This has all happened before. The proto-WeWork was called HQGlobal and the firm behind it was Frontline Capital. The whole thing unraveled in the 2000 bust as the tenants all went out of business and canceled their leases at the same time. WeWork is not going to be pretty when the economy turns. Bill Ackman backed Frontline Capital and it pretty much sunk his first hedge fund, Gotham Capital.
> Mr. Neumann still has allies among the directors and the ability to fire the entire board thanks to shares he controls that carry extra votes.
It defies imagination that a fund would put 10B into a company whose CEO is accountable to no one. I think we may also see new leadership in SoftBank, or at least their next fund.
You can thank loose monetary policy that has created an unbalance between capital seeking returns and the number of investment opportunities. Executives have leveraged this into abusive multi-class share structures that sacrifice shareholder's ability to reign in company behavior. The result is a few tech executives wielding unaccountable authority over incredibly powerful economic resources.
This is awesome, it might force the private sector to regulate governance structures more strictly.
The exchanges and indexes already do this, but haven't gotten around to cultish companies that consider themselves tech. The exchanges and indexes say things like “minimum X% of float needs to be in the market”, so you dont have 1% of the company trading with the CEO now being a billionaire on paper from 99% of shares. Ive seen Chinese exchange allows for shenanigans like that, for example, while US ones dont. They could easily dictate share class structures, ultimate beneficial ownership rules, and more.
This would force VCs and PE to require changes no matter how much FOMO they have.
WeWork is a useful product. Office real estate is broken for startups. Landlords make us take 5-10 year leases when startup planning horizons are almost never longer than 18 months. WeWork earning 30-40% margins by allowing us to take shorter terms that better fit our needs. Should be a good business.
With $700M extracted and long term leases to the company for properties that he owns... One could easily ride off into the sunset.
It will be interesting, and insightful, to see if that is the tact he takes. If he does... It will add credibility to the already strong case for this being deliberate deceit versus unchecked ignorant hubris.
The $700M figure is a combination of equity sold outright and loans taken out using the equity as collateral. I have not seen any breakdown of how much falls in each category. I would not be surprised to see those loans get called in soon given the current situation and the recent governance change requiring him to pay back any profits he makes on leasing those properties to We.
I'm not sure if any other employee in any other company could get away with something like that. Sounds like a clear conflict of interest to me. Same goes for some of Elon's and Tesla's business transactions, so. Sounds like an overall bad idea to me, just how SoftBank accepted any of it is beyond my imagination.
I'm all for letting founders cash out to a certain degree before an IPO, but 700M and the lease agreements? Bot sure if that was a good deal for investors.
Help me understand how this is a coherent argument. I could see making the argument that investors share some of the blame for what the CEO did. How could they have more of the blame?
Adam has the votes, but not the cash. Softbank has the cash, but not the votes. Arrangements can be made.
Ironically, that's a problem for Adam precisely because We is not Theranos. Holmes had the votes and the cash, which hadn't been spent yet since Theranos wasn't a real business, and she could (and did) just coast for years on what was already in the bank without any need to go to any investors or banks or third parties (who would of course have demanded her ouster as step 1). But since We is a real business with real users and a successful one, We can't just coast on its cash (even if it stopped expansion).
If he fires the whole board, wouldn't that add further doubt about the company's governance and reduce the expected value of any future IPO even further? It doesn't seem like that would be in his best interest.
It depends, I suppose, on how soon We needs more investor money. If he actually exercises his right to fire the entire board, it seems like it would be hard to get somebody else to chip in big money.
On the other hand, it could be that Softbank knows it won't work, but feels they have to be seen attempting something.
This is just the beginning. Start microwaving some popcorn because this will be quite a glorious train wreck to watch! Hopefully the negative impacts are economically isolated.
I don’t mean to speak in support of the CEO, and I don’t say this to support WeWork.
> The Wall Street Journal reported last week that Mr. Neumann had taken marijuana on a flight from New York to Israel.
In this day and age, where we have businesses that legally sell weed, this sort of commentary appears to be a pointless inclusion of “salacious” details. It is irrelevant to the discussion of whether WeWork has a legitimate growth model or whether the CEO is doing the “right” thing.
