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WeWork Sunk Cost Fallacy

MTEE1985

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WeWork has been discussed on the forum a couple times, notably HERE where the discussion is around the concept and if people like it, and HERE where discussing if a lack of professionalism may have been the straw that broke the camels back.

For those not following along, there has been a lot going on lately. The tl;dr is that the company was scheduled to IPO this month, at an estimated $47b valuation, making it one of the most valuable startups of the decade.

Further due diligence showed increasing losses every quarter and year. As revenue increased, losses increased. It was a good test of the markets appetite for another high growth-high loss IPO. The company wanted to be valued as a tech company vs a real estate company. Ultimately, the much hyped IPO was delayed, then shelved indefinitely.

Now, SoftBank is expected to announce a package to take control of the company it has already invested billions into, at a valuation that is 20% of what it was a month ago.

Now, we must give credit where credit is due. Adam Neumann, the founder and former CEO saw a need and came up with a valuable solution. He is receiving an exit package worth up to $1.7b for his role.

Also, SoftBank’s team are no dummies, you don’t develop two $100b investment funds by being lucky or by buying Apple at the right time.

With the new deal, SoftBank will have a company, valued at $8b that they have already and/or committed to investing $15b into.

I would love to hear some takes on a path to profitability for WeWork. Is this a massive example of sunk cost fallacy for SoftBank? Or did they just acquire a $45b company for $15b?
 
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meridian_blue

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I work in the commercial real estate industry, and WeWork has been a hot topic among industry vets for a LONG time. Most RE people I spoke to never understood the hype the company generated or how it was being valuated in the way that it was. Real estate people were talking about NOI and cap rates, while WeWork was talking about Membership Growth and Burn Rates.

In the end, WeWork was a real estate company masquerading as a tech company. Silicon Valley has gotten into this huge frenzy where growth triumphed over every other metric - even profit, and we've gotten to granting ridiculous, multi-billion-dollar valuations for companies that were bleeding money.

This frenzy of expansion and corporate excess was funded primarily by SoftBank, who poured billions and billions into the company because they were enamored with the companies growth (albeit unprofitable) & the companies charismatic leader). The fact that the basic economics of WeWork didn't make sense (take on fixed debt, for variable income) were tossed out the window.

In the midst of all this excess, Neumann and other execs ran WeWork like their own personal piggy bank. Do a little digging via Google and you'll find a laundry list of examples (private jets, outlandish parties, giving friends and family members C-suite positions and lucrative contracts, etc.). One of the more ridiculous stories was when Neumann decided to trademark the logo 'We' under his own name and sold it back to his own company for $5.9M! (this was later reversed after an investor outcry).

Eventually though, the raw numbers outweighed the hype and We Work reached a tipping point. When they announced their IPO and their accounting books were turned open for public market investors to review, the sham was revealed. The company’s value plummeted and what was once a company worth $47B is now on the brink of insolvency…

I think you’re right in saying that SoftBank is in sunk cost fallacy. I really see no way of them ever re-cooping their investment. They’re throwing good money after bad. But they have very few options – they can’t afford the consequences of telling their investors that they lost everything on WeWork. It would sink their entire investment fund program. So, the charade continues, and SoftBank is left to pray that they somehow make a miraculous recovery.

The only winner in this story is Neumann, who walked away with a $1.7B payout. There’s no way his shares are worth anything near that amount, but it doesn’t matter. He owned a majority of the voting shares, so SoftBank had no choice but to buy him out just to get him to step down.

What’s sad is there’s so many employees who are left with nothing. While Neumann sold his shares for $1.7B, their stock options worthless and they are on the verge of being laid off…
 

Rabby

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CEO severance: $1.7B.
Employee severance: Oops, we're too broke to pay that.
Employee shares: probably worth $0.
Other investor shares: whatever they can get at a fire sale?

All I can see it as is a fraud. Startup culture seems to somehow excuse people from making duplicitous promises and acting against the interests of people whose trust they've gained. For leading a company while acting only in one's personal interest, with disregard to other shareholders. Even trademarking the name personally and selling it to the company? Come on.

These kinds of actions are inexcusable in corporate governance, yet they are excused if the criminals are celebrity kids from Silicon Valley blowing other people's money on bullshit. They know it's BS and they're only in it to siphon off a few million or, hey, let's go for 9 figures.

Yes, sunk cost; we're in this rockstar-founder-startup pit too deep, and apparently we have to see what's at the bottom of the hole. Onward, to the conclusion of morbid curiosity.
 

