
I guess I kind of wait until I feel particularly down and tired, but otherwise well hydrated, and that's when I want coffee, but not always at the same time of day.
(psst, train your own, damnit)
Actually, we just need this in general...
Now, Uber has it own share of quite extensive R&D on self driving tech. How can it be a $50 Bn market cap company today? With all the markets it is present in? For me, it looks like an opposite case of that of WeWork. Conspiracy against the company right in public market. It began with Travis getting all the heat for pretty trivial things, all the way till the IPO and now.
I honestly don't understand how a company which practically revolutionized public transport all over the world and created a business model which gave a bazillion uber-for-X companies be valued so less.
This makes their business vulnerable to price competition and raises doubts about their ability to make large profits over any long period of time. At the moment, they are losing money, but their (still high, imo) valuation is based on the fact that they are the biggest player and this means they have 'mind share' / brand awareness. If they try to start making a profit e.g. by pricing above their costs and not giving so many subsidies / bonuses, then they are vulnerable to any of their numerous competitors stealing market share by undercutting / offering their own bonuses or subsidies. They are already in fierce competition in many markets so it doesn't seem that their brand is necessarily enough to give them a huge and defensible advantage.
By contrast, all reports I have read (e.g. https://www.ft.com/content/7c8e1d02-2ff2-11e9-8744-e7016697f... ) indicate that Waymo's self-driving tech is the best in the market by some margin, with Cruise a distant second (and everyone else, including Uber, way behind that). And Waymo's technology is fundamentally more complicated and difficult to copy than a taxi hailing app. You couldn't have multiple local competitors to Waymo popping up in each city around the world, in the same way you have with Uber. So their competitive advantage seems a lot more defensible, meaning that their potential to earn defensible profits from their technology seem stronger in the long run. Continuing on this idea of defensibility: whereas people are happy to try any new cab-hailing app that launches with a promotion, the decision on which self-driving tech to use is going to be a lot more strict, in that unless it really works, it's not viable. So having the best tech makes a BIG difference, unlike for ride sharing.
The car industry is worth $1tn+ per year. The market for ride sharing is probably one or two orders of magnitude smaller than that ($12bn by 2025 according to this: https://www.prnewswire.com/news-releases/ride-sharing-market... , although Uber's revenues are already $11bn so I question the accuracy of this). Uber is a loss-making and non-unique ride sharing company with so-far unfilled aspirations to develop market-ready self-driving tech. Waymo is a self-driving tech company with apparently real potential to disrupt the trillion-dollar car industry with their unique technology.
Finally, Waymo's valuation is only on paper, whereas Uber's is in a public market. As WeWork (and Uber) have recently demonstrated, private valuations may not hold in private markets. However, given the reasons above, I actually think that the Waymo valuation might be more reasonable than the Uber one.
Listen to this, to compare to the current state of WeWork
https://www.stitcher.com/podcast/national-public-radio/how-i...
Sounds like from the intro blurb that this was potentially recorded in June 2017 and this is a replay of that episode Sep 2 2018.
As for Adam N, I have to think some part of him knew that it was a bullshit valuation and all the hand-wavy "we are a tech company that also happens to do real estate" doesn't pass the smell test to me. He has personally enriched himself quite a bit so even if the whole thing falls apart he will be ok. I don't know if there is a bubble in SV or not, but it seems that the last couple of really huge unicorn companies have all been based on BS(We Work), Fraud(Theranos), and untenable business models (Uber). I'm far removed from that whole scene so maybe I'm showing my ignorance by stating this. I am, however, very curious to hear about any startup unicorns that are profitable or at least have a clear roadmap to profitability and not based on a business model that will be outlawed in a few years.
After reading some of the stories, I'm minded to believe maybe he didn't...
But I have trouble squaring that with extremely hard-nosed moves like cashing out $700 million, and getting loans from the company to buy buildings to lease back to the company.
The only "tech" part of WeWork is their app and related community. Which is a ghost town used mostly by businesses to spam their services to uninterested members.
https://www.se-radio.net/2013/12/episode-199-michael-stonebr...
