
WeWTF - braythwayt
https://www.profgalloway.com/wewtf
======
DoreenMichele
I really enjoyed the acerbic and colorful style of this article, but wouldn't
have enjoyed it nearly so much if it were all style and no substance. He's
clearly knowledgeable, though I know the style of writing isn't the usual fare
for HN.

He's correct that really good businesses tend to start during recessions.
Starting a business during a Roaring Twenties style economy when you could
literally support yourself with a ridiculous idea like selling pet rocks will
not test your business model and help you find its weaknesses. A la some
African saying to the effect that "Calm seas don't produce skilled sailors."

I learned a lot and I am a bit envious of his acerbic wit. I feel like that's
more acceptable from a man, but _sarcastic contempt_ was pretty much my
default as a teen and I sometimes think I've become a bit too PC over the
years.

~~~
simonebrunozzi
> I've become a bit too PC over the years.

What's "PC" ? Did you mean PC as in "PC vs Mac" boring/conformist vs cool?

~~~
DoreenMichele
Politically correct.

~~~
simonebrunozzi
Ah, makes sense. Thanks. Somehow the obvious was escaping me.

------
mola
I don't understand why all analysis of the craziness that is The We Company is
filled with opaque language and colorful mind bending terms. The company is a
fraud, it should be explained with facts, and clear simple language.
Everything else is just muddying the water.

~~~
endorphone
A lot of the behaviors of the founder seem outrageously fishy, however they
are legitimately filling a rapidly growing need. At this very moment I have
the WeWork Toronto locations page open as I contemplate biting the bullet on a
private office there just to get out of the home office occasionally.

~~~
sameers
I think the author's point is, that in a recession, you wouldn't bite the
bullet, because you (the average consumer) become cost-conscious. The idea is
that therefore, WeWork's revenue model can turn on a dime but their debt
obligations go nowhere when that happens, and then they are in a hole.

Moreso, the author's point is that other businesses that have these long-term
depreciations trade their equity at a much smaller revenue multiple. He's
basically saying, you can't escape the fundamentals.

~~~
DenisM
Recession could be hedged with stock options, no? At their scale they will get
custom-tailored option product to match their liabilities.

~~~
huac
it'll be super expensive to hedge -- the higher the volatility of the
underlying asset (here, the number of people who pay for a desk or whatever),
the more valuable/expensive an option on that asset is. but I also don't think
it makes a ton of sense. in effect, WeWork would reduce their cash flow
growth, with payments going towards hedging. their entire pitch is that they
are a fast growing company, which justifies an insane multiple, any hedging
would reduce that risk.

you don't hedge against decreases in demand via financial instruments, instead
you: 1\. hedge against decrease in demand through diversification of services;
if wework sells some property management software (for example) then that
might be more recession-resistant than their actual leasing business. 2\.
hedge against decrease in demand through long-term contracts: getting IBM to
sign a 10 year lease (for example) is usually a safe bet that you'll have a
tenant through the recession; on demand hot desks are much less safe 3\. hedge
against cost increases using financial instruments: most corporations doing
hedging are hedging against commodity price changes, e.g. airlines buying oil
futures or mcdonalds buying beef futures. similarly, wework might buy kombucha
or aluminum cup futures, but there is no derivatives market for on-demand
desks :)

of course, there are different perspectives on this. matt levine has a really
interesting column about the different philosophies of where diversification
belongs, at the corporate level or at the investor level:
[https://www.bloomberg.com/opinion/articles/2019-04-09/ceos-l...](https://www.bloomberg.com/opinion/articles/2019-04-09/ceos-
learn-something-in-business-school). my finance classes were relatively recent
so you might be able to tell my bias.

~~~
DenisM
Patent post suggested drought of renters due to a recession. Recession can be
hedged against by purchasing e.g. 12 months options that are far enough out of
the money to be cheap yet close enough to cover a major recession event.

