What if the economy never turns?
How many of those places have people working at co-working spaces anyway? As opposed to home?
Not sure that during a downturn companies, or even individuals will be more likely to go for paying for fancy coworking space... perhaps less so?
My understanding is WeWork is more likely to be MORE sensitive to an economic downturn compared to their competitors as their valuation will put more pressure on them to make money and arguably they might already be behind the bullet on that one.
Same reason companies pay Google and Amazon for cloud servers
Cynically, those companies have the downside of needing to make a profit. WeWork strikes me as the sort of company that would happily take a massive loss, just to get to brag that Stripe and Facebook use their services.
That strategy works great, so long as you have unlimited funding.
That's kinda the point of WeWork: flexibility.
Remember this is a company that already has a major international business in one of the most regulation industries. Adding in a few real-estate deals is unlikely to be a major source of friction.
This article (https://www.curbed.com/2019/3/26/18280774/wework-real-estate...) seems to indicate that big corporate clients are quite happy to do exactly what I described. I suspect this probably also has to do with transferring CapEx to OpEx.
Perhaps Stripe, specifically, thinks they have a better bead on this than employing someone like WeWork.
Of course, but I assume that WeWork offered them a better deal.
It's the same as a individuals buy vs. rent scenario for a house. Sure, rent may be cheaper, but there are long term pros just holding the property yourself if you can afford it.
WeWork offers both services. WeWork will just as happily get you a whole building designed and decorated to your exact specs, as they will provide you with 3 desks paid for by the day.
If they had a bunch of boring utility companies and collections agencies leasing from them then we might be onto something.
It defies imagination that a fund would put 10B into a company whose CEO is accountable to no one. I think we may also see new leadership in SoftBank, or at least their next fund.
I'm not so sure. WeWork is the product of three capital sources.
One, Mortimer Zuckerman, who was "not just their landlords AND seed investor," but also "happened to own Fast Company and NY Post which were instrumental in propping up WeWork in the press before anybody knew who they were" .
Two, MBS, who backed the Vision Fund to the tune of $45 billion .
Three, Masa Son.
Mr. Zuckerman's investment was too small to be affected by monetary policy. And I doubt the Saudis invested in the Vision Fund because their bonds weren't yielding enough. The only monetary actor is Son, though that is more based on Japan than dollar dynamics.
WeWork's competition, on the other hand, is juiced by monetary policy in the form of construction loan and mortgage rates. But that doesn't create WeWork, just lots of commercial real estate.
My impression is that upon this foundation and US interest rate/monetary policies create a perverse incentive where the investor doesn't really have to care too much how the company turns out. Like sure, a success pays off much more, but bankruptcy isn't bad either. Did I dream all this? :)
The Vision Fund will have a $10bn capital loss to write off against future capital gains taxes. But those losses are worth a hell of a lot less than $10bn in cash.
WeWork has no federal guarantees and basically no assets. Its downside scenario is grim for shareholders. The only one walking away with cash might be Adam, though I expect he'll burn a good amount of it defending against litigious shareholders and possibly prosecutors.
Nope. It is always better to have income and pay taxes on it than to have losses and not pay taxes on the losses when we are dealing with entities over certain ( rather small ) size.
There is so much capital desperately trying to find a home that they are having to invest in companies with very little oversight or influence. In the past they would have been the grown-ups in the room, applying some scrutiny and skepticism to everything. But now companies can simply go somewhere else if you turn them down.
She seemed to think that there were a lot of companies being kept afloat by this easy money that could easily go pop in the near future, or companies that should have gone bust ages ago but are limping along with cheap credit.
It does seem that whether or not we are headed for an imminant bust, the economy is in a pretty peculiar place at the moment with negative interest rates etc.
i would really like to listen to it because intuitively i’ve felt the same way and wonder what others who are-in-the-know have to say about that.