Only on a tangent - it's an otherwise fascinating episode from a database wizard.
Are these good examples, though? Dropbox is down ~35% since IPOing, and Slack is down almost 50%. This certainly suggests the market thinks they were both overvalued when they IPO'd.
Slack went public at $26, it is at $23.50 today. It is less than 10% less than the IPO price.
What happens when the inevitable correction comes? The Fed will run out of monetary tricks, eventually.
No, it won't.
It might run into a monetary-policy resistant situation (e.g., stagflation), but the Fed has infinite range of monetary policy tricks available (literally, there's no floor to rates now that the Fed has taken notice of the use of negative rates elsewhere.)
>In fact, I would be wary of software companies without a base of free users, as that means the company needs to keep spending a lot of its revenue on sales and marketing. I am much more wary of companies that keep or burning cash for years and years with the only excuse that "Amazon did that as well".
I think about this a little differently. Spending money on free users is actually a much more efficient "marketing expense" than classic outbound strategies (e.g., online advertising).
When a consumer realizes they are getting 50% off of a service or product they didn't want or need in the first place, they stop signing up for deals. Also, once the businesses realize these customers don't provide repeat business and they are devaluing their product for consumers who do want it, they stop offering the discounts. Finally, it's trivial to sign up for each of their competitors and play them off of each other.
When does a Cloudflare customer stop needing secure, performant content delivery, and how easy is it to switch to a competitor?
Plus companies like Uber don't exactly own assets, its more tech company than not.
For all the promise of the Web, people live in the real world, that's where the money is to be made, mega tech companies are necessarily going to live at the interface.
Except Buffett did it with non-tech, capital-heavy companies. Where it arguably works a lot more reliably.
How so?
I don't think he invests so much in capital starved businesses, more he just uses the cash generated by eg insurance to invest in high quality businesses. I suppose the difference here is the high quality part. Wework doesn't seem to have much of a moat, have particularly good governance, or have much of a track record of anything.
Holding it for a period of time is "generating float." For many of these companies the float is a large multiple of the profit.
https://www.theverge.com/2019/7/10/20689644/apple-zoom-web-s...
Also, valuations are so nebulous and ungrounded in reality at this point. Who is to say what anything is worth. You put something out there and someone is willing to pay billions for it, who are you to say that isn't the right value. There are a lot of problems to pin on Adam, I don't think the valuation is one of them.
Softbank bought in, so this is more valuable, so Softbank will buy in again at a higher valuation, so this is more valuable, so Softbank will buy in again at a higher valuation; and round and round it went until we hit ~$40B
-Margin Call
SV ran out of the first two because they are much harder. We are left with the dying gasps of companies trying the third way.
The social focus is indeed different but I wouldn't call that alone a massive paradigm shift.
They borrowed short, lent long and then pretended it was as sustainable business. To their credit, they abundantly disclosed their shenanigans. (I haven't seen any evidence suggesting investors can reasonably claim fraud.) But they were playing fast and loose with basic economics.
At its core, sure, WeWork could have been a business. Its thesis, that office space should be treated as a service versus capital expense, is plausible. But there was so much garbage--the party-at-work hypothesis, thoughtless cross-selling, nepotism, consciousness nonsense, self-dealing, et cetera--that the value got diluted while the price was pumped.
SoftBank and Masayoshi Son's hypothesis is:
1. Find a market which can be captured by a business with access to massive capital
2. Provide massive capital
3. Extract profits once a monopoly has been established
WeWork is a terrible example of this, because in no way does scale give them unique advantages. And furthermore, "scale" in this context means "scale in the office property market" -- that's a pretty big pool to expect to overflow.
Uber's product isn't rides. Uber's product is being the market-maker between riders and drivers.
Austin has a non-profit rideshare business that matches riders and drivers.
I run a small digital agency, as a WeWork member when I'm on the road being able to know I can find and book space for meetings or work is invaluable. We've also spun up offices in new cities (Mexico City for us) easily and quickly with a confidence in the level of service and support that we're getting.
