It's remarkably easy to make fun of WeWork, given the company's high-as-a-kite ambitions, its largely conjectural business model, its dependence on fresh capital for survival, its charismatic CEO’s new-age antics, and its disregard for conventional norms of ethical corporate behavior.[a]
But if the IPO of a company as prominent as WeWork fails and the company is unable to raise the fresh capital it needs to stay afloat, we should view that as a warning sign that capital markets are shifting from "grow at all costs" to "show me the profits."
The last time we had such a shift, in 2000, it was sudden and cruel. Many fast-growing companies found themselves unable to raise capital. Down-rounds became common. There was a wave of failures. The startup ecosystem went through a long, cold winter.[b]
If you are at a money-burning startup, please make sure your company has a viable plan for survival in the event that access to fresh capital is suddenly cut off.[c]
[c] Here's a good first-hand account of a fast-growing, money-burning company that managed to survive the post-2000 environment, while most of its competitors went bankrupt: https://a16z.com/2010/03/17/the-case-for-the-fat-startup/
Framing the entire market as “either you buy into this single obvious scam or everything falls apart” is extreme. WeWork has been a gamble throughout, and the latest antics just pushed investors from “yes its a bad investment long term but short term I’ll make a profit” into straight up “this bag is on fire and I’m sure it’s filled with shit so I’ll let someone else step on it”. Wework failing is not going to trigger a complete market collapse. When Theranos blew up the next Monday was business as usual for every single other company.
I don't know, by the time you get to a series G, "show me the profits" is a fair demand that the capital markets should never not be making.
Your post seems to say "if you don't prop up WeWork, good luck raising money for your startup." I think it's a little disingenuous to project that guilt onto startups that are in reasonable early and growth stages. Every company has a viable plan for survival by that stage. And that plan is: show the market the profits.
WeWork coming back down to earth doesn't mean that suddenly we will see drastic tightening from seed-stage to growth-stage VC.
I'd take that as a signal that VCs need to do a better job of evaluating their bets. If a company make gargantuan losses year upon year despite getting billions in funding, the secondary markets don't have any obligation to bail out the CEO and his VC benefactors.
We Work has no place in anyone’s portfolio and Softbank was the greater fool.
It is a great story for founders and for closely held corporations. The investor disclosures came out and there is no oxygen here for investors.
WeWork best deleverage and just continue its rental business.
This can function in a vacuum.
Their grow with all revenue and no profits scheme has nothing wrong with it, its the governance structure and convoluted corporate structure that all but ensures investors are guaranteed nothing.
From [c] - “Here is my central argument. There are only two priorities for a start-up:
Winning the market and not running out of cash. ”
This quote misses an important third option - don’t get so big that even if you win one hundred percent of the market, you still can’t generate a return.
Dumping a billion dollars into a company in a niche market is also a failure mode.
WeWork is in no way, shape or form a tech company.
Thus I feel the comparisons to 2000 (or to other real tech businesses of today) fall apart at that point already.
I think it's important to not gloss over what the markets are looking for in companies they want to grow as fast as possible: monopoly.
IMO, the shift to "show me profits" could be as much about the growing societal and regulatory backlash to monopolistic tech, which, if materialized, drastically reduces the probability of achieving or maintaining monopoly.
So if we don't support the insider self dealing of management and complete lack of discipline or board governance then legitimate cos will all shut down?
I think that’s some truth to your statement about growth, but also would like to point out that most IPOs we see where growth at all costs are tech or primarily tech companies and WeWork isn’t. At all.
Outside tech, growth has rarely been the kind of Play you make at a great loss, and most ventures need some sort of grounding in reality.
Show me a tech IPO that seeks revenue and then we can debate a change in the markets.
Exactly. I don't understand all the schadenfreude about this company. WeWork is a basically good idea that seems to fill a real need, they just couldn't make it work in the economic environment they found themselves in (which, to be fair, is mostly about the "funding environment", and thus sort of an own-goal given that they didn't "need" to take all that cash).
