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It's very difficult to see how SoftBank breaks even on this new deal. They're investing $5bn now, with the hope that it's worth more than that when they IPO, bu
by Traster 7y ago
It's very difficult to see how SoftBank breaks even on this new deal. They're investing $5bn now, with the hope that it's worth more than that when they IPO, but several things have killed that idea. Firstly, their brand is tarnished. Secondly, the growth play will be gone by the time they IPO. Thirdly, the charismatic leader is gone, so the message of "Disrupting" and "We're a tech play' is gone. They've put $5bn into a company that's roughly the same size as a public company that's got a $4Bn market cap, but only got 70% equity as a result.
I think I'm at the point where I think that Softbank is throwing billions into wework to save face. That is a very bad move.
- asfarley 7y agoI took a look to see if Softbank was hiring any vetting-watchdogs to prevent this in the future. They had one open position. It required all applications to have an extensive history at a prestigous VC firm, i.e. they are looking for people from the in-group. I think a less-incestuous vetting strategy would give more honest results. Too bad, I think there's a lot of people on HN who would excel at this position despite not having worked at a big VC.
- jessaustin 7y agoI have no particular love for any of the big-name "prestigious" VCs, but ISTM they haven't had much influence at WeWork so far. Instead SoftBank just handed the keys to a crazy dude, with the thought that he would make it rain. Maybe it didn't rain hard enough, but the firm is still in business and now they've gotten rid of the crazy dude. Maybe SoftBank just sees this as a slightly more intense version of the traditional transition from founders to "professional" management? It seems likely to feature a great deal of the equity dilution that founders traditionally suffer...
- duxup 7y agoI don't see why someone with that history would necessarily do a poor job.
- OnlineGladiator 7y agoI think his point is an insider can't see the forest through the trees, and you need a fresh perspective to understand what's really happening. Basically that hiring an insider just perpetuates the echo chamber.
- duxup 7y agoWhat makes that resume necessarily an insider?
- OnlineGladiator 7y agoHe means the entire VC industry is an echo chamber.
- duxup 7y agoBut is that what WeWork is?
- flukus 7y agoConsidering their current vetting is quite lacking, shouldn't they be looking to hire someone experienced? You don't hire a junior engineer to build you're new enterprise system.
- ms4720 7y agoPerhaps shouldn't would be more accurate
- philip1209 7y agoI don't think their brand is "tarnished." The only people they are beholden to are their LPs, who I assume endorsed this deal. None of the actions they have taken as an investor should make others view their money "toxic." WeWork is just going to have to transition from wartime to peacetime. Ben Horowitz has a great article about what this looks like [1]. They're going to clean up the books, stop making risky acquisitions, and focus on the core business instead of side projects. After a few years of being "boring" and improving margins, then they ostensibly will look like a much more stable investment to public markets. [1] https://a16z.com/2011/04/14/peacetime-ceowartime-ceo-2/ https://a16z.com/2011/04/14/peacetime-ceowartime-ceo-2/
- hari_seldon_ 7y agoCan you explain why you think they are not going to be forced to remain in “wartime?”
- stickfigure 7y agoPresumably the unit economics are positive and they will break even.
- ceejayoz 7y agoWhy is it a given the unit economics are positive?
- rurp 7y agoIt's not, but WeWork heavily implied they are and that seems to be a key part of their new strategy. Obviously many people are skeptical (including myself), but I suppose we'll find out soon enough.
- jjeaff 7y agoApparently the unit economics are still showing lost money because they aren't fully leased at many of their locations so their rationale is that as those locations, mature, they will fill up. Which is pretty normal in the real estate market. But it's definitely not a certainty that the locations will fill to capacity.
- paulsutter 7y agoWeWork had so many excesses, like paying 100% commission to real estate agents. Softbank can cut out such nonsense, not just the tequila and private jets. Softbank also has full access to the company’s financials and will be in a position to restructure. It’s safe to say they are a lot better informed than we are.
- acchow 7y ago> like paying 100% commission to real estate agents. Why did they do this?
