SoftBank to take control of WeWork: Sources
cnbc.com
cnbc.com
I think I'm at the point where I think that Softbank is throwing billions into wework to save face. That is a very bad move.
They had one open position. It required all applications to have an extensive history at a prestigous VC firm, i.e. they are looking for people from the in-group.
I think a less-incestuous vetting strategy would give more honest results. Too bad, I think there's a lot of people on HN who would excel at this position despite not having worked at a big VC.
WeWork is just going to have to transition from wartime to peacetime. Ben Horowitz has a great article about what this looks like [1]. They're going to clean up the books, stop making risky acquisitions, and focus on the core business instead of side projects. After a few years of being "boring" and improving margins, then they ostensibly will look like a much more stable investment to public markets.
But it's definitely not a certainty that the locations will fill to capacity.
This looks like the upper limit for WeWork. It doesn't matter how much nicer looking their offices are or if they have free beer bashes and parties, those expenses are all tiny when it comes to the bottom line of a multibillion dollar corporation.
Plus, Regus has more desks and branches than WeWork, and is orders of magnitude less expensive.
Just as a thought experiment, imagine that Regus ended up just straight out getting all of WeWork's assets in some sort of liquidation, and half the tenants stayed. They would get bigger!
There is a possibility that WeWork can tap into more interesting markets.
Purely annecdotal, but the people I hear about who ending up in WeWork used to be in either dirt cheap local coworking spaces, or just getting their own offices. It does feel like a "pie got bigger" sort of thing, that wasn't before captured by such a large player.
If WeWork get all Regus assets for free and half their business, sure, why not? That would be an immediate 3-4 billion dollar injection. As it currently stands, their coolness(tm) is not enough to compensate for their bloated fees and limited office space locations.
WeWork can't keep it up forever. Eventually they have to raise prices and/or cut perks (probably both).
Softbank also has full access to the company’s financials and will be in a position to restructure. It’s safe to say they are a lot better informed than we are.
Why did they do this?
Source: https://outline.com/yCcgS5
If not likely to result in your real estate agents sending more things to you in the future.
If it turns WeWork profitable by cutting costs and implementing responsible leadership, it just keeps its share of all future profits. SoftBank wouldn't be doing this if it didn't think those profits were likely to be more than total investment so far.
In other words, WeWork got acquired instead of IPO-ing.
Yes. The Vision Fund, like all VC funds, has a finite lifespan that all the investors agreed to when they funded it.
WeWork, though, needs a lot more than new capital.
I suppose it’s theoretically possible but Vision Fund invested $10.5Bn in WeWork expecting a multiple of that back for Vision Fund investors. Where will SoftBank get that kind of money?
The bull case for WeWork that I always heard was based on the existence of a WeWork-shaped market opportunity, and WeWork themselves being in pole position to take it. The bear case was that WeWork was run by crazy people. I think SoftBank’s decisions here are making the best of a bad situation.
- SoftBank to invest $4-5 billion
- Pre-money valuation at $7.5-8 billion
- SoftBank will end the deal with ~70% control of WeWork
- SoftBank's Marcelo Claure to take over as chairman of We
- No confirmed word on additional job cuts, asset sales, or clawbacks from Neumann
[1] https://www.cnbc.com/2019/10/21/softbank-to-take-control-of-...
At some point you have to wonder when its better to cut your losses and scrap the entire thing.
This is where the value of all that liquidation preference kicks in. At some point it becomes in SoftBanks interest to push for lower valuation, as it means they get to wipe out all the people that came before.
Many of the best companies look like risky bets at the start.
SpaceX likewise is also in a somewhat murky financial position, although I suspect they will come out doing great in the future. My limited understanding is they are avoiding an IPO because their financials are not up to snuff.
AirBnB was heavily derisked before serious investors took notice - YC loves talking about them as an example because they had so much trouble raising a seed round before they skyrocketed into their A round shortly thereafter. Also I suspect AirBnB is actually going to IPO at a lower valuation than their last round, but I realize I am very much an outlier with that assessment.
I understand high risk high reward, but sometimes investors are just being dumb. I feel like you chose terrible examples to make your point. And since all of your examples are private companies it is impossible for us to analyze their finances.
They were founded in 1992, were bought by Google and then sold to Softbank. I don't think that qualifies as "continually sold", particularly when the buy-and-seller was Google. I'm not as negative on Google's acquisition strategy as many here, but Google selling companies a few years after acquisition is hardly unheard-of.
Also this reason rings hollow with some of the other stuff Google has attempted with doing business in China.
