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WeWork Bonds Drop Below Par for First Time Since IPO Filing (bloomberg.com)
181 points by dsgerard 7 months ago | hide | past | web | favorite | 128 comments

It's remarkably easy to make fun of WeWork, given the company's high-as-a-kite ambitions, its largely conjectural business model, its dependence on fresh capital for survival, its charismatic CEO’s new-age antics, and its disregard for conventional norms of ethical corporate behavior.[a]

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

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

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


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

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

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

Framing the entire market as “either you buy into this single obvious scam or everything falls apart” is extreme. WeWork has been a gamble throughout, and the latest antics just pushed investors from “yes its a bad investment long term but short term I’ll make a profit” into straight up “this bag is on fire and I’m sure it’s filled with shit so I’ll let someone else step on it”. Wework failing is not going to trigger a complete market collapse. When Theranos blew up the next Monday was business as usual for every single other company.

There are a lot of big startups without a good business model who have been surviving on copious amounts of easy capital.

For me as occasional observer, the first shot across the bow was the Uber S1. It seems to have made a lot of people pause and question the business models of other companies as well. Nobody jumping ship, but caution in the winds.

To throw caution to the winds means to be careless (you're throwing caution away). Is "caution in the wind" an actual phrase?

Pretty sure they just meant that caution is the order of the day.

...and a healthy market must make bad ones go under. Some of those companies should have been stopped way earlier.

Now do Uber.

I don't know, by the time you get to a series G, "show me the profits" is a fair demand that the capital markets should never not be making.

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.

>Your post seems to say

I think it clearly does not. It was descriptive, not prescriptive.

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

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

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

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

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

As long as the investor can make money by selling to the greater fool it's all good. I think that's the current strategy with the companies that keep losing money. Pump up validation and then dump it on the public markets.

Agreed. Grow at all costs is what incubates the "fail fast" approach, which I, personally, disagree with. There's a reason why you need to spend most of your time designing and architecting and jump to implementation only when the viability of the solution has been justified. And part of this justification has to be a solid business model that has a clear road to profits. And a path to profit that's not decades away. As things stand, it looks like most startups want to exit through an acquisition and not ever have to talk profits.

Huh? If investors demand immediately profitability, wouldn't that push companies to "fail fast" even more? The point of failing fast is to spend as little time as possible working on the wrong ideas, i.e. to find 'market fit' as soon as possible.

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.

> 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.

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?

The basis for investing should be connecting companies that actually need money with the money they need.

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

Some business models don't work unless they're a decent size, like marketplaces and social networks. Beyond that I generally agree. E.g. MoviePass, huge growth but no revenue. There are probably some good companies mixed in with the lemons but with the inverted yield curve etc. it's clear the tide is going to to go out sometime.

If the market return on capital is mid to low single digits, then some new high growth opportunity will tend to attract capital just early enough that the money losing period cancels out the excess returns, if markets are efficient (neglecting the risk of failure). Otherwise, someone else takes the opportunity instead. No?

I'd take that as a signal that VCs need to do a better job of evaluating their bets. If a company make gargantuan losses year upon year despite getting billions in funding, the secondary markets don't have any obligation to bail out the CEO and his VC benefactors.

We Work has no place in anyone’s portfolio and Softbank was the greater fool.

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.

From [c] - “Here is my central argument. There are only two priorities for a start-up: Winning the market and not running out of cash. ”

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.

WeWork is in no way, shape or form a tech company. Thus I feel the comparisons to 2000 (or to other real tech businesses of today) fall apart at that point already.

I think it's important to not gloss over what the markets are looking for in companies they want to grow as fast as possible: monopoly.

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.

It's only a warning if you are betting on the frauds. If you are betting on real businesses it's a relief.

Non-frauds can also have capital/cashflow troubles

That's survivor bias though, isn't it?

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.

WeWork is VERY big though.

For instance, their market cap is 1.5x what Kodak peaked at.

Which market cap? The one that was set by investors during the last round and has already been more than halved?

Market cap is almost never used as the valuation of a privately held company. Their valuation which since around $17B has almost solely been funded by SoftBank and the venture fund? SoftBank took them from a $20B valuation with others to solo pushing them up to $47B over the course of less than 2 years. That doesn’t count as a market cap.

>market cap

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.

So if we don't support the insider self dealing of management and complete lack of discipline or board governance then legitimate cos will all shut down?

Seems like a strange and skewed view.

I think that’s some truth to your statement about growth, but also would like to point out that most IPOs we see where growth at all costs are tech or primarily tech companies and WeWork isn’t. At all.

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.

> It's remarkably easy to make fun of WeWork

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.

yea, no. It's simply an overpriced asset and the market is concerned that without an adjustment there isnt much room to grow in value.

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.

I'm not sure that WeWork has a strong business model. WeWork is absorbing the financial liability of signing long-term leases, and not passing that risk onto their customers. So financial discipline is critical to their business plan. Customer growth without financial discipline will just increase those liabilities.

Naw fam, you're ignoring the growing trend of short term leases and the value of a consistent repeatable brand in the space. It's not an industry killer, but they still do have a strong product.

