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WeWork says will file to withdraw IPO (reuters.com)
645 points by pseudolus 16 days ago | hide | past | web | favorite | 384 comments

I'm just impressed by how well the fallout has been predicted by Scott Galloway[0] and Matt Levine.

Has been an incredible learning experience for me on the unicorn class in general. Looking forward to unicorn report for 2019 [1].

[0] https://www.profgalloway.com/wewtf-part-deux

[1] https://corpgov.law.harvard.edu/2019/03/20/the-unicorn-ipo-r...

Galloway always predicts that every tech company is a bubble. Every now and then he's right.

Right, maybe not every tech company but he is wrong more often than he is right.

For example, he predicted both Amazon and Google would be 'losers' back in 2015.. oops:


From the article “For Galloway, the winner will be Macy’s, which has successfully gone online,”

Macy’s Stock https://g.co/kgs/8KZ1Kj

Prediction is a hard business.

Prediction is very difficult, especially if it's about the future. - Niels Bohr

I had previously heard this attributed to Yogi Berra, so I had to check. Apparently[1], it's an old Danish proverb.

[1]: https://quoteinvestigator.com/2013/10/20/no-predict/

So non-future prediction is also difficult it seems!

What pumped up their stock so much in 2015?

Levine is skeptical/amused by the nonsensical valuations but takes a more neutral stance, probably because he was never truly invested in/familiar with/cared that much about new technology and what people promise it can do. Galloway is more idealistic and Levine is more practical taking things at face value and breaking them down. They're both very knowledgeable and worth reading.

> ..probably because he was never truly invested in/familiar with/cared that much about new technology and what people promise it can do.

Where's the technology in WeWork?

We are current WeWork tenants. WeWork can’t even provide us an interface to manage and view who used WeWork credits in our org. We asked for a report and got a pdf after 2 days.

Tech my foot. The printer software is an abomination.

I found the best way to print in Wework is to email the document to the reception and have them print it for me.

> The printer software is an abomination.

...that's a surprise....

If I recall correctly, there was also no uninstaller (at least on Mac, 2 years ago).

Oh, so they are a classic tech company, then.

After a year I never figured out how to print. You should be able to print from their app.

It's a cornerstone of their brand relative to other office space leasing companies, and tech investors are how/where they got a lot of their funding. Check out their S-1, they mention "technology" 110 times:

"Technology is at the foundation of our global platform. Our purpose-built technology and operational expertise has allowed us to scale our core WeWork space-as-a-service offering quickly, while improving the quality of our solutions and decreasing the cost to find, build, fill and run our spaces. We have approximately 1,000 engineers, product designers and machine learning scientists that are dedicated to building, integrating and automating the complex systems we use to operate our business. As a result, we are able to deliver a premium experience to our members at a lower price relative to traditional alternatives."


It’s “tech theatre,” not tech. It’s how they got their funding, but reading what even the happy users on HN have had to say, the technology isn’t core to why people rent from them.

> the technology isn’t core to why people rent from them

Okay, I'll bite: what is the core of their value-proposition? A cultural aesthetic? Cheap rent?

As a former WeWork tenant, their value proposition to customers is that they provide office space quickly and without any long term obligation in convenient, trendy locations. They're also very eager to beat competitors on price in my personal experience.

Since it's very easy to set up a competitor (at least in my area, since numerous knockoffs have been created in the last few years) their margins are low at best, and they have almost no customer lock-in, I have no idea what their value proposition is for investors.

I'm not sure about the price-beating anymore.

A few days ago I moved into a WeWork clone called JustCo. The spaces are much larger, look virtually identical and are in a neighbouring building. Price difference per month was $2300 vs $1600 + a month free. WeWork's best offer was 5% off if we signed for 12 months. No free beer here, but I've got a beer budget of $700 a month with the savings.

It seems WeWork's sales guys here in Sydney have very little freedom to discount.

Nailed it. Brilliant.

1000 engineers for what? Again, where is the technology?

Maintaining internal frameworks, delivery pipelines, infrastructure, instrumentation and product roadmaps. Transitioning to new organizational structures. Internal hackathons and lunch ‘n learns. What am I forgetting?

Blog posts, conference talks, building at scale, open source contributions, core libs, platform, tools, dashboard migrations

Ping pong.

How did I forget?

He is bullish on AirBnB[0] and Shopify[1].

[0] https://www.vox.com/2018/10/26/18029008/pivot-kara-swisher-s...

[1] https://www.youtube.com/watch?v=m58YkxEjzT4



Linked to a better resource.

most tech companies are bubbles or at least unrealistically over valued. its just that if you keep believing the myth long enough, it starts being true.

In the long view, all tech companies are small bubbles. They don’t stick around and have no long term value.

What evidence do you have to support that conclusion?


I wouldn't give that much worship to Galloway it's not like he is always right or my guess even close to that (and nobody is). For example this post circa 2017 about the bubble. I can't tell you how many people have not called the bubble since the last bubble correctly. Galloway is one of them:


Market was at 21,600 (very roughly) on the approx. date of that post and now is at close to 27,000. It did not go lower than 22,400 in the interim.

To wit (that post):

> There are several hard metrics for why we may be nearing full-monty bubble, including things my NYU colleagues spend a great deal of time thinking about, and understand much better. But you don't need a Nobel to see the similarities between 1999 and 2017. (Btw, NYU Stern has three active Nobel Prize winners… We. Rule. But that's another post.)

Very generally if you are predicting a collapse ala 1999 you need to be a bit more accurate than that.

I didn't do a great deal of work to find that post either, it was linked in the post you gave.

Edit: Also love his being so proud of the anointed 3 active nobel prize winners. Would like to remind everyone that until recently the game in business was making money or a great product or being loved by your customers not winning academic awards and platitudes.

Galloway's strength is that he's an amazing communicator and very arrogant. People eat up what he says without a moment's thought. And to be fair he's had some great calls, ie, Amazon's stock run in 2017 and this WeWork fiasco (although the WeWork one wasn't that hard to predict after the reports on the corporate malfeasance came out). Combine an arrogant and vociferous personality with a couple of correct calls and you have something that sells.

But he's also made some really bad calls. For example he predicted that Spotify was going to be the next FANG and that the stock price would double last year. That's not a crime, nobody knows what is going to happen in the future, but it's the arrogance and condescension and air of certainty that bothers me.

He was so adamant about the dominance of voice and how Alexa was going to take over and largely disrupt touch screens. That was the call that I never agreed with and made me more skeptical of what he says. More than once I saw him on tv talking very condescendingly to people who questioned that call and in the end, two years later, I still don't know a single person who has ordered anything using Alexa. To this day it remains a cooking timer and a way to control audio equipment (if I'm really lazy). Galloway called it the most transformative device in ten years. Really?

I occasionally order from Alexa but we call them “Amelia Bedelia orders” because there’s really no telling what we’ll actually get. It’s kind of fun.

My favorite so far has been the bulk-order of travel size bars of dove soap. Why is that even a thing? Surely anyone who could fit 12 travel bars in their suitcase could just as easily fit a regular bar?

> Surely anyone who could fit 12 travel bars in their suitcase could just as easily fit a regular bar?

... why would you assume someone would take all of them at the same time? Instead of maybe multiple family members using them, keeping a stockpile at home (so they don't have to order an individual one every time they need one), keeping them on hand for guests, ...

> ... why would you assume someone would take all of them at the same time?

I was being facetious... taking it literally à la Amelia Bedelia.

People who travel a lot for work and need one bar at a time and (for some reason) prefer Dove soap.

Yeah but what if you're travelling with twelve kids, apostles, etc?

Yeah, if you’re bragging about Nobel prizes in economics, you’re doing it wrong. They make the Peace Prize seem rigorous.

I think it's deliberate, he never gives a 'maybe this, maybe that' answer. He does the analysis, but then does an intuitive glance at the end and takes a side one way or the other

Sure he's wrong a lot, but at least he's never half-right half-wrong

I wouldn’t say he “predicted” anything unless I’m missing something. He commented on the S-1 after it was released.

He also gave a glowing take on Smile Direct Club the day before the IPO, which has tanked 50% in a few weeks and had the biggest IPO flop in a decade, so YMMV.

It has been super interesting listening to Scott Galloway blast WeWork and their business model on the podcast Pivot.

Would be great to remove Kara Swisher's self-aggrandizement and name-droppery and isolate Galloway's takes entirely.

God, Kara Swisher is perhaps the most annoying tech journalist on the planet. Her "analysis" consists of inserting random name-drops that are completely unrelated to the topic at hand and then regurgitating the analysis of smarter people without any additional value add.

It seems Kara Swisher's entire reason for existing is for expressing disdain. In any organization she'd be that political person who adds no value to projects but rises due to her expertise at networking and name dropping.

I much prefer the journalists on the Economist podcast and the people on The Weeds (Vox) and FiveThirtyEight.

I really bought into the hype and gave her a try - she adds absolutely nothing to the conversation.

The a16z podcasts are way better - I can't recall the name of the ladies who generally host that but they are much more effective interviewers and analysts.

This is almost too perfect but SoftBank is, at the moment, trying to hire a valuations director:


Sort of a "Never attribute to malice that which is adequately explained by stupidity" kind of thing . . .

In their defense, Masayoshi Son made much of his fortune by applying the greater fool theory (and lost much of it that way as well). There's a chance they really just took a calculated risk here, and with many of their other investments too. The risk being not so much the success of the company like normal VC investments, but explicitly a "maybe we can profitably push this through an IPO, let's see if the sheeple fall for it" kind of thing.

Hypothetically, if he was really good at this he'd pick a highly leveraged market segment, attempt to crash it with a ridiculously implausible high-profile failure at the tail end of a bubble, and benefit by shorting everything that wasn't nailed to the floor.

Or maybe he's just a bit gullible. It's hard to be sure.

Live by the sword, die by the sword. Eventually you will be the greatest fool.

Thats quite the defense.

Alternatively, never be too quick to attribute to stupidity when there’s a strong incentive for malice to take advantage of that attribution to hide itself.


Hanlon's Razor needs a strong caveat that it should never be uncritically applied when strong financial motives are at play.

I think Hanlon's Razor became popular in earlier days of the Internet, when dumb technical decision might happen ... people are dumb. Today, with money riding on everything, the situation can be much muddier, with dumb technical decisions happening because people are greedy ... and dumb.


Alternatively, never attribute to malice or stupidity what can easily be attributed to greed and lack of incentive.

Greed and perverse incentives.

"It'll do a bunch of deals that'll crater the company within 3 years, but I'll cash out $700mil on the way and be long gone before everybody who stays is trying to climb out of the glowing hole in the ground..."

It's hard to get investment decisions right all the time. One day you buy 30% of AliBaba for $20m, another you invest in WeWork.