That said: I don't know that I agree with the 2000 crash analogy. My feeling at the time was that the venture investors were a lagging indicator. The crash started in the already-public stocks at time when angels and VC's were still desperate to make deals.
yea, no. It's simply an overpriced asset and the market is concerned that without an adjustment there isnt much room to grow in value.
I dont think anyone think WeWork is not a strong business model. Id even take it one step further in that it's not the cash burn thats really killing people, it's the valuation. I know theyre connected as a larger company should hypothetically be able to sell less of itself for more money, but at 1/3 of the valuation I think the market feels different about the biz. Although the social signal of being forced to cut does some real bad psychological voodoo.
That is an interesting point, but I am not sure how big a factor that first paragraph is! I would think it is more against all the shenanigans of WeWork than the overall market forces.
It just seems like WeWork took an existing business model of renting office space, went all VC and gathered a bunch of money and sky high evaluation (toss in some creepy insider dealing) ... and ... that's it.
I know there were some theories on cornering the market, or getting some sort of huge buy in / contracts with companies hiring remote workers but for the most part there's plenty of office space (at least in my area) and remote work that I see rarely involves the hiring company shelling out extra for expensive office space for remote workers.
I wonder what other folks selling office space in the market think about all this? They seem to operate just fine and financially seem to do so with a lot less risk than WeWork.
> It just seems like WeWork took an existing business model of renting office space, went all VC and gathered a bunch of money and sky high evaluation (toss in some creepy insider dealing) ... and ... that's it
The nutty thing is WeWork could have worked as a well-executed business. The core thesis, that companies of all sizes appreciate the flexibility of spinning up and down remote workplaces as a variable (versus fixed) cost has legs.
There is a borrowing-short-buying-long aspect to their business, but that could be managed through a combination of first-loss guarantees and sandboxed leases (on both sides).
The problem is the CEO, enabled by Masa Son, showed zero discipline on any level. Nepotism, self dealing, lack of focus, cost inflation...about the only thing they did right, it seems, was expansively disclose all of this to their investors.
> It just seems like WeWork took an existing business model of renting office space, went all VC and gathered a bunch of money and sky high evaluation (toss in some creepy insider dealing) ... and ... that's it.
That is basically what they did, but they also marketed it really well and made the process seamless. Everyone points to Regus as an example of a company that already existed in WeWork's space, but as far as I can tell, most people have only heard of Regus because WeWork is so often compared to them.
Before WeWork, most people weren't aware that coworking spaces were an option. Startups would work out of homes or they would find cheap office space and sign long term leases for spaces they might soon outgrow. WeWork solved these issues for them.
Now, I don't think there's much of a competitive moat. I don't think there's much stopping companies from moving to any other co-working space. Their corporate governance issues are crazy. They are probably overvalued (at least as of their last raise in the private markets). But they certainly are the 900 pound gorilla in this space and the space has gotten much bigger as a result of them.
> I wonder what other folks selling office space in the market think about all this?
If I owned a bunch of office space, I'd be exiting now (or would have already exited). I think it's probably like the bitcoin effect: bitcoin got notorious, so all the other coins went up too. IMO, uncoordinated pump and dump.
IPO valuation aside -- it is premature to write the WeWork model off
It could end up being a strong counter-cyclical model -- and outperforms as the economy tightens
Traditional office space is a 2, 5, 10 year commitment and a pain to move things around -- with WeWork you're paying monthly and relocating geographically is simple
CFOs will often look to pay more per month for shorter commitments which fit well with budgets and can be terminated quickly if situations change
WeWork also makes setting up an office in a new region super simple vs contracting with local landlords
It does not seem to be a viable business so this makes sense.
I think that there was some type of hope that access to IPO funding will allow it to continue to search for a viable business model. This path to possible success seems to be dwindling.
If WeWork needs to have a self-sustaining business model in the near term, it could quickly collapse.
I am not sure but will SoftBank and other wealthy investors continue to fund it in its current state?
How much money does WeWork have in the bank? What is its burn rate? Could its loans get called?
Could WeWork have just months or even weeks to live? Will this failure cause investors to get spooked? They already are somewhat spooked because of Uber and Lyft post IPO performance. Thus we may be on the verge of a shift here.
I wonder what they sold their initial investors on?