I suspect that SoftBank is attempting to win this battle in the court of public opinion, because they bought shares that didn’t have the same voting rights as Mr Neumann’s shares, and they now regret that decision.
Didn't the two head honchos already redirect some cashflow to their accounts? I think they and their grandchildren will be fine... Softbank on the other hand...
Leaving aside all of the headline-making entertainment of Adam Neumann being Adam, the real problem here is that WeWork really doesn't have much in the way of enduring network-effect advantages -- even though it tried so hard to convince investors otherwise.
In many tech-fueled marketplaces, getting big in a hurry is a practically unbeatable advantage. I saw this 20 years ago when I was tracking eBay. No end of little players would approach me and say: "I've designed a better marketplace than eBay. If I just had 1 million users, you'd see how good it is."
But it was too late, and there was no way for them to go from 10 users, to 10,000, to anything bigger. Loyalties on both sides of the market were already sewn up. Both buyers and sellers wanted a deep, super-smooth market where they could transact 10-50 times a month without ever being frustrated by a lack of market depth.
When people need a viable market many times a week, switching costs become unfathomably high. eBay owned that concept for as long as it would work. It's been basically the same story for Uber, Lyft, Twitter, etc.
But this is not true the one-time need of renting this season's splashy workspace with free kombucha. Tenants pick their spot and then stay for 3 months, 11 months, three years or whatever. There's a little bit of shuffling around and re-transacting, but not nearly as much.
Besides, if the WeWork concept is that good, it's easy to copy and does not need giant scale to work. That's totally different from trying to build the third ride-hailing service. In this case, someone who owns three office buildings in Chicago's West Loop can convert them to a WeWork clone and rent them just fine to people who want to be in that neighborhood.
The fact that this new outfit (WeLoop) does not have a London outpost or a list of 75,000 other tenants in other states is irrelevant. Buyers show up for one transaction (get me a groovy office space in my neighborhood) and then they are done. That is already beginning to happen, in fact.
Yeah, WeWork has a greater ability to serve large corporations that want an ever-changing blend of space in a lot of cities. But that's not its core market. And even if it is, WeWork isn't automatically better off than existing REITs that can tweak their multi-city properties as needed.
So it's brave of Team Adam to go into a lot of cities all at once and tell people that this year's losses will soon give way to profits once the buildings fill up. But that doesn't seem to be happening on schedule. And even if WeWork eventually gets to breakeven, that just entitles it to compete against a lot of established players who already own better buildings in better locations -- and who can clone whatever elements of WeWork design seem appealing to customers.
Getting access to capital on super-friendly terms gave WeWork the ability to build fast, almost regardless of what the short-term economics might be. But now access to capital is getting quite a bit harder.
And that can feed on itself in scary ways. Once capital gets scarce, a lot of expansion plans get much harder to carry out. Now growth slows. And that makes investors more jittery. Borrowing rates go up; loan covenants get tighter, and equity dilution gets more severe. Growth shrinks further. Money gets tighter.
In such situations, it takes a skilled pilot to land the plane safely, let alone regain altitude.
It's really hard to see where their killer position is.
If the focus is getting a lot of people into an office for a long time, then it will eventually be cheaper for those people to rent their own.
If focus is on short term individuals, then they can just switch to whichever competitor comes along with a newer office and a more enticing introductory rate.
Maybe main advantage is that they're flexible. If you need 20 people sitting together in a random city, for 6 months, starting end of the month - well they can do this, but so can all manner of other managed office providers.
Other 'unicorns' such as Uber and Lyft can compete based upon which app you open first, how many drivers they can put near you - We has to compete by making great big office buildings appear.
I think it's possible there could be advantages for a chain co-working space over independent ones, but it depends on how the market looks long term. Not saying that chain has to be WeWork, of course.
For instance, short term users, who pay the highest rates, could turn out to be a big part of the market. That could be business travelers, companies moving office or setting up offices, companies that need temp office work, etc. They may go for a well-known chain over an independent, just like business travelers often do with hotels. Similar with, as you mentioned, big companies that need to hire in a lot of different cities at once.
