7 ms·

I think the article missed the point. WeWork was following a traditional (and valid) business model, but they managed to get Softbank to value them as a tech c

by Lazare 5y ago

I think the article missed the point. WeWork was following a traditional (and valid) business model, but they managed to get Softbank to value them as a tech company. That valuation was unwarranted, and ended up with Softbank losing a ton of money. Without Softbank's money, WeWork was nothing, but none of those five lessons relate to how to find a deep-pocketed VC willing to give you billions of dollars to grow a low-margin, capital-intensive, non-tech business. It seems absurd to suggest any of the lessons are applicable outside the the very specific time and place of WeWork's initial growth. "Just be confident you can raise a billion dollars for a bullshit idea and it'll happen" doesn't work if there's nobody handing out billion dollar investments to people with bullshit ideas.

jacquesm 5y ago
Something similar holds for Theranos: if people had done their homework instead of throwing insane amounts of money at this without any skepticism at all due to fear-of-missing-out then there would have been a much more quiet ending to that story. And in a way this is probably Holmes' best defense against the shareholder claims (of course, she still did lie to them): none of them did their part. When there is a transaction of this magnitude, normally both parties have duties: the one party has a duty to inform, the other party has a duty to investigate. Here both parties failed, not just one.
- nradov 5y ago
  Caveat emptor is not a valid defense in a criminal fraud trial. The jury instructions will reflect this.
  - jacquesm 5y ago
    Yes, she definitely will not get away with it, but it will almost certainly be tried and has been one of the things that most professionals in the M&A field have been pretty surprised at: that none of the investors did their homework, they just believed her when she made her pretty strong claims.
    - alisonkisk 5y ago
      Yes, the last defense of a fraudster is "it's not lie if I believe it; I'm just dumb and these dumb people gave me money" even for decade of lies.
Jasper_ 5y ago
You're forgetting the other half of SoftBank's strategy: that with a billion dollar cash injection, SoftBank could play kingmaker and decide the winners in any given market. SoftBank didn't just invest a billion dollars because they thought WeWork could win the market, they invested a billion dollars to make them the winners. Which SoftBank would then own the controlling stake of. But, uh, yeah, turns out that didn't quite work. Turns out when you Silicon Valley tech executives a billion dollars, they don't really think too about long-term business plans. And a billion dollars dries up a lot faster than you think.
- Lazare 5y ago
  Well...yes and no. We can argue about whether Softbanks plan of handing out billions to let tech companies blitzscale and obtain market dominance via first mover advantage and network effects and the power of SaaS economics (good scaling; low capital intensiveness) and so forth was a good idea or not. But WeWork was 1) not a tech company 2) had no hope of obtaining market dominance 3) wasn't the first mover 4) existed in a market with no network effects 5) wasn't a SaaS company but instead was in a capital intensive business that scaled linearly. No part of the Softbank plan applied here! > Turns out when you Silicon Valley tech executives a billion dollars What about when you hand some real estate developers...what did it end up being in the end? $18.5B dollars? (On a similar note, in other markets - specifically ride hailing - Softbank picked multiple competitors in a single market and funded both sides ensuring no single market leader would emerge. Again, even if the core Softbank strategy would have worked, it can't work when you don't even try and follow it.)
  - nradov 5y ago
    There was a bit of a network effect. Business travelers could use WeWork office and meeting space in any city, so expanding that network of facilities increased the total value in more than a linear way. But of course that wasn't nearly enough to justify the valuation.
- deleted 5y ago
  [deleted]
- 5y ago
HWR_14 5y ago
The fraud part wasn't "got investors to overvalue the company". That's salesmanship. It's the long term profitable leases with companies privately owned by the CEO (apparently purchased by him right before the lease was signed) that would make it fraud.

by Lazare 5y ago

jacquesm 5y ago

Something similar holds for Theranos: if people had done their homework instead of throwing insane amounts of money at this without any skepticism at all due to fear-of-missing-out then there would have been a much more quiet ending to that story. And in a way this is probably Holmes' best defense against the shareholder claims (of course, she still did lie to them): none of them did their part. When there is a transaction of this magnitude, normally both parties have duties: the one party has a duty to inform, the other party has a duty to investigate. Here both parties failed, not just one.

nradov 5y ago
Caveat emptor is not a valid defense in a criminal fraud trial. The jury instructions will reflect this.
- jacquesm 5y ago
  Yes, she definitely will not get away with it, but it will almost certainly be tried and has been one of the things that most professionals in the M&A field have been pretty surprised at: that none of the investors did their homework, they just believed her when she made her pretty strong claims.
  - alisonkisk 5y ago
    Yes, the last defense of a fraudster is "it's not lie if I believe it; I'm just dumb and these dumb people gave me money" even for decade of lies.

Jasper_ 5y ago

You're forgetting the other half of SoftBank's strategy: that with a billion dollar cash injection, SoftBank could play kingmaker and decide the winners in any given market. SoftBank didn't just invest a billion dollars because they thought WeWork could win the market, they invested a billion dollars to make them the winners. Which SoftBank would then own the controlling stake of. But, uh, yeah, turns out that didn't quite work. Turns out when you Silicon Valley tech executives a billion dollars, they don't really think too about long-term business plans. And a billion dollars dries up a lot faster than you think.

Lazare 5y ago
Well...yes and no. We can argue about whether Softbanks plan of handing out billions to let tech companies blitzscale and obtain market dominance via first mover advantage and network effects and the power of SaaS economics (good scaling; low capital intensiveness) and so forth was a good idea or not. But WeWork was 1) not a tech company 2) had no hope of obtaining market dominance 3) wasn't the first mover 4) existed in a market with no network effects 5) wasn't a SaaS company but instead was in a capital intensive business that scaled linearly. No part of the Softbank plan applied here! > Turns out when you Silicon Valley tech executives a billion dollars What about when you hand some real estate developers...what did it end up being in the end? $18.5B dollars? (On a similar note, in other markets - specifically ride hailing - Softbank picked multiple competitors in a single market and funded both sides ensuring no single market leader would emerge. Again, even if the core Softbank strategy would have worked, it can't work when you don't even try and follow it.)
- nradov 5y ago
  There was a bit of a network effect. Business travelers could use WeWork office and meeting space in any city, so expanding that network of facilities increased the total value in more than a linear way. But of course that wasn't nearly enough to justify the valuation.
deleted 5y ago
[deleted]
5y ago

HWR_14 5y ago

The fraud part wasn't "got investors to overvalue the company". That's salesmanship. It's the long term profitable leases with companies privately owned by the CEO (apparently purchased by him right before the lease was signed) that would make it fraud.