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SoftBank to take control of WeWork: Sources (cnbc.com)
234 points by sikim 23 days ago | hide | past | web | favorite | 178 comments

It's very difficult to see how SoftBank breaks even on this new deal. They're investing $5bn now, with the hope that it's worth more than that when they IPO, but several things have killed that idea. Firstly, their brand is tarnished. Secondly, the growth play will be gone by the time they IPO. Thirdly, the charismatic leader is gone, so the message of "Disrupting" and "We're a tech play' is gone. They've put $5bn into a company that's roughly the same size as a public company that's got a $4Bn market cap, but only got 70% equity as a result.

I think I'm at the point where I think that Softbank is throwing billions into wework to save face. That is a very bad move.

WeWork had so many excesses, like paying 100% commission to real estate agents. Softbank can cut out such nonsense, not just the tequila and private jets.

Softbank also has full access to the company’s financials and will be in a position to restructure. It’s safe to say they are a lot better informed than we are.

> like paying 100% commission to real estate agents.

Why did they do this?

To grow faster and disrupt the market. For a while it was more than a simple commission: it was 100% of the revenue for a whole year. They were also offering one-year free rent to new customers.

Source: https://outline.com/yCcgS5

That has to be the most ridiculous thing I’ve ever heard, since Enron paid their employees bonuses for unprofitable deals.

we'll take a loss on each sale, and make up for it in volume!

"100% of revenue from the year as commission" and "rent is free for the first year" sounds like the perfect combination, though.

If not likely to result in your real estate agents sending more things to you in the future.

It makes sense for Adam. Schmooze the real estate agents with WeWork money so they find you nice deals and get you priority bids, buy the property at this nice discount, lease the property to WeWork. He's winning all around, spend money that's not yours to get equity that is yours.

Related party deals We Works previous C level execs had interests in the property We Work took leases in.

I took a look to see if Softbank was hiring any vetting-watchdogs to prevent this in the future.

They had one open position. It required all applications to have an extensive history at a prestigous VC firm, i.e. they are looking for people from the in-group.

I think a less-incestuous vetting strategy would give more honest results. Too bad, I think there's a lot of people on HN who would excel at this position despite not having worked at a big VC.

I have no particular love for any of the big-name "prestigious" VCs, but ISTM they haven't had much influence at WeWork so far. Instead SoftBank just handed the keys to a crazy dude, with the thought that he would make it rain. Maybe it didn't rain hard enough, but the firm is still in business and now they've gotten rid of the crazy dude. Maybe SoftBank just sees this as a slightly more intense version of the traditional transition from founders to "professional" management? It seems likely to feature a great deal of the equity dilution that founders traditionally suffer...

Considering their current vetting is quite lacking, shouldn't they be looking to hire someone experienced? You don't hire a junior engineer to build you're new enterprise system.

Perhaps shouldn't would be more accurate

I don't see why someone with that history would necessarily do a poor job.

I think his point is an insider can't see the forest through the trees, and you need a fresh perspective to understand what's really happening. Basically that hiring an insider just perpetuates the echo chamber.

What makes that resume necessarily an insider?

He means the entire VC industry is an echo chamber.

But is that what WeWork is?

I don't think their brand is "tarnished." The only people they are beholden to are their LPs, who I assume endorsed this deal. None of the actions they have taken as an investor should make others view their money "toxic."

WeWork is just going to have to transition from wartime to peacetime. Ben Horowitz has a great article about what this looks like [1]. They're going to clean up the books, stop making risky acquisitions, and focus on the core business instead of side projects. After a few years of being "boring" and improving margins, then they ostensibly will look like a much more stable investment to public markets.

[1] https://a16z.com/2011/04/14/peacetime-ceowartime-ceo-2/

The peacetime version of WeWork that you envision already exists, it's called IWG. It's roughly the same size as WeWork but it's only worth $4.5b. Paying $5b for 70% of it doesn't seem like a good idea.


This looks like the upper limit for WeWork. It doesn't matter how much nicer looking their offices are or if they have free beer bashes and parties, those expenses are all tiny when it comes to the bottom line of a multibillion dollar corporation.

Plus, Regus has more desks and branches than WeWork, and is orders of magnitude less expensive.

I am not a fan of the WeWork business and would bet on its failure, but I don't think that one can just say that "this company is $5 billion, so this is the cap of how big such a company in this market can become."

Just as a thought experiment, imagine that Regus ended up just straight out getting all of WeWork's assets in some sort of liquidation, and half the tenants stayed. They would get bigger!

There is a possibility that WeWork can tap into more interesting markets.

Purely annecdotal, but the people I hear about who ending up in WeWork used to be in either dirt cheap local coworking spaces, or just getting their own offices. It does feel like a "pie got bigger" sort of thing, that wasn't before captured by such a large player.

Perhaps I was not precise in my wording. With the way WeWork currently works, and its asset allocation and fee structure, I don't think expansion or more market cap than Regus is possible.

If WeWork get all Regus assets for free and half their business, sure, why not? That would be an immediate 3-4 billion dollar injection. As it currently stands, their coolness(tm) is not enough to compensate for their bloated fees and limited office space locations.