Wow what a huge rise and fall in the past few weeks! What I don't understand is how the S-1 filing ever saw the light of day? How could nobody reviewing that see any of the red flags that were obvious?

I think this just shows how hard it is to be objective when there are so many cultural/financial/etc influences affecting your judgement. Obviously their team bought the hype (and as a sad Browns fan I can totally sympathize with buying into hype then being disappointed!)

How could nobody reviewing that see any of the red flags that were obvious?

The Emperor's New Clothes is not just about rulers and their fashion choices. I've caught myself doing the same thing with much smaller investments that are rolling over tits up. I wanna believe, because the alternative is most unappealing ("You were wrong, Mr. Mikestew, and you are going to lose money on this. Most of it, in fact.") So I'm guessing when reviewing the S-1 when your financial testicles are lying on the block, you can easily skim right over the uncomfortable parts.

Of course, the rest of us with no financial stake, or other incentive to look at the S-1 with only one eye, look and ask, "WTF?"

> Obviously their team bought the hype

or nobody wanted to rock the boat. If you had pointed out this as a legal grunt or rank & file finance guy, you would have looked bad for "ruining" the exec's payday. Better to let the market decide and just keep your head down and receive your pay check.

Especially if it turned out the market loved it. Then you're truly screwed. When you're working for a regular paycheck, better to be optimistic and wrong than pessimistic and wrong.

> In a frenzied effort to secure the roughly $100 million in fees for representing WeWork’s IPO, the world’s biggest banks had fallen over themselves to convince Neumann they understood the grandiosity of his vision.


The people in charge very clearly misread the market and thought they could unload that steaming pile of junk on the public markets. Everyone involved in this IPO knew how bad things were, they just hoped the market was hungry enough for "tech stocks" to paper over those issues.

Bystander effect, nobody speaks up because no one else has spoken up. Even if you have a feeling that something is a bad idea, you don't want to stick your neck out and have to defend your claim.

Probably also the (former) CEO that won't back off until he actually touches the stove.

Some people are experiential learners.

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" Upton Sinclair

It's all about them Benjamins.

they were all operating (and may still be) from within the reality distortion field. the field covers the valley and beyond.

Because everyone involved in the IPO would have benefited from making the company public?

Powerful incentives are a hell of a drug.

Did you not watch the game yesterday?

Waiting for Stripe's new API that adds GET/POST/PUT/PATCH/DELETE functionality for your companies IPO.

Cannot understand how they can restructure this. Even one new building in London which isn't anywhere near structurally complete WeWork has taken 18 floors on a 25 year lease (I think due to open 2020 or 2021).

Is there a way they can walk away from all these commitments? I understand they have a SPE structure which potentially allows them to do that, but I imagine there must be some costs or downsides to it, otherwise it isn't much of a lease commitment from WeWork's PoV.

Pay whatever cost is in the lease in order to break it or go bankrupt and pay out creditors first. The building management will then either find a new tenant and/or enforce other components of the lease and sue for their money per the contract agreement.

I had also thought that they had set up some leases through their own legal structures so they could limit some of WeWork's financial liability from the lease.

The leases through the special purpose entities are still (supposedly) guaranteed by parent WeWork. To shed the leases would require wiping out some component of the equity through bankruptcy.

I thought companies walk away from leases all the time. Every restaurant you’ve ever eaten at the is no longer there probably bailed on a lease.

Bankruptcy is a different story than a company just deciding, "Nope, we don't want the lease anymore". And most restaurants are structured as an LLC and owned by the parent corporation (or just independently owned by individuals) who can shut down the business and not be on the hook for any debts that were not secured with a personal guarantee.

WeWork is structured the same afaik.

Then unless the LLC's operated on credit secured by a WeWork guarantee, if the LLC dissolves then WeWork probably couldn't be sued for the broken lease. However I'm not a lawyer, much less one specializing in LLC liabilities etc.

I’d guess, given the diversity of commercial RE counter parties that the WeWork hydra is negotiating with, at least a good portion would’ve priced-in a premium for early termination.

This whole thing has been nuts. It's clear no one who invested late ever actually believed in the valuations -- matt levine says it better

"We came to market and public investors informally expressed some skepticism and its private backers were immediately like “wait this company isn’t profitable, why did no one tell us, burn it all down.” I am not saying that the public markets are wrong, but I kind of wanted there to be a difference of opinion; I kind of wanted the people who bought WeWork at a $47 billion valuation to act like they meant it."

Even simpler: it's fraud and they got caught. Hopefully it doesn't paint other great IPOs in a bad light.

In order for something to be fraud there has to be deception. This was never the case with WeWork.

I think the shenanigans they were pulling (crazy governance, conflicts of interest enriching the founder and wife, bad acquisitions) were obvious to the HN and analyst community, but possibly they hoped it would be over the heads of retail investors.

Now obviously, in this case, it was too blatant and stunk bad enough that even retail investors shied away.

The vast majority of shares purchased at IPOs are by institutional investors writing very large checks, not retail investors.

Retail investors shying away had nothing to do with the IPO getting pulled. And even if this wasn't the case it's still not fraud: if retail investors have all the data (which they did) but still want to buy something, it's not deception.

Well speaking for myself it was obvious to me, but it was NOT obvious it wouldn't work. A lot of companies had successful IPOs with those issues.

Most of the ethical red flags seem to be identical to municipal government corruption, e.g. enriching family members and giving contracts to companies one owns. It's been going on for hundreds of years, you'd think retail investors would be wise at this point

Isn't the most basic fraud to advertise fraud? My Google fu fails me, but in general I seem to recall the absolute most common con is to "recruit" people for a made up con (essentially: if you give me 1k we can defraud this mark for 100k and share the profit (the con obviously being that your partner simply pockets the 1k))?

> In order for something to be fraud there has to be deception.

Not "fraud" in technical sense; more like "generous marketing".

Running an ad of a bunch of thin, attractive people drinking Coke is not fraud. It's also not very accurate either.

If SoftBank had to do creative accounting to value it at $47 billion in January in order to support the IPO price (and thus increase the value of their existing investment) then that might be fraud. I haven't seen anybody suggest that such evidence exists though.

Whether there was deception and therefore fraud will likely be determined in a court of law, by a jury.

Masquerading as a tech company is deception. Pumping up valuation is deception.

> Hopefully it doesn't paint other great IPOs in a bad light.

Are you thinking of any in particular? Attention toward IPOs (especially on HN) go almost exclusively to bad IPOs. Fair offerings seem to get ignored.

Edit: Peloton is one that comes to mind. Nearly $1 billion in sales, up 40% YoY. Although even they are posting a net loss of a quarter billion.

Zoom [1], Cloudflare [2], and Datadog [3] had a fairly warm reception on HN and they're solid companies with high gross margins.

[1] https://news.ycombinator.com/item?id=19465860

[2] https://news.ycombinator.com/item?id=20706702

[3] https://news.ycombinator.com/item?id=20781610

> Peloton is one that comes to mind

Is it not possible that both investors and the public will find the shine off the apple of pairing two independently somewhat unattractive things--a stationary bicycle and a hefty monthly fee--as used models start to hit the secondary market?

Have you ever tried to sell a used stationary bicycle? It ain't easy! The evidence of the gulf between good intentions and regular use is right there.

There’s a HUGE secondary market for Peloton bikes. There’s an extremely active Facebook group with these. They tend to sell within hours from what I’ve seen.

We have a Peloton bike and treadmill both. I haven't watched too closely, but occasionally people ask about selling their bikes (or buying a used bike to save money), and the impression I get is that they hold their value relatively well. Then again, asking price != sale price. I'm trying to validate but all I'm finding on sfbay.craigslist is coupon codes and "Peloton style spinning bike" and so forth.

What I've observed, very very anecdotally, is that Peloton buyers become emotionally invested, and it turns out that they don't use the thing much, but resist strongly the idea of selling it at a huge loss and admitting defeat. Because buyers tend to have quite a bit of disposable income, it takes a long time to drift down to a market-clearing price.

Do you know any? I only personally know a couple of Peloton owners (from the time before they owned one), and they all use them regularly. The people I know from Peloton groups online, obviously, are a self-selecting group of more frequent/fervent users, so they don't really count.

We go in cycles; I use the bike much less frequently in the summer when I ride outside more, and more in the winter. I'm around 300 rides on it, my wife's closer to 100. (I ride more/she runs more).

We bought the treadmill in the spring after she got injured (again) trying to run in short morning daylight hours, or waning evening daylight hours, so we haven't used it as much, but it will definitely get a lot more use as the darkness descends on us again.

We're both pretty active, so I guess maybe we don't represent the average of the addressable market, but maybe we represent more of an average of CURRENT owners.

Peloton could really have a home run, market-wise, if they could sell expensive equipment AND subscriptions that people don't want to let go of because they want to keep thinking of themselves as people who work out. (The same way people keep paying gym memberships because they want to believe they're going to work out more).

eBay has something to say about this: new Peloton bikes run $2245 on their site, they're clearing for about $1700-$1800 on eBay right now.

This is a significant value drop, but not huge given the logistical difficulties of this specific resale market (shipping these things is hard.)

Yeah, I'm not sure I'd ever try selling something that heavy on eBay, I'd only turn to local buyers.

It's certainly not hard to imagine Peloton is something of a fad. There is no shortage of those in the fitness space--in addition to the, as you say, general omnipresence of New Year's resolutions vs. ongoing use.

Or Pelotron could be the start of communal home fitness, taking the place of gym (e.g. Soul Cycle) subscription fees. Point is there is no way to know for certain.

How is it fraud? They disclosed everything, people said “this is crap,” and they all had to take a huge bath.

Yes, Softbank and others will lose a lot of money, and Neumann made money off them, but they’re all grownups who knew what they were getting into.

It is less fraud and more like gambling. They want the next Google or Facebook desperately to make big money.

So this is what I do not understand: they burn through money like crazy. For them IPO was not a path to liquidity for stock holders, rather it was a way to do the next raise. The large market basically said "Nah, can't get that money on those terms. Sorry". Their only private source of funding is Softbank.

How are they going to raise more money for opex? Go back to Softbank and get another pile of cash at even higher valuation? Because it would be incredibly dumb for Softbank to do that as they have no serious competitors on the next round. So is softbank going to say 'This will be the down round and, we will now own 95% of the company and all of you, previous shareholders, get whatever is left? It is a down round with a wipe out, take it or leave it?'

WeWork’s plan was to raise at least $4Bn from IPO which would unlock $6Bn in bank loans, before the end of the year. Now they have a $10Bn hole in their budget which coincidentally is almost exactly the same size as SoftBank’s investment in them. They are in a lot of trouble if SoftBank doesn’t double down, and do it soon. Q4 starts tomorrow! And $10Bn may be more than the entire company is worth!

