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>The Gulf investors backing the Vision Fund seem to have decided that WeWork is not a tech bet but simply an aggressive punt on real estate. This is the bogey
by Traster 8y ago
>The Gulf investors backing the Vision Fund seem to have decided that WeWork is not a tech bet but simply an aggressive punt on real estate.
This is the bogey man of a huge number of current 'tech startups' - What if it turns out Tesla really are a car company! Or if We Work are actually an office rental company! OR gasp Uber is a cab company! (1)
We now have a glut of companies operating in traditional markets that have valuations that would indicate they'll be as big or bigger than their biggest competitors. IWG is a comparable company to WeWork, has £2.35n revenue and £1.95Bn market cap. Wework has slightly lower revenue but is being lined up for a £20Bn valuation. Not only this, but WeWork are going to learn about the cyclical nature of office rental revenue.
The key for these companies is to show concrete indicators that their business is actually different from the companies they're disrupting and We Work has done an absolutely rubbish job of that so far.
(1) I want to be clear I don't think all those examples have nothing to differentiate them, but it's closer than some people might like to think.
- scandox 8y agoIn 1999 there was an email going round about how ridiculous dotcom valuations were. Taking Amazon, I think, as an example it said it would have to earn more than Kodak, Boeing, Caterpillar etc to ever be worth it's valuation. There was a general sense of "it's just a bookstore". Now I know everything is more mature and the situation is different, but I also remember feeling very confident that Amazon was waaay overvalued.
- zwkrt 8y agoPets.com was also overvalued, right? It's easy to see the winners in hindsight.
- wuliwong 8y agoIt went out of business in 2000 so I guess any valuation over zero turned out to be too high?
- coldcode 8y agoPets went out of business trying to ship heavy dog food for free. But today the logistics for that actually exists. Often it doesn't pay to be too early. If you are too early you need more cash to stick around until you are proven right. Webvan was another example, today food shipping businesses are everywhere (whether they make money or not one can argue) but back then they were too early and tried too hard before the logistics worked.
- mrnobody_67 8y agoChewsie sold for $3.35 billion recently...
- ironcan 8y agoOn the flip side, if it wasn't Amazon mentioned but pets.com, they were entirely right.
- bryanlarsen 8y agoI guess the right question is, was a basket containing Amazon.com, pets.com and all the rest overvalued? Amazon is up about 15X since its peak before the crash, the dow is at 3X over the same period. So as long as AMZN was >= 20% of your basket, then it was fairly valued. Sounds about right.
- bilbo0s 8y ago>So as long as AMZN was >= 20% of your basket... and there's the rub, knowing, a priori, what the proper balance should be.
- deleted 8y ago[deleted]
- Cthulhu_ 8y agoAmazon also aggressively and effectively expanded from being "just" a bookstore to a cheap store that sells everything, and diversified even further by effectively creating the multi-billion dollar cloud computing market, which in turn created the hyperscaling startup boom. Amazon deserves that valuation for that (not so much for its extorsion of its employees though; you'd expect one of the highest valued companies of the world to pay its employees accordingly)
- JumpCrisscross 8y ago> was a basket containing Amazon.com, pets.com and all the rest overvalued? Yes. This has been extensively studied. Almost every investor who deployed new capital in the late 90s lost money on those investments. > as long as AMZN was >= 20% of your basket You’d have to torture causality to come up with a portfolio that would have made sense in the 90s and would have been 20%+ Amazon. It wasn’t even in the top 10 most valuable public companies by market cap [1]. [1] https://en.m.wikipedia.org/wiki/List_of_public_corporations_by_market_capitalization https://en.m.wikipedia.org/wiki/List_of_public_corporations_...
- sputknick 8y agoThat's a good analogy, because over a 10-20 year time horizon it turned out to be a bargain, but over 1-2 year time horizon it was WAY overvalued.
- Grazester 8y agoWell amazon didn't achieve what is did staying a bookstore.
- Spooky23 8y agoIt still is! It's a heavily leveraged company with high capital requirements. AWS makes all of the money.