I agree with you. WeWork doesn't have strong network effects and the business model is easy to copy. There are real estate companies that each owns tens of millions of square feet of office space. If WeWork really were worth $40 billion, the companies who own office buildings could just create their own coworking spaces and rake in the billions instead.

From my experience here in Germany, Regus is in fact more expensive than WeWork. And they have worse contract conditions, e.g. no free coffee, many upsells, bad contract durations, and intransparent add-ons.

That's because Regus actually makes money, while WeWork is burning cash at an unsustainable rate in an attempt to grab market share.

WeWork can't keep it up forever. Eventually they have to raise prices and/or cut perks (probably both).

Can you explain why you think they are not going to be forced to remain in “wartime?”

Presumably the unit economics are positive and they will break even.

Why is it a given the unit economics are positive?

It's not, but WeWork heavily implied they are and that seems to be a key part of their new strategy. Obviously many people are skeptical (including myself), but I suppose we'll find out soon enough.

Apparently the unit economics are still showing lost money because they aren't fully leased at many of their locations so their rationale is that as those locations, mature, they will fill up. Which is pretty normal in the real estate market.

But it's definitely not a certainty that the locations will fill to capacity.

Rebranding can happen, and the “charismatic leader” was the #1 problem.

The bull case for WeWork that I always heard was based on the existence of a WeWork-shaped market opportunity, and WeWork themselves being in pole position to take it. The bear case was that WeWork was run by crazy people. I think SoftBank’s decisions here are making the best of a bad situation.

I agree, with the loon no longer in the lead, they have a chance.

They've been upgraded from no hope in hell to a slim chance in hell.

Does WeWork ever need to IPO?

If it turns WeWork profitable by cutting costs and implementing responsible leadership, it just keeps its share of all future profits. SoftBank wouldn't be doing this if it didn't think those profits were likely to be more than total investment so far.

In other words, WeWork got acquired instead of IPO-ing.

The future profits only need to be higher than the $5B plus whatever they can get today from liquidating their existing holding. Sunk cost fallacy, or "what is done is done".

Don't forget opportunity cost. The future profits need to be higher than the $5B plus liquidation value, PLUS the expected value of another investment at the margin.

Oh yeah you can use the yield curve to discount future flows, and then demand something extra on top of that (Graham's margin of safety).

There needs to be some kind of exit, because at some point the Vision Fund needs to return money to investors - and that's a lot sooner than "run WeWork to earn back $5b+ via dividends" would take.

As soon as it’s been transformed into a profitable business, the exit is going to become an option.

Does WeWork ever need to IPO?

Yes. The Vision Fund, like all VC funds, has a finite lifespan that all the investors agreed to when they funded it.

They could do a direct listing instead - it's like an IPO but without raising additional capital. Just put your existing shares on the market.

WeWork, though, needs a lot more than new capital.

True, but there's always the possibility of the Vision Fund selling WeWork to Softbank proper. And I don't think this round of investment is from the Vision Fund, so it appears that Softbank proper is going to end up with a larger stake than the Vision Fund already. I suppose there's also always the option of selling WeWork to Berkshire Hathaway or something if they can get it boring and profitable.

the possibility of the Vision Fund selling WeWork to Softbank proper.

I suppose it’s theoretically possible but Vision Fund invested $10.5Bn in WeWork expecting a multiple of that back for Vision Fund investors. Where will SoftBank get that kind of money?

What if they are just trying to stem a contagion effect spreading to their other investments. Their other investments are a lot better but the retail market can be very irrational when there is bad news.

Yeah, seems like SoftBank isn't doing this just to save face. They're doing it to prevent the whole party from coming to an end, right quick.

Only time will tell, but SoftBank has the ability to combine WeWork with competing brands and unify the global strategy to unlock Asian markets. Also, getting rid of the old leadership is a net positive, IMO. There’s still a business case here.

Fourthly, we're now in the longest economic expansion on record and overdue for a recession, which a number of economic indicators seem to imply is coming in the near future. A looming cyclical collapse in demand for office space is not something any of the valuation models being applied to WeWork seem to be taking into account.

What I read is that $5B is on top of their past investments of roughly $11B.

The $5b is coming from SoftBank Group. The earlier $11b came from the Vision Fund, which is a subsidiary with an entirely different operating environment.

Sure, but it still means somehow Masayoshi Son (and the investors whose money he manages) has paid $16bn for a thing now worth $8bn.

Assuming WeWork ends up being worth $5B+, it's kinda impressive that Masayoshi Son comes out of this with Softbank owning much of WeWork and the Vision Fund investors being the ones getting burned.

Except the vision fund is structured as debt for the outside money. Softbank takes the profit and loss minus interest payments on the debt. Thus the vision fund is more like a leveraged softbank.

Sunk cost fallacy.

The only idea i have is to turn it into a REIT.