At this point it's akin to someone who seeks out abusive partners due to mental health issues. It doesn't make the partners any less abusive, but lets not kid ourselves and think the seeker is a healthy individual.
Their greed is killing them.
That has nothing to do with preferred shares. Most of public companies adopted poison pills aka shareholder right protection plans which work along the lines of this:
1. If someone acquires a certain percentage of company shares without board of directors agreeing to it, then the company automatically issues a very large number (2x to 3x) of shares and allows shareholders of record of a certain past date before the hostile party launched the acquisition to obtain newly issued shares at a discount.
2. Board members have staggered terms so the acquiring party cannot replace more than a small percentage of board members thereby preventing the one's ability to flood the board one's supporters
It used to be that preferred shares were a special class of equity that paid higher dividends. The funny part is that tech companies tend not to pay any dividends what so ever and now with the special classes of shares that have nearly no voting rights ( compared to the 'preferred shares' that are controlled by the insiders ) the same companies make a virtual mockery out of the concept of a "public company". Facebook is not a public company in any sense other than the name -- it is Mark's personal piggybank that he shares with a few insiders with the crums off the table being given to the people whom he used to call "stupid".
With a single class of shares every shareholder interest is aligned. It is not possible to create a subclass of shareholders among the existing shareholders without existing shareholders agreeing to it. So in a buyout all shares are equal and will receive and equal percentage of distribution of all assets regardless of how those assets are structured.
The moment there are different classes of shareholders, there's a jockeying for a position. It is no different from the plays that can be made by a private company when it is getting a new round of investment/gets bought out -- those with A class shares have certain rights, with B some other rights with C some other rights etc. There's nothing ( apart from a rather complicated regulations that govern a right of minority shareholders not to get totally screwed ) that prevents those that control the voting block via special preferred shares from virtually screwing other shareholders:
Board can just vote to split the company into "icky carcass" with nominal assets, most of the liabilities give most of it to non-voting shares. Give the non-voting shares some tiny percentage of the ownership in the "awesome sauce" part of the company. Voting shares (held by insiders) get the opposite percentage. As the part of this deal the "awesome sauce" company gets sold.
It just has not been tried yet -- in fact I'm very surprised it has not been tried yet. It of course would be challenged in courts but I'm pretty sure it will be found legal -- after all "you have no rights compared to the rights of holders of class SP" has been spelled out in the offering paperwork and investors/employees/shareholders still lapped it.
This isn't entirely true. Once a company passes the shareholder limit they are required to publish public financials similar to what a publicly traded company must provide. However they are not required to sell their stock on the open market, it's just that it's such a small step at this point that most if not all do.
Also - while this is often quoted as the reason for Facebook's IPO, it's worth noting that the investor limit was actually raised (from 500 to 2000) a couple months before Facebook's IPO. If it were really the main reason they could have easily held off on the IPO and carried on as a private company.
And even if he didn't need cash, an IPO creates an incredible opportunity to use shares as a currency to fund high-dollar acquisitions, which he has most certainly taken advantage of.
As is the case with toxic discourse on his website, the nonchalant attitude with private information, Zuck loves to steer clear of taking responsibility for anything. The IPO allows the message to be: it's not my personal responsibility, I'm merely the CEO of the company.
If you actually make money, have positive cash flow, and have a sustainable business model, you don't have to give up control. The investors will come to you -- foreign concept to the SV-SF "high tech" bubble, I know.
Citation very much needed. The majority of tech jobs are not at startups of either kind.
As others mention, there are historical reasons why WeWork got this. But things like WeWork and Uber are going to be the new historical reasons why founders don't get that as much.
So I completely understand why founders, now given the opportunity, would write these sorts of share class structures into their business. It's definitely gone too far, though. But that's usually what happens.
But they're trying to become a public company - that's the point.
