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What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens? I have got to think that Soft Bank knew/kn

• wastedhours 7y ago
  > I have to think some part of him knew that it was a bullshit valuation After reading some of the stories, I'm minded to believe maybe he didn't...
  • michaelt 7y ago
    It's possible Neumann was some sort of idealistic hippie who believed his own BS and got in over his head. But I have trouble squaring that with extremely hard-nosed moves like cashing out $700 million, and getting loans from the company to buy buildings to lease back to the company.
    • human20190310 7y ago
      Hippies are at least as greedy as anyone else.
      • bananocurrency 7y ago
        When you #define hippie whoever you want it to mean then I guess anyone is as greedy as anyone else.
• Ozumandias 7y ago
  Your first paragraph reminds me of the "Go Fever" phenomenon associated with the Space Shuttle Challenger disaster[1]. [1] https://en.wikipedia.org/wiki/Go_fever https://en.wikipedia.org/wiki/Go_fever
• puranjay 7y ago
  It's amazing how they could even delude themselves into thinking they're a tech company. The only "tech" part of WeWork is their app and related community. Which is a ghost town used mostly by businesses to spam their services to uninterested members.
• axiak 7y ago
  I think the pure tech plays in 2019 are doing just fine. Zoom, Cloudflare, and Datadog all look like good companies. They're just not over-hyped and overinflated.
  • i_am_proteus 7y ago
    The smoke and mirrors plays need mass hype/media blitz to "succeed." The companies that actually add value only need to market to the audiences for which they're economically relevant.
    • claudeganon 7y ago
      Spot on. Many of these companies have devolved into little more than pump-and-dump schemes for executive compensation. All that’s undergirding them are their BS “disruption” and PR narratives, gobbled up and regurgitated by the media.
  • john_moscow 7y ago
    Cloudflare still relies on the "massive amount of free users creating buzz vs. a tiny fraction of paid users". Although not an obvious scam, they may very well go the Groupon way.
    • akulkarni 7y ago
      This is a classic "bottoms-up" model that is quite viable (eg Dropbox, Slack, Zoom, Elastic, MongoDB). Not sure why anyone would call it a scam. In fact, I would be wary of software companies without a base of free users, as that means the company needs to keep spending a lot of its revenue on sales and marketing.
      • papito 7y ago
        Not necessarily. You don't need marketing and sales people if you have a free-tier product that markets itself. Michael Stonebraker, the guy who took Postgres from academia and into the real world, talks about how he applies this with VoltDB https://www.se-radio.net/2013/12/episode-199-michael-stonebraker/ https://www.se-radio.net/2013/12/episode-199-michael-stonebr... Only on a tangent - it's an otherwise fascinating episode from a database wizard.
• oillio 7y ago
  After a while living in an echo chamber of yes-men, you start to believe your own bullshit. Also, valuations are so nebulous and ungrounded in reality at this point. Who is to say what anything is worth. You put something out there and someone is willing to pay billions for it, who are you to say that isn't the right value. There are a lot of problems to pin on Adam, I don't think the valuation is one of them.
  • camelCaseOfBeer 7y ago
    Not to mention it's nearly impossible as a human to grasp how much value is represented in a million hundred dollar bills. People think about a billion dollars as a lot of money,and that's about as far as it goes.
  • number_six 7y ago
    The valuation is from Softbank consistently buying rounds of equity at higher and higher valuations that they themselves were creating. Softbank bought in, so this is more valuable, so Softbank will buy in again at a higher valuation, so this is more valuable, so Softbank will buy in again at a higher valuation; and round and round it went until we hit ~$40B
• kache_ 7y ago
  There are in fact a few unicorns with recurring revenue that is close to their operational costs. You just don't read about them on the news unlike the trainwrecks. Good news leads to no news.
  • NotSammyHagar 7y ago
    What are those? Snowflake is one I think
    • haasted 7y ago
      Cloudflare? Not sure whether they are profitable at the moment, but their product seems substantial.
• JohnJamesRambo 7y ago
  “There are three ways to make a living in this business: be first, be smarter, or cheat.“ -Margin Call SV ran out of the first two because they are much harder. We are left with the dying gasps of companies trying the third way.
  • LordFast 7y ago
    This needs to be a lot higher.
