5 ms·

The WeWork debacle should be an indictment of modern finance

44 points by jajag 7y ago

parvenu74 7y ago
WeWork seems like it should be a buyout target either by a hotel chain or a restaurant chain (Starbucks?) since the basic model is "more permanent and slightly more private than a coffee shop"...
- goatinaboat 7y ago
  No one other than SoftBank believes it is even worth $8Bn. After it goes bankrupt someone might buy it in a fire sale. Probably next year. It’s not clear why the Graun is so upset however. Not a penny of public nor pension fund money was burnt in this. Just the Saudis and a few other billionaires.
  - scrumper 7y ago
    They're annoyed because of Adam Neumann's golden parachute. If he'd have been kicked out with nothing except the obligation to pay interest on that personal loan to JPMorgan, the article might have come out differently.
    - goatinaboat 7y ago
      He bamboozled the Saudis sure, but it’s not as if he actually managed to rip off retail investors, as was his intent.
      - chrisjc 7y ago
        Bamboozled the first time perhaps. It seems they wouldn't let it happen a second time, hence Softbank's (not Vision) infusion of cash.
        goatinaboat 7y ago
        I’m not sure I’d want to bamboozle a man nicknamed Bonesaw even once
  - skinnymuch 7y ago
    The Saudis and Vision Fund didn’t lose much over this. Only $3B is from Vision Fund outside Softbank.
    - goatinaboat 7y ago
      Didn't the Vision Fund invest $10.5Bn already?
      - skinnymuch 7y ago
        I’ll try to find which big article said it. I think it’s from WSJ or business insider if you’re interested where they were breaking down how silly and awful Vision Fund is for SoftBank. It said of the $9B already invested, only $3B is coming from Vision Fund outside Softbank Vision Fund money.
dickeytk 7y ago
It simply shows what happens when investors lack due diligence. It also shows that the process for going public works: it lays bare the problems with private businesses that current investors are unable or unwilling to uncover themselves. The only thing that worked out badly is how the employees are being treated.
cjf4 7y ago
WeWork is ultimately a feather in modern finance's cap. Wall street didn't buy the scam, and now the company is re-calibrating. Isn't that the way it should work?
whack 7y ago
I've been hearing surprisingly often the sentiment that WeWork is "undercutting its competitors in a race to the bottom, using investor capital as oxygen to sustain losses while other serviced office-space providers ran out of breath and expired". This seems surprisingly disingenuous. The numbers show that WeWork is charging its clients at a gross margin that is comparable, if not greater, to traditional rivals like IWG [1]. WeWork might be operating at a net loss, but that is only because they are reinvesting all their money into growing their capacity. It seems unfair to accuse WeWork of winning simply by undercutting its rivals so as to starve them of oxygen. It also seems unfair to accuse WeWork of destroying the economy via unprofitable business models, and to accuse its CEO of being a complete charlatan, when they have successfully built a legitimate billion dollar business from scratch [1]. Is WeWork overvalued in its recent valuations? I think so. But that is the folly of its investors, and investors alone. The commentary that companies like WeWork are somehow fraudulent and worthless and ruining the economy, seems ridiculous. [1] https://news.crunchbase.com/news/gross-margins-wework-and-the-public-comp-question/ https://news.crunchbase.com/news/gross-margins-wework-and-th...
- gerbilly 7y ago
  > It seems unfair to accuse WeWork of winning simply by undercutting its rivals so as to starve them of oxygen. I think it's a great jumping off point for criticism actually. Those other companies that they are trying to asphyxiate are started by people, with dreams and families and employees. It's a terrible scorched earth strategy that I'd love to see made illegal if there were only some way to police it.
  - socalnate1 7y ago
    I don't think you fully read the comment you are responding to. The point was that WeWork actually isn't undercutting its rivals.
- tlb 7y ago
  That would be true if We could expect to someday achieve full occupancy. Part of their appeal is flexibility and supporting digital nomads, so they may never achieve the same level of occupancy as, say, Regus.
cnst 7y ago
> • Nesrine Malik is a Guardian columnist Can anyone explain what does the above mean? Are they an employee, or a contractor? I just suddenly became curious since they're portraying contractors as some sort of second class citizens, which they aren't at all, at least not in the software industry.
- katmannthree 7y ago
  >contractors as some sort of second class citizens, which they aren't at all, at least not in the software industry Perhaps not from your experience, but I don't believe that's generally true. The difference in benefits, bonuses, salary, tax burden, etc is pretty large.
- goatinaboat 7y ago
  There are two kinds of staff at The Guardian - privately educated trust fund kids, and unpaid interns.
tolstoshev 7y ago
Isn't this a textbook definition of predatory pricing and illegal in the US? WeWork’s strategy wasn’t simply to fulfil a practical need: its aim was market domination, to be achieved by undercutting its competitors in a race to the bottom, using investor capital as oxygen to sustain losses while other serviced office-space providers ran out of breath and expired. The idea was then to leverage its reach to name its terms and prices.
- wjnc 7y ago
  Yes, it looks like an attempt at predatory pricing. It didn't succeed though. I have no specific knowledge of US antitrust, but usually for predatory behavior to 'stick' you need to have market power to begin with. WeWork didn't have any and wasn't really near the point of having any when they went bust (40% market share is a commonly heard number). Another plus for current capitalism and regulation is that the fillings the SEC demands really brought home what was wrong with WeWork. So in that sense investor protections in the current rules really did help. Mainly (professional) suckers lost their money.
SpicyLemonZest 7y ago
I don't understand why it's an indictment. SoftBank decided to spend billions of dollars on a stupid risky bet, which is fine, they're allowed to do that. Then they tried to offload that risky bet onto the general public in an IPO. The system of modern finance said "hold on, this is a stupid risky bet, you can't use our money for it". So now SoftBank has to either accept the loss or make the bet successful without the help of the rest of the financial system. That's what's supposed to happen, no?
- SilasX 7y ago
  Furthermore, Softbank didn't somehow get tightly coupled to the rest of the financial system that the Fed and/or Congress felt they had to get bailed out. Edit: With that said, the WeWork CEO (AIUI) did get away with a lot of stuff that just shouldn't be allowed under modern practices of corporate government, like funneling money to his own businesses. That is a failing of modern finance.
  - austhrow743 7y ago
    If the investors allow him to do that, is it a failure of modern finance or just them?
- samsonradu 7y ago
  Were the banks supposed to play ball or say ‘hold on’ before offloading to the public? Honest question.
- itcrowd 7y ago
  "I don't understand why it's an indictment." You are not reacting to the content of the opinion piece. Three points are made in the piece that "indict modern finance", none of them being about SoftBank's "stupid risky bet" or how that should be regulated/banned. > But the crisis at WeWork [..] exemplifies the increasing volatility of the economic model that inflated the unicorns of the past. And it involves three trends [..]: the expansion of the gig economy, the relatively low cost of commercial real estate, and the increase in financial flows from sovereign investors in search of political capital. (edit: not sure I agree with the content of the article, but I'm quoting the gist of it)
draw_down 7y ago
Well, it’s certainly been revealing to see most of the discussion focusing on demonizing the CEO. But he wasn’t acting in a vacuum, and the company has a board.