Which brings a question - could it be that this entire thing was Softbank's play to control the entire company?

$6B to get the seat at the table.

$10B now as a down around for a wipe out?

$16B is a lot to pay for a turkey, even if you wipe out all the other shareholders in it.

True, but consider:

1. They want some turkey.

2. WeWorks is a turkey that already exists, in a good enough form and, should non-wanker management be installed, fat trimmed and the co being returned to real estate business rather than technology business, it seems to be a pretty tasty and immediately available one.

3. Buying it outright would have been a lot more expensive.

Is it any different from Softbank investing in Sprint? They could have invested in smaller company and built it themselves but instead they dumped money into someone who was already there and slowly reshaped the management

WeWork is not worth $16Bn. IWG is only worth $3.6Bn and is many times the size by sq ft under management. I don’t believe that WeWork is even worth $1Bn using similar valuation.

Err... that's not an accurate comparison. If Softbank gives WeWork $10B for 100% of the company then its book value will skyrocket as its liabilities won't increase even by a penny but it will get 10B on its balance sheet. There's not a single company in the WW lines business that has this kind of a prospect. Regus simply can't raise this kind of money -- if they could, they would have.

Well sure but why would they pay 10x as much as it’s worth? Remember they have already invested $10.5Bn. So they would be paying a grand total of $20.5Bn and what would be their exit strategy from that?

Lets presume that for some reason Softbank wants to play in this space. What are the plays that are at its disposal?

1. It can buy Regus. Regus does not need money to survive, has poisoned pill and does not have a brand recognition. With 3B yearly revenue. Anything below 8x the revenue probably won't get a board's automatic stamp of approval and anything below 10x won't get a board's enthusiastic "Yes, please!". So that's 35B. Regus with Softbank money would definitely crush everyone. It will take a long time just to get the 35B back.

Pro: Definitely a solid play Con: Really expensive.

2. They can create their own competitor - it will take 3-5 years or longer to assemble the entity comparable to WeWork with the same level of name recognition. It will also cost more than WeWork already burned. During that time Regus may restructure and become a real competitor ( they are in a different market now ) and whoever picks up a corpse of WeWork could become a competitor in the juciest markets.

Pro: cheapest Con: longest, and most unclear -- Regus may pick up WeWork corpse making it the undisputed leader.

3. Basically do a hostile takeover of WeWork. If that was the play, it seems to have worked very well. It was as if a biker was taking candy from a baby: neither VCs nor C-suite, not ibankers seemed to have caught on.

Pro: No WeWork corpse for Regus to pick up cheap, no other competitors show up from it. Cheaper than buying Regus. Con: ~10B spent already + 10B to buy the rest.

> what would be their exit strategy from that?

They may not be looking for an exit at all. At those sizes cash equivalents without good investment prospects aren't a good asset.

They may not be looking for an exit at all.

But they have to. Like all VC funds Vision Fund has a set lifecycle. In their case they have 5 years to invest (starting on the day the fund closes to new investors, which has already happened) and then 7 years until maturity at which point it dissolves and returns capital to investors. The clock is ticking.

It depends on how their fund is structured. Based on what I have read the minimum life of their LPs is 12 years. At the scale it operates, and considering from whom it raises money it does not make much sense to structure it as a typical VC fund.

I wonder if Softbank has released all of it's funds to WeWork. they usually release them in tranches based on milestone achievements. In this case doing an IPO was likely one. Which is probably why they were pushing against doing an IPO, potentially saving some of the remaining capital. Not sure.

Why is WeWork considered a tech company?

And what exactly is wrong with their business model? That's not clear to me from the article. It says they take long-term leases and sell short-term leases. That seems straightforward and potentially lucrative if they're adding value, making it easier to find suitable short-term office space, etc. Is it just that they're not making money doing this? Why not?

I think the reason you don't get an answer to this is because this is article number 100352752. WeWork isn't a tech company because there's no unique technology they use to rent out office space- which is how they make money. Their business model is "Sign long term contracts cheap, rent out to short term tenants expensive". Which is fine, but it doesn't justify their valuation (which is predicated on them 'disrupting' the office rental industry) and isn't fine - because so far they spend more money renting the office space than they do leasing it out to their tenants. So their real business model is "Rent $1 worth of office space out for 50 cents". They had no compelling path to profitability.

Isn't airbnb similarly disqualified under your definition?

Airbnb could have existed using an army of secretaries taking phonecalls and making reservations, but it would have cost more

We work could have existed with an army of secretaries taking phonecalls and it would have cost less

Airbnb's business is the app that connects property owners to renters. Their app is the technology, their marginal costs are 0- you can add another property to the website trivially. Their value is in the network effects in their app just like facebook. Wework actually sign rental contracts and take on the risk of not being able to fill the properties.

A big difference is that AirBnB (and Uber, Lyft, etc...) don’t own or lease any of the underlying assets (apartments, cars) but are purely middlemen.

AirBnB is convenient. WeWork isn't really more convenient than existing competitors. It just has the wow factor.

The wow factor being embodied primarily in a Charismatic Young Narcissist (CYN) CEO. See Elizabeth Holmes.

> Why is WeWork considered a tech company?

They are considered a tech company (by the people who consider them a tech company) because they say they're a tech company. And they say that because tech companies get higher valuations.

> And what exactly is wrong with their business model? [...] It says they take long-term leases and sell short-term leases.

Right. So in the good times, you can make a fair bit of money doing this, but in bad times you'll lose a lot of money, as all the short term leases drop off.

Traditionally companies in this space work around this by buying their own buildings, by having fat margins in the good times, by not making very much money, and by occasionally going bankrupt. :) It's a perfectly valid business model, but it's not super attractive to investors; it's capital intensive and not very profitable. IWC (formerly known as Regus) has about 5 times the locations WeWork does, and is worth about $3B. $3B is a lot of money, so there's nothing wrong with the business model, but it's also a lot less than the $47B people were talking about for WeWork until very recently.

WeWork is trying to find a way to do something different or cooler, in the hopes of finding a reason they should be values completely differently than IWC, but so far that's translated into renting buildings, thin margins, no profits, and no story for why what they're doing is fundamentally better or more valuable than what IWC is doing. Yes, they have a live DJ in one of their London buildings and IWC does not, but IWC is making money and WeWork is not, and I mean...you can hire a DJ if that turns out to be the critical feature missing from other office space.

> That seems straightforward and potentially lucrative if they're adding value

Right. Especially now that Adam Neumann has stepped down, there's no reason WeWork can't find their niche as another IWC. The problem is, as another IWC, there's no real reason they'll be worth even $10B (again, IWC is much larger and only worth $3B), and Softbank backed them at much higher valuations. Just because WeWork has a profitable niche doesn't mean their investors will be okay. For Softbank the difference between a $5B valuation and a $0B valuation is minimal, when they were expecting something more like $60B.

> It says they take long-term leases and sell short-term leases. That seems straightforward and potentially lucrative if they're adding value, making it easier to find suitable short-term office space, etc.

When times get tough the startups go back to their parent's garages or basements and don't renew their short term leases. WeWork is stuck with their long-term leases.

Conversely while times are good startups are willing to pay premium for short term leases, either to expand quickly if times stay good or to go back to some garage if times get tough. The business model is essentialy similar to an insurance, they make money by taking on other people's risks.

Of course WeWork doesn't operate financially like this. The business model is sound in principle, but WeWork's execution seems ill conceived (except for the personal enrichment of the CEO).

I see lots of cheering which, to some degree, I understand given the public persona of Adam Neumann.

I'm more interested in the ramifications, and I don't just mean the obvious ones like "potential tech recession" (maybe, who knows) or "more due diligence" (unlikely, or if so likely to swing completely the other direction).

Given that "private markets are the new public markets" I wonder if this will just encourage more companies to stay private either indefinitely (e.g. MailChimp though obviously I realize they are an exception) or for a period far beyond the norm (AirBnB) to wait for a more favorable time to IPO. Maybe we'll see companies switch to RSUs instead of ISOs as this becomes more common.

Staying private longer in the face of capital markets skeptical of money losing businesses isn't much of an option. Eventually, in order for the private investors to make money, they either need to get profitable or go public. AirBnB is a poor example of staying private longer in these circumstances because they are profitable. [0]

[0] https://www.cnbc.com/2019/01/15/airbnb-sustains-profit-as-it...

> Eventually, in order for the private investors to make money, they either need to get profitable or go public.

Most (but not all, obviously) unicorns could easily be profitable if they chose to be. It would come at the expense of growth and R&D, but they would be profitable nonetheless. Growth is just valued much more heavily in the current market.

If you look at S-1s or even recent public unicorn earning statements, most of their losses stem from outsized increases in R&D/etc. expenditures despite healthily increasing revenues. The most recent example I can think of off the top of my head is Dropbox.

Yes, the thing is that profitability in that way would cost them their IPO, whose value would plummet. And private investors that bought in at 10x or 20x revenue would not be happy with 0.2x profitability. More or less what happened with WeWork once they issued their offering & the CEO's behavior caused scrutiny on the whole thing.

Could also go strategic exit or PE route, though former tricky to put together and latter tough on valuation

Adam Neumann and his wife Rebekah Neumann have repeatedly shown massive unethical behavior (see the plethora of Bloomberg articles about the many examples) without integrity on many levels, which are a "extremely interesting set of self-dealing priorities"-at best.

One possible ramification is that the so called "window" is about to close and as such, most companies will have a bit of a higher bar to IPO. "Good" companies might raise money at worse terms than otherwise. Backpressure could mean a harder environment to raise capital all the way back to early rounds. Or this is just a one time shitty governance company and things will keep going. You know, past results yada yada.

I'm just curious about something ... do WeWork employees work in their co-working spaces? Or do they have their own office?

I recently interviewed with them. They have their own regularly leased office spaces like the rest of us.

There are full-remote companies too :)

Some of both. I regularly use WeWork coworking spaces, but have a regular office for only employees at my home base.

Incoming layoffs... between wework and uber the market will be "flooded" with talent.

I wonder if having wework on your resume is a good or bad thing.

How many engineers does WeWork actually employ though? From everything I've read on here they're not really a tech company. I can't imagine that, even if it all goes up in flames, there will be many SWEs looking for new jobs from this.

Uber is another story. They've got a sizeable engineering force.

I honestly think Uber has over-invested in engineering. The problem they're trying to solve isn't so complicated that it needs their current engineering force. They don't have to add new features at as rapid a pace as a true software-focused company like, say, Stripe.

From an external viewpoint stuff like building your own internal chat application seems like a "too many engineers with too little to do" kid of decision.


The chat program they’re referring to in the beginning was HipChat, which really was a steaming pile of crap. Uber was our largest user and they constantly brought the entire service down.

