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]
[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/
Your post seems to say "if you don't prop up WeWork, good luck raising money for your startup." I think it's a little disingenuous to project that guilt onto startups that are in reasonable early and growth stages. Every company has a viable plan for survival by that stage. And that plan is: show the market the profits.
WeWork coming back down to earth doesn't mean that suddenly we will see drastic tightening from seed-stage to growth-stage VC.
I think it clearly does not. It was descriptive, not prescriptive.
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.
Time spent designing and architecting isn't free either and, for a lot of people, 'implementing' is the only viable means of testing designs and architecture, and more importantly whether there are any (potential) customers.
An "exit through an acquisition" is a perfectly sensible goal if acquisitions are common or expected. It's pretty common in (some) other industries, e.g. pharmaceuticals.
That's exactly the problem I see. We're going about it backwards. Shouldn't you start something because you have a customer need and not start something and then find a customer?
If a company is already making enough money to fund its whole operations plus make a profit that it can use to grow, and it isn't trying to massively grow at all costs, then it has no reason to sell itself to an outside party for an injection of cash
It is a great story for founders and for closely held corporations. The investor disclosures came out and there is no oxygen here for investors.
WeWork best deleverage and just continue its rental business.
This can function in a vacuum.
Their grow with all revenue and no profits scheme has nothing wrong with it, its the governance structure and convoluted corporate structure that all but ensures investors are guaranteed nothing.
This quote misses an important third option - don’t get so big that even if you win one hundred percent of the market, you still can’t generate a return.
Dumping a billion dollars into a company in a niche market is also a failure mode.
IMO, the shift to "show me profits" could be as much about the growing societal and regulatory backlash to monopolistic tech, which, if materialized, drastically reduces the probability of achieving or maintaining monopoly.
There are a ton of bad ideas and companies that sink all the time. WeWork isn't new or unique in this regard, for reasons you described.
Just because you see a boat sink doesn't mean the other floating boats are going to start sinking as well.
For instance, their market cap is 1.5x what Kodak peaked at.
You mean their private unicorn valuation? Kodak is publicly traded, WeWork is not, so you can't compare them. WeWork isn't that different from most failing unicorns.
Seems like a strange and skewed view.
Outside tech, growth has rarely been the kind of Play you make at a great loss, and most ventures need some sort of grounding in reality.
Show me a tech IPO that seeks revenue and then we can debate a change in the markets.
Exactly. I don't understand all the schadenfreude about this company. WeWork is a basically good idea that seems to fill a real need, they just couldn't make it work in the economic environment they found themselves in (which, to be fair, is mostly about the "funding environment", and thus sort of an own-goal given that they didn't "need" to take all that cash).
That said: I don't know that I agree with the 2000 crash analogy. My feeling at the time was that the venture investors were a lagging indicator. The crash started in the already-public stocks at time when angels and VC's were still desperate to make deals.
I dont think anyone think WeWork is not a strong business model. Id even take it one step further in that it's not the cash burn thats really killing people, it's the valuation. I know theyre connected as a larger company should hypothetically be able to sell less of itself for more money, but at 1/3 of the valuation I think the market feels different about the biz. Although the social signal of being forced to cut does some real bad psychological voodoo.
Nah. This happened again in 2008.
It's that wave of cheap money that we're riding, with banks having satisfied regulators and new regulations enacted in the wake of 2008, that has led us to where we are today. Companies with invented valuation and unconvincing financials going public, or trying to, in WeWork's case.
softbank just called the top
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.
The nutty thing is WeWork could have worked as a well-executed business. The core thesis, that companies of all sizes appreciate the flexibility of spinning up and down remote workplaces as a variable (versus fixed) cost has legs.
There is a borrowing-short-buying-long aspect to their business, but that could be managed through a combination of first-loss guarantees and sandboxed leases (on both sides).
The problem is the CEO, enabled by Masa Son, showed zero discipline on any level. Nepotism, self dealing, lack of focus, cost inflation...about the only thing they did right, it seems, was expansively disclose all of this to their investors.
