
WeWork’s Back Is Against a Wall - JumpCrisscross
https://www.wsj.com/articles/weworks-back-is-against-a-wall-11568733815?mod=rsswn
======
wayoutthere
As has been called out by other analyses, the problem here isn’t really
WeWork, it’s SoftBank. They thought they could run a pump-and-dump like
Goldman did with Uber, but sorely misjudged the market’s view of WeWork.

WeWork is probably legitimately in the $15B range, but SoftBank has really
tied themselves in a knot with such a high valuation paired with the downside
insurance. They‘re in for an 11-figure loss no matter what, because
liquidation preferences and huge losses scare off any serious investors they
could potentially find.

My guess is that WeWork ends up getting massively scaled back and sold to one
of its smaller competitors for under a billion. They’re just way too
overextended to have any value beyond the brand.

~~~
payne92
>the problem here isn’t really WeWork, it’s SoftBank

No: WeWork is a huge part of the "problem", with crazy org structure, self-
dealing, a "cult of CEO" structure, and a business model that may not be that
defensible. Softbank is an enabler.

Let's hope this his "peak hubris" and we're back to more sensible tech IPO
attempts.

~~~
throwaway_law
>No: WeWork is a huge part of the "problem", with crazy org structure, self-
dealing, a "cult of CEO" structure, and a business model that may not be that
defensible.

Sounds just about par for the course of any SV startup, the only difference
is, the critique seems consistent with outsiders criticizing SV startup IPOs,
only the shoe is on the other foot and SV is criticizing outsiders for the
very concepts it seems to promote within its own little bubble.

~~~
azylman
WeWork takes this much further than other SV companies. In their S-1 filing,
they had to disclose something like 100+ related party transactions:
[https://www.forbes.com/sites/alapshah/2019/08/19/just-how-
un...](https://www.forbes.com/sites/alapshah/2019/08/19/just-how-unusual-are-
the-related-party-transactions-disclosed-in-the-we-
companys-s-1-filing/#755f9080266a)

~~~
tru3_power
Wow, those filings make it seem like the founder was using WeWork as his
personal piggy bank. Did I understand it right that he took out a loan from
WeWork then used a bonus from the company to pay it back?

~~~
manigandham
He sold the company a trademark for the word "we" for $6M. It was eventually
rolled back after media exposure.

------
btown
> In this case, downside protection for early backers appears to take the form
> of a $1 billion convertible note that changes into equity on the last day of
> this year. The note is held by major shareholder SoftBank, according to We’s
> regulatory filings. We’s prospectus offers only a vague price for the
> conversion, so it is impossible to tell exactly how much or whether
> shareholders will be diluted, says Nori Gerardo Lietz, senior lecturer of
> business administration at Harvard Business School in an unpublished paper
> seen by The Wall Street Journal. But because the conversion appears to
> happen after the IPO, buyers of its shares in the offering could take a hit.

How is this not something material that should be disclosed as part of the
initial filing?

~~~
epiphanitus
"A final squeeze on the company is that it will lose its status as an emerging
company under the JOBS Act by the end of this year, which would make the IPO
process even more cumbersome. The act allows the company to use more lenient
reporting standards about its finances and executive compensation—a potential
problem for a company already dogged by governance concerns."

It might also explain why they have been so pushing so aggressively for an IPO
this year.

~~~
JMTQp8lwXL
The higher set of reporting standards that would be imposed next calendar year
might help raise public confidence in the business.

------
jacquesm
I loathe WeWork, especially their 'photograph everybody that visits our
building high res and up close and with the names attached to the record'. I
stopped going there to visit companies after the first time they pulled that.
Oh, and got into a tiff with a receptionist that insisted I not block the
camera.

Here's to hoping they go bust.

~~~
boring_twenties
Isn't this kind of thing standard any time you visit e.g. a Google office, or
a colocation facility?

~~~
nullc
Many of these companies required you to agree to an absurd NDA which is
extremely one sided... all for the benefit of attending a meeting they invited
you to.

Getting your picture taken would be a much better deal.

~~~
jacquesm
How about neither?

------
seibelj
If WeWork owns no assets (leasing model), can't raise money, burns billions
per year, and runs out of cash, what is there left except bankruptcy? It's a
cash flow model that doesn't cover its costs - WeWork pays 100 units for
commercial real-estate and flips it for 90 units. This is the Movie Pass model
- they give VC money directly to customers!

~~~
jacquesm
> This is the Movie Pass model

It's the dumb-money backed venture model, and there are plenty of those. Many
companies that are not profitable on a unit-economic basis are kept afloat by
burning cash. It can't last of course, but in the meantime they can make your
life quite hard if you are competing with them.