IDK if making their own was the right solution, but it was driven by necessity and not boredom I assure you.

The largest user of HipChat, really? Uber must have been something like 5k-15k employees at that time. I thought HipChat was used in F500, much larger than that.

Anyway, HipChat was bought and killed by Slack. They avoided a dying product by accident.

Yes. It seemed like every single one of their drivers was getting messages from one of their chat rooms in HipChat. It was like 25k people in a single room iirc. They seemed to be using it for notifications or something?

At any rate HipChat was already dead prior to the sale. Atlassian made a new program from scratch called Stride which was its own little awful can of worms.

Literally nothing in the first paragraph is true. For driver interaction, if it wasn't a push notification in the app then it would have been some sort of driver operations community tool like zendesk or similar.

> It was like 25k people in a single room iirc.

This never happened. I literally could not have happened. Uber ditched Hipchat when it was around 10k employees. The largest rooms I ever saw were outages or eng rooms with a few thousand, most with the room muted unless they needed something.

Theres really no point litigating this 4 years later (who cares) but it did happen. Uber had bots of some type, thousands of them in a single room. They were the largest user of our v1 API, which was an ancient shitty PHP base, and whatever they were doing put an enormous load on our backend during peak traffic periods and crippled the entire service.

Seeing this behavior was as easy as doing a join in mysql for user ids and rooms. I mean it's likely you wouldn't have seen it, or the room, or had knowledge of it unless you weren't directly involved with whatever it was?

It's actually quite relevant. I've worked in mega corporation, 50k employees and above. The inability of third party software to cope with the amount of users is a major recurring blocker for using off-the-shelf software and a big driver for developing things internally.

Most open-source and commercial software advertise that they can scale, but throw the first 500 or 5000 users and it's breaking apart.

With that context, I believe you. At the same time, I'm going to go out on a limb and guess that no one at Uber realized this either.

> It was like 25k people in a single room iirc.

Build it, and they will come ... and do something you hadn't planned for.

So why didn't they switch to Slack, Mattermost, etc rather than build their own?

They didn't build their own. The just forked Mattermost and skinned it a bit. Also invested/spent/donated $10k to have a say in Mattermost's roadmap.

Why not slack TL;DR - Uber, surprisingly, is cheap about off-the-shelf solutions. Cheaper than they are about balloons anyway.

Slack was trialed twice. Once in late 2015, and there were some bumps. Rather than stick with it, Uber ditched it citing it "couldn't handle their scale". Maybe that was true at the time, but I had a distinct impression that that's what the group in tech services at the time _wanted_ as well. Their lead on it was very much the type of person that would argue that there's no difference between hipchat and slack. If you asked the right person, you'd get the real answer: slack costs more than hipchat. Besides, the only person they had to convince was directors that didn't use chat anyway. All the executive leadership used Hangouts too. So they just needed to show the price graph comparison to justify, but as far as I know no qualitative productivity cost/savings/improvements measurement was made or factored into this.

Fast forward to the second try, late 2017. Supposedly when Dara came in he asked the same "why not Slack?" question. The UChat team was pretty intent on doubling down justifying their product, but a Slack pilot was done anyway. The pilot was a massive success by all accounts and basically everyone that made the switch was quite happy with it. Then tech services ended the pilot, sent out a survey, and were never heard from again. Would frequently give spiky answers when people asked for the results of the survey as well. Again - ask privately, and the answer you'll get is that Slack was just deemed as too expensive.

In both cases - tech services claimed that Slack was too expensive because of a price that was linearly extrapolated from their website. A lot of people didn't buy this, because that's just not really how enterprise contracts work. But tech services isn't accountable to UChat users, just the eng leadership they report up to.

In any case - everyone* else is still paying the productivity cost of using UChat/mattermost. It's more reliable than hipchat, sure. But is's miles away from being as useful as Slack. Especially the mobile apps - mattermost is a low quality, utilitarian react native app.

*Except ATG. ATG uses Slack because they actually don't fall under the CTO's jurisdiction. And executive leadership all still presumably use hangouts, because the UChat mobile apps are too crap.

When Uber trialed Slack in 2015, there were clear performance issues. Uber was aware of the potential issues ahead of time and slowly onboarded individual teams. As the onboarding went on, functionality like searching for an individual user clearly deteriorated.

I left Uber before the late 2017 Slack test, so I know nothing about it, but I think "It costs too much" is a very fair objection to using a chat app, especially for an unprofitable company that would have to pay for >30k seats.

At this point, I'm sure that Slack has resolved these performance issues for the sake of onboarding all companies that are Uber-sized or larger.

TL;DR - the team that evaluated whether Slack would be good for the company also had the most to lose if Slack was selected over their own product.

Someone needed a promotion.

Absolutely. They need a huge operations and driver support/sales team, but R&D not so much, outside of the self-driving money pit.

WeWork has done a significant amount of hiring in New York City for SWEs with very generous compensation, and honestly hasn't really had much for them to do.

Should have made them get their realtor licenses.

Any idea how much the actual salary for these positions was vs the stock component which may well be worth nothing?

Compared to Uber they're still small. But I recall an article not so long ago talking about the tracking WeWork had installed in their offices that gave them startling insights like "people tend to drink more coffee in the mornings". They've been just as guilty as any of hiring a bunch of developers just so they can call themselves a "tech company".

> that gave them startling insights like "people tend to drink more coffee in the mornings".

To play devil's advocate a bit, isn't this how science works? If you're not checking the obvious, you won't discover that people actually drink more coffee on the afternoon, or what have you.

Personally, I generally drink no more than one medium/large coffee all day, but sometimes in the morning, sometimes in the afternoon, and sometimes I spend all day drinking it and reheating it, and still have some left when I go home.

I guess I kind of wait until I feel particularly down and tired, but otherwise well hydrated, and that's when I want coffee, but not always at the same time of day.

At least 500 doing a quick search for 'software engineer' at 'wework'. Probably over 1000 for different job titles, etc.

I wonder how many of them are independent founders being facetious. They might be, literally, a software enegineer who is "at" wework.

That just seems mind boggling to me.

They're a tech company in the sense that their internal and client-facing operations are enabled by custom tech, and they have the scale that that stuff needs to be pretty mature. But I wouldn't necessarily assume a WeWork engineer is doing cutting-edge stuff (not that they're not; I just wouldn't assume it).

> They're a tech company in the sense that their internal and client-facing operations are enabled by custom tech...

If that's the definition of a tech company, then Citibank, United Airlines and Fedex are also tech companies.

Arguably, yes.

I don't think that's exclusive of the other types of company you can be.

Well in case of Uber their engineering side is quite strong. WeWork? Not saying their engineering is bad, but as far as I know there's nothing groundbreaking there besides a standard CRM & billing system? So I think as an engineer having Uber would be a very good signal your resume, WeWork would be just like any other company.

Flooded means I'll be able to find more than 3-4 qualified applicants per quarter? Good

I think those folks will still shoot for top companies, so if that’s you, most likely.

(psst, train your own, damnit)

So you mean flooded with "talent"?

The people at these companies actually handling individual contributor level execution are pretty talented. It's just that the plan/model they work under is not sustainable.

Cultural fit is so important these days and every one of them was a cultural fit at an extremely shady company. Even if they weren’t participating in the rampant excesses, they were still willing to go along with it.

We're talking about an office here, not a SS regiment.

We should start a google sheet of startup ideas where ppl from this and all pools can say “I have talent that would work for that” and others can say “I’d fund that”

Actually, we just need this in general...

The market is always flooded with "talent". The problem is finding good engineers which are around 1 in 100 resumes.

How do you know the other 99 are bad?

They didn't go to Stanford. /snark

On a side note, I was quite surprised/shocked to see Waymo's recent valuation. $105Bn!! That is after Morgan Stanley cut it by 40%. So it was 165 Billion dollars prior to that. 165!!

Now, Uber has it own share of quite extensive R&D on self driving tech. How can it be a $50 Bn market cap company today? With all the markets it is present in? For me, it looks like an opposite case of that of WeWork. Conspiracy against the company right in public market. It began with Travis getting all the heat for pretty trivial things, all the way till the IPO and now.

I honestly don't understand how a company which practically revolutionized public transport all over the world and created a business model which gave a bazillion uber-for-X companies be valued so less.

Uber's tech and business model is relatively easy to replicate. So much so, that in many of their markets they already have at least one close competitor, or near-perfect competitor if you count Lyft (who have a similarly good app to Uber in my estimation; many of the other substitutes seem to have a pretty acceptable app that is missing some of the polish of Uber).

This makes their business vulnerable to price competition and raises doubts about their ability to make large profits over any long period of time. At the moment, they are losing money, but their (still high, imo) valuation is based on the fact that they are the biggest player and this means they have 'mind share' / brand awareness. If they try to start making a profit e.g. by pricing above their costs and not giving so many subsidies / bonuses, then they are vulnerable to any of their numerous competitors stealing market share by undercutting / offering their own bonuses or subsidies. They are already in fierce competition in many markets so it doesn't seem that their brand is necessarily enough to give them a huge and defensible advantage.

By contrast, all reports I have read (e.g. https://www.ft.com/content/7c8e1d02-2ff2-11e9-8744-e7016697f... ) indicate that Waymo's self-driving tech is the best in the market by some margin, with Cruise a distant second (and everyone else, including Uber, way behind that). And Waymo's technology is fundamentally more complicated and difficult to copy than a taxi hailing app. You couldn't have multiple local competitors to Waymo popping up in each city around the world, in the same way you have with Uber. So their competitive advantage seems a lot more defensible, meaning that their potential to earn defensible profits from their technology seem stronger in the long run. Continuing on this idea of defensibility: whereas people are happy to try any new cab-hailing app that launches with a promotion, the decision on which self-driving tech to use is going to be a lot more strict, in that unless it really works, it's not viable. So having the best tech makes a BIG difference, unlike for ride sharing.

The car industry is worth $1tn+ per year. The market for ride sharing is probably one or two orders of magnitude smaller than that ($12bn by 2025 according to this: https://www.prnewswire.com/news-releases/ride-sharing-market... , although Uber's revenues are already $11bn so I question the accuracy of this). Uber is a loss-making and non-unique ride sharing company with so-far unfilled aspirations to develop market-ready self-driving tech. Waymo is a self-driving tech company with apparently real potential to disrupt the trillion-dollar car industry with their unique technology.

Finally, Waymo's valuation is only on paper, whereas Uber's is in a public market. As WeWork (and Uber) have recently demonstrated, private valuations may not hold in private markets. However, given the reasons above, I actually think that the Waymo valuation might be more reasonable than the Uber one.

Wow. I just looked at Cruise's numbers. 19Bn. That explains a lot. I guess I've been way out of touch with happenings of self driving world. Thank you for the details.