There is a premium for this and we've moved on from those offices sometimes as we settle in. But its not a non-existent advantage.
Within the original thesis per se it gave them a possible demand-side advantage. (Commercial real estate is too big for any meaningful sell-side advantages.)
Being able to say "let's open a branch in Singapore and see how it goes for 6 months" with a few clicks is quite awesome. If I trusted it to be around in a few years, it would change how I think about deploying people.
To be able to deliver that value prop, you need seats available in Singapore. (And New York and London and Dubai.) Hence a potential scaling advantage.
I'd have thought that for most businesses, the two big obstacles for doing this are a) getting skilled people to suddenly move to Singapore at your will, and b) getting the Singapore office well integrated with the rest of the company.
Compared to those two, setting up an office lease is about as hard as tying your shoelaces.
This has not been my experience. Given how localized real estate markets are, they haven't been subjected to efficiency-driving global competition. The result is every market has hidden oddities. Little details that are a nuisance if you know about them but a disaster if you bumble through the process.
For long-term commitments to a market, sure, it makes sense to own your plot. But for short-term assignments? Toes in the water? Being able to spin up an office with flown-in staff committed to for the short-term, to develop leads and/or find those skilled locals to hire, is a tactical advantage which doesn't presently exist.
Matt Stoller wrote a great post about it:
https://mattstoller.substack.com/p/wework-and-counterfeit-ca...
"Generally speaking, Softbank’s model is to manipulate private capital markets as a way of drowning out competitors with cash. For instance, there were several ‘rounds’ of WeWork investment where Softbank was buying more shares at higher valuations. WeWork ostensibly became more valuable because Son said it was more valuable, and bought shares for higher prices. And since there was no public market for these shares, the pricing of the shares was totally arbitrary. WeWork then used this cash to underprice competitors in the co-working space market, hoping to be able to profit later once it had a strong market position in real estate subletting or ancillary businesses.
Engaging in such a strategy used to be illegal, and was known as predatory pricing. There are laws, like Robinson-Patman and the Clayton Act, which, if read properly and enforced, prohibit such conduct. The reason is very basic to capitalism. Capitalism works because companies that thrive take a bunch of inputs and create a product that is more valuable than the sum of its parts. That creates additional value, and in such a model companies have to compete by making better goods and services.
What predatory pricing does is to enable competition purely based on access to capital. Someone like Neumann, and Son’s entire model with his Vision Fund, is to take inputs, combine them into products worth less than their cost, and plug up the deficit through the capital markets in hopes of acquiring market power later or of just self-dealing so the losses are placed onto someone else."
No evidence of fraud, no. But cheating is not necessarily fraud because not all rules are codified as law. There is cleverly devious cheating, like a lot of what Gates and Jobs did in the 80s. That's cheating, but it's clever and it's cute so we think of it positively.
Then there's cheating as in pretending to defy the laws of economics, which is what WeWork did. They were trying to scale out of a business that loses money on the marginal dollar. Nothing illegal about that. But together with Masa Son's spigot of Saudi cash and Neumann's rampant self dealing, I'd go ahead and qualify it as cheating.
WeWork's revenues already cover its rent costs even at just 70% occupancy.
I still don't see this "cheating" you speak of.
You've just described almost every company in the financial sector.
They do have some scale, and there's always the idea that you can move to a different office or reconfigure your space quickly. This has real value. Just not $50 billion worth.
This is called "Being disruptive." Basically, just ignore the law, but make sure you get enough workers and customers that love you so that they turn against politics when you break the law.
Unfortunately, this seems to be the only way that's not outright massive violence such as Hongkong or France to get politicians to do their goddamn job. Taxi services have had a really massive lobby power in the US.
If not then this is just a silly point. Some of the regulations were unreasonable and the result of corruption - but Uber also skirted insurance and background check related laws at various times.
The end result is a safer, better-functioning street transit system (in New York at least). I don't care if they were in it for social change or for the money. They delivered results, both themselves and by kicking taxis up a notch.