- fhbdukfrh 8y agoThat's pretty revisionist as to the actual reality. The vast majority where incredibly overvalued internet plays on traditional markets, exactly what the gp warns. You just picked one of the few that survived and thrived. Don't overestimate how inevitable it was that we ended up with the Amazon we see today. The biggest difference I see this time is these unicorns have actual revenue. Heavily subsidized but revenue still. Last time we had monster companies that didn't even show that given 2 dollars they could make 1, so progress?
- darawk 8y agoIt's not revisionist. The problem is identifying which ones will survive ex ante. Given 100 assets to invest in, if you knew that one of them would become amazon in 20 years, but the other 99 would die, how do you value them? Well, you value all 100 at 1/100th the expected value of Amazon. Now, maybe you look at each individual company and try to pick a winner to put all your arrows behind, but assuming you can't reliably do that (which is a reasonable assumption), you would want to value all 100 at quite a bit more than they currently appear to be worth.
- rchaud 8y agoWell, back then the capital markets were all about value investing. And if someone in 1999 told you that a publicly traded company could run losses for 15 years straight and be 'successful', you'd have looked at him as though he were a fool. 'Valuation' these days seems to be less about determining the free cash flow of a company's operations. It's the promise of great innovation that's just around the corner. Or, more likely, it's the promise that a bigger company will acquire this company at a markup above whatever you paid.
- benj111 8y agoSo we should be contrarian, and move back to value investing again? I wonder how these profitless companies will fare when the next recession arrives.
- vm 8y agoAmazon was also overvalued in 1999. It took almost a decade to get back to its dotcom valuation. Amazon of 1999 and 2009 were two very different companies.
- cgb223 8y agoI got a similar email about pets.com It’s all relative
- simias 8y agoHindsight is 20/20. Maybe people in 1999 were wrong about Amazon but they were right about Pets.com and many others, your comment is just an example of survivorship bias. I mean, I'm sure you're not trying to argue that dotcom valuations weren't generally ridiculous. Besides, Amazon, Kodak and Boeing were never exactly in the same market. The parent is comparing companies that ostensibly offer similar services. If I can trust Wikipedia by 1999 Amazon "also sold video games, consumer electronics, home-improvement items, software, games and toys in addition to other items." That meant that it was already an online retail store, not a mere bookstore.
- mcguire 8y agoOn the other, other hand, Amazon sends currently very overvalued as a retail company. (I haven't looked at the comparative sizes of its various components.) How long before Amazon sounds of its retail business?
- dcole2929 8y agoAmazon hasn't been just a retail company in a very long time. It is probably THE Tech company at this point. They are a consumer electronics company having cornered the market on the cheap android tablet, and the smart speaker. They are a dominant enterprise cloud player. They own the biggest player in e-sports currently with twitch. They are in the music and video streaming business. They do government contracting at this point. The valuation is more than justified.
- treis 8y agoI think the point is that Amazon as retail on the web isn't the success story of Amazon. It's all of the other things you mentioned.
- jjeaff 8y agoAnd twitch is becoming much more than esports. With YouTube shooting itself in the foot with their copyright nonsense, there are lots of big YouTubers carefully transitioning their content and user base to twitch.
- rafiki6 8y agoWho says that feeling was wrong? At that time, Amazon was a moonshot gamble. Lots of very important things needed to line up for it to be successful, primary of which was investor confidence in a company that didn't turn a profit for most of it's existence. I still think Amazon is overvalued and the market will correct it at some point.
- wernercd 8y agoHow many "over valued" "Amazons" died? Compared to the Unicorns like... well... Amazon? It's like saying "All houses built in 1900 are built SOLID because look at all the 100 year old houses that still exist" and then completely ignoring all the 100 year old houses that don't exist... Hell, look at the companies that were undervalued. GIANTS! Companies that will never fall... like, say, Blackberry and Palm?
- cafard 8y agoYes, but then Palm had a higher market cap than the rest of 3Com, which owned 80% of it. https://en.wikipedia.org/wiki/3Com#1997%E2%80%932000 https://en.wikipedia.org/wiki/3Com#1997%E2%80%932000
- parthdesai 8y agoHey Steve Jobs, Bill Gates and Zuckerberg dropped out of college, so everyone should drop out and they will become billionaires.