Here is the “how I built this” for ‘we work’

Listen to this, to compare to the current state of WeWork


Oh nice find! This is going to be an interesting listen.

Sounds like from the intro blurb that this was potentially recorded in June 2017 and this is a replay of that episode Sep 2 2018.

What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens? I have got to think that Soft Bank knew/knows the valuation was off. The fact that they pushed on means they either intended to try and get away with it/take the money and run as I cant believe incompetence is the reason here. How did this get so far along???

As for Adam N, I have to think some part of him knew that it was a bullshit valuation and all the hand-wavy "we are a tech company that also happens to do real estate" doesn't pass the smell test to me. He has personally enriched himself quite a bit so even if the whole thing falls apart he will be ok. I don't know if there is a bubble in SV or not, but it seems that the last couple of really huge unicorn companies have all been based on BS(We Work), Fraud(Theranos), and untenable business models (Uber). I'm far removed from that whole scene so maybe I'm showing my ignorance by stating this. I am, however, very curious to hear about any startup unicorns that are profitable or at least have a clear roadmap to profitability and not based on a business model that will be outlawed in a few years.

I think there's a class of narcissist that doesn't really have knowledge and beliefs as much as they have desires and things to say that get them closer to their desires.

So in some sense I think asking what Adam Neumann and Elizabeth Holmes really believe is a category error. Knowing the truth makes lying really hard. If you spend a lot of time figuring out what's true, that builds mental habits that make lying feel bad. But if mostly ignore "true", then it's much easier to focus only on what Nixon's press secretary called the "operative statement" [1]. For narcissist CEOs, I think they treat the objective truth like a child sometimes treats a scary closet: if they never look at it or think about it, it's not a problem.

[1] https://www.nytimes.com/2003/02/16/weekinreview/the-nation-t...

I think the OP's question really involves the CFO or any accountants involved in this case. I would expect the CEO to be driven more by vision than by cold, hard facts.

> I would expect the CEO to be driven more by vision than by cold, hard facts.

If the facts don't align with your vision, figure out a different vision.

If one is cushioned by unlimited amount of VC money, then it can take a while to realize that the vision was untenable.

I don't know the story with WeWork's CFO. But the book "Super Pumped" documents how Kalanick used his dominance to keep from having a CFO at all for long periods.

A good CEO who is very strong on vision will build a team that keeps him in check by having balancing strengths. But narcissists don't like balance. So they build teams that let them do what they want. And when they hire somebody who isn't an enabler, that person soon ends up gone one way or another. And it's not just CEOs. You can find a good example of this in recent US politics.

I'm guessing that the issues have something to do with the management structure.

If your CEO is delusional, it's usually possible to reign him or her in... From what I understand, Neumann had some special votes that basically allowed him to fire the board at any point.

I imagine that anyone with a pragmatic mindset willing to ask "wait, but the numbers are..." was pushed out of the picture either explicitly or implicitly by the power imbalance.

Holy crap: You're right.


Thanks for the tip! I didn't realize that.

> I would expect the CEO to be driven more by vision than by cold, hard facts.

Vision is fine but cold, hard facts are essential too. If you let your vision get the better of you and you ignore the facts then you're on the path to self destruction.

I'm guessing there's a mix of "it's hard to tell bad news" and "it's hard to hear bad news".

If those two factors are strong (say, cultural reasons), a lot of red flags can fall by the wayside.

You mean the CFO who took over the helm of the company?

I think there's a class of narcissist that doesn't really have knowledge and beliefs as much as they have desires and things to say that get them closer to their desires.

This problem is fed by the fact that they surround themselves with yes men, who only benefit by feeding the beast, until the beast eats itself.

It's called Michael Jackson Syndrome.

The show Silicon Valley had a great protrayal what surrounding yourself with yes-men can do to a person

The best part: https://www.youtube.com/watch?v=XAeEpbtHDPw

Wow, that's really good. So nicely performed. Thanks for sharing that.


Everyone has their own peculiar mental model of reality, sometimes more optimistic, sometimes more pessimistic, almost always with strange boundaries on the thinkable universe.

I estimate this is how the majority of bad financial situations happen, whether untenable mortgages, huge credit card bills, excessive student debt, etc.

People are usually not fundamentally stupid or poor decision makers, but they do usually ignore uncomfortable thoughts.

It's easy for that to happen to one person; it's more surprising when it happens to dozens of people.

“There are three ways to make a living in this business: be first, be smarter, or cheat.“

-Margin Call

SV ran out of the first two because they are much harder. We are left with the dying gasps of companies trying the third way.

> or cheat

This is called "Being disruptive." Basically, just ignore the law, but make sure you get enough workers and customers that love you so that they turn against politics when you break the law.

This gets called "being disruptive" but it's possible to be disruptive without ignoring the law. For example see SpaceX: successful disruption of the launch industry, without breaking any laws.

The issue is that not every industry is so inefficient as to be possible to legally disrupt profitably, so people try to do an end-run around the law.

The CEO of SpaceX did commit a couple crimes in the same podcast.

Uber's autonomous car fatally collided with a woman, raising questions of negligence and liability in automation.

Uber acquired some of Alphabet/Waymo's trade secrets when they aqui-hired one of their former engineers who apparently kept a bunch of Waymo's IP he worked on. That engineer himself is now facing a federal indictment, and Uber and Waymo have settled.

E-scooters are facilitating a number of city-specific crimes (it's usually illegal to operate a vehicle, bike, or skate on a city sidewalk and the e-scooters do not provide helmets but neither do the riders). To say nothing of the legally dubious use of public property to deploy them.

Move fast and break stuff indeed.

I guess I'm not sure what Musk smoking pot on Joe Rogan has to do with SpaceX's unquestionable success in a market dominated practically since its inception by pork-armored incumbents.

If anything, I'd expect it to work against them.

What was/were the other crime(s)?

What crimes did the CEO of Spacex commit on the "podcast"?

Riding without a helmet and similar stuff is likely just a contravention in most places.

Are you talking about the Joe Rogan podcast? It's recorded/filmed from California, where marijuana is legal recreationaly, and had been at the time of the original broadcast.

"Disruption" gets a lot of abuse.

As it was originally proliferated in reference to tech ventures, it referred to a very specific pattern highlighted by Clay Christensen's writings out of HBS.

In classical "disruption," a product or technology that is notionally "worse," but as a result greatly cheaper or more easily distributed, takes over a market from notionally "better" but more expensive legacy approach. Often includes de-skilling of the use case too.

It's sort of like guerilla warfare in that way.

The successful recent IPOs people are pointing to in this comment section -- like Zoom, Datadog, and Cloudflare -- all tend to have a version of this classical disruption if you try and see it.

I say this not for mere pedantry but because taking "disruptive" to mean "F---ing things up (rules, laws, etc.)" dilutes a useful concept in thinking about technology adoption approaches.

>> when you break the law.

This is more an inditement of modern society, highlighting how much freedom we have lost

When an app like uber is "illegal" one can not call that society free in the least bit.

The fact that most things are by default a violation of some law or regulation is the #1 reason we are no longer innovating as fast as we used to.

Some might see this as a good thing, I do not

You seriously have a twisted and static view of what society should be.

You don't ask the question, why should an app like Uber be illegal? Why should taxi medallion holders have a monopoly on on-demand transportation in a city? To make hedgefunds rich?

Transportation across cities in North America sucked before Uber. You are completely delusional if you think pre-Uber and pre-Lyft cities were some kind of transportation mecca. It was horrible. I used to wait in the rain at UCSF for 30 - 45 minutes on the curb waiting and hoping for a taxi and finally just pitifully walking home getting drenched.

I love having a ride-hailing app and not having to waste money on a car or motorcycle.

I really think people that love static bureaucratic states should go live in France or some communist nation.

Uber and Lyft can't start up in a city if they have to wait for all the politicians and bureaucrats to give them an okay, when these people are bought and sold by unions and hedgefunds. Only delusional people think there's a path to disrupt that kind of logjam by waiting in line like a "good boy".

"you don't ask the question, why should an app like Uber be illegal? Why should taxi medallion holders have a monopoly on on-demand transportation in a city? To make hedgefunds rich?"

Medallions are just a mechanism for limiting the number of cabs to what the street network can support; isn't that obviously necessary?

On the other hand, it appears from what I read that Uber may have actually been dealing with the problem by charging surge rates and then keeping most of it, thereby reducing demand without increasing supply which is just what is needed. But that outrages everybody, so the argument for having the government ration things is that it's more socially acceptable - which is a valid reason!

The apps of Uber and Lyft seem to me like valuable innovations in that they allow you to get information on your ride, predict the cost, and pay with a credit card which are great improvements on regular cabs.

But cheering unregulated cabs makes no sense to me - the streets in a given city seem obviously a commons that needs regulation. Uber and Lyft are forms of regulation, so really, people only debate the details. Freedom vs. non-freedom is a caricature.

> Basically, just ignore the law, but make sure you get enough workers and customers that love you so that they turn against politics when you break the law.

Unfortunately, this seems to be the only way that's not outright massive violence such as Hongkong or France to get politicians to do their goddamn job. Taxi services have had a really massive lobby power in the US.

Is Uber in it for the social change?

If not then this is just a silly point. Some of the regulations were unreasonable and the result of corruption - but Uber also skirted insurance and background check related laws at various times.

> Is Uber in it for the social change?

The end result is a safer, better-functioning street transit system (in New York at least). I don't care if they were in it for social change or for the money. They delivered results, both themselves and by kicking taxis up a notch.

(Many activists aren't in it for altruistic purposes. That doesn't make their work less meaningful.)

Exactly. Some of the regulations were due to corruption. But others we reasonable ways to create a situation fair to workers. Regulating the number of cabs allowed drivers to have some confident that they'd earn a reasonable wage. And the medallion system ended up being basically an investment/retirement plan for a lot of cab drivers.

Yes, the rise of the Internet meant it was time to change how we did cab dispatch. And it would have been great to see what else we could improve, including getting the cab companies to be less oligopolistic. But Uber was clearly after a monopoly [1] so Kalanick could jack rates up enough to justify the billions of investment they took. But national monopolies are way more harmful to both workers and customers than local, strongly regulated oligopolies. Uber was ultimately trying to make things worse, but with them skimming the monopoly rents.

[1] https://www.amazon.com/Super-Pumped-Battle-Mike-Isaac/dp/039...

Neither is the taxi lobby out there for the social change.

It's better to have two parties competing for user's money than just one party fixing the price and service quality.

Sorry, to clarify... the comment above was:

> Unfortunately, this seems to be the only way that's not outright massive violence such as Hongkong or France to get politicians to do their goddamn job. Taxi services have had a really massive lobby power in the US.