~~~
seibelj
I think one difference between the typical VC model and Movie Pass / WeWork is
that VC-backed companies typically own assets, such as valuable IP and
software. WeWork doesn't own anything and operates a real estate splitting
service. This is a thin-margin business. Similarly, Move Pass didn't own the
theaters, the films, and didn't ink any exclusive deals - they just took 10
units of money from customers and gave them 100 units of tickets. There is no
real value there.

~~~
mschuster91
> they just took 10 units of money from customers and gave them 100 units of
> tickets.

One could have said the same about Netflix and Spotify. The key point is to
find a monthly fee that is low enough to get masses of people subscribing, but
high enough that the masses of 1-movie-a-month ordinary users support the
30-movies-a-month power users - or to cap the "power user" limit at something
reasonable.

The other thing would be to gain value from the users beyond the subscription,
for example by having them rate the movies they see or giving out boni (=one
high quality review gets you two extra visits even if you hit the cap).

~~~
munk-a
_Except_ that Netflix and Spotify don't have to pay the per-performance costs,
Netflix isn't paying $29.99[1] to CBS every time someone watches Star Trek TNG
- and spotify isn't paying 70$ every time I listen to a song even though
concert tickets might run that high.

MoviePass _may_ have been a sane venture if they rented out the theatres for
MoviePass specific screenings at a flat rate then tried to make a margin on
filling those seats up enough. As it is they resold a thing from one company
to consumers at a price below the consumer's standard price while trying to
convince theatres to honor the passes by rebating the theatres well below
standard fare price.

Would you like to buy a coke from a merchant for 2$? What if I could sell you
a subscription to buy as many cokes as you'd like for free for a 29$ monthly
fee, while offering the merchant 1.50$ per sold item - oh and the transaction
would still take place in the store... and be run by the shop owner... they'd
just make less money - but hey maybe my subscription will end up selling more
coke than the merchant would normally sell - but wait if that happens I lose
money, so I only end up making money here if both of you are screwed because
I'm essentially trying to make money shaving it off of a transaction that was
already taking place.

MoviePass was so ridiculously stupid[2].

1\. The price off of Amazon to purchase the season in CAD

2\. Props to college humor on a great mock of their business and CEO, worth a
watch if you want a laugh.

------
tempsy
Semi-unrelated, but the American Express Business Platinum Card currently
offers 1-year of WeWork included as part of $595 annual fee (which is easy to
cover with the airline incidental credits, bonus points) until the end of the
year.

If you were thinking of joining WeWork that is an incredible deal, especially
since it allows you to use any WeWork anywhere in the world.

~~~
muddi900
I am jumping on that.

~~~
servercobra
It's pretty wonderful. Just started last week and loving it so far. $50/mo
WeWork, effectively? Awesome. Plus $200 off at Dell (picked up a new SSD for
free), $200 off flight incidentals for one airline, etc. The thing basically
pays for itself (for the first year at least).

~~~
dx034
I'd be curious who actually pays for that. Is it Amex or did We & Dell give
that much discount?

~~~
codeisawesome
Who pays for it? Likely:

\- People not paying their Credit Card bills on time and racking up interest.

\- Everyone else who is not using a Credit Card and get points (or get less
points), subsidise the points users.

\- Merchants who pay 3% transaction fees.

\- Probably to a small degree, investors who buy stock in the cc companies
(capital, which is deployed for Growth).

~~~
dx034
I meant this offer compared to other card offers which are not as generous.
All of the points you mentioned would mean that Amex pays for it. However, I'm
not sure they really pay much of the face value for the Dell and WeWork
vouchers, I'd just be curious if they paid 50%, 10% or even less.

------
dxhdr
I wonder how Adam Neumann is feeling through all of this. Stressed out?
Checked out? Calculating? Defiant? Worried? Embarrassed?

What's it like being the public face of a company under such intense scrutiny?