It's also possible a big chain could manage to offer better deals than a smaller player if they can negotiate with big, multicity landlords and other vendors or get some kind of special deals for members (e.g., discounts on software, or cheap lunch delivery/taxi service sharing drivers between members).
We also owns Meetup, and I could see WeWork or another chain finding ways to offer additional uses that we don't currently associate with coworking spaces. The advantage could be easy online booking for all kinds of meetings and events, maybe with added features like food and beverage catering.
A chain could also effectively become a marketplace for coworking and other temporary business space needs. Maybe you could book a spot for your company holiday party, or reserve a shopping mall kiosk for a week to do user testing, or even book space at a non-corporate-owned coworking space through your account.
Valuation is based on what percent of shares an investor buys for how much. eg; if I buy 5% (0.05) of a company for 100$. The company valuation would be 100 / 0.05 = 2000$.
It can be a little more complicated with post and pre buy valuation, but that is the general idea.
It seems too late for this to make much of a difference in IPO valuation for investors (really SoftBank) to get the exit they want. Neumann's actions may have been a catalyst, but now everyone is really questioning the "tech startup" valuation and unit economics.
Everyone likes to pile on WeWork, and I get it, but as someone who dealt with both startup and solo office leases in the pre-WeWork era: my God is WeWork's model comparatively amazing as a customer. The spaces are nice, there are no headaches, you can purchase the exact amount of space and duration you need, and you have a guaranteed decent place to do some work or just hang out anywhere you travel.
The "no competitive advantage / anyone can do this" crowd is sort of ignoring the fact that no one did, at least for folks that care about the things I mention.
No one discusses it, but I thought a bit reason WeWork got this far is that when they started, the financial crash meant commercial leases were very cheap. Since they lock those in for 10+ years, but then their contracts with the clients are 1m month plus, they have seen revenue rise with the economy but costs stay roughly the same.
Its sort of the opposite of the problem banks have where they borrow short term and lend long term.
I am randomly bombarded by negative things regarding WeWork on the internet lately. Some posts linked to negative news coverages about WeWork appeared on my facebook feed (business insider articles) I saw somewhere else that how some WeWork division manager wanted employees fired because she didn't like their energy.
I have no opinion about the company neither I want to but I definitely feel pushed to have a negative opinion about them!
[+] [-] soniman|6 years ago|reply
[+] [-] jeremyjh|6 years ago|reply
It defies imagination that a fund would put 10B into a company whose CEO is accountable to no one. I think we may also see new leadership in SoftBank, or at least their next fund.
[+] [-] Donald|6 years ago|reply
[+] [-] ink_13|6 years ago|reply
[+] [-] paggle|6 years ago|reply
[+] [-] selimthegrim|6 years ago|reply
[+] [-] rolltiide|6 years ago|reply
The exchanges and indexes already do this, but haven't gotten around to cultish companies that consider themselves tech. The exchanges and indexes say things like “minimum X% of float needs to be in the market”, so you dont have 1% of the company trading with the CEO now being a billionaire on paper from 99% of shares. Ive seen Chinese exchange allows for shenanigans like that, for example, while US ones dont. They could easily dictate share class structures, ultimate beneficial ownership rules, and more.
This would force VCs and PE to require changes no matter how much FOMO they have.
[+] [-] thedogeye|6 years ago|reply
[+] [-] kunday|6 years ago|reply
https://www.profgalloway.com/wewtf-part-deux
[+] [-] MobileVet|6 years ago|reply
It will be interesting, and insightful, to see if that is the tact he takes. If he does... It will add credibility to the already strong case for this being deliberate deceit versus unchecked ignorant hubris.
[+] [-] DebtDeflation|6 years ago|reply
The $700M figure is a combination of equity sold outright and loans taken out using the equity as collateral. I have not seen any breakdown of how much falls in each category. I would not be surprised to see those loans get called in soon given the current situation and the recent governance change requiring him to pay back any profits he makes on leasing those properties to We.
[+] [-] blantonl|6 years ago|reply
[+] [-] hef19898|6 years ago|reply
I'm all for letting founders cash out to a certain degree before an IPO, but 700M and the lease agreements? Bot sure if that was a good deal for investors.
