Showing posts with label wework. Show all posts
Showing posts with label wework. Show all posts

Wednesday, October 23, 2019

Can WeWork Be Rescued?

I have not read too much on this topic, so I will refrain from taking major stands. I will keep my comments to the minimum. But some outlines are obvious even if you just skim the headlines. And WeWork has been making the headlines for all the wrong reasons recently.

Is this like throwing good money after bad? Maybe not. Without this cash infusion, all of Softbank's earlier investment would have gone to zero. I think they had $30 billion into it. Which was a stupid sum to begin with. 30B is a lot to give a company.

The basic business model of WeWork was not and is not unsound. You grab larger properties in big cities, slice them up, and rent out individual desks. I can see a margin there. That can be profitable. But is this scalable? Can it see exponential growth like tech startups are expected to have? Maybe, maybe not. But it looks like WeWork ended up having some major governance issues. Bad governance on its own can kill. But sometimes if there is too much dissonance in what you say you will do, and what you perform, that can lead to governance constipation.

This cash infusion has prevented the immediate death of WeWork. But now Softbank has 40B in this venture. Can this be recouped? Fast enough? I am not sure. I don't know.

WeWork has created some great coworking spaces. I have visited many of them. In fact, I have seen the company from its infancy. I have been impressed. It has grown right before my eyes. Too bad the insides have been less remarkable. I hope WeWork sticks around. But I feel sorry for Masa Son. This 40B is going to be too much of a drag on his 100B Vision Fund. Now there is tremendous pressure on the other 60B to perform. This 40B will not give him 10X, which is considered excellent by VCs. And this might still go to zero. So that is a lot of pressure.

There is plenty of early-stage action. There is more early-stage tech startup action now on the planet (and I mean the planet, not Silicon Valley, or New York) than ever before. So I am not going to argue 100B is too big a size for a VC fund. But Masa did not go into WeWork's early stage. He went in when WeWork was grabbing all the headlines.

There are plenty of Yahoos and Alibabas on the cutting edges of technology today. Too bad Masa was caught sleeping on the wheels. We just saw a very expensive firing of a CEO.

WeWork: Blitzscaling or Blitzflailing? Prominent news organizations, ranging from The Economist to Wired (multiple times), have been describing WeWork as an example of blitzscaling. ....... We argued extensively in our book, Blitzscaling, that these strategies and tactics describe why Silicon Valley Bay Area – which has a population of less than 4 million – generates such a massively disproportionate number of global technology companies. ......... If you add together Apple, Alphabet, eBay, Facebook*, Lyft, Palo Alto Networks*, PayPal, Salesforce, ServiceNow*, Twitter, Uber, and Workday*, these twelve companies alone have a market capitalization of $3 Trillion, a little bit more than the annual GDP of the United Kingdom in 2018. ..........