Better article in [1]. From the unconfirmed report:

- SoftBank to invest $4-5 billion

- Pre-money valuation at $7.5-8 billion

- SoftBank will end the deal with ~70% control of WeWork

- SoftBank's Marcelo Claure to take over as chairman of We

- No confirmed word on additional job cuts, asset sales, or clawbacks from Neumann

[1] https://www.cnbc.com/2019/10/21/softbank-to-take-control-of-...

Also, from another article (by Axios):

"SoftBank will pay former WeWork CEO and current non-executive chairman Adam Neumann around $200 million to leave the board of directors, give up his voting shares and support SoftBank's takeover, according to multiple sources familiar with the situation."


I'm utterly confused on how Neumann walks away with so much. Given the burn rate and the capital requirements, I cant imagine many other players who can step in at this point. And if no one steps in, the firm is worth zero.

So isnt this a recapitalization of the firm? Why would they need to pay $200M for control if the alternative is some variation of bankruptcy followed by a firesale and cheap buy?

>So isnt this a recapitalization of the firm? Why would they need to pay $200M for control if the alternative is some variation of bankruptcy followed by a firesale and cheap buy?

Because it is obvious if they do Firesale and Cheap buy they would have destroy the company and buy something that everyone knows isn't remotely worth that much. By trying to save it now they could at least get back some of its investment via IPO.

My question is what if Neumann decides to be an ass, and just want to watch everything burn? After all he has the voting shares.

They could probably sue him. As a member of the board of directors he still has an obligation to act in the interests of the shareholders even if he controls a majority of the votes.

Wow, so it turns there is a difference between Majority of shares (50%+) and Majority of Voting Power.

So hypnotically could he have done it if he had 50%+ vote? Or could he still be sued? And by watching everything burn, I mean he could try to spin it as he will take drastic action to improve on the situation and refuse Softbank's offer.

> So hypnotically could he have done it if he had 50%+ vote? Or could he still be sued?

Could still be sued.

> And by watching everything burn, I mean he could try to spin it as he will take drastic action to improve on the situation and refuse Softbank's offer.

Having a spin can help in court, but a court is likely to see through it.

4 to 5 billion investment in a company with an 8 billion dollar valuation.

At some point you have to wonder when its better to cut your losses and scrap the entire thing.

I mean, if you liked 20% ownership at 50bn, you prob love 70% ownership at $8bn.

This is where the value of all that liquidation preference kicks in. At some point it becomes in SoftBanks interest to push for lower valuation, as it means they get to wipe out all the people that came before.

But the reason they liked 20% ownership at $50bn is presumably because they thought they can cash-out at $80bn+. This cash-out valuation was not value-based but growth/hype-based. It seems that weworks will no longer be valued on growth/hype, which means that the value of weworks is much lower.

Liking 20% ownership at 50bn doesnt mean you like 70% ownership at $8bn. The value of the company had significant future growth/hype component which required other investors to pour additional money in to keep up the growth, that is now gone.

They basically bought control of the company for ~$15B. Any valuation north of $20B ought to put them in the black.

Big Edit: multiplying is hard, forgot to multiply by the PE ratio! Actually, potential valuation is 660B.. so 20% would mean 3% of US office real estate business. At a less generous pe of ~10 (perhaps more appropriate given they don't own the buildings), it would be about 10% of real estate market.


Sure, but $20B valuation seems hard to achieve.

US commercial real estate market by revenue is ~$1.1T [0]

Office space by value is about 1/8th [1]

Regus gross margin is ~16% [2]

Real estate generally has good PE ratio but partly because they usually own the property [3], so let's be generous at 30x.

So if we value WeWorks as a normal real estate company AND weworks has %100 of US office real estate business we have a valuation of 1100 / 8 x 0.16 x 30 = $660B.

Now, weworks exists outside of the US, but the valuation you propose means they must have ~equivalent of all US office real estate.

[0]- https://www.ibisworld.com/industry-statistics/market-size/co...

[1] - https://www.reit.com/sites/default/files/chartjuly92019.png

[2] - http://www.annualreports.com/HostedData/AnnualReports/PDF/LS...

[3] - https://www.investopedia.com/ask/answers/052815/what-priceto...

Don’t you need to multiply that 22B by 30, or did you get all of those references but you don’t understand the difference between profit and valuation...

you're right, apparently multiplying is hard! I first decided to make my back of napkin calculation (forgot to include the PE ratio) then wrote the post. I've amended it now.

What about the 30x earnings multiple? Shouldn't it be $22B*30?

So WeWork "only" needs to capture ~3% of the US market to be worth $20B

>> US commercial real estate market by revenue is ~$1.1T [0] >> Office space by value is about 1/8th [1]

I'm a big fan of the WeWork concept, not commenting on specifics of how the business was run.

The way things worked in the past was just silly -- you signed a multi-year lease with no elasticity. I paid WeWork for personal space before and now my employer pays. It is expensive, but only on a unit basis. The model totally makes sense to me as a purchaser.

I guess the WeWork risk is the buy-long sell-short model which is always risky unless you are earning sufficient spread.

I think it’s a given that Softbank’s involvement means the target market is global, with expansion in EMEA through acquisitions or mergers with other portfolio companies.

Probably less if we take into account tax credits.

