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WeWTF (profgalloway.com)
840 points by braythwayt on Aug 17, 2019 | hide | past | favorite | 278 comments

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.

> I really enjoyed the acerbic and colorful style of this article

I did too, and have started looking at some of his other recent posts. I think they will well repay the effort. For example, this from the one on "Mueller and Night Invasions":

"As a kid, I would digest my stomach waiting in the living room, after school, for my mom to get home so I’d tell her I had lost another $33 jacket. My 8-year-old spent $44 for an in-app Princess Celestia Pony and, when confronted, beamed with pride, as spending money is a new skill he’s mastered, similar to math or (not) feeding the dog. It took just one generation for spending money to evolve from a crime to a competence."

He had a terrific YouTube channel that’s worth watching through.


Oh my God!!!! Thank you so much for this. I've missed my Prof Galloway since L2 sold

he was more caustic than acerbic

That website looks really useful. Thanks for sharing.

I find it odd that this link and the author's site both have similar color schemes

> 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?

Politically correct.

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

We've all become too PC and the stains of that culture are bursting out the sides in unexpected and colorful ways. It's oppressive to be PC and we haven't acknowledged that side of it well enough. (Oppressive to the person constantly censoring themselves in the name of PC)

FYI, the term non-PC is mental gymnastics for “being a dick” so I suppose you’re arguing we should be bigger dicks to each other.

IMO, you should be yourself, unless you’re a dick in which case, don’t be yourself. It may feel oppressive to you, but frankly, I don’t ... care, and neither does the rest of society which is why your approach doesn’t get you far. Hopefully this framing is illustrative.

An ironic statement given that "dick" is not PC language. It's a gendered slur insulting men on an overwhelmingly male forum.

I think it's a bit more complicated and nuanced than that, though I don't really think this is the time or place for me personally to try to get into it in a substantive way.

Yeah, haha, my reply was a bit meta ^_^ basically making the affirmative case for PC in a non-PC way. I agree with you that there's nuances (and that this isn't the place) -- and of course simultaneously I'd love to see peoples' skins thicken up. My reply is more to the FOX News trademarked rallying cry against political correctness more than against the dictionary definition. With that in mind, I'd expect someone arguing against PC to appreciate the tone of my reply as that is the kind of discourse they're advocating for.

To me, PC culture is more about style than substance, a thing I very contemptuously called "empty polite noises" when I was younger.

I generally shoot for genuine respect of people. I far prefer the company of authentic but socially awkward people to superficially smooth con artist types.

If one can combine authentic respect with smooth language, they are basically hitting international diplomat levels of social interaction. Awesome if one can pull that off, but quite oppressive to expect it as a default for being able to interact with others at all.

Which is why PC culture is very often toxic: In a world where asking for both is very often asking too much, it usually prioritizes style over substance.

You will note that HN doesn't require PC language. The mods will not come down on you for casually swearing. They will come down on you for ad hominems.

It's a good standard, imo.

Absolutely not. Political correctness is a term for completely suffocating certain lines of thought such as stereotyping and certain methods for expressing outrage. PC culture is highly alienating to many Americans and is one of the reasons that Trump was so successful in 2016.

Would it be wrong to suggest that bigots and racists deserve to be alienated?

Would it be wrong to imply that if you're non-PC you're a racist and/or bigot?

I don’t think that’s what they were saying. I think they were saying that people with distasteful positions need not receive the same platform as those who dont.

The fact is that while everyone is entitled to speak freely Nobody is entitled to a platform. You have to earn your platform. You earn it through the way in which you present your ideas, which is particularly true for challenging ideas.

(Oppressive to the person constantly censoring themselves in the name of PC)

I mostly don't suffer from this issue. It's a genuine concern that if you can't speak certain words, then you can't think certain thoughts and you may not be able to feel your own feelings.

I spent a lot of time in therapy. I feel fairly comfortable with myself.

It's a topic I should perhaps explore more sometime, but I have had a really rough month, I'm still exhausted and I've got a looming deadline, so now is not the time for that.

> if you can't speak certain words, then you can't think certain thoughts

That's the strong Sapir-Whorf hypothesis and it's not been a serious linguistic theory for nearly about a century now. It's not a concern.

You might have been thinking about the weak Sapir-Whorf hypothesis, which is about the much more reasonable idea that linguistic structure merely influences thoughts and decisions. Except that it's such an obvious no-brainer, it's hardly worth mentioning. Also it makes it quite a leap to go from there to being unable to feel your own feelings (again, instead of influencing ones feelings).

(see https://en.wikipedia.org/wiki/Linguistic_relativity )

On the other hand, speaking about being genuine: I personally believe that being PC is about being sensitive and aware of other people's feelings, to genuinely spend the effort to understand why or why not something would be offensive to people. And with understanding, you'll find that your language changes (just like it changes when you become friends with someone). That is really taking the substance over just the style.

And personally, I have found that cultivating this awareness in myself has allowed me to actually think MORE thoughts, and feel MORE feelings. Claiming it does the opposite is not helping. This is a matter of feeling comfortable with the other person's feelings, not about yourself.

Also it makes it quite a leap to go from there to being unable to feel your own feelings (again, instead of influencing ones feelings).

I'm not making some mental leap. I'm describing first-hand experience of things I've had to overcome.

Your experience of life doesn't negate my experience of life.

My mistake, I thought you were making a general case.

> if you can't speak certain words, then you can't think certain thoughts

Are you saying that you're incapable of non-narrative thoughts?

No. I'm saying that an oppressive enough culture, where you cannot express yourself, interferes with your relationship to yourself and with developing better mental models.

I don't see why self discovery has to involve external expression. Isn't the whole point to delve inwards?

Without a mirror or other external device, no one can see their own face.

It's a bit like that.

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.

> The company is a fraud

This is extreme. Adam’s self-dealing is abundantly disclosed. There is no evidence he is acting in bad faith. (Versus being deluded himself.)

Lots of businesses leverage paper-thin margins. Lots of businesses borrow short and lend long. Lots of businesses, particularly real estate businesses, feature self-dealing and family control galore. American corporate law goes out of its way to avoid criminalising stupidity.

There is a chance WeWork attains enterprise lock-in sufficient to let it weather a storm. There is a chance it expands cross-selling to bring its books into the black. These chances are slim. But they’re clearly disclosed.

> Lots of businesses, particularly real estate businesses, feature self-dealing and family control galore. American corporate law goes out of its way to avoid criminalising stupidity.

Self-dealing, as in how the founder leases his building to his firm, or how he owned and sold the We trademark to his own firm? I wouldn't call that 'stupidity'. In fact, it sounds very smart, for the founder. And unethical bordering on criminal.