blitzscaling is prioritizing speed over efficiency in the face of uncertainty

........ Blitzscaling does call for prioritizing speed over profits ....... The purpose of blitzscaling is to achieve enduring market leadership in what we call Glengarry Glen Ross markets. A Glengarry Glen Ross market is a winner-take-most market that occurs when being the first player to reach critical scale brings lasting competitive advantage. The term comes from the classic movie about a sales contest where “First prize is a Cadillac, second prize is a set of steak knives, and third prize is, ‘You’re fired.’” ......... Once achieved, leadership in a Glengarry Glen Ross market can provide decades of substantially profitable operations, repaying and justifying the costs incurred in blitzscaling. ......... In Blitzscaling, we lay out the four key growth factors that enable a company to successfully blitzscale, as well as the two key growth limiters that can make the strategy a poor choice. ........ It doesn’t make sense to expend massive resources to win a small market. ..... A good product with great distribution is more likely to win a Glengarry Glen Ross market than a great product with poor distribution. ........ The purpose of blitzscaling is to win the market so that the company can generate massive profits for years or even decades. (Consider Amazon’s evolution from a low-margin retailer to a high-margin marketplace and cloud computing leader.)....... Network Effects (or other competitive moats) ... This is the key growth factor that defines a Glengarry Glen Ross market. Without this growth factor, it’s hard to financially justify the high cost of blitzscaling. ........ two key growth limiters: ... Product/Market fit doesn’t guarantee long-term success, but a lack of Product/Market fit does guarantee long-term failure. ..... Designing a scalable economic model isn’t enough if the company can’t scale up operations to meet demand. This applies to both the infrastructure and the organization. ........ WeWork business model .. in the first half of 2019, the company had revenues of $1.5 billion and expenses of $2.9 billion. ....... Apple’s gross margin is 38%, and Alphabet’s 56%. ..... WeWork with gross margins of just 3% ...... Unlike software, where you can sell as many copies as the customers want, you can’t rent the same square foot of space to more than one tenant. ........ in the end, WeWork’s business model doesn’t provide any lock-in. WeWork tenants can easily move, and many of its co-working members don’t even need a cardboard box to clean out their dedicated desks. ...... it’s not clear that there is a “Cadillac/steak knives/you’re fired” market dynamic at work. ......... WeWork’s occupancy rate of 80% compares favorably to IWG’s 72%. This suggests that customers like the WeWork product. ....... WeWork offers American Express Platinum customers an entire year of WeWork access for free—a $2,700 value that comes bundled with a credit card with a $450 annual fee. Offers like this can boost occupancy but hurt gross margins. Subsidies only make sense in blitzscaling if they are a temporary measure that allows you to achieve market leadership and establish a profitable and sustainable business on the other side of those subsidies. ............. Alphabet invented AdWords several years after launching; Amazon invented AWS more than a decade after going public. ........

While WeWork’s business model checks the boxes on big market, effective distribution, and Product/Market fit, the poor gross margins (with no clear path to significant improvement), operational scalability challenges, and most importantly, lack of network effects and lock-in, indicate that this is not a Glengarry Glen Ross market where you can build enduring and profitable market leadership. Thus, the choice of blitzscaling is likely a dangerous rather than intelligent risk.

............ Hotel companies like Marriott and Hilton have pursued an “asset-light” strategy where they manage the hotels that carry their brand, rather than owning the actual bricks and mortar. Airbnb is completely asset-less, acting as a two-sided marketplace to bring together hosts and guests. ........ we explain why blitzscalers should never take risks that endanger their customers or pose a significant risk to the fabric of society ....... ethical or integrity risks like the self-dealing behavior that reportedly took place under the watch of WeWork’s founder and former CEO, Adam Neumann. ........ the value WeWork created doesn’t appear to exceed the amount of capital expended to build it. ........

Without major changes to its business model, WeWork’s efforts at blitzscaling seem likely to turn into blitzflailing.

SoftBank to Take Majority Stake in WeWork as Adam Neumann Gets Big Payout The deal reportedly calls for WeWork co-founder Adam Neumann to receive nearly $1.7 billion and surrender his posts as chairman and a director. ...... WeWork chose a rescue proposal from SoftBank over a competitive offer from JPMorgan Chase (JPM), although one source familiar with the situation told Barron’s that JPMorgan never made a serious alternative.