  • pbreit 7y ago
    How is this comment relevant to WeWork? How has it "cheated"? It definitely is early/first and very smart.
    • gtirloni 7y ago
      Early/first in what exactly?
      • pbreit 7y ago
        Massive paradigm shift in office leasing.
        • munk-a 7y ago
          Please elaborate in what was innovative here, their technical infrastructure seems to be nothing to write home about and well appointed office leasing has been around for quite some time. The social focus is indeed different but I wouldn't call that alone a massive paradigm shift.
          • pbreit 7y ago
            The friction eliminated and expanded flexibility from normal office leasing was quite pronounced. Add to that a huge block of delighted customers. Not sure how you are defining innovation but there is clearly a lot going on there.
• olliej 7y ago
  They thought they would be able to IPO at $50 billion. Their problem was that the IPO process took long enough for people to realize how bonkers it was - it didn’t help that they were going to IPO after all the other loss making hype businesses are down from their IPO prices (so presumably people are viewing similar IPOs with suspicion). What’s annoying to me is that these companies that are making huge losses were able to hoover up so much of the VC funding, while actual profitable businesses were not :-( I recall reading an article a few years ago from a profitable startup talking about trying to get VC funding, and all their interactions were basically “you should stop charging so you can get market share”. Essentially demanding that they make their profitable company unprofitable. I wish I could remember where it was.
  • jvagner 7y ago
    We believed in "spin", and figured if Uber could IPO, then so could they.
• deleted 7y ago
  [deleted]
• 5trokerac3 7y ago
  We've been seeing nothing but bullshit valuations for years. Twitter was a bullshit valuation. I'm just glad we finally had a sanity check on something.
  • tenaciousDaniel 7y ago
    I'm not knowledgeable in this area, but I think it's telling that SoftBank is the same people who gave a dog walking startup a 300M valuation: https://techcrunch.com/2018/01/30/on-demand-dog-walking-app-wag-raises-300-million-from-softbank-vision-fund/ https://techcrunch.com/2018/01/30/on-demand-dog-walking-app-...
    • kossae 7y ago
      Note, the _investment_ was 300M, meaning the valuation was actually higher than that! According to Crunchbase: > Wag has a post-money valuation in the range of $500M to $1B as of Jan 30, 2018 according to PrivCo.
      • tenaciousDaniel 7y ago
        lol what the fuck
      • appkate 7y ago
        I'm not surprised they are pivoting to a cat-walking startup to get a higher valuation.
      • notfromhere 7y ago
        VC valuations are a solid argument against the wisdom of private markets
  • mypalmike 7y ago
    Twitter might be a bad example. The current P/E of Twitter is around 14 with the stock trading around 80% over the IPO price.
• _Codemonkeyism 7y ago
  In many enterprises people know that sh happens. But saying so is usually a career limiting move.
• mrnobody_67 7y ago
  Banks don't win IPO mandates by quoting the board of directors a valuation that's lower than the last round. Both Goldman and Morgan Stanley gave the BoD much higher valuation numbers, which made members believe the stock price was going to go up... and when your options are going up in price, it's easiest not to rock the boat, and ignore misdeeds or conflicts. You only realize who has been swimming in the ocean without trunks when the tide goes out ;)
• benj111 7y ago
  Companies are worth what people are willing to to pay for them. Softbank was willing to pay an amount most others weren't. In that situation there are 2 options, take the lower price, or wait until the higher price is proved to be justified. I don't know at what point we can decide that the vision fund isnt, well, visionary. As things stand though, if you have faith in Weworks business model, this seems like a reasonable move. To be clear, I don't have any particular faith in that business model, but I don't have any money on the line either way.
• mytailorisrich 7y ago
  In finance no-one admits that they screwed up unless they have no choice, if at all.
• callalex 7y ago
  Twilio is an example of a recent unicorn with sane financials.
• rdiddly 7y ago
  Everyone has a vested interest in continuing to believe that which they already believe. To change your opinion requires acknowledging that your old opinion, the one you perhaps espoused publicly and persuaded others into believing, was wrong. It's embarrassing. So most people tend to put that reckoning off until the last possible moment, even in defiance of hard evidence in some cases.
  • Paperweight 7y ago
    Then do other people now trust you less because you were wrong, or do they trust you more because you correct yourself?