That is an interesting point, but I am not sure how big a factor that first paragraph is! I would think it is more against all the shenanigans of WeWork than the overall market forces.

> The last time we had such a shift, in 2000

Nah. This happened again in 2008.

Parent comment is a bit terse so let me explain a tiny bit more. While the 2008 financial crisis itself was precipitated by real estate mortgage shenanigans, as the dust was settling and thereafter, it became very difficult to secure funding, at least compared to before. Banks, under renewed scrutiny by regulators, became so risk adverse that the fed's lowered interest rates, which made money "cheaper", were nigh unwilling to lend money to all but the strongest borrowers. But then the strongest borrowers needed cash the least.

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.

If we don't believe the emperor has clothes then we'll all lose faith in the gov't and it will collapse.

Wouldn't the market shifting to "show me the profits" be a good thing overall?

yea this is effectively "it"

softbank just called the top

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

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

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

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

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.

Don’t forget the weird cultish vibe of WeWork, like the forced summer camp, etc. This alone tells you something is very wrong.

Don't forget the "no eating meat" on WeWork business.

They seriously had forced summer camps? WTF?

On mobile but look up their reviews in Glassdoor or indeed. All reviews are suspect individually but there is definitely quite a pattern.

Forced summer camp, nepotism, back stabbing politics, etc. Sounds like a hellish place to work.

it's not uncommon with hypey vc funded startups. I've gone to two different startup camps, it's very much so kool-aid drinking exercises

Note that in WeWork’s case it was not a “startup camp” like you mention, but an actual honest to God employee summer camp with mandatory attendance. Like a camp at a lake with archery & campfire stories, except everything is whitewashed with corporate retreat brainwashing.

We was already being valued at around $17B in 2016 and 2017 before Masa came in and took it all the way to $47B. That $17B valuation was likely too high too so all the enabling blame isn’t on just Masa.

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?

The vibe I got from WeWork is that the CEO was phony but not fraud, and he joking admitted his ridiculous plans, and investors said yes assuming all the financially ridiculous stuff was a joke. Or it was an attention play where he got as far as he could by betting investors wouldn't read the fine print until they had too much sunk cost and had to pray for a miracle exit.

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

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

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

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

> Before WeWork, most people weren't aware that coworking spaces were an option

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.

Regus may be huge, but they're generally not listed in any of the coworking space directories I've been checking.

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.

Regus was very well known in professional communities, i.e., lawyers, accountants, consultants, before WeWork. Especially during the recession it was a great, professional looking place to meet with clients without the overhead of an office lease.

It probably depends on where you're located but co-working spaces have been a thing in Silicon Valley since at least the late 1990's (first Internet boom). Everyone in the tech industry knew about them.

I heard about Regus years before I'd ever heard of WeWork, however, all of the other new players in the space (barely a week goes by without seeing an ad for a new building in London with flexible offices and coworking) have only really gained visibility since.

Have a feeling the newer, smaller players with more limited portfolios (and exposure) might survive better.

There is a place near me that is part of Regus, but you wouldn't know it, it's very much positioned as a co-working style location. They seem to be using the tactic of setting up parallel brands that don't have the baggage of the old, but have access to their capital, management and expertise.

I frankly don't see We work having any long term advantage over any of the other big players.

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

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

I googled WeWork when I needed space, but a Regus place popped up closer to me.

...as far as I can tell, most people have only heard of Regus because WeWork is so often compared to them.

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.

> But they certainly are the 900 pound gorilla in this 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.

Before WeWork, most people weren't aware that coworking spaces were an option

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.

Yeah that broad stroke of millennials isn’t at all true.

I wonder if by more people knowing about these options because of WeWork ... if more are actually doing more of it who weren't already?

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.

I think the established office owners were astonished at the high valuations in an otherwise boring industry. I remember this article from a few months ago. https://www.reuters.com/article/us-usa-property-wework-value...

It also mentions the big problem with We, than in the next downturn the revenue will likely stop and it'll be in trouble.

The radical transparency is refreshing. WeWork became We because it doesn't work.

> I wonder what other folks selling office space in the market think about all this?

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.

That or maybe round up some traditional investors to prep for swooping up some good buys after the dust settles?

IPO valuation aside -- it is premature to write the WeWork model off

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

I don't think anyone's writing the model of "lease office space on flexible short term basis, including by the desk" off. But the many other companies doing it without free beer, self-dealing and Ponzi scheme approach to growth and valuations are probably better placed to weather recessions...

I'm sorry I've heard these claims but I'm strongly sceptical. WeWork source their office space on long term contracts and lease them on short term contracts. So in order for them to make more money during a recession there needs to be an increase in demand for office rental space during a recession. Even if that does occur, a competitor could come in and rent some of the office space freed up by the recession and out-compete wework by having lower costs. That's best case. In reality, in a recession companies look to lower their cost - the first people they'll get rid of is the high cost wework spaces, consolidating employees into larger regional offices (which traditionally has the side benefit of lowering headcount). No one is increasing their high cost offices during a recession.

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.

The elasticity is nice, sure, but in a contraction wouldn't we see less startups needing office space overall?

