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Comment by S_A_P | Hacker News Reader

What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens? I have got to think that Soft Bank knew/knows the valuation was off. The fact that they pushed on means they either intended to try and get away with it/take the money and run as I cant believe incompetence is the reason here. How did this get so far along???

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.

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I think there's a class of narcissist that doesn't really have knowledge and beliefs as much as they have desires and things to say that get them closer to their desires.

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...

Exactly.

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.

I think the OP's question really involves the CFO or any accountants involved in this case. I would expect the CEO to be driven more by vision than by cold, hard facts.

I'm guessing there's a mix of "it's hard to tell bad news" and "it's hard to hear bad news".

If those two factors are strong (say, cultural reasons), a lot of red flags can fall by the wayside.

You mean the CFO who took over the helm of the company?

> I would expect the CEO to be driven more by vision than by cold, hard facts.

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.

> I would expect the CEO to be driven more by vision than by cold, hard facts.

If the facts don't align with your vision, figure out a different vision.

If one is cushioned by unlimited amount of VC money, then it can take a while to realize that the vision was untenable.

I'm guessing that the issues have something to do with the management structure.

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.

Holy crap: You're right.

https://www.vox.com/recode/2019/9/24/20882133/wework-adam-ne...

Thanks for the tip! I didn't realize that.

I don't know the story with WeWork's CFO. But the book "Super Pumped" documents how Kalanick used his dominance to keep from having a CFO at all for long periods.

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.

I think there's a class of narcissist that doesn't really have knowledge and beliefs as much as they have desires and things to say that get them closer to their desires.

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 show Silicon Valley had a great protrayal what surrounding yourself with yes-men can do to a person

The best part: https://www.youtube.com/watch?v=XAeEpbtHDPw

Wow, that's really good. So nicely performed. Thanks for sharing that.

“There are three ways to make a living in this business: be first, be smarter, or cheat.“

-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.

This needs to be a lot higher.

How is this comment relevant to WeWork? How has it "cheated"? It definitely is early/first and very smart.

Early/first in what exactly?

Massive paradigm shift in office leasing.

Please elaborate in what was innovative here, their technical infrastructure seems to be nothing to write home about and well appointed office leasing has been around for quite some time.

The social focus is indeed different but I wouldn't call that alone a massive paradigm shift.

The friction eliminated and expanded flexibility from normal office leasing was quite pronounced. Add to that a huge block of delighted customers. Not sure how you are defining innovation but there is clearly a lot going on there.

> How is this comment relevant to WeWork? How has it "cheated"?

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.

Furthermore, and this to me is the most damning indictment: where's the moat?

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.

Same for Uber.

I was going to include Uber, but there's an argument that creating a realtime, massively-scaled fare-setting infrastructure is a moat.

Uber's product isn't rides. Uber's product is being the market-maker between riders and drivers.

Right, but Lyft has the same product. Given enough time, we might see other ride-share companies succeed with the same (yet inferior) tech servicing specific cities.

Austin has a non-profit rideshare business that matches riders and drivers.

http://www.rideaustin.com

I can't quantify it - but WeWork's scale does give them a bit of an advantage.

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.

> WeWork's scale does give them a bit of an 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.

> 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.

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.

> 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.

There's also the Softbank buys of equity at consistently higher and higher valuations that they themselves were creating.

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."

So not really any "cheating", right?

> So not really any "cheating", right?

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.

Wut?

WeWork's revenues already cover its rent costs even at just 70% occupancy.

I still don't see this "cheating" you speak of.

> They borrowed short, lent long and then pretended it was as sustainable business.

You've just described almost every company in the financial sector.

I think that they got rid of the rubber ruler, and many of the other asymmetrical bargaining issues that consumers of space faced against large landlords.

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.

Honestly, it wasn't even smart. And the thing it was first at was social focused co-working spaces, there have been more bare bones offerings for co-working spaces for a long time, WeWork just tried to appeal to that SV niche of people that'd like the folks they're subletting with to be the kind they'd like to share a beer with.

> or cheat

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.

> 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.

Is Uber in it for the social change?

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.

> Is Uber in it for the social change?

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.)

Neither is the taxi lobby out there for the social change.

It's better to have two parties competing for user's money than just one party fixing the price and service quality.

Sorry, to clarify... the comment above was:

> 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.

consumers vote with their wallet, at the of the day.

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

Exactly. Some of the regulations were due to corruption. But others we reasonable ways to create a situation fair to workers. Regulating the number of cabs allowed drivers to have some confident that they'd earn a reasonable wage. And the medallion system ended up being basically an investment/retirement plan for a lot of cab drivers.