Also makes the sale possibility much more likely for the brand and whatever it is they call all that IP that they have.

They can also wipe out themselves by throwing good money after bad.

Same could have been said for AirBnb, Boston Dynamics, SpaceX etc.

Many of the best companies look like risky bets at the start.

How do you consider Boston Dynamics successful? They are continually sold to new owners because nobody knows how they can generate a profit.

SpaceX likewise is also in a somewhat murky financial position, although I suspect they will come out doing great in the future. My limited understanding is they are avoiding an IPO because their financials are not up to snuff.

AirBnB was heavily derisked before serious investors took notice - YC loves talking about them as an example because they had so much trouble raising a seed round before they skyrocketed into their A round shortly thereafter. Also I suspect AirBnB is actually going to IPO at a lower valuation than their last round, but I realize I am very much an outlier with that assessment.

I understand high risk high reward, but sometimes investors are just being dumb. I feel like you chose terrible examples to make your point. And since all of your examples are private companies it is impossible for us to analyze their finances.

> My limited understanding is they are avoiding an IPO because their financials are not up to snuff.

My understanding is that they're avoiding an IPO because it would jeopardize SpaceX's mission of getting to Mars. When they're privately held, Musk can vet investors to be sure that they're aligned with SpaceX's mission, or ensure that they're powerless enough that they can't make problems if they're not (eg. no board seats). When they're publicly held, things like unveiling Starship when NASA is pissed about Crew Dragon not being ready yet is just inviting a shareholder lawsuit. Wall Street tends to take a dim view of long-term highly risky bets, and going to Mars with privately funded R&D is precisely that.

I highly doubt going to Mars is the reason space x is still private. Given that astronauts have shown somewhat serious issues after being in space for six months, it’s unlikely the human body could survive three years in zero gravity without serious damage. Which means that a space flight to Mars would also require some form of artificial gravity and so for our lifetimes, is likely going to remain science fiction.

No, Musk is going to keep SpaceX private because he hates public oversight, like the kind he’s gotten with Tesla.

Where'd you get the idea that a Mars trip is going to involve three years of zero-G?

A Hohmann transfer orbit (minimum energy) will get you there in nine months. SpaceX is targeting a higher energy, shorter trip that'll probably wind up being about six months each way (with Mars gravity in the middle).

I agree with you that the no-gravity part is likely doable with an acceptable risk.

What I haven't seen are actual solutions for how to deal with the radiation. Yes, there is ongoing research from NASA, ESA, JAXA and others, and lots of interesting proposals like hydrogenated boron nanotubes, electromagnetic force fields, lithium shields etc. But no solutions even close to implementation.

Here's from an ESA blog post on the topic earlier this year:

> As it stands today, we can’t go to Mars due to radiation. It would be impossible to meet acceptable dose limits.


Are we going to send astronauts who have accepted they will likely die from the mission? Is getting a person quickly to mars worth such a suicide trip?

The final issue I believe will be a hurdle is the psychology. It's one thing sending people to the moon for a few days, or to the ISS for half a yesr where they can look out the window at Earth every day. But I'm not sure the human mind is going to stand up well to the type of extreme isolation a trip to Mars requires. It's certainly never been tested before.

> What I haven't seen are actual solutions for how to deal with the radiation.


"According to the National Cancer Institute, the lifetime risk of dying from cancer is 21 percent; the two-thirds of a sievert from a round-trip mission to Mars would raise that risk by three percentage points, to 24 percent."

Mars advocates like Zubrin argue the "acceptable dose limits" are exceedingly conservative, and that NASA willingly permitted far more dangerous operations (like the Shuttle) than radiation incurs.

> It's certainly never been tested before.

Sure it has. https://en.wikipedia.org/wiki/MARS-500

I don't think you understand space and space technology well enough to evaluate SpaceX if you think there's no way to 'generate' gravity in space without using space magic gravity generation.

Or physics - how to generate artificial gravity on an accelerating spaceship is literally an intro physics homework question.

We've currently never built a manned space ship for month long travels in outer space. We've never built a space ship that uses centrifugal force to simulate gravity and done longitudinal studies to verify that this doesn't have an adverse impact on Humans. SpaceX is has a market capitalization of 33.3 Billion. SpaceX which was founded 17 years ago has never had a manned flight. SpaceX has also never had a flight leave the atmosphere so far. But yes, it's entirely believable that they will go to Mars in our lifetime.

> SpaceX has also never had a flight leave the atmosphere so far.

Uh, what?

I can only assume he meant a manned flight.

> They are continually sold to new owners because nobody knows how they can generate a profit.

They were founded in 1992, were bought by Google and then sold to Softbank. I don't think that qualifies as "continually sold", particularly when the buy-and-seller was Google. I'm not as negative on Google's acquisition strategy as many here, but Google selling companies a few years after acquisition is hardly unheard-of.

Fair point, the way I said it exaggerated the issue. But I still think any company sold more than once has an issue. Boston Dynamics was first sold to Google, and then sold to Softbank - so they meet my criterion.