I've heard it's not uncommon to separate low-multiple assets and high-multiple assets into different structures.

In this case, the builds are the low-multiple assets and they're being separated out from the high-multiple asset which is the management company.

Imagine a huge conglomerate who has the ability to take revenues in more than one division - you claim the revenues in whatever the market treats as having a higher multiple, thus inflating your “growth” story and your stock price. To financial folks it looks like you’re shedding old businesses and making a new hit, but in reality it’s a finance trick.

Wouldn't the buildings usually be owned by, like, a subsidiary of WeWork, or a holding company that also owned WeWork, or something?

WeWork is the junk company that only exists to funnel investor money to the founder via his other company.

This company is completely unlike the early days of Amazon or others who lost money, WeWork seems to have zero plan to ever make money or be profitable. It's just a ponzi scheme that is trying to push scam up and out to the IPO market.

It's a despicable fraud and would be completely illegal if we had a functional SEC. They are just amping up the Uber-style con game to the next level.

There will be dozens more scam companies like this until someone finally cracks the whip, so get used to it.

> WeWork seems to have zero plan to ever make money or be profitable

Last I checked, being up shit creek without a paddle isn’t illegal.

The problem with criminalising stupidity is differentiating genius and idiocy is often only possible ex post facto. We let investors take informed risks with their own capital. The SEC’s main job is making sure companies selling securities truthfully represent themselves.

There are many business models I never thought would work but which, due to scale, clicked. I’m sceptical about WeWork. But the way for them to die is for them to starve to death. If the Saudis (and Kazakhs?!) want to give them money, so long as they aren’t creating negative externalities, I don’t see the problem.

My god, this isn't rocket science bruh.

The SEC used to prevent companies from listing that were obvious scams. They simply need to start doing their jobs again, it's not a tricky differentiation problem or moral quandry that we need to bust out latin to explain.

Right, but who exactly is being forced to invest?

The VCs went into this with their eyes open and probably information rights.

The public has been told this stock features a CEO who scammed his own company out of licensing fees for the name, and features abundant self-dealing for leases of buildings he owns. Anyone who invests has been warned.

If it's that sure of a thing, then let's all work to solve the problem by shorting the price all the way to zero.

None of what you said challenges the idea that it's a fraud, rather just paints a picture of what's considered to be fraud in this case being widespread.

> None of what you said challenges the idea that it's a fraud

I’m not saying WeWork isn’t a fraud. I’m saying we have no evidence it is one.

People can reasonably disagree about whether a business model is sustainable. A bunch of people have bet one way. A bunch will bet the other. I don’t like WeWork, but I don’t like this idea that if outsiders disagree with the sustainability of a business model the government should shut it down.

If WeWork can realise cross-selling opportunities or unique leverage, through scale, over its lessors, it could work. It’s one thing to say something is stupid. It’s another to shut down the debate.

Fraud involves deception, what is wework lying to people about?

That's what gets me about it. They don't seem to be lying. I've always thought WeWork was more some kind of odd way for VCs to get exposure to Real Estate and have it look like a tech investment.

What I said is accurate. See the rest of the thread for arguments that they're a fraud and what is meant by the term in this case.

I'm genuinely curious, mind you I haven't read much about Wework.

So, I can understand how a company like Theranos is fraud, because they are lying and have no product.

But, I've used wework successfully, I know a lot of people using wework successfully. They have a product that works and that people pay for. How can such a company be a fraud?

> They have a product. How can such a company be a fraud?

Fraud, put simply, is lying with material consequences. If Apple said their iPhone can fly you to the moon, and you bought it on that basis, you were defrauded. That the product does a bunch of other useful things is irrelevant.

That said, I agree with you in us having insufficient evidence to label WeWork a fraud. They’re aggressively disclosing their weaknesses. No evidence of deception.

Disclaimer: I am not a lawyer. This is not legal advice. Don’t toe the line with fraud.

> If Apple said their iPhone can fly you to the moon, and you bought it on that basis, you were defrauded.

Or possibly, if you sued Apple for that, your suit would be dismissed because Apple's statement was "mere puffery": an advertising claim so outlandish that no reasonable person would be expected to take it seriously.

A famous example is Leonard v. Pepsico, Inc., where a Pepsi TV commercial showed some of the things you could get by redeeming Pepsi Points that you earned with your purchases. It begins with:

and ends with a high school student vertically landing a Harrier fighter jet in the school yard, opening the cockpit with no helmet on but a Pepsi in hand, and laughing "Sure beats the bus!"

  7,000,000 PEPSI POINTS
You could also buy extra Pepsi Points for ten cents each if you didn't have enough for the prize you wanted.

John Leonard wanted that Harrier, so he sent PepsiCo a certified check for $700,000, minus $1.50 for the 15 Pepsi Points he already had, plus $10 shipping and handling.

When PepsiCo returned the check instead of sending his jet, he sued. Here's the commercial and the rest of the story:




(I'm not commenting on WeWork, only on the lunar iPhone example.)

> if you sued Apple for that, your suit would be dismissed because Apple's statement was "mere puffery"

Agreed. The example was facetious.

The underlying point, that a company producing a useful product can still commit fraud, to customers and/or to investors, stands.

As, this is why so many businesses can claim to be the "Worlds Best".

that seems more like an exaggeration than a fraud if the product does work for the most part no?

> that seems more like an exaggeration than a fraud if the product does work for the most part no?

If you bought it to go to the moon, it doesn’t work as promised. If the lie was wilful, that’s honest-services fraud.

Less facetious of an example: you sell a company that makes lots of money but has a material liability on its books. The liability can’t kill the company. But you intentionally hid it from a buyer. The company still generates all those dollars. But your hiding this material fact from the purchaser is fraudulent.

Disclaimer: I am not a lawyer. None of this is legal advice.

It's not about the Wework product "office space" being fraud, but about the product "wework shares" being sold as a good investment which is questionable

> about the product "wework shares" being sold as a good investment which is questionable

Investments can be shoddy without being fraudulent.

Securities offerings are never suggested that they’re a good investment; the same way that a software stack doesn’t suggest it’s the best thing for your use case.

It’s up to you to evaluate the investment in question and decide whether you wanna invest.

Nowhere do they say it is a good investment. You can’t do that in an S1. Investors decide.

(Today I learned to “toe” the line... not to “tow” it!)

I think the point is not that they don't deliver a service; it's that the prospects for that service are far less rosy than they want you to believe, and the company is being gutted by disgraceful profiteering, nepotism, and what some people might call stealing.

It worked for Eddie Lampert with Sears.

having a product that works doesnt mean they have a good stock. They are not selling tickets to wework here, they are selling shares

Theranos was a fraud to consumers and regulators.