The exchanges and indexes already do this, but haven't gotten around to cultish companies that consider themselves tech. The exchanges and indexes say things like “minimum X% of float needs to be in the market”, so you dont have 1% of the company trading with the CEO now being a billionaire on paper from 99% of shares. Ive seen Chinese exchange allows for shenanigans like that, for example, while US ones dont. They could easily dictate share class structures, ultimate beneficial ownership rules, and more.
This would force VCs and PE to require changes no matter how much FOMO they have.
WeWork probably does have an advantage specifically for tech startups. But startups are definitionally not a large market, nor are they generally a good one. When we're small, we're cheapskates. And then we pretty quickly either go out of business or become like other companies, willing and able to deal with building owners directly. It's high churn, which is expensive.
Startup investment is also pretty cyclical; anybody who was around after Bubble 1.0 knows how quickly the party stops when investors get nervous. So WeWork has a lot of long-term commitments, with no obvious way to cover them in the next recession. And since we're already in the longest peacetime economic expansion, the possibility of recession is definitely on investor's minds.
I take issue with the "people have been doing the same thing for years" take, when most hugely successful start-ups tend to be small tweaks on established ideas. Take AirBnB. Peer-to-peer short term rentals existed on the Internet in the form of sites like VRBO since the late 90s, but AirBnB's relatively small changes (mainly ensuring that the financial transaction occurred completely on their platform) allowed for the sea change of urban short term rentals.
While I'm bearish on WeWork for the same reasons as many other people, I think there is certainly room for a consolidated business of month-to-month office rentals that offers a branded experience.
WeWork is betting on taking a similar track - sure, companies _could_ decide they want to build out expertise in leasing and managing real estate space, but it can actually help them focus on their core business more by leaving it to another company that provides the 'platform'. The growth of WeWork's enterprise offerings and general awareness of how to pitch to mid- and large-size tenants indicates that growth projections are not pinned to a startup-driven economy.
Although now I think about it, perhaps demand volatility is even more important. Office space needs are way more stable and predictable than server load. Salesforce, for example, signed a 15-year lease for Salesforce tower. And there's every reason to think they'll use it. Whereas AWS and its customers benefit hugely from being able to change load both month to month and hour to hour.
Yes, WeWork has market-fit, no one denies that. Their problem is governance and risk management. On top of it, how would an unprofitable company with massive debt and contract obligations do during a down-turn.
It's not that there is no need for what WeWork does; it's that they do it too expensively, and are valuing themselves far too high.
WeWork main competitor is Regus, founded in 1989. Regus is now present worldwide with revenues of 2.535 billion GBP (2018). Their market cap is a mere 3.68 billion!
There are also tons of smaller companies in that sector which are not international (mostly 1/2 countries) with much lower valuations.
So, the business model is fine, the market fine, the room to expansion here (especially with growth of remote work). Just the previous valuation wasn't.
But for the difference in valuation, that's an easy thing to do in a LBO: Hire a Chief Design Officer!
Thanks to WeWork maybe, their new offices are better:
That depends on their financial state. If they over expanded with the expectation of future capital to cover future contractual costs then they'll need to find a way to cover those costs without funding. That could be impossible without declaring bankruptcy.
Not really. Regus is brutally bad. I am not a fan of WeWork specifically but it's vastly superior to Regus' offices, old-school style of lead capture, and terrible dealing with its customers.
I now lease from an independent co-working space to expand on my small business' offices until we can find a larger space at a reasonable price (good luck with that in Seattle), and it's been great. WeWork helped push co-working along. Regus has done absolutely nothing in this regard for decades.
They're a glorified landlord, not a product.
Use wework to fill the building, then go around them to get more cash by leasing directly to the tenants. Tenants might even see rents lower.
Shopify went through something similar -- offering their product for free, taking a cut of any transacted products. But they realized that it incentivized companies who, deep down, knew they would never make a dollar. So it was okay to sign up for the 'free' ecommerce software, because they were never going to make a dime.
It also _dis_incentivized companies that were actually selling things, because taking a cut of every transaction is too expensive if you're really driving volume.