As far as I understand, the reason why Google sold Boston Dynamics was not because it wasn't able to make a profit, but because the obvious way how it would make a profit - military contracts - were not considered strategically acceptable.

Except the military rejected Boston Dynamics for being too loud - I'm not sure of the timing of that decision though so that very well may have been determined after Google sold Boston Dynamics.

Also this reason rings hollow with some of the other stuff Google has attempted with doing business in China.

Furthermore, according to https://craft.co/wework/funding-rounds, WeWork has already received $12 billion plus in equity investments (not counting debt raises). Softbank alone has already put in $9.4 billion in equity + $1 billion in debt.

So it looks like they've already destroyed $4 billion+ in value. I'm curious how the more financially astute than I see this as anything besides throwing good money after bad?

The underlying value of a company can diverge from its valuation. While obviously this happened when they pitched a $50bn valuation, it could also be happening here. IE Softbank thinks the value is way higher than 8Bn but forced a low valuation as to buy up as much stock as possible.

It seems like they haven’t even read the Wikipedia for Sunk Cost Fallacy.

In case any SoftBank homies are reading this, here you go. You are investing in the Concorde.


I don't think that's really relevant here. The $11B is sunk, the question is whether buying control of WeWork is worth $5B.

WeWork is the dominant player as the overwhelming trend in business is towards flexible and remote working.

If even a small percentage of companies adopt the Gitlab model, WeWork is going to be extremely successful. And given Softbank's business model is designed for long term, strategic bets there is no way I would be cutting losses just yet.

Softbanks model isn't proven yet. They overinvest and create unicorns in the expectation that the 10x extra cash will cement market leadership for the startup.

That doesn't mean much if the market does not materialize, which is possible because remote work does not require shared office space. Currently the trend is that connectivity removes the need for an office entirely, not generate more demand for them.

Softbank's model won't be proven for decades. It invests in brands that they believe will dominant their industry and still be around in 50 years time.

And as Gitlab and others have found many people simply don't like working at home and want to be around other people. And also need infrastructure like meeting rooms on the odd occasion. WeWork provides that in almost every city. And 500,000+ people today currently see it as a useful service.

Which is still to my point: Softbanks Vision Fund model is not proven yet. It is just as probable it is more a vehicle to find a place for Middle Eastern money to sit than a true 10x fund strategy, which is becoming more evident since they're already working on Vision Fund 2.

Requiring Gitlab doesn't translate into requiring office space either.

Back of a napkin:

* Growth in remote workers = 9% per year.

* Percentage of remote workers who want an office = 20%.

* WeWork market share = 90%.

= 1.62% of all workers each year will potentially shift to WeWork.

You think 9% of all workers will switch to being remote every year starting now? By that logic, there won’t be any non-remote workers left in 15 years. The current number is only about 3% [1], so a more reasonable growth number (although still large) is 0.25%, which means (by the rest of your numbers), only 0.045% of all workers (in the US) each year will switch to WeWork.

[1]: https://smallbiztrends.com/2018/04/2018-remote-work-statisti...

> * WeWork market share = 90%.

I think that's where the error lies. WeWork has no lock-in, there's no good reason to choose them over a competitor and it doesn't take much capital to start a local competitor (and there are many already).

I was looking at offices like this recently and the most important factor was being close to home which had local competitors. When I look at WeWork locations, they're mostly in the CBD, so they're not even attracting anyone with a local office.

It's not even a new business model, just SV hype.

90% market share of office space? That's hilarious

I can actually see this working out. Comparing the first half of 2018 to the first half of 2019, WeWork roughly doubled revenue while keeping losses constant. Their losses went from ~2x revenue to ~1x revenue, which is still nuts, but improving quickly. They also had $1.5 billion in revenue through 2 quarters, and are growing at roughly 100% year over year.

If SoftBank can really reign in spending, in 2 years we could be looking at a company that’s cashflow neutral, growing very quickly, with annual revenue in the range of $5-10 billion. From the outside looking in, this seems possible to me, and would result in a company with a valuation much higher than $8 billion.

This has to be tough for all of the WeWork employees who were paper millionaires and now have stock options that likely won't survive all of SoftBank's preferences when and if WeWork finally IPOs.

I'll be honest here, cry me a river. Everyone who joins a pre IPO company should value their stock at 0.

That seems uncharitable given the CEO looks to be walking away with ~$900M total from the endeavor while everyone else gets... nothing? Probably?

Evidence why people should value their stock at zero.

>the CEO looks to be walking away with ~$900M total from the endeavor

How much of the previous $700M did he actually walk away with though? Everything I've read suggests that he only sold a small portion of the $700M in stock, and the majority he kept and borrowed against to buy the buildings he leases back to WeWork. In one of the negotiations post IPO collapse, he agreed to give any profit he makes off those leases back to WeWork. Also, at what valuation level for WeWork is $700M for his equity even based on?

thousands of people crushed. Really awful.

Actually SoftBank is getting a good deal, using $5B to get a controlling interest of WeWork at 70%, wiping out all the commons and other LP's. If they can cut out the slacks and focus on the core value proposition, WeWork can work after 4 to 5 years. The WeWork brand is unique and valuable.