Wework isn't so much a fraud as the next pets.com waiting to happen.

I know almost nothing about finance, and the only things I had to look up in the linked post were "EBITDA," "DJIA" (which turns out to just be an acronym for the Dow Jones) and "flywheel effect." Seems pretty plain to me.

Because I'm a huge noob too I googled these terms:

* EBITDA or Earnings Before Interest, Tax, Depreciation and Amortization. It's pretty much the net (before-tax) income of the company (per year), but after expenses that are easy to calculate (like employees' salaries and rent).

* DJIA or Dow Jones Industrial Average. It seems to be an index of the stock market, meaning a number calculated from the price of a selected number of stocks (in practice, 30 large US companies).

* The Flywheel Effect. I guess to understand this one you need to understand what a flywheel is, it seems to be a pretty heavy wheel. The metaphor here is that building a successful company is like pushing a massive wheel for a very long time until it catches some momentum and roll by itself?

It's worth noting that the DJIA comment was specifically mentioned because it contains only 30 companies and a terrible indicator of the overall health of all American companies. But it's used as the primary indicator of the health of American companies in nightly news reports.

"Similar to the DJIA, last-round private valuations are harmful metrics that create the illusion of prosperity."

A lot of people just wish the DJIA 30 would disappear from popular use. It's a harmful metric that gives the illusion of prosperity.

The Russel and S&P are generally right next to the Dow in financial news. There is value in each of those indexes if you know what you are evaluating. The health of large companies does reflect the health of the overall economy for the most part. Combining that with the S&P gives a pretty good measure of the US economy.

The only people who don't like the DJIA are nerds who are annoyed that such a simple model works so well at approximating the whole market:


Flywheel effect is a jeff bezos/jim collins (good to great) reference: https://medium.com/swlh/the-amazing-flywheel-effect-80a0a21a...

And that can be used to spin up secondary revenue streams more easily than starting from scratch.

A simple way to reason about EBITDA, is raw earnings before tax and accounting specialists come in and do financial engineering. Typically accountants will do some magic to earnings by using ITDA, so this gives a bit more of a uniform earnings picture across businesses.

Another way to reason about it is "earnings before bad stuff." Your explanation makes it sound like it is a superior measure by painting the other GAAP measures as "financial engineering." EBITDA is vastly inferior, although it has some uses in comparisons and also glossing over bad news.

Examples: I take a loan with 1 million a month in interest payments and I "invest it" and "earn" 1 million a month. EBITDA: 1 million a month. Amazing! Real world, net zero.

I buy a 20 million dollar piece of equipment that lasts 20 years. From it, I "earn" a million a year. EBITDA: great! Real world, net zero.

Each financial metric tells a story. They each tell different stories so it is not a case of one being more important than the other. EBITDA is a way to compare similar companies that may have different capital structures. So it allows a side-by-side comparison of the core business.

For instance, Companies A and B are competitors in the same market and both have a million dollars in annual revenue and earnings of $100K. Are they both worth the same? What if I told you that Company A has no debt, and is depreciating its assets at an accelerated rate (ie is "paying off" its capital investments rapidly) while Company B is loaded up with massive debt and is depreciating more slowly? That changes the picture a little bit, doesn't it? This is why you have different metrics. Think of them as clues in a detective story rather than horses in a race.

To quote myself:

> although it has some uses in comparisons

So we agree about that. In terms of EBITDA's "other uses" your example proves my point? From an EBITDA perspective, those companies look the same, so if you want to paint a rosy picture and you're the company with lousy financials, EBITDA is your go-to metric for your talking points.

I disagree it can be indicative of the real world. It is if I’m buying it from you. If I’m buying the business id like to understand the cash flow I could expect. I’m not necessarily going to have that loan with interest or the same taxes so it makes sense to pull it out and have an earnings only metric

> "DJIA" (which turns out to just be an acronym for the Dow Jones)

Dow jones compiles indices on several sectors, not just the Industrials. Hence the four letters in the acronym.

That's extremely misleading. DJIA is the original one and it's named that because A is for average and DJ is for Dow Jones. So only one of letters could vary in context, and only the I is the one people mean when they take about Dow Jones.

"The Dow" or "the Dow Jones" always means DJIA.

The WSJ is owned by "Dow Jones the company". Not "the" Dow Jones, I'll grant.

It comes up in their articles sometimes, and is probably why they prefer to refer to the DJIA as a measure of market price than the SPX.

Oooh thanks.

Parent post was misleading, though.

I liked the post except for its repeated use of the nonsense buzzphrase "virtue signaling." WTF is that supposed to mean?

We have lots and lots of words; I don't believe this BS phrase fills an otherwise unfillable gap.

I find "virtue signaling" is a useful concept; It's the idea of doing public things that signal how virtuous you are, but don't have the impact they suggest. Example might be front-yard cactus gardens to save water compared to lawns ? (while ignoring washing , agriculture, and industry )

It seems irresponsible to use the term fraud. You need strong evidence to accuse someone in a criminal offence.

Fraud is Theranos. We seems more of a BetterPlace - delusional, charismatic founder + too much money - sound business model.

You can never be sure that it is a fraud until someone is convicted. Convincing the company that you are the CEO of to pay you personally $5.9 million dollars for the trademark "We" (after you started the company and called it WeWork btw.) could be considered defrauding investors if the trademark "We" was not really worth $5.9m.

It's not fraud until someone wins in court. And not all cases of fraud are pursued.

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.

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.

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

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.... my finance classes were relatively recent so you might be able to tell my bias.

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.

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-...

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.

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.

what underlying asset would you buy the options on? if it's just on the overall market, then what advantage is there for wework to do that versus an individual investor?

I have made a long reply to a sibling comment.

Hedging via options is guaranteed to cost more than the benefit you’d receive, over the long run. This is due to the volatility risk premium (the insurers against risk must be paid, and will price it to come out ahead).

See https://www.aqr.com/Insights/Research/White-Papers/Pathetic-...

But no, you cannot hedge away risks of a recession - for cheaper than what a recession would cause.

It is not free or magic to do that.

There are dozens of non-WeWork coworking spaces across Toronto.

For sure, though the common model seems to be going in a class B building on a highway somewhere on the periphery and setting up an incredibly drab, soul crushing office. I've worked for Bell and RBC -- I've already done the soul crushing office thing.

I have absolutely no doubt that I've missed some good ones, but that's how WeWork made me interested in something that I'd put off for so long -- really nice looking interiors in great parts of town/great buildings. They are in no way a tech company, however their aesthetic and values do more closely mirror tech companies than a lot of their competitors that are low cost satellite office providers for low-tier organizations.