    • rdiddly 7y ago
      Welp to borrow from gool ol' Neil Peart, those who wish to be would probably pick the latter; but those who wish to seem would put more emphasis on the former!
• djsumdog 7y ago
  I think Uber will pop within the next 5~10 years. I'm surprised they still have investors at this point. So much was banking on the self-driving model, which I honestly think is 10~15 years away from being viable (and for half the cost of the research, cities could just start laying down rails with all their roads .. would be way easier .. and a solved problem). We're due for another venture backed capital burst. DropBox, Lyft, Uber .. the article posted on here a earlier about Counterfeit Capitalism comes to mind. There are too many companies trying to 'get there first' at all costs and squeeze out everyone else. I honestly wonder if we're going to see another 2000 era dotcom burst for many of these smaller companies. I'm curious how taxi companies will retake their local markets once the big ride sharing companies are gone.
  • pinkfoot 7y ago
    Where I live any ferrous rails will be gone tomorrow morning.
• prostoalex 7y ago
  > I have got to think that Soft Bank knew/knows the valuation was off. For private rounds valuation is part of the equation, but liquidation preferences and ratchets are likely more important. As the famous finance saying goes "You set the price - I set the terms, you set the terms - I set the price". SoftBank has negotiated downside protection. Everything from there is just gravy on top. The press never seems to discriminate between preferred and simple shares, so why not reach for the moon, e.g. https://www.latimes.com/business/la-fi-hy-uber-ipo-20181016-story.html https://www.latimes.com/business/la-fi-hy-uber-ipo-20181016-...
  • skinnymuch 7y ago
    What major downside or any protections does SoftBank have with WeWork right now? Is there anything they are getting now or likely to get that doesn’t still have them $7B or so down the hole for WeWork? The major thing is usually first dibs if the company sells for a lot less than the later valuations. In this case that doesn’t seem likely to happen with Softbank getting back most of their investment
    • prostoalex 7y ago
      https://www.cnbc.com/2019/09/24/softbank-has-a-multi-million-dollar-protection-in-weworks-ipo.html https://www.cnbc.com/2019/09/24/softbank-has-a-multi-million...
      • greenyoda 7y ago
        That article says: >The [ratchet] provision could grant existing shareholders $200 million to $500 million worth of additional shares, most of which would go to SoftBank, Kennedy said. For example, if WeWork’s market cap came in at less than $14.5 billion post-IPO, the total value of additional shares issued to SoftBank under the provision would be more than $400 million. $400 million doesn't seem to be much of a compensation for losing billions of dollars in investments. And that assumes that the company will IPO before it goes bankrupt (e.g., from investors pulling the plug on any future investments to cut their losses).
• sukilot 7y ago
  Humans are often irrational wikipedia.org/wiki/Escalation_of_commitment wikipedia.org/wiki/Dollar_auction
• bryanmgreen 7y ago
  Not even just with companies so ridiculous like WeWork, but also ones that lose profit and hundreds of millions of cash exclusively due to bad business models.
• dalbasal 7y ago
  Fred W just wrote about this, with a fairly moderate perspective. Reality check, rather than reality crashing down. I think wework just has too many things wrong with it. (1) Recent IPOs (eg uber), weren't great. (2) Financial performance from uber and other recent IPOs isn't great. (3) Theranos is old-ish news by now, but it's a good example of what public investors are looking out for: bubble excesses. Public markets atm are moneyed, but skeptical. Worried about this new, enormous private equity market pumping and dumping on them. Once you add in the (4) difficult-to-understand ownership structure (with dubious scent), (5) complex leveraging/debt/liabilities and (6) complicated entanglement in the real estate market movements..... It just adds up to too much, IMO. Every one of those 6 "problems" could make wework look like a "you should have known better" investment, CEO scandals cultural weirdness aside. ^IMO it's more about monopolies (thiel's definition) than software. Selling software doesn't guarantee "software margins" long-term. What uber, wework, etc. lack is monopoly mechanisms: lock-in or network effects. Even though uber is a market/network, the market can happily bear more than one ride hailing app. That means margin-killing price competition.