I don’t know if the math adds up, but I think it deserves studying.

I’m not looking to hedge against all kinds of customer flight with an
instrument, that’s clearly foolish as you noted. But particular events can be
hedged.

~~~
dannyw
The cost of consistent recession hedging is prohibitive and larger than the
benefit you’d receive, because of arbitrage (if it was cheaper than risk, you
could invest risk free).

See: [https://www.aqr.com/Insights/Research/White-
Papers/Pathetic-...](https://www.aqr.com/Insights/Research/White-
Papers/Pathetic-Protection-The-Elusive-Benefits-of-Protective-Puts)

If you could hedge a recession, we’d have no recessions :)

Hedging only works if you have short time durations (eg you wanna hedge
specifically in October, because you have a big bill due then), or if you’re
the one providing the hedge and capturing the Volatility Risk Premium.

~~~
DenisM
I'm not looking for a blanket hedge though.

"We Work" can have a built-in cushion against smaller recession events - long-
term leases, being able to predict which percentage of short-term leases will
dry up, cash reserves, some sort of counter-cyclical lease agreement (e.g.
with repo companies), counter-recession marketing/education/etc program (e.g.
"let's beat recession together by sticking together!" or some such).

Where the hedge is coming in is making sure that the company does not end up
upside down if recession hits harder than the built-in cushion can absorb.
They could be buying 12 month S&P500 options on a rolling basis - buy a new
batch every month as the previous batch expires. The idea is not to get paid
each time SPY drops 5% down, but to get paid when it drops 35% down signaling
an actual market crisis and have enough time/money to survive the hit.

I don't know if it makes sense as I'm just making this up as a I go, but your
criticism is selling the idea short. Ahem.

------
dlgeek
> Adam also owned the rights to the "We" trademark, which the firm decided
> they must own and paid the founder/CEO $5.9 million for the rights. The
> rights to a name nearly identical to the name of the firm where he’s the
> founder/CEO and largest shareholder.

Really? How is this sort of shenanigan allowed?

~~~
marcinzm
Adam controls the majority of voting right to the company and the board (made
up of VCs) doesn't want a messy legal fight since they stand to lose money if
We tanks. So a moderate amount of graft is tolerated since the alternative is
less desirable.

~~~
dooglius
Breach of fiduciary duty can be a criminal matter in addition to a civil one.

~~~
amluto
I am not a securities lawyer (or any other type of lawyer), but: if this all
blows up, I believe that self-dealing by the executives is an excellent way
for creditors to pierce the corporate veil.

------
vmurthy
The most interesting part of this article is the term "Community Adjusted
EBITDA". It's not a term invented by the Prof but something used by WeWork. I
remember Warren Buffett/Charlie Munger calling EBIDTA as bulls* earnings [1]
but community adjusted EBITDA just smells like someone in Enron got hired by
the We company recently. It almost feels like We IPO is the bellwether for an
upcoming crash :-(

[1]
[https://www.forbes.com/sites/brentbeshore/2014/11/13/ebitda-...](https://www.forbes.com/sites/brentbeshore/2014/11/13/ebitda-
is-bs-earnings/#4f0539e56070)

~~~
csours
> "More than its cash-burning ways, WeWork’s IPO will test investor tolerance
> for made-up accounting metrics. You might recall “Community Adjusted
> EBITDA,” the gauge WeWork devised to measure net income before not only
> interest, taxes, depreciation, and amortization, but also “building- and
> community-level operating expenses,” a category that includes rent and
> tenancy expenses, utilities, internet, the salaries of building staff, and
> the cost of building amenities (which WeWork has described as “our largest
> category of expenses”)." [0]

Hahaha. I think its pretty fair to say that this is not a Generally Accepted
Accounting Practice measurement. (non-GAAP)

I've only visited a We Work location once, but it really felt like a VC funded
startup - particularly the amenities. Without the amenities, it would have
been just another depressing office.