I don’t know about Toronto, but, here in Philly, we are at the Make Office at 20th and Market, diagonal to WeWork.

We have private offices, better views, zero annoyance from fellow lessees (nobody leaning over to sell us insurance while we have headphones on, or harassing us about their recruiting services), pay half the rent (even less, now that we signed a long-term lease, previously we were month-to-month).

As far as I can tell, the WeWork across the street has a nicer interior and better coffee. That’s it. That’s all.

And it’s way more expensive and has a way more distracting culture.

The reason WeWork is a better offering is that they’re losing money and investors are paying for this nice interior.

This is all nice for customers, but makes for a shitty investment.

WeWork doesn’t have any real competitive advantage when you want to turn it into a healthy, profitable company. Then it will just be any other coworking space; perhaps a more fancy one, but also more expensive.

You’re disregarding brand appeal.

Starbucks has no real competitive advantage over Local Coffee Co. other than great location, decor and brand appeal too. Thats what OP argues were the deciding factors for them. To attribute nice decor as being nothing more than a sunk cost is erroneous at best.

That's not correct. Starbucks has incredible economies of scale and purchasing power at this point.

Clearly Wework has at least some economies of scale, but as for purchasing power not so much. The mass importation, distribution, and sale of a perishable agricultural product is a whole different kind of thing.

Let’s go with your argument. What economies of scale and purchasing power would make for a differentiable competitive difference vs Local Coffee Co? Are those economies the driving force for Starbucks success? For their competitive advantage in the eyes of a consumer?

WeWork is an international brand. Can you name another coworking space in nearby [state/country]? On the other hand there’s prob a WeWork there with a certain consistency wrt quality that you’d expect.

I can, Regus. They’ve been around forever, this business model is not novel.

But the lack of examples doesn’t support the argument the way you think it does.

That means it’s very much an open question if this model could ever be successful. Unlike chain food/beverage which is a highly proven business model.

But you still haven’t given me an example. Thusly any competitor to come into this space would have to spend as much as WeWork at least to unseat them or to make a competitive brand for themselves. Sure the market’s not new, but the solidified brand in this market is. That counts for a lot.

I have indeed given you an example, it’s called Regus. Google it, they have an international brand too. Wework now has a higher profile.

Good for them, but what’s that worth exactly? Having brand recognition is not at all the same thing as a barrier to entry of a market, or a network effect.

The market for shared or managed office has very low barriers to entry and modest network effects. Thus making the concept of a monopoly in this market more than implausible.

> What economies of scale and purchasing power would make for a differentiable competitive difference vs Local Coffee Co?

If Starbucks spends less money buying coffee, that means they can afford to spend more money on nice decorations (and better real estate, more ads/PR to increase brand presence, etc.) than Local Coffee Co. The real estate/furniture is presumably a relatively small portion of the operating costs of a coffee shop, so e.g. buying 10% cheaper coffee beans could mean getting a location that's two times as attractive to customers.

WeWork might not be able to do that as easily because for them, the real estate and furniture is their only product.

Cost of coffee in cup of latte is less than 25cents and Starbucks sells latte for $4.5. I am sure Starbucks has small price advantage compared to local coffee shop but this advantage is minuscule for widely traded commodities like coffee, milk and paper cups. I doubt that's their main competitor advantage.

Personally for me ability to order Starbucks coffee online and have it ready when I get to the store is a game changer + consistent user experience. Local coffee shops are always hit/miss.

So a competitor to WeWork would have to spend even more than WeWork to compete vs the brand. They’d be even more strapped for cash for PR/ads than the main player. They have the first mover advantage.

> So a competitor to WeWork would have to spend even more than WeWork to compete vs the brand. They’d be even more strapped for cash for PR/ads than the main player.

WeWork won't be able to maintain their venture-capital-fueled level of spending forever. Starbucks' economies of scale aren't a one-time "build the brand" thing, they're a constant source of capital that allows them to continually build and maintain storefronts better than Local Coffee Co can.

I can totally see a world where WeWork, forced by the public markets to attempt to reach profitability, stops putting as much money into their buildings and furniture as they currently are. Then, the next real estate firm disguised as a tech startup can raise private money at a forty-eight million dollar valuation, build even nicer offices, and eat their lunch.

> They have the first mover advantage.

I am not convinced the first-mover advantage is very significant in the short-term office rental industry! WeWork got a lot of customers by selling nice offices at below cost, even though other players in the space had been around longer. Who's to say another company couldn't do the same thing?

Starbucks also has incredible gross margins of close to 60%. Almost as high as a SaaS business (70-95%).

WeWork has 10-15% gross margins.

"Gross margin is a company's net sales revenue minus its cost of goods sold (COGS). The gross margin represents the amount of sales revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells."

Starbucks does not have more competitive gross margins than Local Coffee Co. would to be a big enough differentiator.

Starbucks also has product consistency. I know a Flat White in Kansas City will be the same as a flat white in Vancouver. If you like that product, that consistency is welcome.

So that would be a similar case for WeWork where you’d expect a bar for quality of offering

Starbucks has good coffee, at least in France it's the only good drip coffee I've found

Additionally to CPLX's point, they can also move profits into low-tax countries by licensing their brand. The fix costs for that are too high for a Local Coffee Co. to copy.

> I have absolutely no doubt that I've missed some good ones, but that's how WeWork made me interested in something that I'd put off for so long -- really nice looking interiors in great parts of town/great buildings.

(I understand that most WeWork locations should look about the same, so…)

I still don't get how their "private" offices have glass panes for walls. That's horribly unconducive for work.

Go visit them before you buy.

I visted the WeWork office on Bloor last year, and it was more like a party than I would like. Seems like a great place to meet a future spouse. Not necessarily a great place for quiet, deep work without noise.

They have a lot of social events. Seems to be their big selling feature. So if you are looking to prospect for customers like a real estate agent or something, maybe it's worth it.

There are definitely offices as good or better than WeWorks in the downtown core. Most of the companies will give you a free day or something so you can actually work there and see what it's like.

We ended up at iQ offices, much quieter than WeWork. Workplace One's new location also seemed pretty compelling, just not in as good a location for those of us commuting on the go train. If internet speeds are important, make sure to ask about that, because most of the offices we talked to had pretty shit speeds.

In Toronto if you're looking at WeWork look at Workhaus as well. My employer just rented with them and I'm pretty impressed. Definitely not boring suburban spaces.

Be sure to cost/feature compare too! https://www.regus.ca/office-space/canada/ontario/toronto

Frankly, this is what I don't understand in this whole charade. IWG has a decent 2.5 billion yearly revenue and wringes a paltry 0.1B net income out of it. I mean, good for you, employing near 10 000 people and still being profitable but still, a 4% profit margin. That's razor thin and it's not immediately visible what WE is going to do so much better -- or better at all.