44 points by jajag 7y ago

WeWork seems like it should be a buyout target either by a hotel chain or a restaurant chain (Starbucks?) since the basic model is "more permanent and slightly more private than a coffee shop"...

goatinaboat 7y ago
No one other than SoftBank believes it is even worth $8Bn. After it goes bankrupt someone might buy it in a fire sale. Probably next year. It’s not clear why the Graun is so upset however. Not a penny of public nor pension fund money was burnt in this. Just the Saudis and a few other billionaires.
- scrumper 7y ago
  They're annoyed because of Adam Neumann's golden parachute. If he'd have been kicked out with nothing except the obligation to pay interest on that personal loan to JPMorgan, the article might have come out differently.
  - goatinaboat 7y ago
    He bamboozled the Saudis sure, but it’s not as if he actually managed to rip off retail investors, as was his intent.
    - chrisjc 7y ago
      Bamboozled the first time perhaps. It seems they wouldn't let it happen a second time, hence Softbank's (not Vision) infusion of cash.
      - goatinaboat 7y ago
        I’m not sure I’d want to bamboozle a man nicknamed Bonesaw even once
- skinnymuch 7y ago
  The Saudis and Vision Fund didn’t lose much over this. Only $3B is from Vision Fund outside Softbank.
  - goatinaboat 7y ago
    Didn't the Vision Fund invest $10.5Bn already?
    - skinnymuch 7y ago
      I’ll try to find which big article said it. I think it’s from WSJ or business insider if you’re interested where they were breaking down how silly and awful Vision Fund is for SoftBank. It said of the $9B already invested, only $3B is coming from Vision Fund outside Softbank Vision Fund money.

dickeytk 7y ago

It simply shows what happens when investors lack due diligence. It also shows that the process for going public works: it lays bare the problems with private businesses that current investors are unable or unwilling to uncover themselves. The only thing that worked out badly is how the employees are being treated.

cjf4 7y ago

WeWork is ultimately a feather in modern finance's cap. Wall street didn't buy the scam, and now the company is re-calibrating. Isn't that the way it should work?