0 - [https://qz.com/1685919/wework-ipo-community-adjusted-
ebitda-...](https://qz.com/1685919/wework-ipo-community-adjusted-ebitda-and-
other-metrics-to-watch-for/)

~~~
vmurthy
Imagine if Netflix says it won't expense content :-) . That's one of the
hundreds of analogies I have read about this creative accounting practice.

------
paganel
When bonds worth $14 trillion are in negative territory and when the 30-year
US treasuries are at historical lows this is what happens, i.e. people are
ready to throw money away at almost anything that flies and moves, as long as
there's a chance of double-digit returns. In other words we live in crazy
times, and as such crazy prospectuses like the one published by WeWork fit the
current financial narrative perfectly.

------
rolltiide
Has anyone seen good coverage of WeWork as an investment?

All my favorite finance meme accounts are tearing this to shreds too.

The only people I’ve heard be excited are the WeWork employees, and you can
practically never get the employees to have a counter view on this even if
they don’t get stock. I dont mean in like “I dont want to rock the boat” way,
but more in an common ignorance of personal finance let alone investing way.
They also arent really the investing class, so far they dont really understand
the memes aside from the comments like “is this company run by Congress?” Not
WeWork specific they just arent investors or financial professionals.

What do the “members” think? Is there any “yes I cant wait to align my
interests with my favorite coworking space by investing in their future
growth” sentiment? Im just not around those people so I dont know

WSJ and Bloomberg have been ripping on this for over a year, and now with the
S-1 out Hackernews and finmeme accounts are ripping it too

Think they’ll retract the S-1 and stay private?

~~~
projektfu
The problem they have is that you can’t save this business by clapping louder.
Either it starts generating profits or it’ll go out of business. I am just
personally surprised that Adam Neumann isn’t getting the kind of negativity
Elizabeth Holmes got. Perhaps after it goes down, who knows, but his activity
has been sufficiently shady that it should be drawing more fire.

~~~
treis
Holmes was deceptive in her fraud and flat out lied to investors. Neumann's
fraud is disclosed and well documented. No skin off my back if he pockets
hundreds of millions of Saudi money.

~~~
projektfu
I’ve got no idea what he’s said to investors but it sounds like they’ve been
repeatedly surprised by things like his real estate holdings and ownership of
the trademark.

~~~
sroussey
Curious for evidence of this.

------
methodover
I think I might be the only person on HN optimistic about WeWork.

Remote work is on the rise here in the US. Startups and entrepreneurship
continue to grow. Finding traditional office space sucks and is a massive
waste of money, and probably always will. Co-working spaces make sense, and
it’s baffling to me that it wasn’t the default way to work in 2010, when I
started programming, let alone 2019.

I feel like if somehow fast food hadn’t been invented til now, and MacDonalds
just got started, we’d be reading pessimistic threads about how it’s a real
estate business masquerading as a food business and is destined for collapse.

But like, it actually does work, as a business, to provide some necessary
service (office space, food) at scale with a big central marketing apparatus.
The fundamentals here seem sensible to me.

~~~
arbuge
WeWork != Coworking

Coworking will grow and prosper. WeWork, I don't know. I don't know how long
any company can survive the egregious investor-fleecing WeWork's founder seems
to wantonly engage in. Perhaps if a clear stop is put to that, and if every
other part of the business plan goes flawlessly, then it has a future.