In short, WeWork is attractive to companies that, deep down, know they aren't going to grow. These companies minimize long-term exposure by paying more short-term. The companies that are _confident_ they will grow have no problem signing 5-year leases. It's the long-term prudent thing to do, and drastically cheaper.
I'm no economist, but to me, it seems that short term rentals can't be an inferior good if a large percentage of startups are already currently using them. You'd need a majority of them to be leasing a traditional office space in order for coworking to be seen as a viable lesser option. And I don't really see larger, more established startups that do have traditional office space (like Duolingo for instance) moving out into a WeWork.
Do you know any companies that have made this kind of transition?
I would note that I know of larger companies that are shifting people to remote who don't consistently use their assigned office space if capacity has gotten tight.
"This time it's different"
But it's also a very risky business, requiring a lot of capital, and it's not at all a SaaS business. The valuation was crazy.
It will be interesting, and insightful, to see if that is the tact he takes. If he does... It will add credibility to the already strong case for this being deliberate deceit versus unchecked ignorant hubris.
The $700M figure is a combination of equity sold outright and loans taken out using the equity as collateral. I have not seen any breakdown of how much falls in each category. I would not be surprised to see those loans get called in soon given the current situation and the recent governance change requiring him to pay back any profits he makes on leasing those properties to We.
I'm all for letting founders cash out to a certain degree before an IPO, but 700M and the lease agreements? Bot sure if that was a good deal for investors.
Even the name of the company is a bold-faced lie.
In this case, there is a clear mismatch in terms of what Adam is saying and his behavior as the CEO of this company. If WeWork’s mission is really to be one of empowering people to work the way they want, its governance structure and actions by those at the top need to reflect those values.
Put simply, the CEO himself isn’t living up to the core values of the company and needs to be dismissed.
Honestly how did you make this logical jump? It’s pretty obvious to me the parent post was pointing out that there is a lot of irony in a company, completely controlled by one individual (or his wife if he dies), is named “We”.
A CEO trying to run a small little nothing company in a weird way isn't a big deal. It's only a problem because of the scale.
This is the fundamental conundrum. Softbank has invested a total of $10.65B for a 29% stake in a company that (if valued like the commercial real estate firm it actually is instead of the tech unicorn that it isn't) is probably worth $5-6B if we're being generous. Further complicating matters, We is posting losses and burning cash at an incredible rate and will need additional financing in the very near future. It only makes sense for Softbank to continue to prop We up if they believe they can dump it on a greater fool in the very near future, which is looking less and less likely by the day.
I think SoftBank is probably pushing things further enough until they raise money for their next vision fund.
The point of the board is in part to keep the CEO in check. They had many opportunities to do so well before weeks before the now shelved IPO roadshow.
One of the things about blame is that it’s never zero sum, and in this case there’s more than enough to go around.
> if he’d acted responsibly
The "if" is the point. SoftBank had the ability to eliminate the risk of this "if", and didn't.
But what about the perspective of SoftBank's shareholders? If they're unhappy about this, they ought to be unhappy with the dealmakers at SoftBank for creating a situation where SoftBank is exposed to volatility of this kind.
This is what people say when they give the executive branch of the United States unchecked power to unilaterally do things and sidestep the legislative and judicial branches. Presidents don't always do that sort of thing, and neither do CEOs or.... normal people.
It would be funny if this blew up in SoftBank's face. I think it will make even Theranos sound more sensible.
Sure, the product exists and it's good but the "business plan" and its assumptions and business structure don't make much sense.
Though I don't know how long they will survive without any more cash injections in the short term due to all their rental liabilities.
In reality, it is a very good product with slim margins. The reason it is losing so much money is because it is expanding quickly to show that it is a "high growth" Unicorn company.
It isn't that it's a scam, it just puts it is a non-tech/non-SaaS category. Every founder/CEO wants to tell a huge growth story. If private investors are buying that then it's just that they miscalculated, but not defrauded.