Would it not be more economically prudent to simply rent a small office? When I looked into these shared spaces, I found them to be a significant rip-off.

..until you pay utilities, sign a lease, pay various insurance, furnishings, security, reception, etc. The rent cost of a small office doesn’t include all of the various things you have to often pay to make it I habitable.

Depends on scale & of course location/local market. If you're only a couple of workers it isn't cost competitive to rent your own office and take care of everything.

Because it's so obviously a fraud that to say so doesn't add anything to the conversation.

On the other hand the fraud is wrapped in the most delicious of absurd flfftery that it's a pleasure to try to ape it.

How is it fraud? Investors make idiotic investments. Nobody is being forced to buy shares of WeWork, and all the financials are there. It’s not like WeWork is lying about financials.

Consider the illegality of Ponzi scheme: nobody is forced to participate, investors make idiotic investments, and yet, because of the essentially certain loss of money, it can be regarded as knowingly defrauding the investor.

A Ponzi scheme lies about the source of returns. WeWork is not lying about any financials. WeWork is not a Ponzi scheme and you know it.

My assumption is these investors know what they’re doing. So they’ve structured things to sell a bag to the public, arbitraging the difference between reality and regulatory requirements/what is documented generally.

A conversation about fraud often litigates whether or not omission is a form of lying.

What did they omit that constitutes a lie in your opinion?

I'm not sure there's fraud here. It's more akin to voting for Trump to "Make America Great". It's purely a pr / sales-pitch and if people decide to invest they may lose their money or they may not. If I believe the S-1 it pretty clearly lays out the shadiness and ridiculousness of the company without being fraudulent.

>it should be explained with facts, and clear simple language.

since it looks like you've spent some time on this, would you care to take a shot?

What makes you think I understand this? my comment originated from the opaque language which read more like works of satire than actual analysis. All I can tell is that the whole way this company and its investors are acting is bat shit crazy. I'd like to get better analysis that is less "entertainment" and more factual and analytical.

>What makes you think I understand this?

The fact that you stated "The company is a fraud", before saying that this should be stated plainly. Since you didn't say something like "...from my point of view I certainly have the impression that..." or something like that. Since you spoke definitively, I assumed you have a definite opinion you formed somehow.

It's actually just satire with numbers. Which seems better than satire by itself by a mile, and (personally) also better than rote numbers listed because it's amusing. Why complain?

> 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?

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.

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

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.

>Adam controls the majority of voting right to the company

This alone should be a massive turn-off for investors, nevermind this kind of personal eccentricity that makes this absolutely insane.

I don’t think majority ownership is necessarily a turn on or a turn off. There are cases when a bunch of minority shareholders would be chaotic and prevent the company from making long term bets. There are also cases where minority ownership would allow for stability while cycling through executive turnover and experimentation.

Which situation you are in, and whether shareholders would be turned off by majority ownership, is context specific.

For example, I think SpaceX would be a less attractive stock if there were only minority stockholders, and having Elon as the majority holder makes it more likely to succeed at going interplanetary, rather than just milking a traditional orbital business model.

If your investment thesis depends on a bold bet like that, a single majority shareholder you trust would be a comfort.

For the SpaceX example, I actually think they'd be better off focusing on the orbital launch market. The dream of affordable and reliable access to space dates back to the 50's and still hasn't been fully realized. In my opinion, that's a bigger deal than trying to get SpaceX to put a payload beyond orbit.

I agree with your larger point though.

SpaceX isn’t a public stock though?

It still has investors, and shares.

This guy has become a multi-hundred-millionaire by renting out office space under a business model that appears to make no financial sense. Because "tech company". It's utterly bonkers.

It's basically a modern ponzi scheme as I see it. The VCs make money at the expense of people who buy post-IPO.

Yeah, I think WeWork is at best the next Groupon: something that was made to seem just plausible enough at the time that the financiers made a bundle, but that rapidly turns into a minor-league business as the shiny wears off post-IPO.

And that's at best. But I think a collapse is more likely. Uber may also be losing a ton of money, but they have enormous pricing power over their major raw materials, namely individual drivers and their cars. But WeWork is renting space from hard-bitten landlords run by professionals, and those companies have plenty of alternative tenants if they don't like WeWork's terms. At some point I think there's going to be a mismatch between their short-term income structure and their long-term obligations to the space owners, and then it's going to be a big old mess.

I fail to see the comparison with Groupon. Most people who have used Groupon have mixed reviews about the product, it worked sometimes but most of the times it didn't.

WeWork on the other hand seems like they have a solid product?

Maybe they are not profitable, and maybe the business model makes no sense and will never be profitable. In that sense then maybe you are right?

But in the mean time, the product they are selling works for their customers and there is high demand at the current price point (which is already insane imo).

To expand on your 3rd paragraph, maybe that's the Ponzi scheme, with big investors playing along:

1. Start a shiny business that attracts customers. Never mind that you're losing money per customer.

2. Get some big investors. You are now valued at 2-digit-billion dollars.

3. Talk about IPO. The general investing public has heard about your shiny service/product because the news talks about how shiny and hip you are (are MSNBC just idiots so easily distracted?) and the public are about to bite!

4. IPO. Big investors cash out. Mom-and-Pop investors lose money.

5. Profit! For you and your big investors.

See also: MoviePass, which failed somewhere between (2) and (3) because they were a little too obvious about doing (1).

This makes me wonder, how many companies in a similar position (great product with a good demand) have failed and shut down to the misfortune of its customers?

I see similar talks about Uber, and yet I can't imagine such a product failing due to the number of happy customers.

https://thehustle.co/Doughbies-cookies-shut-down/ is one that I know quite a few people feel strongly about.

It sounds like it was mostly about the founders not wanting to continue maintaining a business that was not a unicorn. There was someone else on HN that posted about a similar company but decided to buy back equity and continue maintaining it.

In a Ponzi scheme you commit fraud. You make false claims about returns, and then use downstream investors money (enticed by those false claims) to pay off upstream investors to keep the scheme going.

This is a stock sale. The "mom and pop investors" buy into it with full knowledge of what they're buying. It might be a bad investment, but I don't see where the fraud comes in? I'm not convinced that WeWork is a sustainable business which is why I won't invest in it. Others might disagree.. we'll find out down the road who is right.

I think that's why they said "modern ponzi scheme".

And no, mom-and-pop investors don't have full knowledge, not like insiders do. The fraud would come in if the insiders are being anything less than perfectly honest about current condition, future prospects, or their expectations.