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...

This gets called "being disruptive" but it's possible to be disruptive without ignoring the law. For example see SpaceX: successful disruption of the launch industry, without breaking any laws.

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.

The CEO of SpaceX did commit a couple crimes in the same podcast.

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.

What crimes did the CEO of Spacex commit on the "podcast"?

I guess I'm not sure what Musk smoking pot on Joe Rogan has to do with SpaceX's unquestionable success in a market dominated practically since its inception by pork-armored incumbents.

If anything, I'd expect it to work against them.

What was/were the other crime(s)?

Are you talking about the Joe Rogan podcast? It's recorded/filmed from California, where marijuana is legal recreationaly, and had been at the time of the original broadcast.

Riding without a helmet and similar stuff is likely just a contravention in most places.

"Disruption" gets a lot of abuse.

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.

>> when you break the law.

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 seriously have a twisted and static view of what society should be.

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".

"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?"

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.

This is a great comment and a great point, but I'm not sure I fully agree with your conclusion. There are still plenty of great companies that are doing the first two, but there certainly is no shortage of the third way. What would be fascinating to me is to categorize, oh, the top N (where N is 5000 or so) of private, growth tech companies that have taken significant recent rounds of VC financing and see how the investment volume skews along these three categories.

Oh man, what a fantastic film. It's a been a while since I saw Margin Call, but I still feel like it's one of the films that best captured the 2008 financial crisis. Jeremy Irons' portrayal of a Goldman CEO-like character — I think he's the one who delivers the line you quoted — remains probably the most convincing portrayal of that type of person I can remember.

The wonderful board room scene:

https://www.youtube.com/watch?v=Hhy7JUinlu0

I was working on a credit trading desk during the beginning of the crisis. At least in my experience, Margin Call is definitely the most accurate movie about high finance I've ever seen.

Ah, yes! Jeremy Irons in that board room... wow!

Whereas in Margin Call, the message was 'I don't cheat and although I like to think we have some pretty smart people in this building it sure is a hell of a lot easier to just be first'.

I think the pure tech plays in 2019 are doing just fine. Zoom, Cloudflare, and Datadog all look like good companies. They're just not over-hyped and overinflated.

The smoke and mirrors plays need mass hype/media blitz to "succeed." The companies that actually add value only need to market to the audiences for which they're economically relevant.

Spot on. Many of these companies have devolved into little more than pump-and-dump schemes for executive compensation. All that’s undergirding them are their BS “disruption” and PR narratives, gobbled up and regurgitated by the media.

Cloudflare still relies on the "massive amount of free users creating buzz vs. a tiny fraction of paid users". Although not an obvious scam, they may very well go the Groupon way.

This is a classic "bottoms-up" model that is quite viable (eg Dropbox, Slack, Zoom, Elastic, MongoDB). Not sure why anyone would call it a scam. 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.

Not necessarily. You don't need marketing and sales people if you have a free-tier product that markets itself. Michael Stonebraker, the guy who took Postgres from academia and into the real world, talks about how he applies this with VoltDB

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.

It seems like you are agreeing with me? :)

Oh.. I guess I do! Waiter, more coffee...

HN: Violent, informed agreement

> Dropbox, slack

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.

I think you are confusing the opening price with an IPO price.

Slack went public at $26, it is at $23.50 today. It is less than 10% less than the IPO price.

Yes, but this is at a time when the overall market is close to an all-time high.

What happens when the inevitable correction comes? The Fed will run out of monetary tricks, eventually.

This is arguably a "things might go wrong in the future" argument, which has no real substance as it can be made about literally anything. To really say something, you'd need to provide some more substance about why you think the current investors in Dropbox and Slack are less informed about economic conditions than investors in the rest of the market.

> 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.)

>This is a classic "bottoms-up" model that is quite viable (eg Dropbox, Slack, Zoom, Elastic, MongoDB). None of which are profitable.

>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 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).

Yes, but if your marketing expenses systematically exceed the revenue from the paid customers, your business isn't viable.

That wasn't Groupon's problem. Cloudflare and Groupon have virtually nothing in common.

What relevance does Groupon have? The two companies aren’t related in any major way. Def not with freemium model or revenue model.

Groupon is a perfect example of a company that became irrelevant before reaching profitability. Most tech valuations are based on the assumption that the company's product will stay hot forever, giving enough time to cut expenses and turn black. While in reality, the crowd of early adopters that gave you the hockey stick growth, quickly moves on to something else once they get bored and then it turns out your market is orders of magnitude smaller than your investors expected.

I don't see a CDN as something that customers get bored of in the same way as coupons for random services.