This was strongly implying that Uber was causing political change. I don't disagree that the competition has been healthy or that the taxi companies were bad actors - or even that the regulations were legitimately onerous sometimes... I object to the statement that "disruption = positive social change".

I think that Uber's case is particularly weak because, while skirting regulation may have gotten accolades, the company itself was toxic to work at and brought in a bevy of sexual harassment charges.

consumers vote with their wallet, at the of the day.

by and large consumers don't care if the company is for social change or not.

it's difficult for a company to succeed in getting customers to pay based purely on social change intentions. That's how a market works

Oh man, what a fantastic film. It's a been a while since I saw Margin Call, but I still feel like it's one of the films that best captured the 2008 financial crisis. Jeremy Irons' portrayal of a Goldman CEO-like character — I think he's the one who delivers the line you quoted — remains probably the most convincing portrayal of that type of person I can remember.

The wonderful board room scene:


I was working on a credit trading desk during the beginning of the crisis. At least in my experience, Margin Call is definitely the most accurate movie about high finance I've ever seen.

Ah, yes! Jeremy Irons in that board room... wow!

This is a great comment and a great point, but I'm not sure I fully agree with your conclusion. There are still plenty of great companies that are doing the first two, but there certainly is no shortage of the third way. What would be fascinating to me is to categorize, oh, the top N (where N is 5000 or so) of private, growth tech companies that have taken significant recent rounds of VC financing and see how the investment volume skews along these three categories.

Whereas in Margin Call, the message was 'I don't cheat and although I like to think we have some pretty smart people in this building it sure is a hell of a lot easier to just be first'.

This needs to be a lot higher.

How is this comment relevant to WeWork? How has it "cheated"? It definitely is early/first and very smart.

> How is this comment relevant to WeWork? How has it "cheated"?

They borrowed short, lent long and then pretended it was as sustainable business. To their credit, they abundantly disclosed their shenanigans. (I haven't seen any evidence suggesting investors can reasonably claim fraud.) But they were playing fast and loose with basic economics.

At its core, sure, WeWork could have been a business. Its thesis, that office space should be treated as a service versus capital expense, is plausible. But there was so much garbage--the party-at-work hypothesis, thoughtless cross-selling, nepotism, consciousness nonsense, self-dealing, et cetera--that the value got diluted while the price was pumped.

Furthermore, and this to me is the most damning indictment: where's the moat?

SoftBank and Masayoshi Son's hypothesis is:

1. Find a market which can be captured by a business with access to massive capital

2. Provide massive capital

3. Extract profits once a monopoly has been established

WeWork is a terrible example of this, because in no way does scale give them unique advantages. And furthermore, "scale" in this context means "scale in the office property market" -- that's a pretty big pool to expect to overflow.

I can't quantify it - but WeWork's scale does give them a bit of an advantage.

I run a small digital agency, as a WeWork member when I'm on the road being able to know I can find and book space for meetings or work is invaluable. We've also spun up offices in new cities (Mexico City for us) easily and quickly with a confidence in the level of service and support that we're getting.

There is a premium for this and we've moved on from those offices sometimes as we settle in. But its not a non-existent advantage.

> WeWork's scale does give them a bit of an advantage

Within the original thesis per se it gave them a possible demand-side advantage. (Commercial real estate is too big for any meaningful sell-side advantages.)

Being able to say "let's open a branch in Singapore and see how it goes for 6 months" with a few clicks is quite awesome. If I trusted it to be around in a few years, it would change how I think about deploying people.

To be able to deliver that value prop, you need seats available in Singapore. (And New York and London and Dubai.) Hence a potential scaling advantage.

> Being able to say "let's open a branch in Singapore and see how it goes for 6 months" with a few clicks is quite awesome.

I'd have thought that for most businesses, the two big obstacles for doing this are a) getting skilled people to suddenly move to Singapore at your will, and b) getting the Singapore office well integrated with the rest of the company.

Compared to those two, setting up an office lease is about as hard as tying your shoelaces.

> Compared to those two, setting up an office lease is about as hard as tying your shoelaces

This has not been my experience. Given how localized real estate markets are, they haven't been subjected to efficiency-driving global competition. The result is every market has hidden oddities. Little details that are a nuisance if you know about them but a disaster if you bumble through the process.

For long-term commitments to a market, sure, it makes sense to own your plot. But for short-term assignments? Toes in the water? Being able to spin up an office with flown-in staff committed to for the short-term, to develop leads and/or find those skilled locals to hire, is a tactical advantage which doesn't presently exist.

Same for Uber.

I was going to include Uber, but there's an argument that creating a realtime, massively-scaled fare-setting infrastructure is a moat.

Uber's product isn't rides. Uber's product is being the market-maker between riders and drivers.

Right, but Lyft has the same product. Given enough time, we might see other ride-share companies succeed with the same (yet inferior) tech servicing specific cities.

Austin has a non-profit rideshare business that matches riders and drivers.


> They borrowed short, lent long and then pretended it was as sustainable business.

You've just described almost every company in the financial sector.

I think that they got rid of the rubber ruler, and many of the other asymmetrical bargaining issues that consumers of space faced against large landlords.

They do have some scale, and there's always the idea that you can move to a different office or reconfigure your space quickly. This has real value. Just not $50 billion worth.

There's also the Softbank buys of equity at consistently higher and higher valuations that they themselves were creating.

Matt Stoller wrote a great post about it:


"Generally speaking, Softbank’s model is to manipulate private capital markets as a way of drowning out competitors with cash. For instance, there were several ‘rounds’ of WeWork investment where Softbank was buying more shares at higher valuations. WeWork ostensibly became more valuable because Son said it was more valuable, and bought shares for higher prices. And since there was no public market for these shares, the pricing of the shares was totally arbitrary. WeWork then used this cash to underprice competitors in the co-working space market, hoping to be able to profit later once it had a strong market position in real estate subletting or ancillary businesses.

Engaging in such a strategy used to be illegal, and was known as predatory pricing. There are laws, like Robinson-Patman and the Clayton Act, which, if read properly and enforced, prohibit such conduct. The reason is very basic to capitalism. Capitalism works because companies that thrive take a bunch of inputs and create a product that is more valuable than the sum of its parts. That creates additional value, and in such a model companies have to compete by making better goods and services.

What predatory pricing does is to enable competition purely based on access to capital. Someone like Neumann, and Son’s entire model with his Vision Fund, is to take inputs, combine them into products worth less than their cost, and plug up the deficit through the capital markets in hopes of acquiring market power later or of just self-dealing so the losses are placed onto someone else."

So not really any "cheating", right?

> So not really any "cheating", right?

No evidence of fraud, no. But cheating is not necessarily fraud because not all rules are codified as law. There is cleverly devious cheating, like a lot of what Gates and Jobs did in the 80s. That's cheating, but it's clever and it's cute so we think of it positively.

Then there's cheating as in pretending to defy the laws of economics, which is what WeWork did. They were trying to scale out of a business that loses money on the marginal dollar. Nothing illegal about that. But together with Masa Son's spigot of Saudi cash and Neumann's rampant self dealing, I'd go ahead and qualify it as cheating.


WeWork's revenues already cover its rent costs even at just 70% occupancy.

I still don't see this "cheating" you speak of.

Early/first in what exactly?

Massive paradigm shift in office leasing.

Please elaborate in what was innovative here, their technical infrastructure seems to be nothing to write home about and well appointed office leasing has been around for quite some time.

The social focus is indeed different but I wouldn't call that alone a massive paradigm shift.

The friction eliminated and expanded flexibility from normal office leasing was quite pronounced. Add to that a huge block of delighted customers. Not sure how you are defining innovation but there is clearly a lot going on there.

Honestly, it wasn't even smart. And the thing it was first at was social focused co-working spaces, there have been more bare bones offerings for co-working spaces for a long time, WeWork just tried to appeal to that SV niche of people that'd like the folks they're subletting with to be the kind they'd like to share a beer with.

I think the pure tech plays in 2019 are doing just fine. Zoom, Cloudflare, and Datadog all look like good companies. They're just not over-hyped and overinflated.

The smoke and mirrors plays need mass hype/media blitz to "succeed." The companies that actually add value only need to market to the audiences for which they're economically relevant.

Spot on. Many of these companies have devolved into little more than pump-and-dump schemes for executive compensation. All that’s undergirding them are their BS “disruption” and PR narratives, gobbled up and regurgitated by the media.

This sounds slightly like a no true Scotsman arguement to me. I'm sure you could find some none pure tech plays that are successful.

Plus companies like Uber don't exactly own assets, its more tech company than not.

For all the promise of the Web, people live in the real world, that's where the money is to be made, mega tech companies are necessarily going to live at the interface.

The irony is that essentially all of SoftBank's playbook is ripped from Buffett.

Except Buffett did it with non-tech, capital-heavy companies. Where it arguably works a lot more reliably.

"SoftBank's playbook is ripped from Buffett"

How so?

Buffett's hypothesis (as I understand it) boiled down to (1) find successful businesses that are capital-starved, (2) pair them with businesses which naturally generate float (e.g. insurance), under a corporate umbrella, (3) invest the float in those businesses and thereby beat market returns (by only selecting quality businesses, and having the ability to provide mentorship / experienced leadership).

Ok fair enough, that's more late Buffett.

I don't think he invests so much in capital starved businesses, more he just uses the cash generated by eg insurance to invest in high quality businesses. I suppose the difference here is the high quality part. Wework doesn't seem to have much of a moat, have particularly good governance, or have much of a track record of anything.

What does 'generate float' mean as a financial term?

It basically means "hold cash", so visa, stripe, insurance companies etc. all get cash from customers, hold it for a period of time, and distribute it to customers.

Holding it for a period of time is "generating float." For many of these companies the float is a large multiple of the profit.

Err, this Zoom? The reinstalls itself Zoom?


Cloudflare still relies on the "massive amount of free users creating buzz vs. a tiny fraction of paid users". Although not an obvious scam, they may very well go the Groupon way.

This is a classic "bottoms-up" model that is quite viable (eg Dropbox, Slack, Zoom, Elastic, MongoDB). Not sure why anyone would call it a scam. In fact, I would be wary of software companies without a base of free users, as that means the company needs to keep spending a lot of its revenue on sales and marketing.

Not necessarily. You don't need marketing and sales people if you have a free-tier product that markets itself. Michael Stonebraker, the guy who took Postgres from academia and into the real world, talks about how he applies this with VoltDB


Only on a tangent - it's an otherwise fascinating episode from a database wizard.

It seems like you are agreeing with me? :)

Oh.. I guess I do! Waiter, more coffee...

HN: Violent, informed agreement

>This is a classic "bottoms-up" model that is quite viable (eg Dropbox, Slack, Zoom, Elastic, MongoDB). None of which are profitable.