(Many activists aren't in it for altruistic purposes. That doesn't make their work less meaningful.)
It's better to have two parties competing for user's money than just one party fixing the price and service quality.
> Unfortunately, this seems to be the only way that's not outright massive violence such as Hongkong or France to get politicians to do their goddamn job. Taxi services have had a really massive lobby power in the US.
This was strongly implying that Uber was causing political change. I don't disagree that the competition has been healthy or that the taxi companies were bad actors - or even that the regulations were legitimately onerous sometimes... I object to the statement that "disruption = positive social change".
I think that Uber's case is particularly weak because, while skirting regulation may have gotten accolades, the company itself was toxic to work at and brought in a bevy of sexual harassment charges.
by and large consumers don't care if the company is for social change or not.
it's difficult for a company to succeed in getting customers to pay based purely on social change intentions. That's how a market works
Yes, the rise of the Internet meant it was time to change how we did cab dispatch. And it would have been great to see what else we could improve, including getting the cab companies to be less oligopolistic. But Uber was clearly after a monopoly [1] so Kalanick could jack rates up enough to justify the billions of investment they took. But national monopolies are way more harmful to both workers and customers than local, strongly regulated oligopolies. Uber was ultimately trying to make things worse, but with them skimming the monopoly rents.
[1] https://www.amazon.com/Super-Pumped-Battle-Mike-Isaac/dp/039...
The issue is that not every industry is so inefficient as to be possible to legally disrupt profitably, so people try to do an end-run around the law.
Uber's autonomous car fatally collided with a woman, raising questions of negligence and liability in automation.
Uber acquired some of Alphabet/Waymo's trade secrets when they aqui-hired one of their former engineers who apparently kept a bunch of Waymo's IP he worked on. That engineer himself is now facing a federal indictment, and Uber and Waymo have settled.
E-scooters are facilitating a number of city-specific crimes (it's usually illegal to operate a vehicle, bike, or skate on a city sidewalk and the e-scooters do not provide helmets but neither do the riders). To say nothing of the legally dubious use of public property to deploy them.
Move fast and break stuff indeed.
If anything, I'd expect it to work against them.
What was/were the other crime(s)?
As it was originally proliferated in reference to tech ventures, it referred to a very specific pattern highlighted by Clay Christensen's writings out of HBS.
In classical "disruption," a product or technology that is notionally "worse," but as a result greatly cheaper or more easily distributed, takes over a market from notionally "better" but more expensive legacy approach. Often includes de-skilling of the use case too.
It's sort of like guerilla warfare in that way.
The successful recent IPOs people are pointing to in this comment section -- like Zoom, Datadog, and Cloudflare -- all tend to have a version of this classical disruption if you try and see it.
I say this not for mere pedantry but because taking "disruptive" to mean "F---ing things up (rules, laws, etc.)" dilutes a useful concept in thinking about technology adoption approaches.
This is more an inditement of modern society, highlighting how much freedom we have lost
When an app like uber is "illegal" one can not call that society free in the least bit.
The fact that most things are by default a violation of some law or regulation is the #1 reason we are no longer innovating as fast as we used to.
Some might see this as a good thing, I do not
You don't ask the question, why should an app like Uber be illegal? Why should taxi medallion holders have a monopoly on on-demand transportation in a city? To make hedgefunds rich?
Transportation across cities in North America sucked before Uber. You are completely delusional if you think pre-Uber and pre-Lyft cities were some kind of transportation mecca. It was horrible. I used to wait in the rain at UCSF for 30 - 45 minutes on the curb waiting and hoping for a taxi and finally just pitifully walking home getting drenched.
I love having a ride-hailing app and not having to waste money on a car or motorcycle.
I really think people that love static bureaucratic states should go live in France or some communist nation.
Uber and Lyft can't start up in a city if they have to wait for all the politicians and bureaucrats to give them an okay, when these people are bought and sold by unions and hedgefunds. Only delusional people think there's a path to disrupt that kind of logjam by waiting in line like a "good boy".
Medallions are just a mechanism for limiting the number of cabs to what the street network can support; isn't that obviously necessary?