But coworking is about alot more than WeWork, and the industry will do fine
whatever WeWork's shenanigans imply for the latter's future. There are
currently around 20,000+ coworking spaces worldwide, of which less than 5% are
WeWork's:

[http://www.deskmag.com/en/2019-state-of-coworking-
spaces-2-m...](http://www.deskmag.com/en/2019-state-of-coworking-
spaces-2-million-members-growth-crisis-market-report-survey-study)

[https://www.wework.com/locations](https://www.wework.com/locations)

~~~
Breza
I'm surprised churches aren't involved in coworking. Many of them have great
downtown locations with space that's only used on weekends.

------
blunte
The current system was ripe for a fantastical display of absurdity, and maybe
this is it. It's startingly familiar given the current US political situation.

All this reminds me of Blackadder 2, Ink and Incapability.
[https://en.wikipedia.org/wiki/Ink_and_Incapability](https://en.wikipedia.org/wiki/Ink_and_Incapability)

Blackadder finds himself in a situation that quickly becomes increasingly
unbelievable. Finally he recognizes he is in a dream, and he wakes up in
disappointment. I'm still waiting to wake up.

~~~
hyperdunc
Compared to the relative stability of the 1990s and early 2000s, the current
political and economic situation does seem somewhat absurd.

But history is littered with turbulent times, and compared to those times the
present is a pleasant dream. Whether it turns nightmarish remains to be seen.

------
panabee
bull hypothesis: the office space industry is very large but fragmented.
wework becomes the central hub in a worldwide network of tenants and
landlords.

bear hypothesis: wework is an overhyped-regus with a frail capital structure,
no scale or network effects, and dangerous liabilities. it will likely
collapse during a recession.

questions for investors:

1\. how much flexibility/escapability does wework have regarding leases and
liabilities? in particular, how much control do they have over cash flows to
avoid disaster during a recession?

2\. how much does it cost and how long does it take for enterprises like cisco
and ibm to open new offices: (1) with wework; (2) with regus or another wework
competitor; and (3) without any outside assistance? how about for companies
with 100-1000 employees?

3\. what is the current breakdown, lifetime value, and retention rate for
wework members among solos, startups (2-99 employees), mid-sized companies
(100-1000 employees), and enterprises (1000+ employees)?

4\. cashing out $700mm seems like a red flag if you believe the company is
worth much more. what percentage of equity does this represent for the
founder? is cashing this much out normal for large IPOs? by comparison, how
much did zuckerberg, hastings, and bezos cash out at IPO?

question for others: what are the first questions you would research on
wework?

~~~
panabee
5\. what are the unit economics for the average wework location, where revenue
is projected at 10%/25%/50%/80% occupancy?

~~~
panabee
note: unit economics should be model as profit/sq. foot.

~~~
panabee
one way to model wework during a recession is to treat recession regus as a
baseline. how has regus fared during recessions? what was the impact on
occupancy rate, sales, and profit?

------
mistrial9
speculation on the origins of this ... in the San Francisco Bay Area, over the
last twenty years, many ordinary downtown office+retail buildings became
empty, due to some combination of suburban sprawl, loss of mom+pop retail,
excessive rent-seeking and urban decay. Meanwhile, tons of twenty-somethings
were arriving with a backpack and a laptop .. it was too fast and fluid for
anyone to want an "address" .. so, the idea of flexible techie office "pop-up"
shared spaces was obvious. Some tried it alone, and some tried to brand it
with extras .. and FAILED FINANCIALLY.. practical people, who did try. If you
have not failed this way, then you do not know how painful it can be, at the
small business level.

At any rate, from one point of view, this WeWork thing is just the oversize
"winner" from New York City, in this dog race. Like commercial fishing, and
some kinds of investments, lots of ordinary efforts fail for no good reasons,
then some pig comes along and gets the momentum.

------
wallflower
Can anyone knowledgeable talk about what happens in a severe business downturn
with We? They have most likely setup separate LLCs for each building’s 10-15
yr lease. Do the LLCs isolate We enough so that LLCs can declare bankruptcy
and the building owners or banks or creditors don’t go after the mothership
We?

~~~
JumpCrisscross
> _Can anyone knowledgeable talk about what happens in a severe business
> downturn with We?_

No. This is a known unknown.