My understanding is that they're avoiding an IPO because it would jeopardize SpaceX's mission of getting to Mars. When they're privately held, Musk can vet investors to be sure that they're aligned with SpaceX's mission, or ensure that they're powerless enough that they can't make problems if they're not (eg. no board seats). When they're publicly held, things like unveiling Starship when NASA is pissed about Crew Dragon not being ready yet is just inviting a shareholder lawsuit. Wall Street tends to take a dim view of long-term highly risky bets, and going to Mars with privately funded R&D is precisely that.
No, Musk is going to keep SpaceX private because he hates public oversight, like the kind he’s gotten with Tesla.
Uh, what?
A Hohmann transfer orbit (minimum energy) will get you there in nine months. SpaceX is targeting a higher energy, shorter trip that'll probably wind up being about six months each way (with Mars gravity in the middle).
What I haven't seen are actual solutions for how to deal with the radiation. Yes, there is ongoing research from NASA, ESA, JAXA and others, and lots of interesting proposals like hydrogenated boron nanotubes, electromagnetic force fields, lithium shields etc. But no solutions even close to implementation.
Here's from an ESA blog post on the topic earlier this year:
> As it stands today, we can’t go to Mars due to radiation. It would be impossible to meet acceptable dose limits.
http://esa.int/Science_Exploration/Human_and_Robotic_Explora...
Are we going to send astronauts who have accepted they will likely die from the mission? Is getting a person quickly to mars worth such a suicide trip?
The final issue I believe will be a hurdle is the psychology. It's one thing sending people to the moon for a few days, or to the ISS for half a yesr where they can look out the window at Earth every day. But I'm not sure the human mind is going to stand up well to the type of extreme isolation a trip to Mars requires. It's certainly never been tested before.
https://www.nytimes.com/2013/05/31/science/space/data-show-h...
"According to the National Cancer Institute, the lifetime risk of dying from cancer is 21 percent; the two-thirds of a sievert from a round-trip mission to Mars would raise that risk by three percentage points, to 24 percent."
Mars advocates like Zubrin argue the "acceptable dose limits" are exceedingly conservative, and that NASA willingly permitted far more dangerous operations (like the Shuttle) than radiation incurs.
> It's certainly never been tested before.
Sure it has. https://en.wikipedia.org/wiki/MARS-500
Liking 20% ownership at 50bn doesnt mean you like 70% ownership at $8bn. The value of the company had significant future growth/hype component which required other investors to pour additional money in to keep up the growth, that is now gone.
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Sure, but $20B valuation seems hard to achieve.
US commercial real estate market by revenue is ~$1.1T [0]
Office space by value is about 1/8th [1]
Regus gross margin is ~16% [2]
Real estate generally has good PE ratio but partly because they usually own the property [3], so let's be generous at 30x.
So if we value WeWorks as a normal real estate company AND weworks has %100 of US office real estate business we have a valuation of 1100 / 8 x 0.16 x 30 = $660B.
Now, weworks exists outside of the US, but the valuation you propose means they must have ~equivalent of all US office real estate.
[0]- https://www.ibisworld.com/industry-statistics/market-size/co...
[1] - https://www.reit.com/sites/default/files/chartjuly92019.png
[2] - http://www.annualreports.com/HostedData/AnnualReports/PDF/LS...
[3] - https://www.investopedia.com/ask/answers/052815/what-priceto...
So WeWork "only" needs to capture ~3% of the US market to be worth $20B
I'm a big fan of the WeWork concept, not commenting on specifics of how the business was run.
The way things worked in the past was just silly -- you signed a multi-year lease with no elasticity. I paid WeWork for personal space before and now my employer pays. It is expensive, but only on a unit basis. The model totally makes sense to me as a purchaser.
I guess the WeWork risk is the buy-long sell-short model which is always risky unless you are earning sufficient spread.
If even a small percentage of companies adopt the Gitlab model, WeWork is going to be extremely successful. And given Softbank's business model is designed for long term, strategic bets there is no way I would be cutting losses just yet.
That doesn't mean much if the market does not materialize, which is possible because remote work does not require shared office space. Currently the trend is that connectivity removes the need for an office entirely, not generate more demand for them.
And as Gitlab and others have found many people simply don't like working at home and want to be around other people. And also need infrastructure like meeting rooms on the odd occasion. WeWork provides that in almost every city. And 500,000+ people today currently see it as a useful service.
Requiring Gitlab doesn't translate into requiring office space either.
* Growth in remote workers = 9% per year.
* Percentage of remote workers who want an office = 20%.
* WeWork market share = 90%.
= 1.62% of all workers each year will potentially shift to WeWork.
[1]: https://smallbiztrends.com/2018/04/2018-remote-work-statisti...
I think that's where the error lies. WeWork has no lock-in, there's no good reason to choose them over a competitor and it doesn't take much capital to start a local competitor (and there are many already).