A product with slim margins is one that you divest from so you can focus on the products with good margins.
Softbank is completely fucked.
Ironically, that's a problem for Adam precisely because We is not Theranos. Holmes had the votes and the cash, which hadn't been spent yet since Theranos wasn't a real business, and she could (and did) just coast for years on what was already in the bank without any need to go to any investors or banks or third parties (who would of course have demanded her ouster as step 1). But since We is a real business with real users and a successful one, We can't just coast on its cash (even if it stopped expansion).
We have a very different definition of what does it mean to be a successful business.
Even if We would fail for lack of further investments (because it's type #2), that doesn't mean it was #3, a Theranos. In both #1 and #2, Softbank has a lot of leverage over Adam, and in both it's kind of a game of chicken: neither Softbank nor Adam want to see lack of cash cause We either permanently curtail its potential (#1) or die (#2).
If it were a real successful business it wouldn't need emergency cash injections to stay alive.
It's game over at that point. Kiss the IPO goodbye, kiss the $6B in lines of credit goodbye, kiss any further investment from Softbank goodbye. With their burn rate, they then have MAYBE another 6 months before they become insolvent. That having been said, it would be quite the Pyrrhic Victory for Softbank, might even mean their demise as well.
Rationally, he might be able to extract more cash out of the business running it into the ground than by having it saved by someone else. Delusionally, he might think he's the only one who can run WeWork.
On the other hand, it could be that Softbank knows it won't work, but feels they have to be seen attempting something.
I read this and heard Gollum saying "We wants it. We needs it."
> The Wall Street Journal reported last week that Mr. Neumann had taken marijuana on a flight from New York to Israel.
In this day and age, where we have businesses that legally sell weed, this sort of commentary appears to be a pointless inclusion of “salacious” details. It is irrelevant to the discussion of whether WeWork has a legitimate growth model or whether the CEO is doing the “right” thing.
I suspect that SoftBank is attempting to win this battle in the court of public opinion, because they bought shares that didn’t have the same voting rights as Mr Neumann’s shares, and they now regret that decision.
According to him, it's more like MeWork.
Taking a little out to derisk yourself after a B or greater round is reasonable. Taking almost 10% of a round is obnoxious.
In many tech-fueled marketplaces, getting big in a hurry is a practically unbeatable advantage. I saw this 20 years ago when I was tracking eBay. No end of little players would approach me and say: "I've designed a better marketplace than eBay. If I just had 1 million users, you'd see how good it is."
But it was too late, and there was no way for them to go from 10 users, to 10,000, to anything bigger. Loyalties on both sides of the market were already sewn up. Both buyers and sellers wanted a deep, super-smooth market where they could transact 10-50 times a month without ever being frustrated by a lack of market depth.
When people need a viable market many times a week, switching costs become unfathomably high. eBay owned that concept for as long as it would work. It's been basically the same story for Uber, Lyft, Twitter, etc.
But this is not true the one-time need of renting this season's splashy workspace with free kombucha. Tenants pick their spot and then stay for 3 months, 11 months, three years or whatever. There's a little bit of shuffling around and re-transacting, but not nearly as much.
Besides, if the WeWork concept is that good, it's easy to copy and does not need giant scale to work. That's totally different from trying to build the third ride-hailing service. In this case, someone who owns three office buildings in Chicago's West Loop can convert them to a WeWork clone and rent them just fine to people who want to be in that neighborhood.
The fact that this new outfit (WeLoop) does not have a London outpost or a list of 75,000 other tenants in other states is irrelevant. Buyers show up for one transaction (get me a groovy office space in my neighborhood) and then they are done. That is already beginning to happen, in fact.
Yeah, WeWork has a greater ability to serve large corporations that want an ever-changing blend of space in a lot of cities. But that's not its core market. And even if it is, WeWork isn't automatically better off than existing REITs that can tweak their multi-city properties as needed.