whack 7y ago

I've been hearing surprisingly often the sentiment that WeWork is "undercutting its competitors in a race to the bottom, using investor capital as oxygen to sustain losses while other serviced office-space providers ran out of breath and expired". This seems surprisingly disingenuous. The numbers show that WeWork is charging its clients at a gross margin that is comparable, if not greater, to traditional rivals like IWG [1]. WeWork might be operating at a net loss, but that is only because they are reinvesting all their money into growing their capacity. It seems unfair to accuse WeWork of winning simply by undercutting its rivals so as to starve them of oxygen. It also seems unfair to accuse WeWork of destroying the economy via unprofitable business models, and to accuse its CEO of being a complete charlatan, when they have successfully built a legitimate billion dollar business from scratch [1]. Is WeWork overvalued in its recent valuations? I think so. But that is the folly of its investors, and investors alone. The commentary that companies like WeWork are somehow fraudulent and worthless and ruining the economy, seems ridiculous. [1] https://news.crunchbase.com/news/gross-margins-wework-and-the-public-comp-question/ https://news.crunchbase.com/news/gross-margins-wework-and-th...

gerbilly 7y ago
> It seems unfair to accuse WeWork of winning simply by undercutting its rivals so as to starve them of oxygen. I think it's a great jumping off point for criticism actually. Those other companies that they are trying to asphyxiate are started by people, with dreams and families and employees. It's a terrible scorched earth strategy that I'd love to see made illegal if there were only some way to police it.
- socalnate1 7y ago
  I don't think you fully read the comment you are responding to. The point was that WeWork actually isn't undercutting its rivals.
tlb 7y ago
That would be true if We could expect to someday achieve full occupancy. Part of their appeal is flexibility and supporting digital nomads, so they may never achieve the same level of occupancy as, say, Regus.

cnst 7y ago

> • Nesrine Malik is a Guardian columnist Can anyone explain what does the above mean? Are they an employee, or a contractor? I just suddenly became curious since they're portraying contractors as some sort of second class citizens, which they aren't at all, at least not in the software industry.

katmannthree 7y ago
>contractors as some sort of second class citizens, which they aren't at all, at least not in the software industry Perhaps not from your experience, but I don't believe that's generally true. The difference in benefits, bonuses, salary, tax burden, etc is pretty large.
goatinaboat 7y ago
There are two kinds of staff at The Guardian - privately educated trust fund kids, and unpaid interns.

tolstoshev 7y ago

Isn't this a textbook definition of predatory pricing and illegal in the US? WeWork’s strategy wasn’t simply to fulfil a practical need: its aim was market domination, to be achieved by undercutting its competitors in a race to the bottom, using investor capital as oxygen to sustain losses while other serviced office-space providers ran out of breath and expired. The idea was then to leverage its reach to name its terms and prices.

wjnc 7y ago
Yes, it looks like an attempt at predatory pricing. It didn't succeed though. I have no specific knowledge of US antitrust, but usually for predatory behavior to 'stick' you need to have market power to begin with. WeWork didn't have any and wasn't really near the point of having any when they went bust (40% market share is a commonly heard number). Another plus for current capitalism and regulation is that the fillings the SEC demands really brought home what was wrong with WeWork. So in that sense investor protections in the current rules really did help. Mainly (professional) suckers lost their money.

SpicyLemonZest 7y ago

I don't understand why it's an indictment. SoftBank decided to spend billions of dollars on a stupid risky bet, which is fine, they're allowed to do that. Then they tried to offload that risky bet onto the general public in an IPO. The system of modern finance said "hold on, this is a stupid risky bet, you can't use our money for it". So now SoftBank has to either accept the loss or make the bet successful without the help of the rest of the financial system. That's what's supposed to happen, no?

SilasX 7y ago
Furthermore, Softbank didn't somehow get tightly coupled to the rest of the financial system that the Fed and/or Congress felt they had to get bailed out. Edit: With that said, the WeWork CEO (AIUI) did get away with a lot of stuff that just shouldn't be allowed under modern practices of corporate government, like funneling money to his own businesses. That is a failing of modern finance.
- austhrow743 7y ago
  If the investors allow him to do that, is it a failure of modern finance or just them?
samsonradu 7y ago
Were the banks supposed to play ball or say ‘hold on’ before offloading to the public? Honest question.
itcrowd 7y ago
"I don't understand why it's an indictment." You are not reacting to the content of the opinion piece. Three points are made in the piece that "indict modern finance", none of them being about SoftBank's "stupid risky bet" or how that should be regulated/banned. > But the crisis at WeWork [..] exemplifies the increasing volatility of the economic model that inflated the unicorns of the past. And it involves three trends [..]: the expansion of the gig economy, the relatively low cost of commercial real estate, and the increase in financial flows from sovereign investors in search of political capital. (edit: not sure I agree with the content of the article, but I'm quoting the gist of it)

draw_down 7y ago

Well, it’s certainly been revealing to see most of the discussion focusing on demonizing the CEO. But he wasn’t acting in a vacuum, and the company has a board.