On the other hand, it appears from what I read that Uber may have actually been dealing with the problem by charging surge rates and then keeping most of it, thereby reducing demand without increasing supply which is just what is needed. But that outrages everybody, so the argument for having the government ration things is that it's more socially acceptable - which is a valid reason!
The apps of Uber and Lyft seem to me like valuable innovations in that they allow you to get information on your ride, predict the cost, and pay with a credit card which are great improvements on regular cabs.
But cheering unregulated cabs makes no sense to me - the streets in a given city seem obviously a commons that needs regulation. Uber and Lyft are forms of regulation, so really, people only debate the details. Freedom vs. non-freedom is a caricature.
The wonderful board room scene:
What’s annoying to me is that these companies that are making huge losses were able to hoover up so much of the VC funding, while actual profitable businesses were not :-(
I recall reading an article a few years ago from a profitable startup talking about trying to get VC funding, and all their interactions were basically “you should stop charging so you can get market share”. Essentially demanding that they make their profitable company unprofitable.
I wish I could remember where it was.
I'm just glad we finally had a sanity check on something.
> Wag has a post-money valuation in the range of $500M to $1B as of Jan 30, 2018 according to PrivCo.
Both Goldman and Morgan Stanley gave the BoD much higher valuation numbers, which made members believe the stock price was going to go up... and when your options are going up in price, it's easiest not to rock the boat, and ignore misdeeds or conflicts.
You only realize who has been swimming in the ocean without trunks when the tide goes out ;)
I don't know at what point we can decide that the vision fund isnt, well, visionary. As things stand though, if you have faith in Weworks business model, this seems like a reasonable move.
To be clear, I don't have any particular faith in that business model, but I don't have any money on the line either way.
We're due for another venture backed capital burst. DropBox, Lyft, Uber .. the article posted on here a earlier about Counterfeit Capitalism comes to mind. There are too many companies trying to 'get there first' at all costs and squeeze out everyone else.
I honestly wonder if we're going to see another 2000 era dotcom burst for many of these smaller companies. I'm curious how taxi companies will retake their local markets once the big ride sharing companies are gone.
For private rounds valuation is part of the equation, but liquidation preferences and ratchets are likely more important. As the famous finance saying goes "You set the price - I set the terms, you set the terms - I set the price".
SoftBank has negotiated downside protection. Everything from there is just gravy on top.
The press never seems to discriminate between preferred and simple shares, so why not reach for the moon, e.g. https://www.latimes.com/business/la-fi-hy-uber-ipo-20181016-...
The major thing is usually first dibs if the company sells for a lot less than the later valuations. In this case that doesn’t seem likely to happen with Softbank getting back most of their investment
>The [ratchet] provision could grant existing shareholders $200 million to $500 million worth of additional shares, most of which would go to SoftBank, Kennedy said. For example, if WeWork’s market cap came in at less than $14.5 billion post-IPO, the total value of additional shares issued to SoftBank under the provision would be more than $400 million.
$400 million doesn't seem to be much of a compensation for losing billions of dollars in investments.
And that assumes that the company will IPO before it goes bankrupt (e.g., from investors pulling the plug on any future investments to cut their losses).
wikipedia.org/wiki/Escalation_of_commitment
wikipedia.org/wiki/Dollar_auction
I think wework just has too many things wrong with it. (1) Recent IPOs (eg uber), weren't great. (2) Financial performance from uber and other recent IPOs isn't great. (3) Theranos is old-ish news by now, but it's a good example of what public investors are looking out for: bubble excesses. Public markets atm are moneyed, but skeptical. Worried about this new, enormous private equity market pumping and dumping on them.
Once you add in the (4) difficult-to-understand ownership structure (with dubious scent), (5) complex leveraging/debt/liabilities and (6) complicated entanglement in the real estate market movements.....
It just adds up to too much, IMO. Every one of those 6 "problems" could make wework look like a "you should have known better" investment, CEO scandals cultural weirdness aside.