  • wpietri 7y ago
    Personally, I'm delighted to see the unicorn bubble popping. For a long time I've felt like the "Uber for X" wave of companies soaked up a lot of investment that should have gone to people building reasonable businesses. It seemed to me that investors were looking for the next Google, the next Facebook. Ignoring that when Google and Facebook started out, they were much more focused and modest than the high-drama unicorns hyping up how they were going to dominate the planet. (And also ignoring that both were profitable at IPO.)
• s3r3nity 7y ago
  Not to be too pedantic, but WeWork HQ is in New York and is not a tech company (according to general sentiment and investor analysis,) so any attempt to correlate to Silicon Valley trends aren't quite fair nor appropriate.
• TheRealDunkirk 7y ago
  > but it seems that the last couple of really huge unicorn companies have all been based on BS(We Work), Fraud(Theranos), and untenable business models (Uber). What I don't understand, and this is an honest question for this crowd: aren't these viable businesses, in and of themselves? Maybe this is a stupid question. This is probably what allowed them to run so far on what they actually were, but here's the question anyway. For instance, WeWork seems to be an AWS-for-office-space. Is that not a useful business? If I own a contract for space that can be slotted into anywhere in the world I might want to sit, is that not a useful thing to pay for? One might argue that, if I had the resources to truly care about a world-wide smorgasbord of office spaces to choose from at any given time, I'd have enough resources to lease my own building(s). But it still seems like something the market needs. Did it have to be a one-hundred-billionaire-minting business to rent space into that kind of market? Theranos seems like a useful thing, and there seems to be an opening in the market for it. Are the cost mechanics of the available technology and the opportunity not aligned? Is there no way to run an economically-viable company providing a blood tester unit with a more-limited set of tests? Did it have to be a unicorn, end-all-be-all, existing-testing-company-destroyer to make any money? You see where I'm going now. Does Uber need to suck all the money into their pockets to fund their self-driving car efforts (or wherever all this money is going) in order for any of it to work? Surely there's a model of ride sharing through an app that doesn't have to suck, pay their drivers well, and is a sustainable business, right? Does it really have to be the "Uber-of-cars," so to speak, in order to exist at all? Is the only game left in the Valley, now, unicorns? All others need not apply?
  • richardwhiuk 7y ago
    The problem with WeWork is that it's business is fundamentally rubbish. It has long leases for buildings, and short leases for customer, so it's basically failure scenario number 1 for an economic downturn. And yes, if you act as a startup, and hire engineers assuming you are startup, you better be a unicorn.
  • metalliqaz 7y ago
    > For instance, WeWork seems to be an AWS-for-office-space. Is that not a useful business? If I own a contract for space that can be slotted into anywhere in the world I might want to sit, is that not a useful thing to pay for? One might argue that, if I had the resources to truly care about a world-wide smorgasbord of office spaces to choose from at any given time, I'd have enough resources to lease my own building(s). But it still seems like something the market needs. Did it have to be a one-hundred-billionaire-minting business to rent space into that kind of market? I think about it from the other direction. WeWork leases office space and parcels it out to temporary tenants. But, what's to stop the management companies that already own the office space to do the same thing? Why pay a middle man? WeWork would take the risk and prove the model effective in a particular area, then their own suppliers could undercut them. Theranos was trying to sell technology that doesn't exist.
• ohazi 7y ago
  People complain about an "IPO shortage" and the problem of VCs capturing all of the pre-IPO growth. But if there's a silver lining here, it's that VCs can pull this shit until the cows come home without causing the same systemic problems that led to the first dot-com crash. They tend to have a small handful of wealthy LPs, and the financial system doesn't really give a shit if they get wiped out - grandma's pension may not be growing fast enough, but it's not going to evaporate. In this case, SoftBank and the Saudis run away with their tail tucked, and everyone else just looks at them like they were idiots and moves on.
• hourislate 7y ago
  >What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens? Wall St. et al, didn't care about anything but off loading this POS onto Investors and then taking their money and running. That's how it works. Thank goodness it rolled over and now the race to zero. Couldn't have happened to a bunch of nicer guys.