[+] [-] iamleppert|6 years ago|reply
Even the name of the company is a bold-faced lie.
[+] [-] rightbyte|6 years ago|reply
https://en.wikipedia.org/wiki/Royal_we
[+] [-] stagger87|6 years ago|reply
[+] [-] quickthrower2|6 years ago|reply
[+] [-] benjaminbrodie2|6 years ago|reply
[+] [-] tempsy|6 years ago|reply
[+] [-] tptacek|6 years ago|reply
[+] [-] raverbashing|6 years ago|reply
It would be funny if this blew up in SoftBank's face. I think it will make even Theranos sound more sensible.
Sure, the product exists and it's good but the "business plan" and its assumptions and business structure don't make much sense.
Though I don't know how long they will survive without any more cash injections in the short term due to all their rental liabilities.
[+] [-] exogeny|6 years ago|reply
Softbank is completely fucked.
[+] [-] gwern|6 years ago|reply
Ironically, that's a problem for Adam precisely because We is not Theranos. Holmes had the votes and the cash, which hadn't been spent yet since Theranos wasn't a real business, and she could (and did) just coast for years on what was already in the bank without any need to go to any investors or banks or third parties (who would of course have demanded her ouster as step 1). But since We is a real business with real users and a successful one, We can't just coast on its cash (even if it stopped expansion).
[+] [-] Lx1oG-AWb6h_ZG0|6 years ago|reply
[+] [-] greenyoda|6 years ago|reply
[+] [-] rossdavidh|6 years ago|reply
On the other hand, it could be that Softbank knows it won't work, but feels they have to be seen attempting something.
[+] [-] bhouston|6 years ago|reply
[+] [-] pythonwutang|6 years ago|reply
[+] [-] 19ylram49|6 years ago|reply
[+] [-] larkinrichards|6 years ago|reply
> The Wall Street Journal reported last week that Mr. Neumann had taken marijuana on a flight from New York to Israel.
In this day and age, where we have businesses that legally sell weed, this sort of commentary appears to be a pointless inclusion of “salacious” details. It is irrelevant to the discussion of whether WeWork has a legitimate growth model or whether the CEO is doing the “right” thing.
I suspect that SoftBank is attempting to win this battle in the court of public opinion, because they bought shares that didn’t have the same voting rights as Mr Neumann’s shares, and they now regret that decision.
[+] [-] rvz|6 years ago|reply
According to him, it's more like MeWork.
[+] [-] bitL|6 years ago|reply
[+] [-] MobileVet|6 years ago|reply
Taking a little out to derisk yourself after a B or greater round is reasonable. Taking almost 10% of a round is obnoxious.
[+] [-] KoftaBob|6 years ago|reply
[+] [-] GCA10|6 years ago|reply
In many tech-fueled marketplaces, getting big in a hurry is a practically unbeatable advantage. I saw this 20 years ago when I was tracking eBay. No end of little players would approach me and say: "I've designed a better marketplace than eBay. If I just had 1 million users, you'd see how good it is."
But it was too late, and there was no way for them to go from 10 users, to 10,000, to anything bigger. Loyalties on both sides of the market were already sewn up. Both buyers and sellers wanted a deep, super-smooth market where they could transact 10-50 times a month without ever being frustrated by a lack of market depth. When people need a viable market many times a week, switching costs become unfathomably high. eBay owned that concept for as long as it would work. It's been basically the same story for Uber, Lyft, Twitter, etc.
But this is not true the one-time need of renting this season's splashy workspace with free kombucha. Tenants pick their spot and then stay for 3 months, 11 months, three years or whatever. There's a little bit of shuffling around and re-transacting, but not nearly as much.
Besides, if the WeWork concept is that good, it's easy to copy and does not need giant scale to work. That's totally different from trying to build the third ride-hailing service. In this case, someone who owns three office buildings in Chicago's West Loop can convert them to a WeWork clone and rent them just fine to people who want to be in that neighborhood. The fact that this new outfit (WeLoop) does not have a London outpost or a list of 75,000 other tenants in other states is irrelevant. Buyers show up for one transaction (get me a groovy office space in my neighborhood) and then they are done. That is already beginning to happen, in fact.