^IMO it's more about monopolies (thiel's definition) than software. Selling software doesn't guarantee "software margins" long-term. What uber, wework, etc. lack is monopoly mechanisms: lock-in or network effects. Even though uber is a market/network, the market can happily bear more than one ride hailing app. That means margin-killing price competition.
What I don't understand, and this is an honest question for this crowd: aren't these viable businesses, in and of themselves? Maybe this is a stupid question. This is probably what allowed them to run so far on what they actually were, but here's the question anyway.
For instance, WeWork seems to be an AWS-for-office-space. Is that not a useful business? If I own a contract for space that can be slotted into anywhere in the world I might want to sit, is that not a useful thing to pay for? One might argue that, if I had the resources to truly care about a world-wide smorgasbord of office spaces to choose from at any given time, I'd have enough resources to lease my own building(s). But it still seems like something the market needs. Did it have to be a one-hundred-billionaire-minting business to rent space into that kind of market?
Theranos seems like a useful thing, and there seems to be an opening in the market for it. Are the cost mechanics of the available technology and the opportunity not aligned? Is there no way to run an economically-viable company providing a blood tester unit with a more-limited set of tests? Did it have to be a unicorn, end-all-be-all, existing-testing-company-destroyer to make any money?
You see where I'm going now. Does Uber need to suck all the money into their pockets to fund their self-driving car efforts (or wherever all this money is going) in order for any of it to work? Surely there's a model of ride sharing through an app that doesn't have to suck, pay their drivers well, and is a sustainable business, right? Does it really have to be the "Uber-of-cars," so to speak, in order to exist at all?
Is the only game left in the Valley, now, unicorns? All others need not apply?
It has long leases for buildings, and short leases for customer, so it's basically failure scenario number 1 for an economic downturn.
And yes, if you act as a startup, and hire engineers assuming you are startup, you better be a unicorn.
I think about it from the other direction. WeWork leases office space and parcels it out to temporary tenants. But, what's to stop the management companies that already own the office space to do the same thing? Why pay a middle man? WeWork would take the risk and prove the model effective in a particular area, then their own suppliers could undercut them.
Theranos was trying to sell technology that doesn't exist.
Assuming their kind of risk in a robust economy is lucrative. But I fail to see how WeWork could ever weather a recession, US or global.
WeWork's business model kind of reminds me of MoviePass in that they are very dependent on vendors who could also be their competitors. And there's the risk that the economy slows down and people cancel their memberships but they still have long term leases to pay...
But if there's a silver lining here, it's that VCs can pull this shit until the cows come home without causing the same systemic problems that led to the first dot-com crash. They tend to have a small handful of wealthy LPs, and the financial system doesn't really give a shit if they get wiped out - grandma's pension may not be growing fast enough, but it's not going to evaporate.
In this case, SoftBank and the Saudis run away with their tail tucked, and everyone else just looks at them like they were idiots and moves on.
Wall St. et al, didn't care about anything but off loading this POS onto Investors and then taking their money and running.
That's how it works. Thank goodness it rolled over and now the race to zero. Couldn't have happened to a bunch of nicer guys.
So in some sense I think asking what Adam Neumann and Elizabeth Holmes really believe is a category error. Knowing the truth makes lying really hard. If you spend a lot of time figuring out what's true, that builds mental habits that make lying feel bad. But if mostly ignore "true", then it's much easier to focus only on what Nixon's press secretary called the "operative statement" [1]. For narcissist CEOs, I think they treat the objective truth like a child sometimes treats a scary closet: if they never look at it or think about it, it's not a problem.
[1] https://www.nytimes.com/2003/02/16/weekinreview/the-nation-t...
Everyone has their own peculiar mental model of reality, sometimes more optimistic, sometimes more pessimistic, almost always with strange boundaries on the thinkable universe.
I estimate this is how the majority of bad financial situations happen, whether untenable mortgages, huge credit card bills, excessive student debt, etc.
People are usually not fundamentally stupid or poor decision makers, but they do usually ignore uncomfortable thoughts.
It's easy for that to happen to one person; it's more surprising when it happens to dozens of people.