I was looking at offices like this recently and the most important factor was being close to home which had local competitors. When I look at WeWork locations, they're mostly in the CBD, so they're not even attracting anyone with a local office.
It's not even a new business model, just SV hype.
So it looks like they've already destroyed $4 billion+ in value. I'm curious how the more financially astute than I see this as anything besides throwing good money after bad?
In case any SoftBank homies are reading this, here you go. You are investing in the Concorde.
"SoftBank will pay former WeWork CEO and current non-executive chairman Adam Neumann around $200 million to leave the board of directors, give up his voting shares and support SoftBank's takeover, according to multiple sources familiar with the situation."
https://www.axios.com/adam-neumann-wework-softbank-takeover-...
So isnt this a recapitalization of the firm? Why would they need to pay $200M for control if the alternative is some variation of bankruptcy followed by a firesale and cheap buy?
Because it is obvious if they do Firesale and Cheap buy they would have destroy the company and buy something that everyone knows isn't remotely worth that much. By trying to save it now they could at least get back some of its investment via IPO.
My question is what if Neumann decides to be an ass, and just want to watch everything burn? After all he has the voting shares.
So hypnotically could he have done it if he had 50%+ vote? Or could he still be sued? And by watching everything burn, I mean he could try to spin it as he will take drastic action to improve on the situation and refuse Softbank's offer.
Could still be sued.
> And by watching everything burn, I mean he could try to spin it as he will take drastic action to improve on the situation and refuse Softbank's offer.
Having a spin can help in court, but a court is likely to see through it.
If SoftBank can really reign in spending, in 2 years we could be looking at a company that’s cashflow neutral, growing very quickly, with annual revenue in the range of $5-10 billion. From the outside looking in, this seems possible to me, and would result in a company with a valuation much higher than $8 billion.
How much of the previous $700M did he actually walk away with though? Everything I've read suggests that he only sold a small portion of the $700M in stock, and the majority he kept and borrowed against to buy the buildings he leases back to WeWork. In one of the negotiations post IPO collapse, he agreed to give any profit he makes off those leases back to WeWork. Also, at what valuation level for WeWork is $700M for his equity even based on?
They did that to Priceline in the past. Priceline was almost dead at one point. Got sold at a fire sales. They hunkered down and executed, and look where they are now.
If Uber took a big write off at this point, not only would American and Japanese companies and Saudi Arabia take major losses but I would imagine big tech stocks in general would start to see a loss in confidence and a reversion to more normal P/E ratios.
I would imagine at that point softbank would be such a dirty word that it would have to firesale as well. And certainly no second vision fund.
And then you could go on and on about what would happen to pensions in the states and the rest of our systemically daisy chained over leveraged economy or whatever else if that happened.
Do I have an overly active imagination? Does anyone else worry about this kind of stuff?
No. The Vision Fund itself is nowhere near large enough to be systemically important, even given a complete loss of all principal.
Also, a lot (most?) of the the risk from SIFIs (https://en.wikipedia.org/wiki/List_of_systemically_important...) is that they're counterparties in tens of thousands to tens of millions of relationships, many of which assume the counterparty is completely reliable. That's not true here; all Softbank and Vision Fund shareholders understand their capital is at risk. Banks also almost inherently use leverage (https://en.wikipedia.org/wiki/Basel_III#Leverage_ratio) more heavily than most other industries.
The other possible results you mentioned are market mechanics. For example, a reversion to more historically-normal P/E ratios is not something that SIFI tries to prevent (or encourage).
Most of the big tech companies have not particularly strange P/E ratios.
> I would imagine at that point softbank would be such a dirty word that it would have to firesale as well.
What's the mechanism here? Uber takes a large writedown leads to Softbank declaring bankruptcy? I don't follow the reasoning.
> Do I have an overly active imagination? Does anyone else worry about this kind of stuff?
Yes and no.
They've probably missed their window for huge VC style growth at that point anyway.
https://www.cnbc.com/2019/09/07/uber-wework-and-slack-public...
So I would assume he knows a little about business.
Knowledge about business -> Current net worth
Remove that.. and he's at 0 or even negative. Is that luck or skill?
It's like, maybe the order in which you have your life experiences is everything.
But it could be just one-in-a-billion luck.
> ... having the distinction of losing the most money in history (approximately $70bn during the dot com crash of 2000).
I don't think this quip makes any sense. It's like the reverse of a gambler telling you how much they made without telling you how much they lost.
Edit: For clarity, I think if you want to ask how much he made/lost in the dotcom boom, you have to compare his worth before the boom to his worth after the crash. Not his worth at the peak of the boom to after the crash. If you think that's wrong I'm interested to hear why.