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.

And to the degree that We Work gets used as a "working from home" option, I expect that in any sort of crunch, many of those people will be told to just, you know, "work from home" and rent conference room facilities etc. on a daily basis as needed.

If everyone moves from long-term office spaces to short-term ones, at the same time that overall office demand declines, then the price of traditional office space is going to crater... taking with it the price (or demand) of WeWork space, which is already not exactly operating at the best margins ever.

And it worked brilliantly

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

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

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

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

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

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

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

I wonder what they sold their initial investors on?

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

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

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

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

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

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

You pitch the business is a fully vertically-integrated lifestyle where people live, work and send their kids to school

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

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

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

If you make it attractive enough I can see people doing it. Use synergy/vertical integration/economies of scale to give people discounts and make their lives more convenient and they'll be willing to give up a lot in terms of things like privacy.

In my opinion the real risk would be the antitrust regulators.

The key here is that it success doesn't even have to be likely for VCs to jump in on something that everyone/everyone from a very large category (workers) might end up using e.g. Uber, WeWork, electric scooter sharing. That is, the demand is clearly already there. Rather than working from profit and trying to scale demand they are working on profitability of a huge market as the technical problem.

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.

> underserved by tech

Are we just calling "California hipster marketing" "tech" now?

What hipster marketing is here?

WeWork is also a New York company.

Eat the world?

You can only gather the returns from turning the world into grey goo once, and then what do you spend it on?

From SoftBank's Son, the largest investor:

>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...

Thank you...I wish I knew what he meant by that.

Yes I'm not sure what "technology to build and network communities" actually is in terms of something that could be worth many billions.

Growth. Most initial investors have already exited the company thanks to Softbank.

I get the "hey Softbank is in it" kinda thing, not smart, but I get it.

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.

There's not as much efficiency as with a cloud provider or something. But there's a level of scale where people switch from thinking "I could use a bit of temporary office space, I wonder where I can get it" to "where's the closest WeWork". I buy that there's some value there.

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

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.

The vast majority of 401(k) money is in large-cap mutual funds which don't invest in IPOs.

Current top institutional holder: Vanguard Group [1]. It's almost like they specialize in mutual-funds and 401k's.

1: https://finance.yahoo.com/quote/SNAP/holders/

Those Vanguard holdings were purchased in the secondary market after SNAP market cap reached certain thresholds. Vanguard bought little or nothing in the IPO.

It doesn't matter if they buy during or shortly after an IPO, the fact of the matter is that there's some value there just by virtue of being listed because you will most definitely get institutional investors based on that fact alone. Institutional investors set the market, everyone else is playing the spread.

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?

wow, can you explain to me how Snapchat ended up on a Vanguard index fund? Is it like a "new start up" index fund or something?

Vanguard has some index funds like VTSMX that buy essentially every publicly traded US stock.

Hold on a minute there, Bloomberg!

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

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

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

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

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

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

This is true for "zeros" which are bonds that pay no interest (eg. treasury notes) but instead pay a premium to the issuing price on maturity but not for bonds in general, which is what WeWork is issuing here.

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.

German bond yields are currently negative. That means that you pay them more than $100 for every $100 you get back.

See https://www.bloomberg.com/markets/rates-bonds/government-bon...

There is actually an important detail here: that's €101, not $101. If you want to transact in dollars there would be no reason not to deal with the US Treasury which is even safer than the German government (Germany can't print Euros to fulfill its debt obligations).

Fine, so take Japan who also has negative yields on short term bonds and can print their own currency.

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).

>hard to know if German bonds are really less safe

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.

That's not how the bond market works (for the most part). Lots of bonds (including some risky bonds) price above par but will have a correspondingly low interest rate such that their yield is in line with other similar bonds.

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)[1]. 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.

[1]I'm simplifying a lot here given all the weird and wonderful types of bonds you can get.

US Treasury 30 year bonds are currently priced over $102.... Calling a bond an IOU doesn't really make sense because you neglect the coupon payments (annual interest). So even though you're paying over $100 to get paid back a $100 principal the yield is still positive because of those coupon payments. Negative yield bonds also exist and are bought for various reasons.

"There isn't an institution in the world that could sell an IOU $100 for $100" is not true

That's a good point, but I think you can get one-year bonds with an annual coupon: that means you get one payment a year from now. So bonds in general aren't IOUs, but there is at least one bond that works like one.

You are right that would be an example of a bond/bill with a 0% coupon rate. There are still weird negative interest rate conditions where it makes sense to buy an IOU for more than you get back (not that I understand those conditions :) )

I think the 'weird' conditions are some combination of there not being other 'riskless' (or less risky) investments and certain institutions being legally required to hold a certain number or amount of 'riskless' or highly-rated (according to the relevant regulators) instruments.

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

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

These bonds have traded below par for a year. The S-1 somehow gave them a pop. If the S-1 is shelved presumably they'll go back to where they were.

The S1 gave them a pop because there was a disclosure that they bought back 33mm.

Quite likely is a vast overstatement. They're yielding a slight bit more than they did on issue.

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

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


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

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

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

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

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

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

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

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

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

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

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

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