So it's brave of Team Adam to go into a lot of cities all at once and tell people that this year's losses will soon give way to profits once the buildings fill up. But that doesn't seem to be happening on schedule. And even if WeWork eventually gets to breakeven, that just entitles it to compete against a lot of established players who already own better buildings in better locations -- and who can clone whatever elements of WeWork design seem appealing to customers.
Getting access to capital on super-friendly terms gave WeWork the ability to build fast, almost regardless of what the short-term economics might be. But now access to capital is getting quite a bit harder.
And that can feed on itself in scary ways. Once capital gets scarce, a lot of expansion plans get much harder to carry out. Now growth slows. And that makes investors more jittery. Borrowing rates go up; loan covenants get tighter, and equity dilution gets more severe. Growth shrinks further. Money gets tighter.
In such situations, it takes a skilled pilot to land the plane safely, let alone regain altitude.
If the focus is getting a lot of people into an office for a long time, then it will eventually be cheaper for those people to rent their own.
If focus is on short term individuals, then they can just switch to whichever competitor comes along with a newer office and a more enticing introductory rate.
Maybe main advantage is that they're flexible. If you need 20 people sitting together in a random city, for 6 months, starting end of the month - well they can do this, but so can all manner of other managed office providers.
Other 'unicorns' such as Uber and Lyft can compete based upon which app you open first, how many drivers they can put near you - We has to compete by making great big office buildings appear.
For instance, short term users, who pay the highest rates, could turn out to be a big part of the market. That could be business travelers, companies moving office or setting up offices, companies that need temp office work, etc. They may go for a well-known chain over an independent, just like business travelers often do with hotels. Similar with, as you mentioned, big companies that need to hire in a lot of different cities at once.
It's also possible a big chain could manage to offer better deals than a smaller player if they can negotiate with big, multicity landlords and other vendors or get some kind of special deals for members (e.g., discounts on software, or cheap lunch delivery/taxi service sharing drivers between members).
We also owns Meetup, and I could see WeWork or another chain finding ways to offer additional uses that we don't currently associate with coworking spaces. The advantage could be easy online booking for all kinds of meetings and events, maybe with added features like food and beverage catering.
A chain could also effectively become a marketplace for coworking and other temporary business space needs. Maybe you could book a spot for your company holiday party, or reserve a shopping mall kiosk for a week to do user testing, or even book space at a non-corporate-owned coworking space through your account.
> A chain could also effectively become a marketplace for coworking and other temporary business space needs. Maybe you could book a spot for your company holiday party, or reserve a shopping mall kiosk for a week to do user testing, or even book space at a non-corporate-owned coworking space through your account.
Much as WeWork could bring customers, I can't help but think Meetup would have been in a much better place to be that middleman for renting interesting and varied spaces without being lumbered with a branded workspace product...
Agree that running a chain of co-working office facilities can be quite a decent business (QADB). But those tend to be valued much more conservatively by the stock market.
Does a CEO have anything to do with that, or is it wholly external?
If I later buy 1 share for $2 then your valuation has doubled. That is basically SoftBank’s business model.
> have agreed to purchase 0.000000001% of the company in exchange for $1.
Just wow, this is gold.
It can be a little more complicated with post and pre buy valuation, but that is the general idea.
Edit: This isn’t meant to be flippant. There is literally no value in this company and its current owners are trying to dump it on a greater fool.
The "no competitive advantage / anyone can do this" crowd is sort of ignoring the fact that no one did, at least for folks that care about the things I mention.
Its sort of the opposite of the problem banks have where they borrow short term and lend long term.
I have no opinion about the company neither I want to but I definitely feel pushed to have a negative opinion about them!
Are the extreme cost cuts true?
That’s like trying to launch a tech company but “forgetting” to set up the servers and hoping if you talk about your vision and say “We” enough no one will notice/mind.
True, but if you do it right it can be a very successful career.