- ratww 7y agoTo grow faster and disrupt the market. For a while it was more than a simple commission: it was 100% of the revenue for a whole year. They were also offering one-year free rent to new customers. Source: https://outline.com/yCcgS5 https://outline.com/yCcgS5
- carty76ers 7y agoThat has to be the most ridiculous thing I’ve ever heard, since Enron paid their employees bonuses for unprofitable deals.
- chii 7y agowe'll take a loss on each sale, and make up for it in volume!
- DuskStar 7y ago"100% of revenue from the year as commission" and "rent is free for the first year" sounds like the perfect combination, though. If not likely to result in your real estate agents sending more things to you in the future.
- hanniabu 7y agoIt makes sense for Adam. Schmooze the real estate agents with WeWork money so they find you nice deals and get you priority bids, buy the property at this nice discount, lease the property to WeWork. He's winning all around, spend money that's not yours to get equity that is yours.
- nihonde 7y agoOnly time will tell, but SoftBank has the ability to combine WeWork with competing brands and unify the global strategy to unlock Asian markets. Also, getting rid of the old leadership is a net positive, IMO. There’s still a business case here.
- malandrew 7y agoWhat if they are just trying to stem a contagion effect spreading to their other investments. Their other investments are a lot better but the retail market can be very irrational when there is bad news.
- teuobk 7y agoYeah, seems like SoftBank isn't doing this just to save face. They're doing it to prevent the whole party from coming to an end, right quick.
- deleted 7y ago[deleted]
- crazygringo 7y agoDoes WeWork ever need to IPO? If it turns WeWork profitable by cutting costs and implementing responsible leadership, it just keeps its share of all future profits. SoftBank wouldn't be doing this if it didn't think those profits were likely to be more than total investment so far. In other words, WeWork got acquired instead of IPO-ing.
- milesskorpen 7y agoThere needs to be some kind of exit, because at some point the Vision Fund needs to return money to investors - and that's a lot sooner than "run WeWork to earn back $5b+ via dividends" would take.
- philwelch 7y agoAs soon as it’s been transformed into a profitable business, the exit is going to become an option.
- H8crilA 7y agoThe future profits only need to be higher than the $5B plus whatever they can get today from liquidating their existing holding. Sunk cost fallacy, or "what is done is done".
- sicromoft 7y agoDon't forget opportunity cost. The future profits need to be higher than the $5B plus liquidation value, PLUS the expected value of another investment at the margin.
- H8crilA 7y agoOh yeah you can use the yield curve to discount future flows, and then demand something extra on top of that (Graham's margin of safety).
- goatinaboat 7y ago
- philwelch 7y agoRebranding can happen, and the “charismatic leader” was the #1 problem. The bull case for WeWork that I always heard was based on the existence of a WeWork-shaped market opportunity, and WeWork themselves being in pole position to take it. The bear case was that WeWork was run by crazy people. I think SoftBank’s decisions here are making the best of a bad situation.
- stjohnswarts 7y agoI agree, with the loon no longer in the lead, they have a chance.
- astrodust 7y agoThey've been upgraded from no hope in hell to a slim chance in hell.
- perl4ever 7y agoWhat I read is that $5B is on top of their past investments of roughly $11B.
- dfcowell 7y agoThe $5b is coming from SoftBank Group. The earlier $11b came from the Vision Fund, which is a subsidiary with an entirely different operating environment.
- semi-extrinsic 7y agoSure, but it still means somehow Masayoshi Son (and the investors whose money he manages) has paid $16bn for a thing now worth $8bn.
- dodobirdlord 7y agoAssuming WeWork ends up being worth $5B+, it's kinda impressive that Masayoshi Son comes out of this with Softbank owning much of WeWork and the Vision Fund investors being the ones getting burned.
- Danieru 7y agoExcept the vision fund is structured as debt for the outside money. Softbank takes the profit and loss minus interest payments on the debt. Thus the vision fund is more like a leveraged softbank.
- detail-oriented 7y agoThe only idea i have is to turn it into a REIT.
- downrightmike 7y agoSunk cost fallacy.
- DebtDeflation 7y agoFourthly, we're now in the longest economic expansion on record and overdue for a recession, which a number of economic indicators seem to imply is coming in the near future. A looming cyclical collapse in demand for office space is not something any of the valuation models being applied to WeWork seem to be taking into account.