On one hand, contracts get cancelled and WeWork defaults. On the other hand,
WeWork’s aggregated buying power lets it renegotiate leases, passing the pain
to landlords.

~~~
goatinaboat
True story: I once worked for a company that rented 3 of 4 floors in a
building. The top floor was empty, and we were expanding, and we wanted it,
and it should have been easy.

It took years. The property company would rather that floor to be empty
earning no rent, than to cut a deal on it. And they won, the company paid
their price and signed the long lease they wanted.

Property companies don’t blink. They will not cut WeWork any slack.

~~~
hnik
This is sometimes the case. Other times renting the last few units brings in
significant cash flow as it increases the NOI disproportionately to leasing
the initial units. For example you’re probably not hiring more custodial staff
and you’re probably able to make draws from your debt as you’ve increased
property value by being fully stabilized

------
JSavageReal
Loved this article. Entertaining and informative (as someone not very informed
on WeWork).

> Ms. Neumann created controversy when she went on CNBC and said: “A big part
> of being a woman is to help men [like Adam] manifest their calling in life.”

In what kind of twisted society does a statement like that create
"controversy"? I'm a man, and I've always felt that in my relationship it is
my duty to bring out the best of my woman and enable her to reach her full
potential. Are my fellow men outraged as well? Only in America does an
innocuous statement like that generate controversy (unless of course this is
just a couple random tweets that the media is trying to turn into a big
controversy to generate ad revenue).

~~~
rossdavidh
Of all the controversies regarding WeWork, this is one of the smaller ones,
really.

------
jasonmar
The author of the article is a professor of marketing so I'd be interested to
learn his opinion on WeWork's marketing instead of accounting, corporate
structure and governance.

Adam's unconventional moves appear extremely outlandish when spelled out in
the S-1 disclosures, but because I have no position I just find it
entertaining. I'm looking forward to the conference calls.

I worked for WeWork for a short period of time during one of the SoftBank
rounds, and one positive unconventional thing the company did was give
employees with vested options the opportunity to cash out alongside Adam,
rather than being forced to wait until post IPO lockup.

------
mark_l_watson
Well, I live in the mountains in Central Arizona, so no WeWork offices near me
(Phoenix and Los Vegas are the nearest). I would be tempted, even though I am
mostly retired, to use a shared office space. I have a great home office but I
still like to go to the library, or to a coffee shop, to write or work.

It just seems like WeWork should charge a little more to nail down
profitability.

~~~
panopticon
For what it's worth, there are non-WeWork coworking spaces all over. I'm not
sure if you're near Flagstaff, but there are several in the area.

I think this business model will continue to survive regardless of WeWork's
success or failure here.

------
TAForObvReasons
For a contrasting view, consider this tweet from @patio11
[https://twitter.com/patio11/status/1161796809741627392](https://twitter.com/patio11/status/1161796809741627392)

> In 2025, every Fortune 500 company will have 10k+ remote workers, and every
> purchasing department will approve a reimbursement for WeWork with no
> questions asked.

The actual bull case for WeWork is similar to Uber: there may be a massive
trend, and WeWork is positioning itself to be the winner. With Uber it's the
push to self-driving cars, and with WeWork it's the corporate move away from
massive campuses and office buildings. In this new landscape, WeWork has
extremely strong branding, experience, and a valuation that suggests it is the
biggest player in the space.

~~~
goatinaboat
_In 2025, every Fortune 500 company will have 10k+ remote workers_

But what does that mean, exactly? I mean, imagine I'm an employee of BigBank
in BigCity. My options are work from their office in the centre of town, work
from my house wearing my pyjamas or... get dressed for work and commute into
the centre of town, and sit in a WeWork instead and then charge it back on
expenses because... reasons? I have better coffee and better wifi at my
house...