- rconti 8y agoSometimes it's different, sometimes it's not. Tech allowed a company like Amazon to scale. Tech allows a company like Uber to allocate rides vastly more efficiently, tech allows a company like AirBnB to enable property owners to extract more value from their property. But tech doesn't allow Tesla to sell 10x more cars than Toyota (for example).
- AlexandrB 8y ago> Tech allows a company like Uber to allocate rides vastly more efficiently It's more accurate to say that venture capital allows Uber to subsidize rides more aggressively. I see no evidence that Uber is substantially more efficient (when you include the driver's costs) than traditional taxi companies. Edit: Uber has also managed to skirt a bunch of labor laws by claiming their employees are contractors. I guess that's a kind of "efficiency".
- rconti 8y agoI think it's unquestionable that tech like Uber's can/does allocate cars and rides more efficiently. The taxi model relies on drivers circling looking for a fare and phone dispatch with, at best, a dispatcher seeing GPS cab location on a screen and trying to eyeball-match it to the caller's location. (or, at worst, caller-reported location, and radioing a bunch of cabs asking them "hey, where you at?") At its most efficient, an Uber model can automatically and predictively allocate rides based on realtime rider and driver current and predicted locations with realtime traffic/travel data. There's simply no comparison. The extent to which rides are cheaper due to skirting of regulations, extracting money from VCs, pushing costs onto drivers, is effectively a separate issue. That is to say, Uber can break many laws, screw over drivers, flood the market with way too many cars, all while losing money, but none of that means that the dispatch model isn't inherently more efficient.
- chipotle_coyote 8y agoThe dispatch model is also relatively easily copyable, though. I don't want to downplay the amount of tech work that went it, but it's not an insurmountable obstacle -- taxi companies could sign up with a service like Curb or Easy, or even create their own like Yellow Cab Houston's Hail a Cab.
- achillesheels 8y agoInclude me in the same boat, but that was many years before I learned value investing and fundamentally analysis of equities. One of which is gross margin analysis. Amazon, despite losing money, had very competitive gross margins from day one. I think pets.com was literally losing money on every product they sold (but don’t quote me), which is not sustainable.
- joejerryronnie 8y agoThey were losing money on each sale but they planned to make it up in volume.
- dragonwriter 8y ago> In 1999 there was an email going round about how ridiculous dotcom valuations were. Which, while some of the examples sometimes quoted survived, was generally validated by the 2000 crash.
- ptero 8y agoIMO Amazon and most other dotcom companies were waaay overvalued at the tail end of the dotcom boom and many companies with hefty valuations from those days do not exist today. What made Amazon survive (and achieve valuations way in excess of those in 1999) was not the fact that it had something super valuable then, but that it relentlessly innovated, stayed flexible (an online bookstore offering a computing cloud services, what a weird idea) and executed well enough. And had enough money and controlled costs well enough to reach profitability. For every Amazon there are hundreds of Enrons and WorldComs.
- casual_slacker 8y agoAmzn (adjusted for splits/etc) had a peak value of $107 in 2000 and a low of $7 in 2001.
- pjc50 8y agoIf you'd invested in Amazon in 1999, you'd have lost 80% over the next year. It stayed flat until about 2008. It's difficult to decompose a stock price, but I think Amazon gets most of its from AWS.
- wil421 8y agoWhat about pets.com and webvan? I feel like we are back in the webvan days again. Except the companies figured out they could trick regular folk into doing deliveries instead of driver who is an actual employee with some kind of benefits.
- dkjshfajskdfa 8y agoI think the key difference is the ubiquity of smart phones and the changes to the labor market after the panic of 08.
- Brockenstein 8y agoDuring the dotcom bubble thousands of companies were way over valued, where are they now? Mostly gone. Amazon survived and evolved. They actually were the exception. That doesn't mean every company that you can imagine being in a similar boat to amazon is going to end up in the same boat as amazon or even close to it. Not to mention when the dotcom bubble popped Amazon's stock price took a beating and didn't really surpass its dotcom bubble peak until fall 2009, 9 years later...
- demarq 8y agoI agree that Tesla is probably just a car company but no american cab company operates in 72 countries outside of america though.
- ghaff 8y agoI tend to agree that Uber and Lyft are qualitatively different from traditional cab companies although, as many others have said, I'm not sure they have much of a moat or economies of scale. For the overwhelming majority of Uber users, it's irrelevant that they're in 72 countries or even multiple countries. In fact, I'm sure many users would switch to a better service that just operated in their own city.