Maybe WeWork can turn cash flow positive, in which case Don can easily justify holding it. So long as he is not forced to mark down then we can continue doubling down. Son is not a guy with an exit plan, he doubles down until bust then waits for the next cycle.
Is there some larger relevance that I'm missing?
An anecdote I heard (unsure if true) was that Softbank had strongly encouraged Adam to focus on growth at the expense of profitability to a much higher degree, shooting for the stars much more than he otherwise would have done.
If I was Icharus and someone else had given me wings and told me fly much higher, I'd have myself to blame but I'd still be upset and filled with regret.
I think the relevance is in the definition of some.
Lots of people had an inkling it was a lot of smoke and mirrors, "tech company this" "we're a platform that", with a lot of weirdness alongside - but then the IPO dropped and confirmed every single assumption and it turned out truth was more ridiculous than fiction.
The larger relevance is how completely unworthy businesses are sprung into a position by cheap VC cash when the foundations are made of custard and spaghetti. Wrap in the "cult of personality" with a seemingly deluded founder and you have the SV equivalent of a soap opera.
Alongside that, it's also a dramatic pantomime as to how said investors are trying to optimise an acquisition without the optics of a failing business. We was a poster child for the Vision Fund, and Softbank has to play this game delicately.
It's fascinating to watch it play out - this isn't just a case of a large business that's fallen on hard times. This is a story about a (hopefully) unique company that should never have worked in the first place, somehow navigating a black swan moment, and potentially turning into a real business.
But also, this story isn't over. This story has been almost an unmitigated catastrophe for the last year and yet this news is telling you that Softbank think that WeWork is currently still the most valuable company in the office rental space despite everything. It also tells you softbank isn't just funded a tonne of companies and are willing to let them go big or collapse - they don't seem able to walk away from WeWork. The reason this is interesting is because this is now raising big red flags about how Softbank's investment portfolio is looking - and it'll be interesting when we hear whether they start to suffer because of it.
One problem is their revenue doubled in the past year while maintaining losses which is a good thing. They wouldn’t have had that same giant revenue to boast about if the S-1 was filed 3 quarters earlier.
Nonetheless, actually giving out the S-1 makes this fun and juicy news. Having SoftBank/Vision Fund behind it, and billions in funding from other investors as well makes it even more interesting. The founders and their corruption and bullshit, specifically Neumann, add on to this as well.
SoftBank likely would have made out better in the near term had they just let the (disappointing, to them) IPO play out. WeWork would have launched with at least a $10B market cap (though of course that could have dropped on day one), would have raised a couple billion, and maybe would have even raised enough to meet the requirements for the loans they were planning on taking out. But now they've more or less gutted the company, killing anything that was even slightly interesting, turning it more or less into a bog-standard office real estate company. Which presumably will be able to turn a profit after a bit of retooling, but it hardly qualifies as "Vision Fund" material.
This is definitely just Son and SoftBank trying to save face.
If they truly think they will get $8Bn worth for investing 4-5Bn now, it's a rational choice.
Adding your past investments to the tally is an instance of the sunk cost fallacy.
If they don't intervene, they lose all their previous investment guaranteed. So just consider all of that previous investment gone (sunk cost).
If they invest $5b they may make an $8b valuation. And they may still think there is upside beyond that.
Not sure if that's what they really think, but a lot of posters here seem to accuse softbank of sunk cost fallacies without considering that they are surely aware of investing 101.
They are bailing out employees and investors. People will at least get something.
Wework is good business if they can become cash positive. They have a brand, more and more people are going remote, there is a bug market for pricey and google-like coworking spaces.
It doesn’t matter if they had a bad CEO, or if they can’t IPO anymore, there’s no reason this wouldn’t become massively profitable in the next 10 years.
It was valued at $20Bn in 2017 based on a $4.4Bn investment from SoftBank (where they were the sole investor). It was then valued at $45Bn in 2018 based on another $3Bn investment from SoftBank (when SoftBank was already the largest investor -- by far). Then, SoftBank made ANOTHER $1Bn investment later in 2018 "valuing" WeWork at $47Bn.
WeWork was ever valued at $72Bn. Maybe you're thinking of Uber.
Never saw the numbers in the prospectus, but surely there was some indication?
This whole ordeal was the best that could happen for the normal people, basically fell into the hole they themselves dug, because the economists etc. called their bullshit out loud.
If you have not already, these are good reads from one of the critics of the whole scheme:
1. WeWTF - https://www.profgalloway.com/wewtf
2. WeWTF, Part Deux - https://www.profgalloway.com/wewtf-part-deux
In this case it turned out they were the first and final fool and they were left holding their own bag.
And thus they essentially sacammed themselves(or really their investors) out of billions.
You'll also hear this referred to as a pump and dump. Pump up the value of some asset and then dump it on someone else.