~~~
evgen
Imagine you are an employee of MidSizedBank in MidSizedCity but happen to live
and work in BigCity because your company has enough business with BigCity
companies that it makes sense to have a local presence for face to face
meetings. MidSizedBank isn't quite sure how much business they will actually
be doing out of BigCity over the next five years and do not want to commit to
a space just yet but currently have six people in BigCity and have teams day-
tripping in for 2-3 days every couple of weeks. WeWork provides the space and
general office infrastructure and MidSizedBank has flexibility for this remote
team.

The WeWork I am at in London is filled with companies like this. Docker's UK
team, PagerDuty's EU branch, more small quant teams than you can shake a stick
at, etc.

You may have better coffee and wifi at your house, but the rest of your team
is not interested in crashing in your kitchen all day...

~~~
TheCoelacanth
But what differentiates them from any other company that rents out commercial
real estate and re-leases it on a shorter term?

I can totally believe that their line of business will grow by a huge factor,
but I don't believe that they will ever earn the out-sized margins to justify
their current valuation. Their business can be replicated by anyone with a bit
of capital to spend on leasing office space. They don't actually own most of
their office space; they just lease it.

~~~
evgen
Nothing specific differentiates them other than scope. I can bounce among a
hot desk at a variety of locations around the city, do the same in cities
across the EU/US, and my company only needs one service provider account to
manage. And we can do so with a generous subsidy from US VCs...

~~~
HillaryBriss
> I can bounce among a hot desk at a variety of locations around the city, do
> the same in cities across the EU/US ...

what about a consistent user experience? that might differentiate We from
competitors: ease of use and familiarity of environment for the workers. I
mean, I go into a Starbucks or a Target store and it looks familiar and I
already know what I'm gonna get (another Starbucks).

------
carlsborg
I skimmed at the S-1 filing .. they list 400k members for 2018, and revenues
of $1.8B, so Average Revenue Per Member is $4500 USD.

Now the gross margins look terrible, but the sell is probably this: how hard
is it to monetize 500k users (Q1 2019 numbers) who land up and work out of
your managed premises everyday?

------
The_Hoff
If you enjoy this, please checkout Scott's podcast Pivot [0]. He shares all
kinds of analysis like this.

[0] [https://pod.link/1073226719](https://pod.link/1073226719)

------
ErikAugust
To me, it’s as simple as they lose $5200 a customer:
[https://beta.trimread.com/articles/78](https://beta.trimread.com/articles/78)

We all can poke fun at the marketing BS and founder antics but it’s just
another investment to avoid for me.

------
buboard
OT but saying "hot take" on twitter is like saying "i m going to pee" in a
toilet.

------
eaenki
Just short it.

~~~
joelx
I thought this would be a good idea on that super hot hamburger chain a few
years ago. I then learned that short interest changes based on short demand
for that stock. I was putting 120% interest per year to short the stock. Be
extremely careful with shorting, Warren Buffett himself says he won't touch
it.

------
dvfjsdhgfv
> ...it was a porn site. 22-28% of users were seeing adult content

No, it wasn't a porn site. It was a site where you could also find porn, which
some people find objectionable and killed it, so the traffic dwindled. Calling
Tumblr a porn site is a crude oversimplification.

------
daveheq
"Occasionally, red flags marry each other"

I'm glad I read this article.

------
Tade0
I have a couple of friends working for WeWork. Should they be worried about
their jobs?

------
crawftv
It all really comes back to Trump in the end.

~~~
SyneRyder
I thought this was a weirdly off topic comment, until I read the full article.
Towards the end it goes off on a wild tangent claiming Union Square Ventures
are the reason progressives could lose the 2020 election to Trump. (?!)

A shame, because the first half of the article is great.

------
completelylegit
I get that the author doesn’t like WeWork, which is fine. But the throw-away
comment that there is some tertiary connection to Goop seems unnecessarily
personal.

Goop is a bunch of nonsense but I’m not sure why its relevant to why WeWork is
nonsense.

~~~
digianarchist
I took that as a poor attempt at humor. I don't think the author actually
implied a connection.