>In fact, I would be wary of software companies without a base of free users, as that means the company needs to keep spending a lot of its revenue on sales and marketing. I am much more wary of companies that keep or burning cash for years and years with the only excuse that "Amazon did that as well".

> I am much more wary of companies that keep or burning cash for years and years with the only excuse that "Amazon did that as well".

I think about this a little differently. Spending money on free users is actually a much more efficient "marketing expense" than classic outbound strategies (e.g., online advertising).

Yes, but if your marketing expenses systematically exceed the revenue from the paid customers, your business isn't viable.

> Dropbox, slack

Are these good examples, though? Dropbox is down ~35% since IPOing, and Slack is down almost 50%. This certainly suggests the market thinks they were both overvalued when they IPO'd.

I think you are confusing the opening price with an IPO price.

Slack went public at $26, it is at $23.50 today. It is less than 10% less than the IPO price.

Yes, but this is at a time when the overall market is close to an all-time high.

What happens when the inevitable correction comes? The Fed will run out of monetary tricks, eventually.

This is arguably a "things might go wrong in the future" argument, which has no real substance as it can be made about literally anything. To really say something, you'd need to provide some more substance about why you think the current investors in Dropbox and Slack are less informed about economic conditions than investors in the rest of the market.

> The Fed will run out of monetary tricks, eventually.

No, it won't.

It might run into a monetary-policy resistant situation (e.g., stagflation), but the Fed has infinite range of monetary policy tricks available (literally, there's no floor to rates now that the Fed has taken notice of the use of negative rates elsewhere.)

That wasn't Groupon's problem. Cloudflare and Groupon have virtually nothing in common.

What relevance does Groupon have? The two companies aren’t related in any major way. Def not with freemium model or revenue model.

Groupon is a perfect example of a company that became irrelevant before reaching profitability. Most tech valuations are based on the assumption that the company's product will stay hot forever, giving enough time to cut expenses and turn black. While in reality, the crowd of early adopters that gave you the hockey stick growth, quickly moves on to something else once they get bored and then it turns out your market is orders of magnitude smaller than your investors expected.

I don't see a CDN as something that customers get bored of in the same way as coupons for random services.

When a consumer realizes they are getting 50% off of a service or product they didn't want or need in the first place, they stop signing up for deals. Also, once the businesses realize these customers don't provide repeat business and they are devaluing their product for consumers who do want it, they stop offering the discounts. Finally, it's trivial to sign up for each of their competitors and play them off of each other.

When does a Cloudflare customer stop needing secure, performant content delivery, and how easy is it to switch to a competitor?

Fred W just wrote about this, with a fairly moderate perspective. Reality check, rather than reality crashing down.

I think wework just has too many things wrong with it. (1) Recent IPOs (eg uber), weren't great. (2) Financial performance from uber and other recent IPOs isn't great. (3) Theranos is old-ish news by now, but it's a good example of what public investors are looking out for: bubble excesses. Public markets atm are moneyed, but skeptical. Worried about this new, enormous private equity market pumping and dumping on them.

Once you add in the (4) difficult-to-understand ownership structure (with dubious scent), (5) complex leveraging/debt/liabilities and (6) complicated entanglement in the real estate market movements.....

It just adds up to too much, IMO. Every one of those 6 "problems" could make wework look like a "you should have known better" investment, CEO scandals cultural weirdness aside.

^IMO it's more about monopolies (thiel's definition) than software. Selling software doesn't guarantee "software margins" long-term. What uber, wework, etc. lack is monopoly mechanisms: lock-in or network effects. Even though uber is a market/network, the market can happily bear more than one ride hailing app. That means margin-killing price competition.

Personally, I'm delighted to see the unicorn bubble popping. For a long time I've felt like the "Uber for X" wave of companies soaked up a lot of investment that should have gone to people building reasonable businesses. It seemed to me that investors were looking for the next Google, the next Facebook. Ignoring that when Google and Facebook started out, they were much more focused and modest than the high-drama unicorns hyping up how they were going to dominate the planet. (And also ignoring that both were profitable at IPO.)

There are in fact a few unicorns with recurring revenue that is close to their operational costs. You just don't read about them on the news unlike the trainwrecks. Good news leads to no news.

What are those? Snowflake is one I think

Cloudflare? Not sure whether they are profitable at the moment, but their product seems substantial.

After a while living in an echo chamber of yes-men, you start to believe your own bullshit.

Also, valuations are so nebulous and ungrounded in reality at this point. Who is to say what anything is worth. You put something out there and someone is willing to pay billions for it, who are you to say that isn't the right value. There are a lot of problems to pin on Adam, I don't think the valuation is one of them.

The valuation is from Softbank consistently buying rounds of equity at higher and higher valuations that they themselves were creating.

Softbank bought in, so this is more valuable, so Softbank will buy in again at a higher valuation, so this is more valuable, so Softbank will buy in again at a higher valuation; and round and round it went until we hit ~$40B

Banks don't win IPO mandates by quoting the board of directors a valuation that's lower than the last round.

Both Goldman and Morgan Stanley gave the BoD much higher valuation numbers, which made members believe the stock price was going to go up... and when your options are going up in price, it's easiest not to rock the boat, and ignore misdeeds or conflicts.

You only realize who has been swimming in the ocean without trunks when the tide goes out ;)

As much as we'd like to draw a sharp line between "Real Businesses" and "Frauds," so much of it actually comes down to whether you can match your ambitions to the amount of money you're likely to raise.

Think about the construction of the Panama Canal. The first few attempts were total fails, because canal-building technology wasn't as advanced as people thought, and eventually the funders got tired of what they perceived as "throwing good money after bad."

Eventually the canal did get built. Technology improved and the winning venture had enough funding to make it happen.

As a thought experiment, if We/Neumann/Softbank had enough money to buy or lease all the great real estate in the world, and to educate all the population in We schools, so that they needed/wanted We offices when they grew up, it could have ruled the world. Putting it that bluntly makes it sound silly, which is probably the right way to view the Neumann era in retrospect.

But when We's future liquidity seemed almost endless, it was possible to dream big dreams. What got them undone is the reality that capital markets do not stay giddy forever. At the top of every cycle, there's always someone who ginned up an enormous flop -- losing their funding partway through for a dream that would not work without more capital.

It's amazing how they could even delude themselves into thinking they're a tech company.

The only "tech" part of WeWork is their app and related community. Which is a ghost town used mostly by businesses to spam their services to uninterested members.

I was reading this blog post by Fred Wilson last night and I think this unlocked a key insight for me[1]. WeWork (Uber, Peloton, Lyft, AirBnB, etc...) are not software companies. None of these businesses sell software, they use software to enable them to sell their end product: Commercial Real Estate (Rides/Freight/Food/Bikes, Exercise Bikes/Treadmills, Rides/Bikes, Home Rentals, etc...).

The mis-calculation that I made was that I thought using software to enhance a legacy business was something that public market investors would apply a high valuation multiple to. What it looks like is happening is that public market investors are comparing these companies to traditional industry companies they already know.

The interesting note is that Amazon, Google and Facebook all stumbled out of the gate, but they were able to pivot to selling software. Amazon with AWS, Google with Search Ads, and Facebook with Mobile Ads. I think this is the pivot that's going to have to happen for the latest round of companies that aren't doing so hot right now to start throwing off cash and increasing their valuations.

[1] - https://avc.com/2019/09/the-great-public-market-reckoning/

>What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens?

Wall St. et al, didn't care about anything but off loading this POS onto Investors and then taking their money and running.

That's how it works. Thank goodness it rolled over and now the race to zero. Couldn't have happened to a bunch of nicer guys.

> but it seems that the last couple of really huge unicorn companies have all been based on BS(We Work), Fraud(Theranos), and untenable business models (Uber).

What I don't understand, and this is an honest question for this crowd: aren't these viable businesses, in and of themselves? Maybe this is a stupid question. This is probably what allowed them to run so far on what they actually were, but here's the question anyway.

For instance, WeWork seems to be an AWS-for-office-space. Is that not a useful business? If I own a contract for space that can be slotted into anywhere in the world I might want to sit, is that not a useful thing to pay for? One might argue that, if I had the resources to truly care about a world-wide smorgasbord of office spaces to choose from at any given time, I'd have enough resources to lease my own building(s). But it still seems like something the market needs. Did it have to be a one-hundred-billionaire-minting business to rent space into that kind of market?

Theranos seems like a useful thing, and there seems to be an opening in the market for it. Are the cost mechanics of the available technology and the opportunity not aligned? Is there no way to run an economically-viable company providing a blood tester unit with a more-limited set of tests? Did it have to be a unicorn, end-all-be-all, existing-testing-company-destroyer to make any money?

You see where I'm going now. Does Uber need to suck all the money into their pockets to fund their self-driving car efforts (or wherever all this money is going) in order for any of it to work? Surely there's a model of ride sharing through an app that doesn't have to suck, pay their drivers well, and is a sustainable business, right? Does it really have to be the "Uber-of-cars," so to speak, in order to exist at all?

Is the only game left in the Valley, now, unicorns? All others need not apply?

> For instance, WeWork seems to be an AWS-for-office-space. Is that not a useful business? If I own a contract for space that can be slotted into anywhere in the world I might want to sit, is that not a useful thing to pay for? One might argue that, if I had the resources to truly care about a world-wide smorgasbord of office spaces to choose from at any given time, I'd have enough resources to lease my own building(s). But it still seems like something the market needs. Did it have to be a one-hundred-billionaire-minting business to rent space into that kind of market?

I think about it from the other direction. WeWork leases office space and parcels it out to temporary tenants. But, what's to stop the management companies that already own the office space to do the same thing? Why pay a middle man? WeWork would take the risk and prove the model effective in a particular area, then their own suppliers could undercut them.

Theranos was trying to sell technology that doesn't exist.

> WeWork leases office space and parcels it out to temporary tenants. But, what's to stop the management companies that already own the office space to do the same thing? Why pay a middle man?

WeWork's business model kind of reminds me of MoviePass in that they are very dependent on vendors who could also be their competitors. And there's the risk that the economy slows down and people cancel their memberships but they still have long term leases to pay...

Most management companies are local. One can kind of see how WeWork would work by being bigger than all management companies and having a global presence.

Assuming their kind of risk in a robust economy is lucrative. But I fail to see how WeWork could ever weather a recession, US or global.

Office brokerage is super-inefficient. If you are looking for up to a few thousand square feet, the current search process is terrible and slow. WeWork commoditizes this aspect, and has a reputation for being an expensive, if fair landlord.

The problem with WeWork is that it's business is fundamentally rubbish.

It has long leases for buildings, and short leases for customer, so it's basically failure scenario number 1 for an economic downturn.

And yes, if you act as a startup, and hire engineers assuming you are startup, you better be a unicorn.