WeWork’s IPO Nightmare a morass of ethical, legal and financial lapses was revealed, to which the investor public's appetite for WeWork sharply waned. ....... WeWork, founded in 2010 by Adam Neumann and Miguel McKelvey ....... The company has over 12,000 employees and manages over 600 properties and operations in over 120 cities worldwide. WeWork is said to manage 46.43 million square feet of property. ...... WeWork scouts buildings and transforms them which it has done for Facebook, Microsoft, HSBC, and Deloitte. ........ “[WeWork] happens to need buildings just like Uber happens to need cars, just like Airbnb happens to need apartments.” (Neumann, A., 2014). ....... The Company also has $47.2billion of location lease liabilities, making it one of the top-3 renting companies in the world ...... “what makes WeWork worth more, the company seems to be saying, is that it’s a tech company — meaning its innovation and flexibility make it better than a regular real estate company” ....... About 40% of WeWork memberships came from companies with 500 or more employees in the second quarter of 2019 ........ Through its $100 billion Softbank Vision Fund (“Vision Fund”), Softbank has invested c.$10.65 billion in WeWork, making it the second-largest shareholder (c.29% ownership), after the combined holdings of the founders. ........ Behind the scenes, it was rumored that Softbank was aggressively pushing for the now ill-fated valuation amount of $47 billion; a significant multiplier in the value of its existing shares if they decided to take the option of reducing their shareholding and ‘cut & run’ from a ‘financially risky’ company ......... Adam Neumann bought real-estate property and leased it back to the Company, the founders owned the trademark on the name “We” ..... these actions essentially constitute ‘double-dipping’ ....... While Neumann received benefits of his role as the Company CEO, he could also receive millions of dollars in secondary income through rent and licensing fees. Even though this might not have raised any legal red-flags, it was certainly ethically questionable, because these actions caused a conflict of interest on the part of the CEO. ........ Ahead of its planned IPO, Neumann liquidated $700 million of his holdings in the Company; a legally acceptable transaction, but ethically questionable; such moves, particularly by senior management members, as showing a lack of confidence in the company. These actions (which could have completely been avoidable), which were never explained, also dampened investor appetite in the Company .......

Nepotism within the Company was rife, where family and friends were granted senior roles, many of which they were not qualified for.

‘The company disclosed two connections in the IPO prospectus: One was Adam’s brother-in-law, who ran the company gym. It also said an immediate family member was paid to host eight live events for the company. ......... The chief product officer was Rebekah’s brother-in-law; the longtime head of real estate was Rebekah’s cousin; and for years, the company’s mega summer retreats were hosted at a venue in upstate New York owned by the cousin’s parents, further evidence of self-dealing. .......

Running high personal expenses, masked as business costs; the Company purchased a $60 million G650 Gulfstream private jet

, and spent even more on upgrades, purchases of chauffeured driven luxury cars, and hosting of lavish parties. .......... Its complex ‘choose-your-adventure’ corporate structure; it makes for such a legal-headache ....... All this was a little too late, as research analysts and social commentators had published their ‘hold’ recommendations and scathing reviews of the Company, respectively. ...... “there appears to be no scale effects, as losses have kept pace with revenue growth. There is little pricing power, as they are still a mole on the elephant of commercial real estate.”