They did that to Priceline in the past. Priceline was almost dead at one point. Got sold at a fire sales. They hunkered down and executed, and look where they are now.

Could you say when this Priceline thing happened?

Other news sources are reporting that Adam Neuman will be paid $200m to resign from the board of directors... just, wow.

after a few years in silicon valley I learned that's essentially the right way to make it here. Building successful companies is for suckers, you just make a big ball of excrements, package it real well and then hand it to someone else before it falls apart. The VC system rewards that more than any other skillset.

WeWork is not a Silicon Valley company.

It is in all the ways that matter.

Incorrect. It is not in all the ways that matter. Have you been to SV recently?

Serious question: given the monstrous scale of softbank, the not so great quality of many of its holdings, and it's ties into multiple world economies, could softbank be a systemic risk to the entire world economy?

If Uber took a big write off at this point, not only would American and Japanese companies and Saudi Arabia take major losses but I would imagine big tech stocks in general would start to see a loss in confidence and a reversion to more normal P/E ratios.

I would imagine at that point softbank would be such a dirty word that it would have to firesale as well. And certainly no second vision fund.

And then you could go on and on about what would happen to pensions in the states and the rest of our systemically daisy chained over leveraged economy or whatever else if that happened.

Do I have an overly active imagination? Does anyone else worry about this kind of stuff?

> could softbank be a systemic risk to the entire world economy?

No. The Vision Fund itself is nowhere near large enough to be systemically important, even given a complete loss of all principal.

Also, a lot (most?) of the the risk from SIFIs (https://en.wikipedia.org/wiki/List_of_systemically_important...) is that they're counterparties in tens of thousands to tens of millions of relationships, many of which assume the counterparty is completely reliable. That's not true here; all Softbank and Vision Fund shareholders understand their capital is at risk. Banks also almost inherently use leverage (https://en.wikipedia.org/wiki/Basel_III#Leverage_ratio) more heavily than most other industries.

The other possible results you mentioned are market mechanics. For example, a reversion to more historically-normal P/E ratios is not something that SIFI tries to prevent (or encourage).

> I would imagine big tech stocks in general would start to see a loss in confidence and a reversion to more normal P/E ratios.

Most of the big tech companies have not particularly strange P/E ratios.

> I would imagine at that point softbank would be such a dirty word that it would have to firesale as well.

What's the mechanism here? Uber takes a large writedown leads to Softbank declaring bankruptcy? I don't follow the reasoning.

> Do I have an overly active imagination? Does anyone else worry about this kind of stuff?

Yes and no.

If two of softbanks biggest assets get marked down significantly, and the rest of their bets are similarly, super leveraged high risk plays, It's not hard for me to imagine trying to liquidate some assets so they could leave with their shirts and give (some) money back to investors.

They've probably missed their window for huge VC style growth at that point anyway.

This is your annual reminder that Masa Son once lost $70B

Right after making 70B?

I don't think this quip makes any sense. It's like the reverse of a gambler telling you how much they made without telling you how much they lost.

Edit: For clarity, I think if you want to ask how much he made/lost in the dotcom boom, you have to compare his worth before the boom to his worth after the crash. Not his worth at the peak of the boom to after the crash. If you think that's wrong I'm interested to hear why.

I believe Son is underwater on Uber as well, and if Slack falls somewhat below $10, would be eating a loss even there.


And that he is far from being the genius investor the Japanese media tries to make him

I suddenly feel better about some of my underperforming assets lol

And is now worth $23B.

So I would assume he knows a little about business.

I'd argue that assumption, [correlation of: current net worth -> knowledge about business], is flawed logically.

You do understand how he made that money right ?

Knowledge about business -> Current net worth

His entire net worth can be accounted for with Softbank's investment of $20m in Alibaba in 1999. That's now worth ~$110B... and he has a 21% stake in softbank.

Remove that.. and he's at 0 or even negative. Is that luck or skill?

Reminds me of Bill Ackman and General Growth Properties.

In what way, please? I only know about Ackman through his Don Quixote-esque battle with Herbalife. What happened with GGP?

I only had the general impression in passing that GGP was his big success that gave him the resources to engage the more recent nonsense. I first heard of him in connection with Valeant more than Herbalife.

It's like, maybe the order in which you have your life experiences is everything.

Well, you can infer that, and people do often infer that from losing a lot of money and then coming back.

But it could be just one-in-a-billion luck.


What’s this in reference to?

He lost a lot in the dotcom collapse around 2000. https://dealbook.nytimes.com/2010/12/13/a-key-figure-in-the-...

To be precise:

> ... having the distinction of losing the most money in history (approximately $70bn during the dot com crash of 2000).

* https://en.wikipedia.org/wiki/Masayoshi_Son

Lots of voices ignoring how Son holds onto stakes. He has yet to liquidate his Yahoo Japan and Alibaba Holdings, and those were massive wins. An embarrassing mistake like WeWork is sure to stay on the books for decades. Selling would force him to mark down the private loss, so more so than winner he will hold I expect.