I've heard a lot of theories (cornering the market, the future of remote work) but I don't quite get what WeWork was selling folks on when it came to investing and evaluations that were so high in the first place.
> It does not seem to be a viable business so this makes sense.
Many businesses that IPO aren't viable, the problem is when the general public figures that out. For instance, snap chat. In no way a viable business, but has plenty of investors thanks to the wall street scam of institutional investors (401ks, etc) buying entire sectors of an exchange. It's a nice scheme to ensure you bail out your 'venture capitalist' friends.
These bonds were trading below par since they were issued, for well over a year. They briefly popped over par after the S-1 was filed. That is to say, the smart money has had these valued fairly for a while, and some fake smart chumps got in late.
Is WeWork a dumpster fire? Probably, but this headline makes it sound like the status quo ante is the end of the world.
This IPO story is struggling. There have been several recent examples of public confidence in the business model collapsing post IPO, but the WSJ and others are reporting on this so heavily as it looks like we’re now seeing public confidence starting to fall apart before the IPO of an ultra-unicorn. Get your popcorn ready.
Someone might buy these bonds at their deflated prices because WeWork still needs to pay interest on that loan and if its still around will eventually pay back the original loan, but for now this is more evidence of market skepticism of the future health of WeWork financially. People are willing to just take a hit now and get out.
There isn't an institution in the world that could sell an IOU $100 for $100, not even the US Treasury. For example, if you bought a 1-year dated IOU for $100 from the US Treasury today, it would cost only $98.30.
Edit: this comment was written in response to the parent before it was edited to remove any trace of what was being replied to.
I have to say that I will be relieved if WeWork fails.
As a startup founder I think their practices are contrary to the interest of small companies looking to rent space.
They officially offer so called flexibility and hipster offices, but this is a disguise to package a lot of small/fragile companies into a big stable system they can sell to big real estate companies.
There is in practice very little value for the small companies, it's a costly gadget that can be useful in some specific cases, but companies like WeWork tend to eat all the available office space and inflate the prices.
This seems like clickbait - not a bond expert but was only at or above bar in the days following the IPO announcement, and prior to that was well below the level it is shown in this article.
[+] [-] cs702|6 years ago|reply
But if the IPO of a company as prominent as WeWork fails and the company is unable to raise the fresh capital it needs to stay afloat, we should view that as a warning sign that capital markets are shifting from "grow at all costs" to "show me the profits."
The last time we had such a shift, in 2000, it was sudden and cruel. Many fast-growing companies found themselves unable to raise capital. Down-rounds became common. There was a wave of failures. The startup ecosystem went through a long, cold winter.[b]
If you are at a money-burning startup, please make sure your company has a viable plan for survival in the event that access to fresh capital is suddenly cut off.[c]
--
[a] https://twitter.com/shiraovide/status/1161601877517246464
[b] https://en.wikipedia.org/wiki/Dot-com_bubble#Aftermath
[c] Here's a good first-hand account of a fast-growing, money-burning company that managed to survive the post-2000 environment, while most of its competitors went bankrupt: https://a16z.com/2010/03/17/the-case-for-the-fat-startup/
[+] [-] nabdab|6 years ago|reply
[+] [-] beager|6 years ago|reply
Your post seems to say "if you don't prop up WeWork, good luck raising money for your startup." I think it's a little disingenuous to project that guilt onto startups that are in reasonable early and growth stages. Every company has a viable plan for survival by that stage. And that plan is: show the market the profits.
WeWork coming back down to earth doesn't mean that suddenly we will see drastic tightening from seed-stage to growth-stage VC.
[+] [-] mrweasel|6 years ago|reply
[+] [-] rchaud|6 years ago|reply
[+] [-] rolltiide|6 years ago|reply
It is a great story for founders and for closely held corporations. The investor disclosures came out and there is no oxygen here for investors.
WeWork best deleverage and just continue its rental business.
This can function in a vacuum.
Their grow with all revenue and no profits scheme has nothing wrong with it, its the governance structure and convoluted corporate structure that all but ensures investors are guaranteed nothing.