~~~
ummonk
I imagine the several hundred million he has already given himself helps tide
over any stress from this.

~~~
goatinaboat
He has the stress of worrying what the family whose money this was will do if
they think he ripped them off...

------
jiveturkey
4 important numbers, from the video:

WeWork's average lease term: 15 years

WeWork Tenant's average lease term: 15 months

WeWork's lease obligations: 47.2 bn

WeWork Tenant's lease commitments: 3.4 bn

Almost certainly, the video glosses over (read: ignores) the likely fact that
the 47.2bn is over that 15 year average, and the 3.4bn is over the 15 month
average, so this doesn't necessarily represent a shortfall _in the long term_.

~~~
jcstauffer
> Almost certainly, the video glosses over (read: ignores) the likely fact
> that the 47.2bn is over that 15 year average, and the 3.4bn is over the 15
> month average, so this doesn't necessarily represent a shortfall in the long
> term.

$47.2bn/15 yrs = $3.15bn/yr lease obligation $3.4bh/1.25 yrs = $2.72bn/yr
lease revenue

So, if they can manage to continue leases at their current rate, they'll be
losing $400m/yr.

~~~
jiveturkey
Thank you for mathing it! That's very helpful.

Big office spaces go un-rented for long periods between tenants. In WeWork's
case, maybe they expect shorter dead times.

Keep in mind also, 15 years on WeWork's side means they've locked those prices
in, whereas 15 month terms on the client side means rents will go up on each
renewal. (assuming no downturns in real estate, of course.)

So, this might pencil out to break-even or a few millions in gross profit ...
over 15 years. Hardly a good business.

------
zantana
I hope this doesn't torpedo meetup.com. They aren't the best for sure, but
they are the right mix between old school mailman list and facebook.

~~~
ellard
How would WeWork going under torpedo meetup.com? I'm not super familiar with
their relationship with each other. Some quick Googling shows that they do
have one partnership for a product related to booking a space for use with a
meetup, but I don't know if MeetUp earns like a huge portion of their revenue
off that.

Edit: Just found out that Meetup.com is owned by WeWork. This makes sense to
me now.

~~~
erichurkman
A lot of meetups are held in WeWork spaces, especially smaller ones that are
too small or niche to have a strong corporate backer.

~~~
ellard
I also just realized that WeWork owns Meetup.com. I don't know how I missed
that.

------
WhompingWindows
Their back is against a wall because they saw a wall, pretended they didn't,
faced away from it, and took backward steps until they hit it.

~~~
farseer
General Melchett: If nothing else works, a total pig-headed unwillingness to
look facts in the face will see us through.

------
DebtDeflation
What exactly is a 1-3 month delay supposed to buy them? What do they think is
going to happen between now and the end of the year to cause potential
investors to say "Wework really is a tech unicorn, I want in on the IPO"?

~~~
ummonk
They could halt expansion and raise prices instead to improve the unit
economics. They could also fire the senior management. I doubt they'll do
either of these things.

(It wouldn't cause it to be a tech IPO, but at least a sustainable business
IPO).

------
quotemstr
Is anyone else reminded of how a bunch of bad business models started falling
apart in 1999 precipitating a recession? We're on the brink of a recession
anyway. Something really unpleasant might be coming.

~~~
Finnucane
I recall in the 90s people saying with a straight face things like "it's about
eyeballs, not profits." Sure, eventually companies like Google were able to
turn the eyeballs into profits by way of advertising, but most of the 90s web
ventures failed to turn their eyeballs into sustainable revenue. Now no one
doubts you can sell stuff on the web, services on the web, ads on the web. Now
what we doubt is the companies like Uber and WeWork that want to 'disrupt' old
businesses like car rental office rental. They've done so, but mainly by
pricing themselves below cost. (leaving aside the, uh, quirks of management)
And there's no sign that they can either raise prices significantly or come up
with other more profitable revenue streams.

------
eternalny1
Someone in the upper levels of WeWork needs to seriously step away for a
minute and look at what they have.

They are not a "tech company" who is trying to "revolutionize" the way people
and communities come together to work.

They are a real estate company with a good interior design team and a founder
with "a vision" but a lack of grasp on reality.

------
DebtDeflation
You can fix the governance problem. You can even fix the profitability
problem. You can't fix the problem that they have high variable costs (leases,
utilities, maintenance) that scale directly proportional to their revenues
which precludes a unicorn valuation.

------
9nGQluzmnq3M
[https://outline.com/rUAupR](https://outline.com/rUAupR) (via bit.ly)

------
tibbydudeza
It is as if Jim Jones and his Kool Aid is back again.