Of course, this might not rise to the level of criminal fraud. But when you look at something like Groupon, which fell 90% quite quickly, and which had insiders taking money out early on, it's reasonable to suspect that at least some insiders knew what they were selling to the public was dubious, but did it anyhow.

The comparison is that Groupon was exciting and hot at the time of the IPO, allowing investors and insiders to hype it and make a very profitable exit. But it turned out not to be great long term for a variety of reasons, so the stock price quickly fell (it's trading at something like 90% off peak).

Groupon is still a functioning business, of course, with something like $2bn/year in revenue. And WeWork might end up a functioning business as well, just like its competitors. But I think its best case is to end up like those competitors, which all have thin margins and look like regular old businesses, not profit fountains like Google, etc.

Don’t underestimate the power of bankruptcy law, which is a plausible outcome. This is partly why real estate companies have lots of entities to use as firewalls and as leverage.

If there's a recession that hits WeWork, those alternative tenants will also dry up, for the same reason. Companies won't want to justify a large capex investment into new office space, and cancel pending contracts for space that hasn't been built out yet.

Comparatively, the money WeWork's customers spend on WeWorks would be considered opex, for those whos budgets are big enough for the distinction to be material.

Is WeWorks hacking corporate America's budgeting practices, doing what AWS did for rack space?

I think you're mixing up a couple of issues.

If a recession hits, or even if there's just a glut of rental office space because other players overinvest, then WeWork may not be able to fill their spaces, which they've mostly committed to on long-term leases. Their costs are fixed in the short term, but their revenue could be highly variable.

It's true that in the longer term the market for large blocks of space follows economic cycles, so if they are looking to expand during a recession, they can get a good price. But why would they do that? Since their business model is all about flexibility, they will be harder hit by recessions than both property owners and other people who need large blocks of space.

The alternative tenants would also presumably rent the building rather than buy it outright. So it would still be opex.

Don't underestimate the amount of time and money it takes to actually make an empty office space usable. And that isn't the worst of it. If you have a fast growing company you'll be moving or expanding your office space at least every other year. Or you can pay for lots of unused space.

With something like WeWork I can just come in no matter if I have a 10 or 100 person team.

Were I work we have moved the HQ 3 times in 4 years with substantial cost. We now have a couple of international locations and all of them are under WeWorks roofs. We are glad to not be dealing with the office burden abroad.

Up until 100 employees in the same location, I'd chose WeWork any day and concentrate on my product. I have been to lots of CoWork spaces, they all don't work long-term and are only good for fairly small teams. WeWork on the other hand is also good for bigger teams.

If it goes where I think it should, then it’ll be the IPO subscribers holding the bag.

That's not fraud, that's business as usual. We are selling to willing buyers at the current fair market price

Where is the Ponzi scheme element?

I believe it's "because on-tap kombucha." That's their secret sauce, or secret juice, if you will.

This is a classic due-diligence item during early funding rounds - up there with "does the company actually own its domain name or do one of the founders own it"?

I suspect either due-diligence caught it and decided to live with it after some negotiation, or they missed it - oops!

No, they just decided later to re-name the company from WeWork to We - and then they needed the new brand name

The founder already personally owned the trademark to "We" well before they made that decision? That's lucky.

In that case wouldn't he simply have to divulge that fact early on in the decision-making process? "Guys, maybe I should recuse myself on this decision since I'm in a bit of a conflict..."

He has majority voting rights, he's the one making these decisions.

> How is this sort of shenanigan allowed?

Investors gave Adam virtually unchecked power over their capital.

The Tragedy of the Commons 2.0™

The Tragedy of the Creative Commons

It usually is not. But delaware

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-...

> "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-...

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.

Twice this week I’ve heard of EBITDA, the last conversation while taking an outdoor break with a coworker bemoaning some head scratching strategy choices from management where I work.

Thanks for the explainer link.

EBITDA itself is an interesting number that tells you something about the company in question. It's not the only number you should use, and it can definitely be misleading if it's the only thing you look at, but it does tell you something about the underlying business.

However, 'We' has it's own EBITDA-sounding metric where they exclude so many expenses it is laughable.

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.

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?

I work in a Wework office and wouldn't touch Wework as an investment with a ten mile pole. It's just an office. A bit more expensive than other coworking spaces. There literally nothing special about it, except that it never turned a profit.

I like that they at least pretend to care about the environment. I'd like it better if they actually did things to lower the energy use of their buildings.

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.

It appears that We has a functional product they're delivering to buying customers; but at severely-questionable future profitability. Theranos claimed they had a product that achieved results it couldn't, customers they didn't have. It seems the difference is between profit viability (We) and fraud (Theranos).

That’s reasonable.

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.

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.

Curious for evidence of this.

> Holmes was deceptive in her fraud

That's kind of true-by-definition; you can't have fraud without being deceptive.

And, from that, it follows that ”Neumann's fraud is disclosed and well documented” cannot be correct.

If they (clearly) disclose all they do, it can’t be fraud.

WeWork customers actually get the office space and amenities they pay for. Theranos customers were not getting finger-prick tests, and many of the tests ended up inaccurate anyway.

That’s true too. The good news, I suppose, is that their customers haven’t put a lot on the line. Leaseholders and investors on the other hand, have. Thinking back to the scandals of the early 2000s, many of them were simply overestimating profits while extracting cash. Eventually the profits needed to appear so they went to accounting fraud.

Neumann's bullshit doesn't run the risk of killing anyone.

It’s likely that the company itself is weirdly cult-like and actively manages out any employees who don’t drink the kool-aid. The vegan thing is a small hint to this.

I dont know about that, it doesn’t seem any different than any startup and private company in this space like ones I’ve worked for where I talk privately with employees about what we will do with our stock options.

The metrics employees consider are just very far removed from anything that matters for making shareholders money. Its like listening to the most retail of retail investors, where sentiment is “hey I know that brand and dont hate them” invest

And yes, sure, sprinkle a little vested interest on top of that, and possible career derailment if your colleagues hear you till you get a perfect storm of no objective reasoning. The issuer side of an offering like this is always a good hand, the employee side is decent too unless you have to buy your own stock options.

Throwaway (but at least the name is apropos).

I worked as a software engineer at WeWork for a bit and no other startup or tech company has come close to the cultishness that Neumann is trying to cultivate there.

Some highlights from my brief time there:

- mandatory spiritual guidance at a company summit where the “guru” enforced the importance of one’s place in the organization

- mandatory attendance at “Summer Camp”, a weekend long music festival with excessive drinking

- mandatory attendance of a talk led by Neumann and transferred to Deepak _fucking_ Chopra at Summer Camp

- the Meetup founder displaying a picture of the twin towers, post plane crash, on a giant screen at Madison a Square Garden during a company summit

And these were just the noteworthy events that rose above the background noise of “What insane thing will Adam Neumann say this time?” each time an all-hands was held.