[+] [-] alasdair_|6 years ago|reply
This quote misses an important third option - don’t get so big that even if you win one hundred percent of the market, you still can’t generate a return.
Dumping a billion dollars into a company in a niche market is also a failure mode.
[+] [-] ulfw|6 years ago|reply
[+] [-] alistproducer2|6 years ago|reply
IMO, the shift to "show me profits" could be as much about the growing societal and regulatory backlash to monopolistic tech, which, if materialized, drastically reduces the probability of achieving or maintaining monopoly.
[+] [-] lonelappde|6 years ago|reply
[+] [-] bduerst|6 years ago|reply
There are a ton of bad ideas and companies that sink all the time. WeWork isn't new or unique in this regard, for reasons you described.
Just because you see a boat sink doesn't mean the other floating boats are going to start sinking as well.
[+] [-] jboydyhacker|6 years ago|reply
Seems like a strange and skewed view.
[+] [-] arielm|6 years ago|reply
Outside tech, growth has rarely been the kind of Play you make at a great loss, and most ventures need some sort of grounding in reality.
Show me a tech IPO that seeks revenue and then we can debate a change in the markets.
[+] [-] ajross|6 years ago|reply
Exactly. I don't understand all the schadenfreude about this company. WeWork is a basically good idea that seems to fill a real need, they just couldn't make it work in the economic environment they found themselves in (which, to be fair, is mostly about the "funding environment", and thus sort of an own-goal given that they didn't "need" to take all that cash).
That said: I don't know that I agree with the 2000 crash analogy. My feeling at the time was that the venture investors were a lagging indicator. The crash started in the already-public stocks at time when angels and VC's were still desperate to make deals.
[+] [-] bksenior|6 years ago|reply
I dont think anyone think WeWork is not a strong business model. Id even take it one step further in that it's not the cash burn thats really killing people, it's the valuation. I know theyre connected as a larger company should hypothetically be able to sell less of itself for more money, but at 1/3 of the valuation I think the market feels different about the biz. Although the social signal of being forced to cut does some real bad psychological voodoo.
[+] [-] roland35|6 years ago|reply
[+] [-] CPLX|6 years ago|reply
Nah. This happened again in 2008.
[+] [-] fullshark|6 years ago|reply
[+] [-] dmitrygr|6 years ago|reply
[+] [-] cagenut|6 years ago|reply
softbank just called the top
[+] [-] duxup|6 years ago|reply
I know there were some theories on cornering the market, or getting some sort of huge buy in / contracts with companies hiring remote workers but for the most part there's plenty of office space (at least in my area) and remote work that I see rarely involves the hiring company shelling out extra for expensive office space for remote workers.
I wonder what other folks selling office space in the market think about all this? They seem to operate just fine and financially seem to do so with a lot less risk than WeWork.
[+] [-] JumpCrisscross|6 years ago|reply
The nutty thing is WeWork could have worked as a well-executed business. The core thesis, that companies of all sizes appreciate the flexibility of spinning up and down remote workplaces as a variable (versus fixed) cost has legs.
There is a borrowing-short-buying-long aspect to their business, but that could be managed through a combination of first-loss guarantees and sandboxed leases (on both sides).
The problem is the CEO, enabled by Masa Son, showed zero discipline on any level. Nepotism, self dealing, lack of focus, cost inflation...about the only thing they did right, it seems, was expansively disclose all of this to their investors.
[+] [-] chadash|6 years ago|reply
That is basically what they did, but they also marketed it really well and made the process seamless. Everyone points to Regus as an example of a company that already existed in WeWork's space, but as far as I can tell, most people have only heard of Regus because WeWork is so often compared to them.
Before WeWork, most people weren't aware that coworking spaces were an option. Startups would work out of homes or they would find cheap office space and sign long term leases for spaces they might soon outgrow. WeWork solved these issues for them.
Now, I don't think there's much of a competitive moat. I don't think there's much stopping companies from moving to any other co-working space. Their corporate governance issues are crazy. They are probably overvalued (at least as of their last raise in the private markets). But they certainly are the 900 pound gorilla in this space and the space has gotten much bigger as a result of them.