Yeah, WeWork has a greater ability to serve large corporations that want an ever-changing blend of space in a lot of cities. But that's not its core market. And even if it is, WeWork isn't automatically better off than existing REITs that can tweak their multi-city properties as needed.
So it's brave of Team Adam to go into a lot of cities all at once and tell people that this year's losses will soon give way to profits once the buildings fill up. But that doesn't seem to be happening on schedule. And even if WeWork eventually gets to breakeven, that just entitles it to compete against a lot of established players who already own better buildings in better locations -- and who can clone whatever elements of WeWork design seem appealing to customers.
Getting access to capital on super-friendly terms gave WeWork the ability to build fast, almost regardless of what the short-term economics might be. But now access to capital is getting quite a bit harder.
And that can feed on itself in scary ways. Once capital gets scarce, a lot of expansion plans get much harder to carry out. Now growth slows. And that makes investors more jittery. Borrowing rates go up; loan covenants get tighter, and equity dilution gets more severe. Growth shrinks further. Money gets tighter.
In such situations, it takes a skilled pilot to land the plane safely, let alone regain altitude.
[+] [-] goldcd|6 years ago|reply
If the focus is getting a lot of people into an office for a long time, then it will eventually be cheaper for those people to rent their own.
If focus is on short term individuals, then they can just switch to whichever competitor comes along with a newer office and a more enticing introductory rate.
Maybe main advantage is that they're flexible. If you need 20 people sitting together in a random city, for 6 months, starting end of the month - well they can do this, but so can all manner of other managed office providers.
Other 'unicorns' such as Uber and Lyft can compete based upon which app you open first, how many drivers they can put near you - We has to compete by making great big office buildings appear.
[+] [-] smelendez|6 years ago|reply
For instance, short term users, who pay the highest rates, could turn out to be a big part of the market. That could be business travelers, companies moving office or setting up offices, companies that need temp office work, etc. They may go for a well-known chain over an independent, just like business travelers often do with hotels. Similar with, as you mentioned, big companies that need to hire in a lot of different cities at once.
It's also possible a big chain could manage to offer better deals than a smaller player if they can negotiate with big, multicity landlords and other vendors or get some kind of special deals for members (e.g., discounts on software, or cheap lunch delivery/taxi service sharing drivers between members).
We also owns Meetup, and I could see WeWork or another chain finding ways to offer additional uses that we don't currently associate with coworking spaces. The advantage could be easy online booking for all kinds of meetings and events, maybe with added features like food and beverage catering.
A chain could also effectively become a marketplace for coworking and other temporary business space needs. Maybe you could book a spot for your company holiday party, or reserve a shopping mall kiosk for a week to do user testing, or even book space at a non-corporate-owned coworking space through your account.
[+] [-] akulbe|6 years ago|reply
Does a CEO have anything to do with that, or is it wholly external?
[+] [-] goatinaboat|6 years ago|reply
If I later buy 1 share for $2 then your valuation has doubled. That is basically SoftBank’s business model.
[+] [-] 100-xyz|6 years ago|reply
It can be a little more complicated with post and pre buy valuation, but that is the general idea.
[+] [-] ineedasername|6 years ago|reply
[+] [-] sciencewolf|6 years ago|reply
[+] [-] toomuchtodo|6 years ago|reply
Edit: This isn’t meant to be flippant. There is literally no value in this company and its current owners are trying to dump it on a greater fool.
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] emagdnim2100|6 years ago|reply
The "no competitive advantage / anyone can do this" crowd is sort of ignoring the fact that no one did, at least for folks that care about the things I mention.
[+] [-] komali2|6 years ago|reply
[+] [-] LatteLazy|6 years ago|reply
Its sort of the opposite of the problem banks have where they borrow short term and lend long term.
[+] [-] serguzest|6 years ago|reply
I have no opinion about the company neither I want to but I definitely feel pushed to have a negative opinion about them!
[+] [-] domnomnom|6 years ago|reply