>a weekend long music festival with excessive drinking

Where can I send my resume?

>and transferred to Deepak _fucking_ Chopra


Are the employees drinking the koolaid? What do you think will happen to We?

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

It's not clear what that would mean for SoftBank but it can't be good. All VC funds are looking for an exit, Vision Fund is no different.

I work out of a WeWork location sometimes. I don't like the product and only work out of WeWorks because I need to for my job. I would never choose to be a "member" on my own.

Here's why I'm not a fan: The interiors are cheesey, badly designed, and generally seem poorly built (things are janky and break way too easily). It's often hard to find a good place to work in the common areas - pop music is blasting in the main common areas and the few phone booths and quiet corners are often full (people sometimes just work in phone booths, which is annoying). The fact that you have to pay to use conference rooms (at least with my company's contract) and you have to pay for granola bars and other snacks feels kinda nickel-and-dimey. (There is free coffee, and free beer but during the workday I'm not usually looking to drink a pint.) Also there's a theme of forced happiness everywhere (the mugs all say "do what you love" or "always half full"), which feels at best like vapid corporate fluff and at worst kinda cult-like, but either way it's mildly off-putting. Finally, they often invite salespeople from different companies to set up tables in the common area to sell/advertise random stuff, which isn't that big a deal but monetizing their tenants' attention during their work day kinda seems at odds with "building a community" and "elevating consciousness" and all.

I like the concept of a global coworking space network. I'm just not a fan of WeWork's implementation.

My bet is that in ten years WeWork will end up a bit like Groupon is today - still going, but far from the world-changing force they were once hyped to be. Of course, a lot of weird stuff can happen and maybe they'll end up dominating the worlwide office market, or maybe they'll flame out spectacularly in a couple of years.

Check out the Odd Lots podcast episode: The Bullish Case for WeWork. Personally, I don't see it -- but capital is so cheap and WW brand so strong that they may be able to pull a rabbit out in a downturn.

It’s the only strong brand in a massive market, real estate.

It may be the only strong brand in co-working spaces, but I find it harder to believe it's the only strong brand in real estate.

It's obviously a more visible brand for people working in a particular area of the tech industry than most real estate brands, but that's a different issue than brand strength in real estate.

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

And get their next cash infusion from where, exactly? If they manage to find even more private investors, that might be an option, but would probably hurt their image more than the negative press around the S-1.

Or try to become profitable really quickly?

if all the news are bearish, it would probably pop up.

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.

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:



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

Only if by fundamentals you mean the fundamental idea behind coworking spaces. Sure, that makes sense. But the WeWork company fundamentals are out of whack. Nobody is arguing that coworking spaces are a bad idea. WeWork is a company that turns 2$ into 1$.

Nearly $3 into $1 actually last quarter

The professor that wrote the analysis distinctly says WeWork as a business has value (worth maybe $2b). The issue is with the valuation of the company that is 26 times the revenue, and priced as a tech company even though it has no tech. It’s a real-estate company (these trade at x3 revenue).

If McDonalds lost money on their restaurants and their executives profited from multiple conflicts of interest, McDonalds wouldn’t have become a successful business.

If the corporate history is to be believed, McDonald's created a profitable system for running a single restaurant and then scaled it. That concept seems quaint today, when people scale without any idea of profitability.

I think most people here think the value of WeWork is definitely not $0, but believe it’s well well well south of their last private valuation, and certainly well below what they’ll try to dump it on the market at.

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

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.

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.

If you have Prime, here you go: https://www.amazon.com/gp/product/B07CJZLF3S?camp=1789&creat...

It's also on Hulu

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?

A lot hinges on what would actually happen to WeWork during a recession. I think there's some possibility that when a recession hits, many companies may find WeWork (and coworking generally) more attractive as they downsize. I'm also curious about whether WeWork has leverage to renegotiate leases, since commercial real estate (which is already not doing well) will weaken in a recession.

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

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

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?

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.

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?

> 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.

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.

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

My experience in downturns (2000, 2008) says that landlords consider leases a crucial part of their hedging strategy and they have zero willingness to renegotiate.

In 2000 I knew someone who called all their major vendors for datacenter space, etc, and threatened that if the landlords didn't cut the cost, he would go bankrupt. The response from 100% was "go ahead". To do otherwise would be philanthropy on their part.

> WeWork’s aggregated buying power lets it renegotiate leases, passing the pain to landlords.

I worked in commercial property for some time, which allowed me to understand why certain things happen that seem irrational from the outside.

Everything in real estate is driven by the valuation. This dictates lending terms, tenant acquisition, sales & marketing strategy, everything.

But valuations, fundamentally, are just numbers that an independent advisor plucks out of thin air. It's a difficult job that ends up being a mishmash of guesswork of what things could be rented for, and how much they will appreciate over the coming years, and tangible numbers around what other "comparable" properties are selling/renting for right now.

This isn't as nonsensical as it sounds. After all, an untenanted building clearly isn't "worthless".

Now owners have every incentive to push this valuation up. Actual yield (i.e. how much rent you are actually receiving at any given point in time) limits your flexibility to do so. It's difficult to convince the valuer that your space could be rented for $1000 psqm when it's already being rented out at $800 psqm.

Absurdly, it's much easier to convince a valuer that untenanted space could be rented at $1000 psqm. There's no direct evidence to the contrary, so the smoke and mirrors story is much more convincing.

This is why commercial landlords will almost always lose a tenant before dropping rents. The latter will crystallise a reduction in yield which immediately affects the property's valuation (and thus their sale prospects or leverage ratio).

It was incredibly eye-opening to see how much unreality goes on in real estate.

Especially if the previous tenant was paying that $1000. You’ve got concrete evidence that it was rented for $1000... why would you want to add concrete evidence that its current market value is only $800?!

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).

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

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.

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.

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.

Oh, there's nothing wrong with shared office spaces. It just seems unreasonable to thing they are going to multiple investor money 100x.

It seems like the valuation should be part commodity (the cost of the services provided), and part location (proportional to your local office real estate market). And maybe your size compared to your next largest competitor.

For a contrasting view, consider this tweet from @patio11 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.

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...

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...

If WW can do this, so can any competitor - large and small.

UK retail is about to implode, so there's going to be plenty of competition in the co-working space as landlords and local business associations agree that reduced rent from light office occupancy is better than no rent from shops.

That may not quite serve the MidSizeMarket - but just as easily, larger competitors with stronger branding and sales efforts could move in. Especially after a downturn.

