
WeWork Bonds Drop Below Par for First Time Since IPO Filing - dsgerard
https://www.bloomberg.com/news/articles/2019-09-10/wework-bonds-drop-below-par-for-first-time-since-ipo-filing-k0dutcn0
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cs702
It's _remarkably easy_ to make fun of WeWork, given the company's high-as-a-
kite ambitions, its largely conjectural business model, its dependence on
fresh capital for survival, its charismatic CEO’s new-age antics, and its
disregard for conventional norms of ethical corporate behavior.[a]

But if the IPO of a company as prominent as WeWork fails and the company is
unable to raise the fresh capital it needs to stay afloat, we should view that
as a _warning sign_ that capital markets are shifting from "grow at all costs"
to "show me the profits."

The last time we had such a shift, in 2000, it was sudden and cruel. Many
fast-growing companies found themselves unable to raise capital. Down-rounds
became common. There was a wave of failures. The startup ecosystem went
through a long, cold winter.[b]

If you are at a money-burning startup, please make sure your company has a
viable plan for survival in the event that access to fresh capital is suddenly
cut off.[c]

\--

[a]
[https://twitter.com/shiraovide/status/1161601877517246464](https://twitter.com/shiraovide/status/1161601877517246464)

[b] [https://en.wikipedia.org/wiki/Dot-
com_bubble#Aftermath](https://en.wikipedia.org/wiki/Dot-com_bubble#Aftermath)

[c] Here's a good first-hand account of a fast-growing, money-burning company
that managed to survive the post-2000 environment, while most of its
competitors went bankrupt: [https://a16z.com/2010/03/17/the-case-for-the-fat-
startup/](https://a16z.com/2010/03/17/the-case-for-the-fat-startup/)

~~~
mrweasel
Shouldn’t “show me the profit” have been the basis for investing all the time?
It’s the growth at all cost that’s dangerous.

~~~
Litmus2336
There are valid reasons to invest in a company that doesn't make profit now,
but will in the future. Almost every business has this phase - it could be
short (a lawnmower company that goes 5k in the hole for equipment) or big (a
company with an idea to revolutionize the DVD to consumer marketplace, that
starts operating at a loss until they build up the required customerbase).

Now, the big issue is that everyone thinks they're the company that's just
operating at a loss right now, until they get the big break and start pulling
in gigantic profit. That's simply not true for every startup, and right now I
think we see VC is far too optimistic. But we don't want _all_ the VC money to
dry up, as then those companies that truly do have an amazing idea, that
really will revolutionize their industry, will not not be able to get the
necessary VC money to get past the unprofitable phase.

~~~
fastball
I think the problem is less companies that don't make _profit_ and more all
the companies that have raised a lot of capital without making that much
_revenue_.

~~~
khuey
Not really, if you have access to capital it's easy to fudge _revenue_ by
selling dollars for ninety five cents, which is more or less what many of
these companies are doing.

------
duxup
It just seems like WeWork took an existing business model of renting office
space, went all VC and gathered a bunch of money and sky high evaluation (toss
in some creepy insider dealing) ... and ... that's it.

I know there were some theories on cornering the market, or getting some sort
of huge buy in / contracts with companies hiring remote workers but for the
most part there's plenty of office space (at least in my area) and remote work
that I see rarely involves the hiring company shelling out extra for expensive
office space for remote workers.

I wonder what other folks selling office space in the market think about all
this? They seem to operate just fine and financially seem to do so with a lot
less risk than WeWork.

~~~
chadash
> _It just seems like WeWork took an existing business model of renting office
> space, went all VC and gathered a bunch of money and sky high evaluation
> (toss in some creepy insider dealing) ... and ... that 's it._

That _is_ basically what they did, but they also marketed it really well and
made the process seamless. Everyone points to Regus as an example of a company
that already existed in WeWork's space, but as far as I can tell, most people
have only heard of Regus because WeWork is so often compared to them.

Before WeWork, most people weren't aware that coworking spaces were an option.
Startups would work out of homes or they would find cheap office space and
sign long term leases for spaces they might soon outgrow. WeWork solved these
issues for them.

Now, I don't think there's much of a competitive moat. I don't think there's
much stopping companies from moving to any other co-working space. Their
corporate governance issues are crazy. They are probably overvalued (at least
as of their last raise in the private markets). But they certainly are the 900
pound gorilla in this space and the space has gotten much bigger as a result
of them.

~~~
mytailorisrich
There's marketing and there's targeted marketing. All the people who need the
services Regus provides know about Regus.

~~~
lonelappde
Right. I never heard of Regus until I needed to work from home. Then I
searched for co-working space and voila Regus name on every building I found.

------
bhouston
It does not seem to be a viable business so this makes sense.

I think that there was some type of hope that access to IPO funding will allow
it to continue to search for a viable business model. This path to possible
success seems to be dwindling.

If WeWork needs to have a self-sustaining business model in the near term, it
could quickly collapse.

I am not sure but will SoftBank and other wealthy investors continue to fund
it in its current state?

How much money does WeWork have in the bank? What is its burn rate? Could its
loans get called?

Could WeWork have just months or even weeks to live? Will this failure cause
investors to get spooked? They already are somewhat spooked because of Uber
and Lyft post IPO performance. Thus we may be on the verge of a shift here.

I think WeWork could be the Lehman Brothers of profitless, over-funded
unicorns (see:
[https://en.wikipedia.org/wiki/Lehman_Brothers](https://en.wikipedia.org/wiki/Lehman_Brothers)
)

~~~
duxup
I wonder what they sold their initial investors on?