If those two factors are strong (say, cultural reasons), a lot of red flags can fall by the wayside.
Vision is fine but cold, hard facts are essential too. If you let your vision get the better of you and you ignore the facts then you're on the path to self destruction.
If the facts don't align with your vision, figure out a different vision.
If your CEO is delusional, it's usually possible to reign him or her in... From what I understand, Neumann had some special votes that basically allowed him to fire the board at any point.
I imagine that anyone with a pragmatic mindset willing to ask "wait, but the numbers are..." was pushed out of the picture either explicitly or implicitly by the power imbalance.
https://www.vox.com/recode/2019/9/24/20882133/wework-adam-ne...
Thanks for the tip! I didn't realize that.
A good CEO who is very strong on vision will build a team that keeps him in check by having balancing strengths. But narcissists don't like balance. So they build teams that let them do what they want. And when they hire somebody who isn't an enabler, that person soon ends up gone one way or another. And it's not just CEOs. You can find a good example of this in recent US politics.
This problem is fed by the fact that they surround themselves with yes men, who only benefit by feeding the beast, until the beast eats itself.
It's called Michael Jackson Syndrome.
The best part: https://www.youtube.com/watch?v=XAeEpbtHDPw
Think about the construction of the Panama Canal. The first few attempts were total fails, because canal-building technology wasn't as advanced as people thought, and eventually the funders got tired of what they perceived as "throwing good money after bad."
Eventually the canal did get built. Technology improved and the winning venture had enough funding to make it happen.
As a thought experiment, if We/Neumann/Softbank had enough money to buy or lease all the great real estate in the world, and to educate all the population in We schools, so that they needed/wanted We offices when they grew up, it could have ruled the world. Putting it that bluntly makes it sound silly, which is probably the right way to view the Neumann era in retrospect.
But when We's future liquidity seemed almost endless, it was possible to dream big dreams. What got them undone is the reality that capital markets do not stay giddy forever. At the top of every cycle, there's always someone who ginned up an enormous flop -- losing their funding partway through for a dream that would not work without more capital.
One of the root issues is that way way too much capital has shifted out of the public markets into private equity. Public markets are significantly more regulated, transparent, and liquid. Public markets are almost always more favorable for regular investors. Whereas privately funded companies tend to be structured to primarily benefit connected insiders.
WeWork's ridiculous valuation is a prime example. Private companies can easily manipulate their valuation, by only making sure to sell shares at pre-arranged prices so that they never down round. In contrast public companies shares are traded thousands of times a day. If investors stop believing in a valuation that's reflected in the stock price in microseconds.
The industry has built up this cult around "unicorns"- multi-billion tech companies that never go public. As if that's a desirable thing. It's mostly been empowered by a mythical cult of the brilliant founder. Said founder-CEO need be unchained from any accountability whatsoever, lest trivialities like quarterly earnings reports or short-sellers constrain his creative vision.
And of course the private equity firms behind the VC capital are more than happy with this arrangement. Again, it's significantly easier to manipulate the valuation of private companies than public ones. Keeping your ventures private forever enables the fund sponsors to massage the return stream on their portfolios, which makes their risk-adjusted performance look far more impressive than it actually is.
Stripe. Recently valued at $35 Billion, although they being profitable is unlikely now considering their phase of international expansion; IMO it does check rest of your questions just because their growth is directly tied to the growth of their customers.
The mis-calculation that I made was that I thought using software to enhance a legacy business was something that public market investors would apply a high valuation multiple to. What it looks like is happening is that public market investors are comparing these companies to traditional industry companies they already know.
The interesting note is that Amazon, Google and Facebook all stumbled out of the gate, but they were able to pivot to selling software. Amazon with AWS, Google with Search Ads, and Facebook with Mobile Ads. I think this is the pivot that's going to have to happen for the latest round of companies that aren't doing so hot right now to start throwing off cash and increasing their valuations.