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Andy Black

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My teeth are actually grinding. I despise startup BS. Growth? Charismatic leader? Emperors new clothes indeed. Some have no intention of adding value or making a profit. Their plan is to use smoke and mirrors to build and sell a turd.

As for WeWork, I know nothing other than what I’ve just read in the forum, so I can’t comment.
 
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GoodluckChuck

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All I know about Wework is that for $235/mo I had open access to 6 floors, 38-44 in one of the tallest buildings in the center of Mexico City. So badass.

Their app sucked. It always had errors.

The staff didn't care about much. They were busy fooling around and not collecting my $.

Free beer and coffee all day long. That can't be profitable.

I loved it. They still owe me $150 they overcharged my card over a year ago. Guess it's in the CEOs hands now.
 

arl

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All I know about Wework is that for $235/mo I had open access to 6 floors, 38-44 in one of the tallest buildings in the center of Mexico City. So badass.

Free beer and coffee all day long. That can't be profitable.

Damn. I'd probably make back the 235 just with free beer and coffee. It doen't make any sense. No wonder the are broke.
 

MTEE1985

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First off, great write-up which hit all the key points.

So, the charade continues, and SoftBank is left to pray that they somehow make a miraculous recovery.

This is what is so fascinating to me. These guys aren’t idiots. The only play I see is if, and it’s a big if, they can shrink losses to the point of a future IPO being welcomed. Otherwise I’m shocked they aren’t just writing it off as being dazzled by the glitter.

What’s sad is there’s so many employees who are left with nothing. While Neumann sold his shares for $1.7B, their stock options worthless and they are on the verge of being laid off…

Article in the Journal this morning about that. Majority of employees not named Neumann bought in at $20/share. New deal values them at $19.19. In 2 months people went from thinking they’d be millionaires to being underwater.
 
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Kid

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Article in the Journal this morning about that. Majority of employees not named Neumann bought in at $20/share. New deal values them at $19.19. In 2 months people went from thinking they’d be millionaires to being underwater
That sucks :(

point of a future IPO being welcomed.

Someone wrote recently that bull market is at its highest when the startups go for IPO.
It makes sense to sell stock when market is most irrational.

The thing i wonder is if they won't ipo now, will they have enough cash to wait for the next bull market. (assuming that recession will kick in soon)
 

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This is what is so fascinating to me. These guys aren’t idiots. The only play I see is if, and it’s a big if, they can shrink losses to the point of a future IPO being welcomed. Otherwise I’m shocked they aren’t just writing it off as being dazzled by the glitter.

The question is how they collateralize the loans. It's likely there was some negotiation here. For example, liquidation priority (sorry employees, early investors, current shareholders). Also perhaps some debt restructuring, so they get certain physical assets upon default. I don't know the details in this case, but high level finance often finds ways to... uh, finance itself.
 

WJK

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I work in the commercial real estate industry, and WeWork has been a hot topic among industry vets for a LONG time. Most RE people I spoke to never understood the hype the company generated or how it was being valuated in the way that it was. Real estate people were talking about NOI and cap rates, while WeWork was talking about Membership Growth and Burn Rates.

In the end, WeWork was a real estate company masquerading as a tech company. Silicon Valley has gotten into this huge frenzy where growth triumphed over every other metric - even profit, and we've gotten to granting ridiculous, multi-billion-dollar valuations for companies that were bleeding money.

This frenzy of expansion and corporate excess was funded primarily by SoftBank, who poured billions and billions into the company because they were enamored with the companies growth (albeit unprofitable) & the companies charismatic leader). The fact that the basic economics of WeWork didn't make sense (take on fixed debt, for variable income) were tossed out the window.

In the midst of all this excess, Neumann and other execs ran WeWork like their own personal piggy bank. Do a little digging via Google and you'll find a laundry list of examples (private jets, outlandish parties, giving friends and family members C-suite positions and lucrative contracts, etc.). One of the more ridiculous stories was when Neumann decided to trademark the logo 'We' under his own name and sold it back to his own company for $5.9M! (this was later reversed after an investor outcry).

Eventually though, the raw numbers outweighed the hype and We Work reached a tipping point. When they announced their IPO and their accounting books were turned open for public market investors to review, the sham was revealed. The company’s value plummeted and what was once a company worth $47B is now on the brink of insolvency…

I think you’re right in saying that SoftBank is in sunk cost fallacy. I really see no way of them ever re-cooping their investment. They’re throwing good money after bad. But they have very few options – they can’t afford the consequences of telling their investors that they lost everything on WeWork. It would sink their entire investment fund program. So, the charade continues, and SoftBank is left to pray that they somehow make a miraculous recovery.