I've heard a lot of theories (cornering the market, the future of remote work)
but I don't quite get what WeWork was selling folks on when it came to
investing and evaluations that were so high in the first place.

~~~
mason55
My guess is that initially they focused on a market that was underserved by
tech (short-term real estate). That by itself is probably enough to get some
initial funding.

Then you show that you're actually executing, at least as far as being able to
grow and manage a real business with real revenues, which can easily get you
another round.

From there they did two things. The first was to start to securitize the
business. You can see this with things like their ARK spinoff, which allowed
them to start raising money from real estate investors. Sure, real estate is a
slow growth business, but it's backed by real assets, and it allowed them to
start pitching to a new kind of investor while they left the equity investors
in the original WeWork.

The second thing was what you mentioned, their pivot to "cornering the
market". If you view VC investing, and especially SoftBank, as an attempt to
find businesses that are going to eat the world with software, then you can
see where WeWork's seemingly random pivot to "We" came from. You pitch the
business is a fully vertically-integrated lifestyle where people live, work
and send their kids to school. The potential returns on something like that
would be insane, so if you can sell even a 1% chance of success you can see
how it would be alluring.

It's also possible that "eat the world" was the pitch all along. I could see a
world where Adam Neumann was smart enough to see the wholly integrated We as
the end game from the beginning and pitch the real estate stuff as a path to
getting there. The revenue and growth would be more predictable than something
like a software product. The losses would obviously be more predictable too
but predictable losses with a clear path to growth might not be such a bad
thing if your end goal has a necessary condition of "be as big as possible".

~~~
goatinaboat
_You pitch the business is a fully vertically-integrated lifestyle where
people live, work and send their kids to school_

I can see how this would seem compelling to a 22-year-old Google employee of
the sort that gave us Google Glass and Google Plus, but was there any research
done that this was a thing that normal people would want?

~~~
foobiekr
It kind of describes the Google extended-university-experience thing though.
Google employees live in a social ecosystem; you don’t just do Yoga, you do
Google Yoga. And so on.

Some subset of people find this gross and creepy but it’s something a lot of
young people demonstrably go for.

------
JackFr
Hold on a minute there, Bloomberg!

These bonds were trading below par since they were issued, for well over a
year. They briefly popped over par after the S-1 was filed. That is to say,
the smart money has had these valued fairly for a while, and some fake smart
chumps got in late.

Is WeWork a dumpster fire? Probably, but this headline makes it sound like the
status quo ante is the end of the world.

------
code4tee
This IPO story is struggling. There have been several recent examples of
public confidence in the business model collapsing post IPO, but the WSJ and
others are reporting on this so heavily as it looks like we’re now seeing
public confidence starting to fall apart before the IPO of an ultra-unicorn.
Get your popcorn ready.

Someone might buy these bonds at their deflated prices because WeWork still
needs to pay interest on that loan and if its still around will eventually pay
back the original loan, but for now this is more evidence of market skepticism
of the future health of WeWork financially. People are willing to just take a
hit now and get out.

~~~
whatshisface
There isn't an institution in the world that could sell an IOU $100 for $100,
not even the US Treasury. For example, if you bought a 1-year dated IOU for
$100 from the US Treasury today, it would cost only $98.30.

Edit: this comment was written in response to the parent before it was edited
to remove any trace of what was being replied to.

~~~
sephamorr
Plenty of sovereign debt interest rates are below zero, so you'd pay $101 for
$100 in a year's time. Whether or not this is sane economic policy is a
question though.

~~~
tomatocracy
Many large corporates can issue at or below zero in Euros in the current
market too, or alternatively issue in very long tenors (30-50+ years) at 1% or
less. It’s insane.

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thismyrealone
I just listened to the Grubstakers episode on WeWork and the founder. I'm
fairly convinced it's all a racket at this point.

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gandalfgeek
Aswath Damodaran has an in depth video valuing WeWork and evaluating it's
business:

[https://youtu.be/WhDi_2-hvLw](https://youtu.be/WhDi_2-hvLw)

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stephc_int13
I have to say that I will be relieved if WeWork fails.

As a startup founder I think their practices are contrary to the interest of
small companies looking to rent space.

They officially offer so called flexibility and hipster offices, but this is a
disguise to package a lot of small/fragile companies into a big stable system
they can sell to big real estate companies.

There is in practice very little value for the small companies, it's a costly
gadget that can be useful in some specific cases, but companies like WeWork
tend to eat all the available office space and inflate the prices.

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tempsy
This seems like clickbait - not a bond expert but was only at or above bar in
the days following the IPO announcement, and prior to that was well below the
level it is shown in this article.

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forgotmypw
I think what people overlook is that WeWork is more than a company or a
coworking space.

WeWork is carving out a new nation, with its own space and rules, from right
inside an existing one.

And its citizens are from one of the productive and capable segments of the
population: tech workers and entrepreneurs.

If they can get past growing pains, I foresee WeWork becoming a superpower.

Hopefully, their human-owned nature will keep them on the good path.

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Havoc
This is gonna get ugly. Loss of confidence pre iPod is a one way street