Maybe WeWork can turn cash flow positive, in which case Don can easily justify holding it. So long as he is not forced to mark down then we can continue doubling down. Son is not a guy with an exit plan, he doubles down until bust then waits for the next cycle.

I don't really get the ongoing obsession with We/Softbank. I kind of got the whole schadenfreude side of it when it all came tumbling down but now it's just turned into a story of a big company trying to dig itself out of a hole created by some dumb decisions it made.

Is there some larger relevance that I'm missing?

Wework and softbank are interesting because they pretty much show you the limits of private equity and tech disruption. Wework was so far away from technology it was fascinating to see the story around it and how it ran its business. Softbank is really interesting because of their role, the unique position its in because of how deep its pockets are, and how the timing of WeWork's story has interacted with SoftBank's raising for the Vision fund. If you want to see how crazy things in PE can go, you can make a good argument that you should be looking at Softbank - with their positions in ARM, uber, Alibaba, Boston Dynamics, Slack, Wag. I mean, we can have an entire conversation about Wag.

But also, this story isn't over. This story has been almost an unmitigated catastrophe for the last year and yet this news is telling you that Softbank think that WeWork is currently still the most valuable company in the office rental space despite everything. It also tells you softbank isn't just funded a tonne of companies and are willing to let them go big or collapse - they don't seem able to walk away from WeWork. The reason this is interesting is because this is now raising big red flags about how Softbank's investment portfolio is looking - and it'll be interesting when we hear whether they start to suffer because of it.

For one thing, I'd argue it's important for startups to understand how Softbank behaves as an investor, since they are a fund many companies might consider taking money from. They have an outsize quantity of capital to invest, so this is more worth watching than other funds' behaviors might be.

Do you think that Neumann feels like he got a raw deal?

I bet that he regrets doing business with Softbank, yes.

An anecdote I heard (unsure if true) was that Softbank had strongly encouraged Adam to focus on growth at the expense of profitability to a much higher degree, shooting for the stars much more than he otherwise would have done.

If I was Icharus and someone else had given me wings and told me fly much higher, I'd have myself to blame but I'd still be upset and filled with regret.

> some dumb decisions

I think the relevance is in the definition of some.

Lots of people had an inkling it was a lot of smoke and mirrors, "tech company this" "we're a platform that", with a lot of weirdness alongside - but then the IPO dropped and confirmed every single assumption and it turned out truth was more ridiculous than fiction.

The larger relevance is how completely unworthy businesses are sprung into a position by cheap VC cash when the foundations are made of custard and spaghetti. Wrap in the "cult of personality" with a seemingly deluded founder and you have the SV equivalent of a soap opera.

Alongside that, it's also a dramatic pantomime as to how said investors are trying to optimise an acquisition without the optics of a failing business. We was a poster child for the Vision Fund, and Softbank has to play this game delicately.

It's fascinating to watch it play out - this isn't just a case of a large business that's fallen on hard times. This is a story about a (hopefully) unique company that should never have worked in the first place, somehow navigating a black swan moment, and potentially turning into a real business.

Definitely I think it has to be that the company was trying to go public. With S-1 filing meaning they wanted to within a month. I also think it’s possible if WeWork IPO’ed in late 2018 or right before Lyft in 2019 and/or the “valuation” never spiked to $47B, it could’ve gone public.

One problem is their revenue doubled in the past year while maintaining losses which is a good thing. They wouldn’t have had that same giant revenue to boast about if the S-1 was filed 3 quarters earlier.

Nonetheless, actually giving out the S-1 makes this fun and juicy news. Having SoftBank/Vision Fund behind it, and billions in funding from other investors as well makes it even more interesting. The founders and their corruption and bullshit, specifically Neumann, add on to this as well.

The thing that's ironic is that the IPO market likely would have valued WeWork at $10B, maybe even $15B, but since that was so much lower than the $47B valuation it had during SoftBank's earlier investment, they balked and walked.

SoftBank likely would have made out better in the near term had they just let the (disappointing, to them) IPO play out. WeWork would have launched with at least a $10B market cap (though of course that could have dropped on day one), would have raised a couple billion, and maybe would have even raised enough to meet the requirements for the loans they were planning on taking out. But now they've more or less gutted the company, killing anything that was even slightly interesting, turning it more or less into a bog-standard office real estate company. Which presumably will be able to turn a profit after a bit of retooling, but it hardly qualifies as "Vision Fund" material.

This is definitely just Son and SoftBank trying to save face.

So Softbank will have invested nearly $16Bn (10.5 already + 5 now) in something that even they think is only worth $8Bn? Am I reading this correctly because that makes no sense whatsoever. Except for Neumann who walks away with his $700Mn regardless!

If they've already invested $10.5Bn, that money is gone (especially if WeWork fails).

If they truly think they will get $8Bn worth for investing 4-5Bn now, it's a rational choice.

Adding your past investments to the tally is an instance of the sunk cost fallacy.

Well, maybe you could think about it like this:

If they don't intervene, they lose all their previous investment guaranteed. So just consider all of that previous investment gone (sunk cost).