The only winner in this story is Neumann, who walked away with a $1.7B payout. There’s no way his shares are worth anything near that amount, but it doesn’t matter. He owned a majority of the voting shares, so SoftBank had no choice but to buy him out just to get him to step down.

What’s sad is there’s so many employees who are left with nothing. While Neumann sold his shares for $1.7B, their stock options worthless and they are on the verge of being laid off…
I agree with you. This is just another commercial property company that has put a spin on their business -- they put lipstick on a pig! I am very head shy about commercial rentals and have been since around 1990 when the market tanked in Los Angeles. And I don't think it's going to get much rosier anytime soon. My fear is that the commercial segment of the RE market is in distress and decline in most locations.
 
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Lion Identity

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WeWork has been discussed on the forum a couple times, notably HERE where the discussion is around the concept and if people like it, and HERE where discussing if a lack of professionalism may have been the straw that broke the camels back.

For those not following along, there has been a lot going on lately. The tl;dr is that the company was scheduled to IPO this month, at an estimated $47b valuation, making it one of the most valuable startups of the decade.

Further due diligence showed increasing losses every quarter and year. As revenue increased, losses increased. It was a good test of the markets appetite for another high growth-high loss IPO. The company wanted to be valued as a tech company vs a real estate company. Ultimately, the much hyped IPO was delayed, then shelved indefinitely.

Now, SoftBank is expected to announce a package to take control of the company it has already invested billions into, at a valuation that is 20% of what it was a month ago.

Now, we must give credit where credit is due. Adam Neumann, the founder and former CEO saw a need and came up with a valuable solution. He is receiving an exit package worth up to $1.7b for his role.

Also, SoftBank’s team are no dummies, you don’t develop two $100b investment funds by being lucky or by buying Apple at the right time.

With the new deal, SoftBank will have a company, valued at $8b that they have already and/or committed to investing $15b into.

I would love to hear some takes on a path to profitability for WeWork. Is this a massive example of sunk cost fallacy for SoftBank? Or did they just acquire a $45b company for $15b?
Great questions, there are some companies that have been losing billions and eventually become very profitable or at the very least through an IPO at least stop losing money. The well known FAANG stocks, Facebook, Amazon, Apple, Netflix and Google are the perfect examples of companies that received billions in VC backed capital and eventually went public with an IPO and have been profitable. They are very much tech/software companies that do have higher relative profit margins compared to most business industries.
Fast forward to 2019 and we have companies like Lyft, Uber, WeWork and others that have a "tech" company type feel, but are in essentially service and landlord/tenant type industries where there is a much tighter profit margin and business model that makes it difficult and potentially impossible to eventually be profitable and stop bleeding cash. For this reason MJ rightly identifies that higher odds for success exist with Fastlane businesses that have a recurring revenue model similar to a Netflix or by creating a marketplace like Google and Facebook do with their platforms.
The bottom line seems to be that in 2019 investors are realizing that many of these cash bleeding companies present enormous risks and downside to actually become profitable. Companies like Zoom that have that monthly recurring software model will nearly always be a better investment and for us as entrepreneurs a better path to profitability and long term success. Thank goodness MJ penned his books to guide us! Very grateful for that.
 

DustinH

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No positive cashflow reported in a real estate business? That should've been the first clue right there.

If you're not cashflowing from day one in a real estate business then you're most likely not going to be profitable later on.

You lease out office space. Just because you make it look cool doesn't mean you make a lot of money. Typically, it means the opposite because you are spending money on stupid stuff.

I failed to see any new tech that WeWork created. So, no value there.
 

J.F.

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What’s sad is there’s so many employees who are left with nothing. While Neumann sold his shares for $1.7B, their stock options worthless and they are on the verge of being laid off…

I don't really find this sad. This is why it's risky to work at a job. If you start a business, you understand that there is risk involved. But people are lied to when they go to work that a "job" is somehow the more stable option.

Putting your fate into the hands of others has NEVER been without risk.

Choose your own fate.
 
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daivey

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I don't really find this sad. This is why it's risky to work at a job. If you start a business, you understand that there is risk involved. But people are lied to when they go to work that a "job" is somehow the more stable option.

Putting your fate into the hands of others has NEVER been without risk.

Choose your own fate.
oh baloonie. Those people arent numbers, they are people that took a risk to be an employee working for this company, while this loser walks away with a 1.7 billion buyout based on a con? you're ok with that? he's a con man, plain and simple.

you're what, 17 years old on these forums preaching this shit? seriously.
 

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