- SneakerXZ 8y agoOutside of US the Uber brand is not so strong. In EU they are very regulated and they compete with local players that understand the market. Asia is also dominated by local players. So Uber exists in these markets, but almost nobody uses it there.
- jtwaleson 8y agoAlmost nobody is a wild exaggeration. Most EU business travellers I know use it very often.
- ahi 8y agoUber and Lyft have worse economics than traditional cab companies. Traditional cab companies have the advantage of fleet maintenance and higher utilization rates. Without VCs and financially illiterate drivers subsidizing fares, Uber and Lyft would be the high cost providers.
- pgeorgi 8y ago> no american cab company operates in 72 countries outside of america though ... while complaining about the big evil taxi cartels
- tluyben2 8y agoAlso; it might be different in the US ( I do not know ) but in the countries (UK (the wooden floors in Aldwych) , NL, DE, HK ( the one in Wan Chai I cannot even hear myself talk often)) I work where partners or clients have invited me to WeWork offices, the employees complained openly about the noise (it is more like a college kantine than an office space) to me and the next time they were not there anymore. Somehow that cannot be good for the bottomline although maybe in the US this is different.
- notus 8y agoWeWork is exactly the same everywhere, just as you described in the US. It is far too noisy to get any meaningful work done.
- sillyquiet 8y agoThis is because they are the trendiest of trendy open office work spaces. Many many other tech companies are following this trend to be sure their new offices are featured in business mags and they can take pretty pictures of the office for promos. Oh, and for greater 'collaboration'.
- _the_inflator 8y agoI don't agree with the "rubbish part". WeWork single handedly changed the way we work. It is way easier to build a tech startup with the help of a co-working space company than before. I suspect that WeWork's business model ain't the problem but it's competitors, for example in London, UK. Competition drives prices for new real estate, crashed margins.
- driverdan 8y ago> WeWork single handedly changed the way we work. Why? Coworking is not a new concept. There are plenty of local coworking spaces in every city that has WeWork. How are they better than their local competitors?
- rickyc091 8y agoNot the OP, but I can shed some of my thoughts as I've been at WeWork, local co-working spaces, and leased our own office space. Most co-working spaces are cheaper, but they won't offer as many amenities as WeWork. 24-hour building access, conference rooms (for clients and internal meetings), phone booths, free coffee, a kitchen to utilize for lunch, highspeed internet (1,000Mbps if you use the ethernet jack) and roughly around 200Mbps on their free Wifi, free printing up to a certain volume every month. Did I forget the best perk? With your WeWork membership you can actually access any other WeWork location in the world and work out of there. There were a number of times when I was traveling, I would just book a desk at another city or country for a single conference room credit. Just a few positives off the top of my head compared to other coworking spaces. While you can find some with the same benefits, WeWork also wins with their decor and natural lighting in some offices. They also make it easy for startups to expand if they need more desk space. You rent on a monthly basis, whereas most places do yearly contracts. Now let's talk about leasing your own space and all the headache that goes with it. At least in NYC, most places don't have a kitchen. So if you want a place to make coffee and wash your hands that's not the bathroom, you'll need to pay someone to have it installed. You'll also need to set up the internet and electricity. And since you're on a lease, there's a good chance the landlord will raise the prices sky high the moment the contract is up. You'll actually end up paying relatively close to WeWork's price per month with a lot more things to manage on your own. Think of it as self-hosting versus managed hosting. Small scale startups don't want to deal with all the headache so they just opt for WeWork. It's a reputable brand and they know what they are getting at any WeWork. It's similar to walking into a Hilton or Marriot. You know what to expect from it. Hope that helps!
- projectramo 8y agoYou're right on Tesla and WeWork, but not on Uber. Uber doesn't buy and own the car, which means it requires much less capital. This small change has many implications, and the tech helps solves many of the problems that come up. I am not saying it is properly valued (over or under or whatever). Just that given the choice between an Uber (or Lyft or yourlocalapp.com) or a cab company with the same fleet, customers, and revenue, I would consider the Uber version more valuable.