Forced summer camp, nepotism, back stabbing politics, etc. Sounds like a hellish place to work.
Side thing. I don’t know how things will work out, but SoftBank put in $9B and owns like 30% of the company. It’s valuation is below $20B now and who knows how low it’ll go. Or what will happen with them needing money. SoftBank and the fund are at best going to be out $4B. Is that what’s likely the case? That money is essentially flushed down the toilet for SB and their fund?
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.
Is this true? I am skeptical. If it is true it speaks to the mindboggling ignorance of Silicon Valley decision makers.
I was living in a small (<500k metro not in california in 2009, and there were already 2 branded “coworking” businesses (that were well marketed to the tiny tech community). I may be the exception but I had not heard of WeWork until much later, but I wasn’t in a talent resource decision making position at the time, it wasn’t really my need to know those things. If it was and I didn’t, I would have fired myself for gross incompetence.
I know they're in my city, but the website location quotes daily prices based on a 24-month commitment.
Either they don't feel threatened by WeWork and independent coworking spaces, or they don't feel the need to adjust their terms and contract conditions... which I find curious.
Have a feeling the newer, smaller players with more limited portfolios (and exposure) might survive better.
I frankly don't see We work having any long term advantage over any of the other big players.
This may well be true, but I'm not sure that's precisely a negative. Most people don't need to hear of Regus unless they're looking for ready-to-go space for a small company, or if they work for a company renting such space. (I'd heard of Regus, as I worked at a company renting space at Regus. And it was a really nice environment. This was back in 2010, by the way.) And I think anyone who was actually doing that search would have pretty easily come across Regus.
WeWork's "innovation" in some ways was marketing directly to developers, pitching themselves as "we're a tech startup ourselves, catering to tech startups just like you!", so people putting together startups would already know their name before they did a search for space.
They are very much not a 800 pound gorilla. That would mean that they could dictate the market, but with some of the most expensive prices for a mediocre offering in comparison to the competition, they can't really do that.
I remember co-working spaces and “live-work units” in London in the 1990’s.
I’ll admit that WeWork has a certain cachet, Millenials can’t imagine anything cooler than getting an Uber from the AirBnB to the WeWork, but that’s just a fashion and they’ll move onto something else soon.
There could be some value there, maybe, but I've looked at WeWork in my area and it's expensive... for having to share a lot of space. It seems like a high bar to get folks into that.
It also mentions the big problem with We, than in the next downturn the revenue will likely stop and it'll be in trouble.
If I owned a bunch of office space, I'd be exiting now (or would have already exited). I think it's probably like the bitcoin effect: bitcoin got notorious, so all the other coins went up too. IMO, uncoordinated pump and dump.
It could end up being a strong counter-cyclical model -- and outperforms as the economy tightens
Traditional office space is a 2, 5, 10 year commitment and a pain to move things around -- with WeWork you're paying monthly and relocating geographically is simple
CFOs will often look to pay more per month for shorter commitments which fit well with budgets and can be terminated quickly if situations change
WeWork also makes setting up an office in a new region super simple vs contracting with local landlords
In a bull period, you're right, CFOs will be willing to spend a little more on high risk projects to allow them to mitigate the risks of long term contracts, but that's not what happens during a recession. During a recession they're overwhelmingly looking to demonstrate a lean, low cost company to shareholders.
Like many of the wework stories, it'd be nice if it were true, but it's just simply not very likely.
If the economy is in the toilet it's hard to get funding to pay someone for office space to hold your startup that you can't fund.
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 )
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.
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".
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?
Some subset of people find this gross and creepy but it’s something a lot of young people demonstrably go for.
In my opinion the real risk would be the antitrust regulators.
They have more money than investment targets, so they basically fund a few moonshot projects that look like they have a 1%+ chance rather than a 0% chance.
I suppose the thesis is that once one of these eventually wins, the losses on the rest will be more than recovered. You just have to do enough 1 out of 100 projects.
Are we just calling "California hipster marketing" "tech" now?