• wpietri 7y ago
  I think there's a class of narcissist that doesn't really have knowledge and beliefs as much as they have desires and things to say that get them closer to their desires. So in some sense I think asking what Adam Neumann and Elizabeth Holmes really believe is a category error. Knowing the truth makes lying really hard. If you spend a lot of time figuring out what's true, that builds mental habits that make lying feel bad. But if mostly ignore "true", then it's much easier to focus only on what Nixon's press secretary called the "operative statement" [1]. For narcissist CEOs, I think they treat the objective truth like a child sometimes treats a scary closet: if they never look at it or think about it, it's not a problem. [1] https://www.nytimes.com/2003/02/16/weekinreview/the-nation-the-nondenial-denier.html https://www.nytimes.com/2003/02/16/weekinreview/the-nation-t...
  • paulddraper 7y ago
    Exactly. Everyone has their own peculiar mental model of reality, sometimes more optimistic, sometimes more pessimistic, almost always with strange boundaries on the thinkable universe. I estimate this is how the majority of bad financial situations happen, whether untenable mortgages, huge credit card bills, excessive student debt, etc. People are usually not fundamentally stupid or poor decision makers, but they do usually ignore uncomfortable thoughts. It's easy for that to happen to one person; it's more surprising when it happens to dozens of people.
  • danesparza 7y ago
    I think the OP's question really involves the CFO or any accountants involved in this case. I would expect the CEO to be driven more by vision than by cold, hard facts.
    • paulddraper 7y ago
      I'm guessing there's a mix of "it's hard to tell bad news" and "it's hard to hear bad news". If those two factors are strong (say, cultural reasons), a lot of red flags can fall by the wayside.
    • Benjammer 7y ago
• GCA10 7y ago
  As much as we'd like to draw a sharp line between "Real Businesses" and "Frauds," so much of it actually comes down to whether you can match your ambitions to the amount of money you're likely to raise. Think about the construction of the Panama Canal. The first few attempts were total fails, because canal-building technology wasn't as advanced as people thought, and eventually the funders got tired of what they perceived as "throwing good money after bad." Eventually the canal did get built. Technology improved and the winning venture had enough funding to make it happen. As a thought experiment, if We/Neumann/Softbank had enough money to buy or lease all the great real estate in the world, and to educate all the population in We schools, so that they needed/wanted We offices when they grew up, it could have ruled the world. Putting it that bluntly makes it sound silly, which is probably the right way to view the Neumann era in retrospect. But when We's future liquidity seemed almost endless, it was possible to dream big dreams. What got them undone is the reality that capital markets do not stay giddy forever. At the top of every cycle, there's always someone who ginned up an enormous flop -- losing their funding partway through for a dream that would not work without more capital.
• dcolkitt 7y ago
  > What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens One of the root issues is that way way too much capital has shifted out of the public markets into private equity. Public markets are significantly more regulated, transparent, and liquid. Public markets are almost always more favorable for regular investors. Whereas privately funded companies tend to be structured to primarily benefit connected insiders. WeWork's ridiculous valuation is a prime example. Private companies can easily manipulate their valuation, by only making sure to sell shares at pre-arranged prices so that they never down round. In contrast public companies shares are traded thousands of times a day. If investors stop believing in a valuation that's reflected in the stock price in microseconds. The industry has built up this cult around "unicorns"- multi-billion tech companies that never go public. As if that's a desirable thing. It's mostly been empowered by a mythical cult of the brilliant founder. Said founder-CEO need be unchained from any accountability whatsoever, lest trivialities like quarterly earnings reports or short-sellers constrain his creative vision. And of course the private equity firms behind the VC capital are more than happy with this arrangement. Again, it's significantly easier to manipulate the valuation of private companies than public ones. Keeping your ventures private forever enables the fund sponsors to massage the return stream on their portfolios, which makes their risk-adjusted performance look far more impressive than it actually is.
• Abishek_Muthian 7y ago
  > very curious to hear about any startup unicorns that are profitable or at least have a clear roadmap to profitability and not based on a business model that will be outlawed in a few years Stripe. Recently valued at $35 Billion, although they being profitable is unlikely now considering their phase of international expansion; IMO it does check rest of your questions just because their growth is directly tied to the growth of their customers.