If they invest $5b they may make an $8b valuation. And they may still think there is upside beyond that.

Not sure if that's what they really think, but a lot of posters here seem to accuse softbank of sunk cost fallacies without considering that they are surely aware of investing 101.

The sunk cost fallacy has a name because people keep doing it, even knowing what it is

In the last 4-5 years, Softbank basically caused hyperinflation in the startup world.

Does this mean then all the common are wiped out due to the liq preference that existed before?

Essentially yes. Not wiped out per se, but underwater. If they can grow the business beyond the high water mark, then there’s a shot at getting paid. But I’d say in a best case that’s unlikely.

No it doesn’t. Read the deal. SoftBank will buy up to $3B in stock from existing shareholders, including employees.

They are bailing out employees and investors. People will at least get something.

Wow, that might be a record, IPO to cramdown in 3 weeks. I wonder if Softbank sees some way to convert some of the real estate into assets that it can sell off before the next recession hits to get its money back. I could not find a single thing in that article that suggested anything other than a liquidation that might favor the investors over creditors.

There doesn’t seem to be any original reporting in this article. The link should probably be: https://www.cnbc.com/2019/10/21/softbank-to-take-control-of-...

Let’s be honest.

Wework is good business if they can become cash positive. They have a brand, more and more people are going remote, there is a bug market for pricey and google-like coworking spaces.

It doesn’t matter if they had a bad CEO, or if they can’t IPO anymore, there’s no reason this wouldn’t become massively profitable in the next 10 years.

I guess Adam will get those margin calls on his $700m in loans on WeWork shares after all. Hope he can cover. https://www.ft.com/content/a9254a70-f1a8-11e9-bfa4-b25f11f42...

This saga will be a great read in a year or three. Hope someone writes a long article on this. Joining the great American predecessors of corporate failure like Enron or Lehman Brothers.

Does softback have strong financiers that can wrestle control over the companies expenditure and balance sheet? Given some of its recent investments at lofty valuations I don't think so. If they can close this gap then I think a turnaround is possible over time. The brand will recover.

Wow, what a fall from grace. Weren't they valued at 72 billion earlier?

If you sell a pig to yourself for $72Bn, does that make it worth $72Bn?

It was valued at $20Bn in 2017 based on a $4.4Bn investment from SoftBank (where they were the sole investor). It was then valued at $45Bn in 2018 based on another $3Bn investment from SoftBank (when SoftBank was already the largest investor -- by far). Then, SoftBank made ANOTHER $1Bn investment later in 2018 "valuing" WeWork at $47Bn.

WeWork was ever valued at $72Bn. Maybe you're thinking of Uber.

It's not grace if it's mostly smoke and mirrors: it's hubris.

46B. Still insane.

So is this effectively a triggering of the partial ratchet noted in the S-1 (i.e. SoftBank gets shares if valuation falls)? Or a whole new deal?

Lol at the title. Imagine citing "Sources" in a paper. If you can't state your sources, just leave out the citation.

how on earth does a company go from getting ready to IPO to being cash-strapped and needing an infusion in such a short space of time?

Never saw the numbers in the prospectus, but surely there was some indication?

It's crazy that it's not basically fraud to do what they did. They put out a 100-200 page document saying "Our business is great" so that retail investors could make an informed investment decision and then 2 months later are like "actually it's relatively worthless and we have no money left and if we can't raise money right now, we will die". Did the people involved really believe that glowing 100+ page report? The difference between this and a pump and dump is simply intent, and I think it's most likely that the intent was there.

I wonder what is going to happen to the wavepool company.

So who exactly came to the conclusion that they were worth >40B just a few weeks before? How does that math even hold up?

Simple, someone gave them money at that valuation (softbank). It doesn't mean the underlying value exists but it does give them that "valuation"

Obviously - but why did Softbank think it was worth so much more? They were an investor - they knew that the company was a financial black hole.

Probably to inflate the valuation, do a quick IPO of WeWork for 10x the actual value it should have, get their shares sold on high price, and wave to the fools that took the bait and bought an almost worthless stock.

This whole ordeal was the best that could happen for the normal people, basically fell into the hole they themselves dug, because the economists etc. called their bullshit out loud.

If you have not already, these are good reads from one of the critics of the whole scheme:

1. WeWTF - https://www.profgalloway.com/wewtf

2. WeWTF, Part Deux - https://www.profgalloway.com/wewtf-part-deux

People refer to this as the greater fool theory. Softbank never believed that valuation. What they believed was that there was someone dumber than them that they could trick into buying it from them leaving themselves with cash and the other person with the overvalued asset.

In this case it turned out they were the first and final fool and they were left holding their own bag.

And thus they essentially sacammed themselves(or really their investors) out of billions.

You'll also hear this referred to as a pump and dump. Pump up the value of some asset and then dump it on someone else.

I keep reading about that real estate company - make up your minds is it a tech company or not?

That's a false dichotomy. Is Amazon a retail company?

amazon is in the tech of retail - and more. what tech does wework make?

Amazon didn't start out with AWS. That's a side effect at becoming a world-conqueror in terms of logistics.

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