WeWork is also a New York company.
You can only gather the returns from turning the world into grey goo once, and then what do you spend it on?
>It is rare for Son, who casts a wide net with his startup investments, to commit so much resources to a single company. But he said WeWork is more than just a renter of office space: it is "something completely new that uses technology to build and network communities."
>"WeWork is the next Alibaba," Son said, referring to SoftBank's early investment in the e-commerce company, which enjoyed meteoric growth as the internet took off in China.
>"I believe it will grow to a substantial scale and become one of our core companies," he said. https://asia.nikkei.com/Spotlight/Sharing-Economy/SoftBank-s...
Growth I don't get. Did they feel they were buying up a lot of undervalued properties and were going to dramatically increase in value somehow?
Office space seems like a mature market and it's not like if I own 3 buildings vs 1000 that there is that much efficiency that growth would get me.
Many businesses that IPO aren't viable, the problem is when the general public figures that out. For instance, snap chat. In no way a viable business, but has plenty of investors thanks to the wall street scam of institutional investors (401ks, etc) buying entire sectors of an exchange. It's a nice scheme to ensure you bail out your 'venture capitalist' friends.
Can you give me an example of a company that IPO'd profitless and the largest shareholders aren't institutional investors that do broad-index-based purchases?
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.
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.
Edit: this comment was written in response to the parent before it was edited to remove any trace of what was being replied to.
When the US Treasury (or WeWork) sells a bond at $100 (and it almost always does), it is based on a face interest rate (say 3%). This interest is fixed (eg. the bond will always pay $3).
If prevailing interest rates rise to 4%, then the price of that bond will drop to a price such that the interest the bond pays ($3 per $100) ends up being a 4% yield.
It also works in the opposite direction and this is how you end up with bond prices above $100. The price has to swing higher for that $3 per $100 face value to have a yield less than 3%.
As an aside, this is also why longer term bonds are riskier than shorter term bonds, you can lose significant amounts of money if interest rates shift higher over 10-15 year timeframes because the market price of the bond will have to drop to make it competitive in secondary markets.
And the US Treasury can print money, but it's got it's own issues with a congress who occasionally has members who grandstand and threaten to default on debts. Meanwhile, Germany runs a surplus budget. I'm not saying that US Bonds aren't extremely safe, but it's hard to know if German bonds are really less safe. The market seems to consider them extremely safe. The biggest risk with German bonds for a buyer who transacts in dollars is currency fluctuation
But I agree with your sentiment with regard to the original comment you responded to (which seems to have been edited now).
It's more of a currency based risk. You're probably right that Germany is as safe of a bet (if not more) to pay back their bonds than the US is. The question is how much 100 Euro is going to be worth in 10 year.
Bonds have a face value (which you get paid at maturity) and a coupon (interest payment calculated as either a fixed percentage of face or as a spread over an underlying rate * face). Both of those components matter to investors and factor into the so-called "yield to maturity" of the debt. The bond price dropping means that the secondary market is demanding a higher yield to maturity on the debt.
The main drivers of that price are the underlying risk-free rate of interest (which compensates investors for the difference in utility between having cash now and having cash in the future and essentially arbs out between all the different risk-free or near-risk-free instruments they can invest in) and the credit spread (which compensates them for the likelihood of default and arbs out with other instruments of similar riskiness and the prices of things like CDSs).
In the 1yr T-bill example, almost all of the price discount you are quoting is about the risk-free rate of return. So say the rates were at 4% when a 10yr note was issued, we are now in the final year and rates have gone up since then, then the price of the bond would drop so that investors get a yield-to-maturity on this bond that is approximately the same as other instruments of equivalent maturity.
The WeWork example is going to be driven by the credit spread - how likely WeWork's is to default and how much investors would be likely to recover in that event. The price going down is to do with the credit spread widening and therefore investors demanding a higher interest rate to compensate.
I'm simplifying a lot here given all the weird and wonderful types of bonds you can get.
"There isn't an institution in the world that could sell an IOU $100 for $100" is not true
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.
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.