WeWTF In frothy markets, it's easy to enter into a consensual hallucination, with investors and markets, that you’re creating value. And it’s easy to wallpaper over the shortcomings of the business with a bull market's halcyon: cheap capital. WeWork has brought new meaning to the word wallpaper. . ....... WeWork's prospectus has a dedication (no joke): "We dedicate this to the power of We — greater than any one of us, but inside each of us." Pretty sure Jim Jones had t-shirts printed up with this inspiring missive. Speaking of idolatry, "Adam" (as in Neumann) is mentioned 169 times, vs. an average of 25 mentions for founder/CEOs in other unicorn prospectuses. ......... We's mission is "to elevate the world's consciousness." ......... We isn't a real estate firm renting desks, it's a Space as a Service (SAAS) firm. I know, use the word "technology" over and over, despite having little R&D and computers and stuff, and voilĂ  … we're Salesforce. ........ Today I froze water and used this technology to reconfigure the environment encapsulating my Zacapa and Coke. So, I'm Bill Gates. ........ We has begun reporting "Community-based EBITDA," profitability before the BITDA, but is also taking out expenses, including real-estate, that comprise the bulk of cost required to deliver the service. A more honest description of the metric would be "EBEE, Earnings Before Everything Else." ........ As someone who follows stocks and goes on TV to pretend I have any idea which direction a given stock is going, I'd like to suggest a few metrics to provide insight into We: .......... Adam Neumann has sold $700 million in stock. .. This is 700 million red flags that spell words on the field of a football field at halftime: "Get me the hell out of this stock, but YOU should buy some." ............. Adam has several family members working in the business who make “less than $200,000." ...... The corporate governance structure of WeWTF makes Chinese firms look American, pre–big tech. ...... The related party section of this prospectus reads like the Trump administration. Adam owns 10 buildings, several that he leased to WeWTF at a handsome profit. Adam also owned the rights to the "We" trademark, which the firm decided they must own and paid the founder/CEO $5.9 million for the rights. The rights to a name nearly identical to the name of the firm where he’s the founder/CEO and largest shareholder. ........ WeWTF has $47 billion in long-term obligations (leases) and will do $3 billion in revenue this year. What could go wrong? ........ There are other businesses like this (real estate, Hertz), and they are good businesses. Businesses that trade at, I don't know, 0.5 to 2x revenues. ....... But is this firm, trading at 26x revenues, superior to Amazon, which trades at 4x revenues? There appears to be no scale effects, as losses have kept pace with revenue growth. There is little pricing power, as they are still a mole on the elephant of commercial real estate. There is no defensible IP, no technology, no regulatory moats, no network effects, and no flywheel effect (the ancillary businesses are stupid, just stupid). ............ The last round $47 billion "valuation" is an illusion. SoftBank invested at this valuation with a "pref," meaning their money is the first money out, limiting the downside. The suckers, idiots, CNBC viewers, great Americans, and people trying to feel young again who buy on the first trade — or after — don’t have this downside protection. Similar to the DJIA, last-round private valuations are harmful metrics that create the illusion of prosperity. The bankers (JPM and Goldman) stand to register $122 million in fees flinging feces at retail investors visiting the unicorn zoo. Any equity analyst who endorses this stock above a $10 billion valuation is lying, stupid, or both. ............. Adam's wife is Gwyneth Paltrow's cousin

Musings on Corporate Governance for Venture-Backed Companies From my perspective of reading the news, we’ve seen a breakdown in governance for several fast-growing technology companies. Take Ofo as an example, once the leading bike-sharing company in China. The company went from a $3 billion valuation to the brink of bankruptcy in less than a year in 2018. Part of the fault falls on poor corporate governance structure. According to a Tech In Asia titled, “Ofo and the dangers of investment capital,” several common and preferred board members all held veto rights, which was a barrier in strategic decisions. There was an opportunity to merge Ofo with its key competitor Mobike that most board members supported but was voted down by a single board member.

Friday, September 13, 2019

Softbank's Problem: Vision, Not Money

100 billion dollars is a lot of money, but it is not too much money for all the innovation that needs to happen, that will happen, with or without the Softbank Vision Fund. So where did the Vision Fund go wrong?

Masa by now has the wrong vantage point.

A tech startup can fail every step of the way. It can fail post-IPO.

But veterans (and give him credit, he has a Steve Jobs-like aura ... he has a stellar record) like Masa learn to become cautious and careless at the same time. Cases in point: Uber and WeWork.

It is hard to spot Uber and WeWork in their early rounds. But by the time they become unicorns, you think, okay, I missed out when it grew from one million to one billion in market value, but now I got it. If I can hop on now, I will still likely see a 100X growth to my investment, when 10X is considered excellent.

But then things go topsyturvy. Elon Musk wants to eat Uber alive. WeWork starts crumbling down right before your eyes post-IPO.

Both are sound companies. Both shifted the paradigm.

Masa picked Alibaba when Alibaba was really young. He has to go to those roots. Maybe it is hard to do. But there are enough early stage companies in the world today that will easily absorb 100B, or whatever is left of it after Uber and WeWork, two dud investments of Masa.