• sharadov 7y ago
  Well, the answer is that since the market has been flush with cash, these companies kept raising more and more money in their rounds. The guys in the early rounds will make their money, but the later rounds ( Softbank) will lose it. VC is a massive bet, Softbank started a new vision fund worth 100B. They know exactly what they are doing. But, with WeWork, they probably thought they could keep the charade long enough to go IPO and get unsuspecting investors in the IPO. When a company is hot, the founders have massive leverage, look at Adam Neumann , employing his family and friends at all key positions.
• joeblau 7y ago
  I was reading this blog post by Fred Wilson last night and I think this unlocked a key insight for me[1]. WeWork (Uber, Peloton, Lyft, AirBnB, etc...) are not software companies. None of these businesses sell software, they use software to enable them to sell their end product: Commercial Real Estate (Rides/Freight/Food/Bikes, Exercise Bikes/Treadmills, Rides/Bikes, Home Rentals, etc...). The mis-calculation that I made was that I thought using software to enhance a legacy business was something that public market investors would apply a high valuation multiple to. What it looks like is happening is that public market investors are comparing these companies to traditional industry companies they already know. The interesting note is that Amazon, Google and Facebook all stumbled out of the gate, but they were able to pivot to selling software. Amazon with AWS, Google with Search Ads, and Facebook with Mobile Ads. I think this is the pivot that's going to have to happen for the latest round of companies that aren't doing so hot right now to start throwing off cash and increasing their valuations. [1] - https://avc.com/2019/09/the-great-public-market-reckoning/ https://avc.com/2019/09/the-great-public-market-reckoning/
• hinkley 7y ago
  On a spectrum we have Ponzi schemes, which never offer a product. We have MLMs which are legal Ponzi because there is an exchange of goods or services, but operate on social networks (original non internet meaning). Then we have franchise schemes where the wholesaling aspect is often less lucrative than the real estate angle (see also Sears, McDonald’s), and so despite offering goods they are de facto profitable real estate endeavors. Then we have manufacturers who actually work the way we believe these other organizations work, by providing goods to retailers who take over some of the salesmanship, logistics and risk for a slice of the profits. Then we have WeWork. Which looks like a technical savvy landlord but under it all is subletting from one of the founders. Which I suppose would make this closest in structure to an IPO for a franchisee? That’s the sort of investment opportunity a bank would be into but makes no sense on the NYSE. WeWork needs to get to a point where some to half of its properties were acquired under their own steam instead of through the founders. Otherwise it’s just a sucker’s bet.
• chkuendig 7y ago
  > What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens? Softbank was hoping Vision Fund II will be closed once this collapses so pumping it up to 47B made sense to juice the returns on Fund I. Adam N. already took 700M of his chips off the table before the IPO as well, so he clearly expected the music to stop playing as well.
• roymurdock 7y ago
  More interested in the public money manager opinion on why not to buy this deal instead of all the other "tech" companies that IPO. What caused enough of them to push back on this valuation and are they acting in a coordinated manner or is it just a few large public funds that usually buy in saying no?
• thesausageking 7y ago
  Why? Because bankers. This was going to be one of the largest IPOs of all time. This means a huge amount of fees for bankers. In addition, WeWork is an opportunity for those bankers to also win business putting together the various kinds of debt WeWork throws off. When bankers want a deal that will generate a huge amount of fees for them, they're not going to tell a potential client they won't get the valuation they want or that he needs curb his spending habits and reduce his control. That's a great way to lose a deal. No, they tell Adam he's a genius, We Company is revolutionary, and once the company is public he should buy a second jet just in case the first one is grounded because a mishap like a cereal box of weed being found on it.
• eternalny1 7y ago
  Oh SoftBank knew, and they tried some shenanigans late in the game to try to get this thing to IPO and not lose a boatload of money. But it didn't work. Sanity has prevailed.
• rhizome 7y ago
  >What I don't understand is how do things get this far down the road before a good old fashioned sanity check happens? Willing dupes. It's a one-step jackpot if you can handwave all that stuff away, or if it never comes up in the first place.
• dragonwriter 7y ago
  > As for Adam N, I have to think some part of him knew that it was a bullshit valuation But that's always the goal: get someone to pay you for somethig more than you think it is worth. And, conversely, they always want to buy it for less than it's really worth. Each side is hoping the other side’s value assessment is BS.
• megaremote 7y ago
  Didn't they just get a 300m injection? That is a pretty big confidence boost that you are doing things right.