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?

This sounds slightly like a no true Scotsman arguement to me. I'm sure you could find some none pure tech plays that are successful.

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.

The irony is that essentially all of SoftBank's playbook is ripped from Buffett.

Except Buffett did it with non-tech, capital-heavy companies. Where it arguably works a lot more reliably.

"SoftBank's playbook is ripped from Buffett"

How so?

Buffett's hypothesis (as I understand it) boiled down to (1) find successful businesses that are capital-starved, (2) pair them with businesses which naturally generate float (e.g. insurance), under a corporate umbrella, (3) invest the float in those businesses and thereby beat market returns (by only selecting quality businesses, and having the ability to provide mentorship / experienced leadership).

Ok fair enough, that's more late Buffett.

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.

What does 'generate float' mean as a financial term?

It basically means "hold cash", so visa, stripe, insurance companies etc. all get cash from customers, hold it for a period of time, and distribute it to customers.

Holding it for a period of time is "generating float." For many of these companies the float is a large multiple of the profit.

Err, this Zoom? The reinstalls itself Zoom?

https://www.theverge.com/2019/7/10/20689644/apple-zoom-web-s...

Fred W just wrote about this, with a fairly moderate perspective. Reality check, rather than reality crashing down.

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.

Personally, I'm delighted to see the unicorn bubble popping. For a long time I've felt like the "Uber for X" wave of companies soaked up a lot of investment that should have gone to people building reasonable businesses. It seemed to me that investors were looking for the next Google, the next Facebook. Ignoring that when Google and Facebook started out, they were much more focused and modest than the high-drama unicorns hyping up how they were going to dominate the planet. (And also ignoring that both were profitable at IPO.)

There are in fact a few unicorns with recurring revenue that is close to their operational costs. You just don't read about them on the news unlike the trainwrecks. Good news leads to no news.

What are those? Snowflake is one I think

Cloudflare? Not sure whether they are profitable at the moment, but their product seems substantial.

After a while living in an echo chamber of yes-men, you start to believe your own bullshit.

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.

The valuation is from Softbank consistently buying rounds of equity at higher and higher valuations that they themselves were creating.

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

Banks don't win IPO mandates by quoting the board of directors a valuation that's lower than the last round.

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 ;)

As much as we'd like to draw a sharp line between "Real Businesses" and "Frauds," so much of it actually comes down to whether you can match your ambitions to the amount of money you're likely to raise.

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.

It's amazing how they could even delude themselves into thinking they're a tech 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.

I was reading this blog post by Fred Wilson last night and I think this unlocked a key insight for me[1]. WeWork (Uber, Peloton, Lyft, AirBnB, etc...) are not software companies. None of these businesses sell software, they use software to enable them to sell their end product: Commercial Real Estate (Rides/Freight/Food/Bikes, Exercise Bikes/Treadmills, Rides/Bikes, Home Rentals, etc...).

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/

>What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens?

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.

> 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).

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?

The problem with WeWork is that it's business is fundamentally rubbish.

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.

> 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?

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.

Most management companies are local. One can kind of see how WeWork would work by being bigger than all management companies and having a global presence.

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 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'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...

Office brokerage is super-inefficient. If you are looking for up to a few thousand square feet, the current search process is terrible and slow. WeWork commoditizes this aspect, and has a reputation for being an expensive, if fair landlord.

Your first paragraph reminds me of the "Go Fever" phenomenon associated with the Space Shuttle Challenger disaster[1]. [1] https://en.wikipedia.org/wiki/Go_fever

Why? Because bankers.

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.

People complain about an "IPO shortage" and the problem of VCs capturing all of the pre-IPO growth.

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.

> What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens

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.

On a spectrum we have Ponzi schemes, which never offer a product. We have MLMs which are legal Ponzi because there is an exchange of goods or services, but operate on social networks (original non internet meaning). Then we have franchise schemes where the wholesaling aspect is often less lucrative than the real estate angle (see also Sears, McDonald’s), and so despite offering goods they are de facto profitable real estate endeavors. Then we have manufacturers who actually work the way we believe these other organizations work, by providing goods to retailers who take over some of the salesmanship, logistics and risk for a slice of the profits.

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.

Everyone has a vested interest in continuing to believe that which they already believe. To change your opinion requires acknowledging that your old opinion, the one you perhaps espoused publicly and persuaded others into believing, was wrong. It's embarrassing. So most people tend to put that reckoning off until the last possible moment, even in defiance of hard evidence in some cases.

Then do other people now trust you less because you were wrong, or do they trust you more because you correct yourself?