Your first paragraph reminds me of the "Go Fever" phenomenon associated with the Space Shuttle Challenger disaster[1]. [1] https://en.wikipedia.org/wiki/Go_fever

Why? Because bankers.

This was going to be one of the largest IPOs of all time. This means a huge amount of fees for bankers. In addition, WeWork is an opportunity for those bankers to also win business putting together the various kinds of debt WeWork throws off.

When bankers want a deal that will generate a huge amount of fees for them, they're not going to tell a potential client they won't get the valuation they want or that he needs curb his spending habits and reduce his control. That's a great way to lose a deal.

No, they tell Adam he's a genius, We Company is revolutionary, and once the company is public he should buy a second jet just in case the first one is grounded because a mishap like a cereal box of weed being found on it.

People complain about an "IPO shortage" and the problem of VCs capturing all of the pre-IPO growth.

But if there's a silver lining here, it's that VCs can pull this shit until the cows come home without causing the same systemic problems that led to the first dot-com crash. They tend to have a small handful of wealthy LPs, and the financial system doesn't really give a shit if they get wiped out - grandma's pension may not be growing fast enough, but it's not going to evaporate.

In this case, SoftBank and the Saudis run away with their tail tucked, and everyone else just looks at them like they were idiots and moves on.

> What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens

One of the root issues is that way way too much capital has shifted out of the public markets into private equity. Public markets are significantly more regulated, transparent, and liquid. Public markets are almost always more favorable for regular investors. Whereas privately funded companies tend to be structured to primarily benefit connected insiders.

WeWork's ridiculous valuation is a prime example. Private companies can easily manipulate their valuation, by only making sure to sell shares at pre-arranged prices so that they never down round. In contrast public companies shares are traded thousands of times a day. If investors stop believing in a valuation that's reflected in the stock price in microseconds.

The industry has built up this cult around "unicorns"- multi-billion tech companies that never go public. As if that's a desirable thing. It's mostly been empowered by a mythical cult of the brilliant founder. Said founder-CEO need be unchained from any accountability whatsoever, lest trivialities like quarterly earnings reports or short-sellers constrain his creative vision.

And of course the private equity firms behind the VC capital are more than happy with this arrangement. Again, it's significantly easier to manipulate the valuation of private companies than public ones. Keeping your ventures private forever enables the fund sponsors to massage the return stream on their portfolios, which makes their risk-adjusted performance look far more impressive than it actually is.

On a spectrum we have Ponzi schemes, which never offer a product. We have MLMs which are legal Ponzi because there is an exchange of goods or services, but operate on social networks (original non internet meaning). Then we have franchise schemes where the wholesaling aspect is often less lucrative than the real estate angle (see also Sears, McDonald’s), and so despite offering goods they are de facto profitable real estate endeavors. Then we have manufacturers who actually work the way we believe these other organizations work, by providing goods to retailers who take over some of the salesmanship, logistics and risk for a slice of the profits.

Then we have WeWork. Which looks like a technical savvy landlord but under it all is subletting from one of the founders. Which I suppose would make this closest in structure to an IPO for a franchisee? That’s the sort of investment opportunity a bank would be into but makes no sense on the NYSE.

WeWork needs to get to a point where some to half of its properties were acquired under their own steam instead of through the founders. Otherwise it’s just a sucker’s bet.

Everyone has a vested interest in continuing to believe that which they already believe. To change your opinion requires acknowledging that your old opinion, the one you perhaps espoused publicly and persuaded others into believing, was wrong. It's embarrassing. So most people tend to put that reckoning off until the last possible moment, even in defiance of hard evidence in some cases.

Then do other people now trust you less because you were wrong, or do they trust you more because you correct yourself?

Welp to borrow from gool ol' Neil Peart, those who wish to be would probably pick the latter; but those who wish to seem would put more emphasis on the former!

> I have to think some part of him knew that it was a bullshit valuation

After reading some of the stories, I'm minded to believe maybe he didn't...

It's possible Neumann was some sort of idealistic hippie who believed his own BS and got in over his head.

But I have trouble squaring that with extremely hard-nosed moves like cashing out $700 million, and getting loans from the company to buy buildings to lease back to the company.

Hippies are at least as greedy as anyone else.

When you #define hippie whoever you want it to mean then I guess anyone is as greedy as anyone else.

> I have got to think that Soft Bank knew/knows the valuation was off.

For private rounds valuation is part of the equation, but liquidation preferences and ratchets are likely more important. As the famous finance saying goes "You set the price - I set the terms, you set the terms - I set the price".

SoftBank has negotiated downside protection. Everything from there is just gravy on top.

The press never seems to discriminate between preferred and simple shares, so why not reach for the moon, e.g. https://www.latimes.com/business/la-fi-hy-uber-ipo-20181016-...

What major downside or any protections does SoftBank have with WeWork right now? Is there anything they are getting now or likely to get that doesn’t still have them $7B or so down the hole for WeWork?

The major thing is usually first dibs if the company sells for a lot less than the later valuations. In this case that doesn’t seem likely to happen with Softbank getting back most of their investment

That article says:

>The [ratchet] provision could grant existing shareholders $200 million to $500 million worth of additional shares, most of which would go to SoftBank, Kennedy said. For example, if WeWork’s market cap came in at less than $14.5 billion post-IPO, the total value of additional shares issued to SoftBank under the provision would be more than $400 million.

$400 million doesn't seem to be much of a compensation for losing billions of dollars in investments.

And that assumes that the company will IPO before it goes bankrupt (e.g., from investors pulling the plug on any future investments to cut their losses).

Yeah, it doesn't de-risk the investment as far as bankruptcy, but SoftBank's exposure is $10.5 bln, according to https://www.nytimes.com/2019/01/07/business/softbank-wework.... so any valuation above $10 bln would be a break-even for them.

Well, the answer is that since the market has been flush with cash, these companies kept raising more and more money in their rounds. The guys in the early rounds will make their money, but the later rounds ( Softbank) will lose it. VC is a massive bet, Softbank started a new vision fund worth 100B. They know exactly what they are doing. But, with WeWork, they probably thought they could keep the charade long enough to go IPO and get unsuspecting investors in the IPO. When a company is hot, the founders have massive leverage, look at Adam Neumann , employing his family and friends at all key positions.

Oh SoftBank knew, and they tried some shenanigans late in the game to try to get this thing to IPO and not lose a boatload of money.

But it didn't work. Sanity has prevailed.

> very curious to hear about any startup unicorns that are profitable or at least have a clear roadmap to profitability and not based on a business model that will be outlawed in a few years

Stripe. Recently valued at $35 Billion, although they being profitable is unlikely now considering their phase of international expansion; IMO it does check rest of your questions just because their growth is directly tied to the growth of their customers.

Not even just with companies so ridiculous like WeWork, but also ones that lose profit and hundreds of millions of cash exclusively due to bad business models.

> What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens?

Softbank was hoping Vision Fund II will be closed once this collapses so pumping it up to 47B made sense to juice the returns on Fund I.

Adam N. already took 700M of his chips off the table before the IPO as well, so he clearly expected the music to stop playing as well.

More interested in the public money manager opinion on why not to buy this deal instead of all the other "tech" companies that IPO. What caused enough of them to push back on this valuation and are they acting in a coordinated manner or is it just a few large public funds that usually buy in saying no?

> As for Adam N, I have to think some part of him knew that it was a bullshit valuation

But that's always the goal: get someone to pay you for somethig more than you think it is worth. And, conversely, they always want to buy it for less than it's really worth. Each side is hoping the other side’s value assessment is BS.

>What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens?

Willing dupes. It's a one-step jackpot if you can handwave all that stuff away, or if it never comes up in the first place.

Humans are often irrational



Not to be too pedantic, but WeWork HQ is in New York and is not a tech company (according to general sentiment and investor analysis,) so any attempt to correlate to Silicon Valley trends aren't quite fair nor appropriate.

They thought they would be able to IPO at $50 billion. Their problem was that the IPO process took long enough for people to realize how bonkers it was - it didn’t help that they were going to IPO after all the other loss making hype businesses are down from their IPO prices (so presumably people are viewing similar IPOs with suspicion).

What’s annoying to me is that these companies that are making huge losses were able to hoover up so much of the VC funding, while actual profitable businesses were not :-(

I recall reading an article a few years ago from a profitable startup talking about trying to get VC funding, and all their interactions were basically “you should stop charging so you can get market share”. Essentially demanding that they make their profitable company unprofitable.

I wish I could remember where it was.

We believed in "spin", and figured if Uber could IPO, then so could they.

I think Uber will pop within the next 5~10 years. I'm surprised they still have investors at this point. So much was banking on the self-driving model, which I honestly think is 10~15 years away from being viable (and for half the cost of the research, cities could just start laying down rails with all their roads .. would be way easier .. and a solved problem).

We're due for another venture backed capital burst. DropBox, Lyft, Uber .. the article posted on here a earlier about Counterfeit Capitalism comes to mind. There are too many companies trying to 'get there first' at all costs and squeeze out everyone else.

I honestly wonder if we're going to see another 2000 era dotcom burst for many of these smaller companies. I'm curious how taxi companies will retake their local markets once the big ride sharing companies are gone.

Where I live any ferrous rails will be gone tomorrow morning.

Twilio is an example of a recent unicorn with sane financials.

We've been seeing nothing but bullshit valuations for years. Twitter was a bullshit valuation.

I'm just glad we finally had a sanity check on something.

I'm not knowledgeable in this area, but I think it's telling that SoftBank is the same people who gave a dog walking startup a 300M valuation: https://techcrunch.com/2018/01/30/on-demand-dog-walking-app-...

Note, the _investment_ was 300M, meaning the valuation was actually higher than that! According to Crunchbase:

> Wag has a post-money valuation in the range of $500M to $1B as of Jan 30, 2018 according to PrivCo.

VC valuations are a solid argument against the wisdom of private markets

lol what the fuck

Twitter might be a bad example. The current P/E of Twitter is around 14 with the stock trading around 80% over the IPO price.

And when was the last time Twitter turned a profit?

What does E even stand for in P/E? Nobody knows.

Didn't they just get a 300m injection? That is a pretty big confidence boost that you are doing things right.

In finance no-one admits that they screwed up unless they have no choice, if at all.

In many enterprises people know that sh happens. But saying so is usually a career limiting move.

Companies are worth what people are willing to to pay for them. Softbank was willing to pay an amount most others weren't. In that situation there are 2 options, take the lower price, or wait until the higher price is proved to be justified.

I don't know at what point we can decide that the vision fund isnt, well, visionary. As things stand though, if you have faith in Weworks business model, this seems like a reasonable move.

To be clear, I don't have any particular faith in that business model, but I don't have any money on the line either way.

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