[+] [-] rb808|6 years ago|reply
It also mentions the big problem with We, than in the next downturn the revenue will likely stop and it'll be in trouble.
[+] [-] linuxftw|6 years ago|reply
If I owned a bunch of office space, I'd be exiting now (or would have already exited). I think it's probably like the bitcoin effect: bitcoin got notorious, so all the other coins went up too. IMO, uncoordinated pump and dump.
[+] [-] mtkd|6 years ago|reply
It could end up being a strong counter-cyclical model -- and outperforms as the economy tightens
Traditional office space is a 2, 5, 10 year commitment and a pain to move things around -- with WeWork you're paying monthly and relocating geographically is simple
CFOs will often look to pay more per month for shorter commitments which fit well with budgets and can be terminated quickly if situations change
WeWork also makes setting up an office in a new region super simple vs contracting with local landlords
[+] [-] fullshark|6 years ago|reply
[+] [-] bhouston|6 years ago|reply
I think that there was some type of hope that access to IPO funding will allow it to continue to search for a viable business model. This path to possible success seems to be dwindling.
If WeWork needs to have a self-sustaining business model in the near term, it could quickly collapse.
I am not sure but will SoftBank and other wealthy investors continue to fund it in its current state?
How much money does WeWork have in the bank? What is its burn rate? Could its loans get called?
Could WeWork have just months or even weeks to live? Will this failure cause investors to get spooked? They already are somewhat spooked because of Uber and Lyft post IPO performance. Thus we may be on the verge of a shift here.
I think WeWork could be the Lehman Brothers of profitless, over-funded unicorns (see: https://en.wikipedia.org/wiki/Lehman_Brothers )
[+] [-] duxup|6 years ago|reply
I've heard a lot of theories (cornering the market, the future of remote work) but I don't quite get what WeWork was selling folks on when it came to investing and evaluations that were so high in the first place.
[+] [-] linuxftw|6 years ago|reply
Many businesses that IPO aren't viable, the problem is when the general public figures that out. For instance, snap chat. In no way a viable business, but has plenty of investors thanks to the wall street scam of institutional investors (401ks, etc) buying entire sectors of an exchange. It's a nice scheme to ensure you bail out your 'venture capitalist' friends.
[+] [-] JackFr|6 years ago|reply
These bonds were trading below par since they were issued, for well over a year. They briefly popped over par after the S-1 was filed. That is to say, the smart money has had these valued fairly for a while, and some fake smart chumps got in late.
Is WeWork a dumpster fire? Probably, but this headline makes it sound like the status quo ante is the end of the world.
[+] [-] code4tee|6 years ago|reply
Someone might buy these bonds at their deflated prices because WeWork still needs to pay interest on that loan and if its still around will eventually pay back the original loan, but for now this is more evidence of market skepticism of the future health of WeWork financially. People are willing to just take a hit now and get out.
[+] [-] whatshisface|6 years ago|reply
Edit: this comment was written in response to the parent before it was edited to remove any trace of what was being replied to.
[+] [-] JackFr|6 years ago|reply
[+] [-] whatok|6 years ago|reply
[+] [-] thismyrealone|6 years ago|reply
[+] [-] gandalfgeek|6 years ago|reply
https://youtu.be/WhDi_2-hvLw
[+] [-] stephc_int13|6 years ago|reply
As a startup founder I think their practices are contrary to the interest of small companies looking to rent space.
They officially offer so called flexibility and hipster offices, but this is a disguise to package a lot of small/fragile companies into a big stable system they can sell to big real estate companies.
There is in practice very little value for the small companies, it's a costly gadget that can be useful in some specific cases, but companies like WeWork tend to eat all the available office space and inflate the prices.
[+] [-] tempsy|6 years ago|reply
[+] [-] forgotmypw|6 years ago|reply
WeWork is carving out a new nation, with its own space and rules, from right inside an existing one.
And its citizens are from one of the productive and capable segments of the population: tech workers and entrepreneurs.
If they can get past growing pains, I foresee WeWork becoming a superpower.
Hopefully, their human-owned nature will keep them on the good path.
[+] [-] Havoc|6 years ago|reply
[+] [-] unknown|6 years ago|reply
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