- blang 8y ago>Uber doesn't buy and own the car, which means it requires much less capital. I don't think this is true with one of the major things they have been selling investors for years: self-driving cars. That certainly requires a lot of capital to pull off, and I think they plan is they would own those cars.
- projectramo 8y agoIf Uber pulls off self-driving cars, I would argue: 1. It is not the same business model it currently has 2. It has an even stronger claim to not being a traditional cab company, and for being a "true" technology company In that case they would have capital costs (perhaps even higher), but would eliminate labor costs.
- sp332 8y agoUber does plan to own the cars though, since they're doing their own self-driving car work and have a deal in place with Volvo for up to 24,000 self-driving SUVs. https://www.washingtonpost.com/business/economy/uber-signs-deal-to-buy-24000-autonomous-vehicles-from-volvo/2017/11/20/d6038f28-ce2a-11e7-81bc-c55a220c8cbe_story.html https://www.washingtonpost.com/business/economy/uber-signs-d...
- tptacek 8y agoThat doesn't really rebut the argument, since they'll only end up with an inventory of thousands of cars if they get self-driving cars to work productively, which would immediately propel them out of any "conventional" category they could have been assigned to. I don't think they will get there with self-driving, but by the same token they're not going to end up owning a zillion cars either.
- simias 8y ago>Not only this, but WeWork are going to learn about the cyclical nature of office rental revenue. I don't know anything about office rental so I'm curious, what makes it cyclical? You also seem to imply that we're high on the cycle (otherwise it wouldn't be a problem for WeWork in the future), why do you think that?
- tragic 8y agoIn brief: if the economy is booming, loads of companies want office space. If the economy tanks, loads of companies need to cancel their leases. WeWork's lifetime has been on the upward slope out of the 2008 crisis. There is a question as to whether they can survive a downturn that at all hits them where it hurts.
- Traster 8y agoOffice rental costs are basically highly correlated with the business cycle, when we're late in the business cycle there's lots of companies doing well, so they're hiring people so they're expanding so they need more office space. We can see that's true due to the low unemployment rate. This drives prices up. Because WeWork's business model is primarily to offer short-term flexible agreements their business is doing great now. The problem is that WeWork is agreeing long-term agreements (5-10 years) with their suppliers. So when a recession happens unemployment will spike, businesses will close offices, consolidate to the low cost offices they own (which they can do really easily with their flexible agreements with WeWork) and WeWork is going to be left with lots of expensive offices that no one wants to use. That's one of the reasons their debt is so expensive.
- throwaway427 8y agoDon't forget that Snap is a camera company.
- mikestew 8y agoSomewhere along the way I think we got it flipped around. No one was calling Sears a tech company in 1969 just because they bought an IBM 370 to computerize their accounting and inventory. By probably 1975, if you were Fortune 500 and still doing your books by hand you were probably just a dinosaur rather than your computerized competitors being so advanced. Uber, Tesla, okay, maybe there is an argument to be made for them to be "tech companies". Like the referenced investors, I fail to see how WeWork is anything but a real estate play, and consequentially having to work from that rulebook. Oh, you have computer systems involved? Welcome to the 21st! Where everyone else does, too. In summary, I don't think simply using a phone app to do some form of collaboration or logistical deployment using assets owned or contracted by the company qualifies one as a "tech company" anymore. I think they're still a traditional company doing what everyone else ought to (and eventually will) be doing to begin with.
- mikeryan 8y agoSimilar I have issues with Compass Real Estate getting 440M in funding to basically buy traditional real estate companies with some sort of mythical special tech to make home buying “better” https://techcrunch.com/2018/09/27/safe-as-houses-compass-400m-real-estate-unicorn/ https://techcrunch.com/2018/09/27/safe-as-houses-compass-400...
- asah 8y agoApparently, they spent the 440M on signing bonuses for top realtors, who brought listings with them. I can't speak to the economics, but as an active buyer right now, I'm seeing Compass listings all over Streeteasy, where the other firms barely acknowledge that SE has upended the search process, and still try to peddle "buyer agent" services, like I can't just find listings online. Compass.com at least has "coming soon" listings.
- everybodyknows 8y agoIndeed. What value does Compass bring to the market that Redfin (standardized deal flow) and Zillow ("coming soon") haven't already?
- 8y ago