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Comment by Traster | Hacker News Reader

It's very difficult to see how SoftBank breaks even on this new deal. They're investing $5bn now, with the hope that it's worth more than that when they IPO, but several things have killed that idea. Firstly, their brand is tarnished. Secondly, the growth play will be gone by the time they IPO. Thirdly, the charismatic leader is gone, so the message of "Disrupting" and "We're a tech play' is gone. They've put $5bn into a company that's roughly the same size as a public company that's got a $4Bn market cap, but only got 70% equity as a result.

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.

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WeWork had so many excesses, like paying 100% commission to real estate agents. Softbank can cut out such nonsense, not just the tequila and private jets.

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.

> like paying 100% commission to real estate agents.

Why did they do this?

To grow faster and disrupt the market. For a while it was more than a simple commission: it was 100% of the revenue for a whole year. They were also offering one-year free rent to new customers.

Source: https://outline.com/yCcgS5

That has to be the most ridiculous thing I’ve ever heard, since Enron paid their employees bonuses for unprofitable deals.

we'll take a loss on each sale, and make up for it in volume!

"100% of revenue from the year as commission" and "rent is free for the first year" sounds like the perfect combination, though.

If not likely to result in your real estate agents sending more things to you in the future.

It makes sense for Adam. Schmooze the real estate agents with WeWork money so they find you nice deals and get you priority bids, buy the property at this nice discount, lease the property to WeWork. He's winning all around, spend money that's not yours to get equity that is yours.

Related party deals We Works previous C level execs had interests in the property We Work took leases in.

I took a look to see if Softbank was hiring any vetting-watchdogs to prevent this in the future.

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.

I have no particular love for any of the big-name "prestigious" VCs, but ISTM they haven't had much influence at WeWork so far. Instead SoftBank just handed the keys to a crazy dude, with the thought that he would make it rain. Maybe it didn't rain hard enough, but the firm is still in business and now they've gotten rid of the crazy dude. Maybe SoftBank just sees this as a slightly more intense version of the traditional transition from founders to "professional" management? It seems likely to feature a great deal of the equity dilution that founders traditionally suffer...

I don't see why someone with that history would necessarily do a poor job.

I think his point is an insider can't see the forest through the trees, and you need a fresh perspective to understand what's really happening. Basically that hiring an insider just perpetuates the echo chamber.

What makes that resume necessarily an insider?

He means the entire VC industry is an echo chamber.

But is that what WeWork is?

Considering their current vetting is quite lacking, shouldn't they be looking to hire someone experienced? You don't hire a junior engineer to build you're new enterprise system.

Perhaps shouldn't would be more accurate

I don't think their brand is "tarnished." The only people they are beholden to are their LPs, who I assume endorsed this deal. None of the actions they have taken as an investor should make others view their money "toxic."

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.

[1] https://a16z.com/2011/04/14/peacetime-ceowartime-ceo-2/

Can you explain why you think they are not going to be forced to remain in “wartime?”

Presumably the unit economics are positive and they will break even.

Why is it a given the unit economics are positive?

It's not, but WeWork heavily implied they are and that seems to be a key part of their new strategy. Obviously many people are skeptical (including myself), but I suppose we'll find out soon enough.

Apparently the unit economics are still showing lost money because they aren't fully leased at many of their locations so their rationale is that as those locations, mature, they will fill up. Which is pretty normal in the real estate market.

But it's definitely not a certainty that the locations will fill to capacity.

The peacetime version of WeWork that you envision already exists, it's called IWG. It's roughly the same size as WeWork but it's only worth $4.5b. Paying $5b for 70% of it doesn't seem like a good idea.

https://finance.yahoo.com/quote/IWGFF?p=IWGFF&.tsrc=fin-srch

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.

I am not a fan of the WeWork business and would bet on its failure, but I don't think that one can just say that "this company is $5 billion, so this is the cap of how big such a company in this market can become."

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.

Perhaps I was not precise in my wording. With the way WeWork currently works, and its asset allocation and fee structure, I don't think expansion or more market cap than Regus is possible.

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.

I agree with you. WeWork doesn't have strong network effects and the business model is easy to copy. There are real estate companies that each owns tens of millions of square feet of office space. If WeWork really were worth $40 billion, the companies who own office buildings could just create their own coworking spaces and rake in the billions instead.

From my experience here in Germany, Regus is in fact more expensive than WeWork. And they have worse contract conditions, e.g. no free coffee, many upsells, bad contract durations, and intransparent add-ons.

That's because Regus actually makes money, while WeWork is burning cash at an unsustainable rate in an attempt to grab market share.

WeWork can't keep it up forever. Eventually they have to raise prices and/or cut perks (probably both).

Rebranding can happen, and the “charismatic leader” was the #1 problem.

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.

I agree, with the loon no longer in the lead, they have a chance.

They've been upgraded from no hope in hell to a slim chance in hell.

Does WeWork ever need to IPO?

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.

There needs to be some kind of exit, because at some point the Vision Fund needs to return money to investors - and that's a lot sooner than "run WeWork to earn back $5b+ via dividends" would take.

As soon as it’s been transformed into a profitable business, the exit is going to become an option.

The future profits only need to be higher than the $5B plus whatever they can get today from liquidating their existing holding. Sunk cost fallacy, or "what is done is done".

Don't forget opportunity cost. The future profits need to be higher than the $5B plus liquidation value, PLUS the expected value of another investment at the margin.

Oh yeah you can use the yield curve to discount future flows, and then demand something extra on top of that (Graham's margin of safety).

Does WeWork ever need to IPO?

Yes. The Vision Fund, like all VC funds, has a finite lifespan that all the investors agreed to when they funded it.

They could do a direct listing instead - it's like an IPO but without raising additional capital. Just put your existing shares on the market.

WeWork, though, needs a lot more than new capital.

True, but there's always the possibility of the Vision Fund selling WeWork to Softbank proper. And I don't think this round of investment is from the Vision Fund, so it appears that Softbank proper is going to end up with a larger stake than the Vision Fund already. I suppose there's also always the option of selling WeWork to Berkshire Hathaway or something if they can get it boring and profitable.

the possibility of the Vision Fund selling WeWork to Softbank proper.

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?

What if they are just trying to stem a contagion effect spreading to their other investments. Their other investments are a lot better but the retail market can be very irrational when there is bad news.

Yeah, seems like SoftBank isn't doing this just to save face. They're doing it to prevent the whole party from coming to an end, right quick.

Only time will tell, but SoftBank has the ability to combine WeWork with competing brands and unify the global strategy to unlock Asian markets. Also, getting rid of the old leadership is a net positive, IMO. There’s still a business case here.

Fourthly, we're now in the longest economic expansion on record and overdue for a recession, which a number of economic indicators seem to imply is coming in the near future. A looming cyclical collapse in demand for office space is not something any of the valuation models being applied to WeWork seem to be taking into account.

What I read is that $5B is on top of their past investments of roughly $11B.

The $5b is coming from SoftBank Group. The earlier $11b came from the Vision Fund, which is a subsidiary with an entirely different operating environment.

Sure, but it still means somehow Masayoshi Son (and the investors whose money he manages) has paid $16bn for a thing now worth $8bn.

Assuming WeWork ends up being worth $5B+, it's kinda impressive that Masayoshi Son comes out of this with Softbank owning much of WeWork and the Vision Fund investors being the ones getting burned.

Except the vision fund is structured as debt for the outside money. Softbank takes the profit and loss minus interest payments on the debt. Thus the vision fund is more like a leveraged softbank.

Sunk cost fallacy.

The only idea i have is to turn it into a REIT.

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