[1] - https://avc.com/2019/09/the-great-public-market-reckoning/
Then we have WeWork. Which looks like a technical savvy landlord but under it all is subletting from one of the founders. Which I suppose would make this closest in structure to an IPO for a franchisee? That’s the sort of investment opportunity a bank would be into but makes no sense on the NYSE.
WeWork needs to get to a point where some to half of its properties were acquired under their own steam instead of through the founders. Otherwise it’s just a sucker’s bet.
Softbank was hoping Vision Fund II will be closed once this collapses so pumping it up to 47B made sense to juice the returns on Fund I.
Adam N. already took 700M of his chips off the table before the IPO as well, so he clearly expected the music to stop playing as well.
This was going to be one of the largest IPOs of all time. This means a huge amount of fees for bankers. In addition, WeWork is an opportunity for those bankers to also win business putting together the various kinds of debt WeWork throws off.
When bankers want a deal that will generate a huge amount of fees for them, they're not going to tell a potential client they won't get the valuation they want or that he needs curb his spending habits and reduce his control. That's a great way to lose a deal.
No, they tell Adam he's a genius, We Company is revolutionary, and once the company is public he should buy a second jet just in case the first one is grounded because a mishap like a cereal box of weed being found on it.
But it didn't work. Sanity has prevailed.
Willing dupes. It's a one-step jackpot if you can handwave all that stuff away, or if it never comes up in the first place.
But that's always the goal: get someone to pay you for somethig more than you think it is worth. And, conversely, they always want to buy it for less than it's really worth. Each side is hoping the other side’s value assessment is BS.
And now they'll be a little less of each.
The lessons they can learn from this experience could put them ahead of the pack. We have an entire generation that knows nothing but post-crisis bull markets. When the next downturn comes, those tempered by bad experiences have the opportunity to position defensively and react nimbly. (Or at least more defensively and nimbler than their peers.)
Depends on specifics. Broadly speaking, having been an IC, the lessons I learned the hard way were:
(1) Pay your taxes early and often. Keep your credit and channels open fixed-cost obligations low. (Nimble and defensive.)
(2) Save aggressively. Rule-of-thumb liquidity advice doesn't apply to you; I learned to keep 2 years of cash in Treasuries et cetera. (Defensive.)
(3) If you can't do (2), favor full-time offers, even those with lower face-value economics. (Defensive.)
(4) Don't over-negotiate. (Nimble.)
(5) Don't feel overly committed to your current gig(s). You can keep grabbing drinks with old colleagues from your new job. When the ship goes down, the captain gets commended for going down with it; everyone else just drowns. (Nimble.)
Save enough for 2 years? Only a very small percent could actually save 2 years worth of salary. For a family I’m not sure if anyone able to do this. The standard advice is 6 months.
As an example, below 1M, I am told, Uber only withheld 25% from vested (taxable) RSU grants.
It was worse in 1999. I knew a few people who blew everything they took out at 1Y with the expectation there was more to come. They ended up with significant tax debt due to under withholding once the market crashed and there wasn’t more to come.
You don't need to save 2 years of salary.
You need to save 2 years of your expenses.
As a SWE, you make at least ~3x what lower-income people in your area make. If you live with the same expenses as those people, you should be saving 2 years of expenses, every year that you work. It's clearly possible to live that way - most people do it just fine.
If, however, you are a good participant in the consumer economy, and spend every dollar that you make (and two pennies besides), a downturn may be tough to weather. You might even have to... not renew the lease on that second Tesla.
People who got culled early in the dotcom did ok since the cross company hiring freeze wasn’t yet in effect. They took a hit but found more secure jobs earlier. The people a bit later went a year unable to find jobs.
It sucked. I left a month later and even though I told management I was looking they chose to keep me for a month and cut the kid who actually wanted to work there.
Somehow I doubt they had a bright and hopeful vision for humanity in mind when they joined up.
In early, the IPO, those shares, the money!
Nope, please have your stuff packed by 2 PM and security will see you out.
Here's another non-tech topic from the frontpage: https://news.ycombinator.com/item?id=21117707
They raised ~11bn from what I've read.
Also of what financial institutions' investment-loan money goes towards.