Welp to borrow from gool ol' Neil Peart, those who wish to be would probably pick the latter; but those who wish to seem would put more emphasis on the former!

> I have to think some part of him knew that it was a bullshit valuation

After reading some of the stories, I'm minded to believe maybe he didn't...

It's possible Neumann was some sort of idealistic hippie who believed his own BS and got in over his head.

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.

Hippies are at least as greedy as anyone else.

When you #define hippie whoever you want it to mean then I guess anyone is as greedy as anyone else.

> I have got to think that Soft Bank knew/knows the valuation was off.

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-...

What major downside or any protections does SoftBank have with WeWork right now? Is there anything they are getting now or likely to get that doesn’t still have them $7B or so down the hole for WeWork?

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

https://www.cnbc.com/2019/09/24/softbank-has-a-multi-million...

That article says:

>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).

Yeah, it doesn't de-risk the investment as far as bankruptcy, but SoftBank's exposure is $10.5 bln, according to https://www.nytimes.com/2019/01/07/business/softbank-wework.... so any valuation above $10 bln would be a break-even for them.

Well, the answer is that since the market has been flush with cash, these companies kept raising more and more money in their rounds. The guys in the early rounds will make their money, but the later rounds ( Softbank) will lose it. VC is a massive bet, Softbank started a new vision fund worth 100B. They know exactly what they are doing. But, with WeWork, they probably thought they could keep the charade long enough to go IPO and get unsuspecting investors in the IPO. When a company is hot, the founders have massive leverage, look at Adam Neumann , employing his family and friends at all key positions.

Oh SoftBank knew, and they tried some shenanigans late in the game to try to get this thing to IPO and not lose a boatload of money.

But it didn't work. Sanity has prevailed.

> 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

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.

Not even just with companies so ridiculous like WeWork, but also ones that lose profit and hundreds of millions of cash exclusively due to bad business models.

> What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens?

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.

More interested in the public money manager opinion on why not to buy this deal instead of all the other "tech" companies that IPO. What caused enough of them to push back on this valuation and are they acting in a coordinated manner or is it just a few large public funds that usually buy in saying no?

> As for Adam N, I have to think some part of him knew that it was a bullshit valuation

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.

>What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens?

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.

Humans are often irrational

wikipedia.org/wiki/Escalation_of_commitment

wikipedia.org/wiki/Dollar_auction

Not to be too pedantic, but WeWork HQ is in New York and is not a tech company (according to general sentiment and investor analysis,) so any attempt to correlate to Silicon Valley trends aren't quite fair nor appropriate.

They thought they would be able to IPO at $50 billion. Their problem was that the IPO process took long enough for people to realize how bonkers it was - it didn’t help that they were going to IPO after all the other loss making hype businesses are down from their IPO prices (so presumably people are viewing similar IPOs with suspicion).

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.

We believed in "spin", and figured if Uber could IPO, then so could they.

I think Uber will pop within the next 5~10 years. I'm surprised they still have investors at this point. So much was banking on the self-driving model, which I honestly think is 10~15 years away from being viable (and for half the cost of the research, cities could just start laying down rails with all their roads .. would be way easier .. and a solved problem).

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.

Where I live any ferrous rails will be gone tomorrow morning.

Twilio is an example of a recent unicorn with sane financials.

We've been seeing nothing but bullshit valuations for years. Twitter was a bullshit valuation.

I'm just glad we finally had a sanity check on something.

I'm not knowledgeable in this area, but I think it's telling that SoftBank is the same people who gave a dog walking startup a 300M valuation: https://techcrunch.com/2018/01/30/on-demand-dog-walking-app-...

Note, the _investment_ was 300M, meaning the valuation was actually higher than that! According to Crunchbase:

> Wag has a post-money valuation in the range of $500M to $1B as of Jan 30, 2018 according to PrivCo.

lol what the fuck

VC valuations are a solid argument against the wisdom of private markets

Twitter might be a bad example. The current P/E of Twitter is around 14 with the stock trading around 80% over the IPO price.

And when was the last time Twitter turned a profit?

Last quarter? https://finance.yahoo.com/quote/TWTR/financials?p=TWTR

What does E even stand for in P/E? Nobody knows.

Didn't they just get a 300m injection? That is a pretty big confidence boost that you are doing things right.

In finance no-one admits that they screwed up unless they have no choice, if at all.

In many enterprises people know that sh happens. But saying so is usually a career limiting move.

Companies are worth what people are willing to to pay for them. Softbank was willing to pay an amount most others weren't. In that situation there are 2 options, take the lower price, or wait until the higher price is proved to be justified.

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.

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