So WW is horribly exposed. It has no real first-mover advantage, no long-term loyalty from customers, and serious financial issues.

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.

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...

> 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).

> I mean, imagine I'm an employee of BigBank in BigCity.

Companies like BigBank will have offices in dozens of cities around the world with frequently shifting office needs. A WeWork type company can definitely fill a role for them. But that niche is already filled and it's a tough business. At this point WeWork is renting out space for less than they paid for it. Obviously that's good for market share but not a good sign for long term viability.

Imagine you work for BigCo in BigCity but live in SmallCity a one hour drive from BigCity. Now you options are spend two hours in your car each day, work from home, or walk 10 minutes to the local WeWork space where you have a desk. Now Imagine that there are also 7 other people at BigCo that live in SmallCity, now you guys can get a shared office space together and still be all be 10 minutes walk from the office.

In fact the company I used to work for did just that. They rented 10 desks at a local co-working space in the next town over and told everybody who lived around there that they where free to work there if they didn't feel like making the 1 hour commute each way.

You might not have the option to work from your office. My workplace is oversubscribing a new location in downtown $Big_City with the simultaneous requirements that all seats in the downtown office be filled each day (to get the tax breaks $Big_City offers) AND that, since there are not enough seats, everyone will have to work from home on some kind of rotation.

And, have you worked from home on any kind of permanent basis? I don't have a family but I still like to get out sometimes. If you have no room for a dedicated office, or if you have pets/family that can be a distraction from work, a collab space is desired.

If a company is controlling costs by forcing people to work-from-home instead of paying for office space, it's not going to reimburse the people who it is forcing to work from home for a collab space plus a profit margin for the operator of the collab space.

As for individuals on their own, sure, if you are permanently working from home, a collab space is great if you don't have a dedicated office—but if WFH is a permanent arrangement, why wouldn't you rent space that includes a dedicated office instead of renting the two things separately with a commute between them plus probably paying a premium for shared office space since it will probably be in a more central, and expensive, location.

I mean, assuming We’s business plan isn't to continue to rent space at a loss forever, but to eventually make a profit.

You don't go to the center of town, you go substantially less far to the local WeWork office, because it makes sense that WeWork in your neighborhood, rather than your company.

As someone who's worked from home for ~3 years now (and with much better coffee and Internet), it's isolating, and I basically don't stand up from my home office for ~16 hours some days, since it's also where I happen to spend at least some of my free time.

Screw "third place", I don't even have a "second place". I live in Bentonville, AR and I cannot wait for the WeWork that was announced here to get built.

But I can't see them actually putting offices at neighborhoods. I've looked at Warsaw and London and the locations are rather central.

What they have currently != what they'll have in the future.

Have they said this anywhere?

Not directly, but I kind of assumed every business wanted to be the "third place" these days, so I extrapolated that to mean that WeWork wants to replace your "second place" with their offices, provide value by saving your commute, and then consume your "third place" entirely as well.

A ton of articles articles talk sideways at this idea, here are a couple (the second link is the most direct "answer" to your question but it's all interesting):



I'm not trying to assert "this is the truth", sorry if that's how I seemed. It's just my layman's take on the situation.

All that may be true--but any F500 will (or already has) strike a heavily discounted deal with WeWork. And WeWork already has small gross margins. And WeWork is still shouldering the risk of matching heavy long terms obligations with short term revenues. And F500 companies have already been doing exactly that for decades with Regus.

If I believed patio11’s 2025 projection, I'd also think by 2030 every Fortune 500 would be looking to optimize their remote-working costs by identifying their steady baseline needs in each major metro, acquiring leases to meet that dedicated capacity, and only allowing individual reimbursements for workers they don't have dedicated space available for (possibly on a day-to-day basis.)

But, I’m not convinced that his 2025—6 years from now—vision is even approximately correct.

This line of reasoning makes sense to me. Anecdata: most of the top tier banks I've worked with or at now have 3-4 people per desk, with more and more people working almost 100% remotely. When I started working with banks about eight years ago, I was usually laughed out the room when suggesting we should allow remote working. I became a kind of pilot case for 100% remote working about four years ago, and nowadays people in the same teams can go months without meeting in person because if they aren't remote all the time they come in to the office on different days.

I'm afraid he is correct, BigCorps are the main tenants as far as I can see. Which is sad, because WeWork is as fake and psychopathic as its CEO.

But Big Corps can do math; whether they will be the main tenants if WeWork ever stops dumping to gain business is less clear. Big Corps have been working with the whole space of available real estate options to optimize costs longer than WeWork has existed; I don't see where WeWork had any stickiness.

BigCorps have „Innovation Labs“, where things are „cooler“ than in main corporate because bean bags. Value proposition is attracting employees that wouldn’t consider joining otherwise. This is them outsourcing this to WeWork, and I can see how they don’t want to be involved in running such an operation. Remember that BigCorp is not price sensitive.

> Remember that BigCorp is not price sensitive.

BigCorps are very price sensitive in the sense of minimizing cost per value and aggressively leveraging their size to do that.

They aren't price sensitive in the sense that if something has a value proposition that justifies the cost (even if it's not a short payoff, and even if it's a large absolute price) they have an easy time finding money.

They may also sometimes seem but to be price sensitive in the first sense because they tend to have lots of small fiefdoms where exceptions to aggressive optimization can survive as long as their shake is not too big and/or the right authorities have bought in, but that's an exception to the general rule and isn't going to cover a massive aren't of remote workers at each BigCorp.

Real Estate is also a much bigger business than taxi cabs.

The big bet on them I suspect is that any upcoming recession will probably lead to a lot of companies wanting to reduce their office costs. They may want to switch to WeWork managing their office spaces much like tech companies want to switch to Amazon Microsoft or IBM managing their IT infrastructure.

Have you seen WeWork’s prices? It’s much more expensive to host a team in WeWork than just about anywhere else (including in your own corporate headquarters). I can understand companies wanting to variabilize office costs, but the first thing they’ll do is launch an RfQ... and WeWork’s fancy offices and free beer are not going to be much help there.

There is little network effects for office space vs taxi availability.

Second, Regus is larger (more revenue, more locations iirc). Regus is profitable.

That's just a direct coworking/office space globally company. WeWork isn't even a leader. It's just shiny bullshit.

The bull case is that there is a vaguely WeWork-shaped market opportunity, and WeWork exists. The bear case focuses on the flaws in WeWork itself. Is WeWork going to sort themselves out before someone else overcomes their market incumbency?

That's a really compelling argument for why WeWork will be a successful office space rental company. That would mean WeWork somehow loses 90% of its value and is still successful...

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