SoftBank Backs Away from Part of Planned WeWork Bailout
wsj.comGreat timing! Current conditions are WeWork's nightmare scenario.
WeWork's raison-d'etre is short term leasing. Leaseholders will end those leases if everyone is working from home. Add to that that an economic recession was always going to be the real test of WeWork's ability to keep up with its huge long-term leases.
Arguably it's in the interest of the landlords to make this work. If WeWork goes under there will be a ton of void commercial space. It's a question of how many lease payments to forgive before it makes sense (and is actually viable) to repossess the buildings and replacement tenants.
There’s going to be a lot of empty space.
The land owners did it to themselves pushing for tighter building codes and zoning. No one built, rent went up, the economy got more fragile because people on the bottom had absolutely nowhere to go. Now they’re going to pay for it (except the ones that saw this coming, I know the building I live in just got sold a few days ago...)
I’ve been saying for years that the housing market is irrational and that most of the US should be building more. Not that my opinion means anything but I also wasn’t the only person saying this.
This thread is about commercial real estate, not residential. And certainly not about your apartment building.
I don't think there is going to be a big demand for large commercial premises for a while. Even after this virus goes away, we are still most likely going be in a recession. Many knowledge workers (and maybe more importantly their managers) will have realised they can actually work from home.
The alternative is the landlords try to rent these spaces as co-working spaces themselves, but demand for that is going to drop too - which is the issue in the first place.
If it's on "interest of the landlords" to make it work, then it will fail. And they will end up with the bill.
I guess if anybody's going to bail out the criminals at WeWork, then, it'll be the landlords.
I really liked the "WeCrashed" podcast [1,2], it traces the rise and fall of WeWork and is well produced.
[1] https://podcasts.apple.com/podcast/wecrashed-the-rise-and-fa...
It is definitely worth a listen. Short episodes and very good story.
> A notice sent to WeWork shareholders Tuesday said that SoftBank believes regulatory probes into the startup’s business [...] give it an out under the deal struck last fall to purchase $3 billion of WeWork shares from existing investors.
> That will include Adam Neumann, former chief executive of WeWork parent We Co., who had the right to sell up to $970 million in stock as part of the October deal that led to his ouster from the company’s board.
Wow.
I'm having a hard time following these two paragraphs. Is it saying that SoftBank invested $3 billion into WeWork which, among other things, funded Neumann's $970 million exit? And they now think they can recover that $3 billion and then deprive Neumann of at least some of that $970 million?
Softbank invested $1.5b, loaned up to $5b, and agreed to purchase $3b from existing shareholders. The last is apparently being... renogotiated.
Cool get out of jail free card for nuking Neumann’s parachute. Whomever put that idea forward earned their fee.
Good excuse now that they see that commercial real estate is about to get nuked.
This one is sure to wind up in Matt Levine's column tomorrow.
The current owners of a large chunk of WeWork stock are going to have to sue Softbank to force them to complete the deal. For all we know, Softbank is experiencing liquidity problems, and would rather welsh on their portfolio company principals than endanger their own investors.
I'm curious what Adam will finally get after all of this, other than an incredible ride.
He still has a wave pool.
"The development won’t affect the $5 billion lifeline SoftBank agreed to give WeWork directly—cash the startup badly needed then as it ran out of runway, and which it is likely to continue to need as the worsening coronavirus outbreak empties out its desks."
Er, yes. WeWork is dead until there is a COVID-19 vaccine. Tightly packing random people is out for now.
Largest corporate tenant in New York City.
We are just starting to see the first wave of this crash.
Even after we start to recover; how many companies are going to keep as much floor space as they had before? Remote work is here to stay.
This is going to turn into a global commercial real estate crash in 6 months, no doubt.
Fantastic. Finally some sanity about disintermediating work from locality.
Sidenote: Carl Icahn is currently shorting commercial RE, so I think you're right.
Paradoxically, I think that the post-crash recovery will be a great opportunity for WeWork (if they survive). My guess is that many companies will outright close most of their branch offices, shifting people / teams that want or need to be in an office to coworking spaces.
This movement will also have reductive effects on carbon emissions, so despite the coming carnage in commercial real estate, it's the right direction. Hopefully a lot of that square footage can be converted to residential, because there is still an affordable housing shortage...
If you can work from anywhere, that helps alleviate the affordable housing shortage. Move where the housing is cheap. Not everyone is going to get to live in Manhattan or SF proper.
This may be somewhat cynical, but housing policy in the US continues to be one of the main tools in systemic oppression of minorities. There are powerful segments of the population who are fine with the status quo and will not be happy if "they" move in next door. So they will do everything they can to "keep property values high" in suburban neighborhoods -- which has historically been a dog whistle for "keep minorities out" -- and in direct opposition to creating more affordable housing.
It'll take decades to "fix" housing policy through upzoning and waiting for the existing population of homeowners to shrink (freeing up housing stock). I don't disagree that there are challenges due to the status quo, but remote work is a fix that can be implemented today and can help lift the wages of folks who might not otherwise be able to have those roles.
You're not going to be able to change property rights in the US, so the problem may be unfixable to be frank, and those property rights are what keeps property values high.
I agree remote work is the right way to go, but the affordable housing crisis can't be fixed through any other method than "build more housing". Every other thing that people propose is designed to protect property value by not building more housing. We simply have to make housing less scarce and yes, that will drive down property value. That's kind of the point.
Right, but until you have the ability to upzone or “build more”, it’s a moot point.
If you don’t own the land, and you can’t push through upzoning legislation, you’re not building more housing.
If it's not in your bank account, it does not exist.
> The development won’t affect the $5 billion lifeline SoftBank agreed to give WeWork directly—cash the startup badly needed then as it ran out of runway, and which it is likely to continue to need as the worsening coronavirus outbreak empties out its desks.
Some of that money, including $1.5 billion in fresh equity, already has been invested.
Still extending and pretending?
WeWork has been screwing members who try to leave out of their security deposit. Could this be why?
SoftBank is finished as a VC investor. You'd have to be an idiot or have no other option (adverse selection) to take their money.
lol. What makes you think that?
A non-paywall source: http://archive.is/uRXE6.
This doesn't seem to have any effects for anyone other than investors; so, this is probably not really relevant for HN as there's hardly anything in the story for us to discuss.
I consider this article "something that gratifies my intellectual curiosity."
That notwithstanding, rather decent of you to post the non-paywalled link. Thank you.
Plenty of WeWork employees are on HN (or former employees, or those that exercised stock options or through WeWork's many acquisitions), plus there are a lot of folks that use WeWork's spaces here.
https://github.com/iamadamdev/bypass-paywalls-firefox is a better solution.
> This doesn't seem to have any effects for anyone other than investors; so, this is probably not really relevant for HN as there's hardly anything in the story for us to discuss.
Uhh, yeah, because we always only discuss stories that are personally relevant to us...
Good. Let that PoS burn.
It's one thing to be mad at the founder, directors and officers. It's another thing to take away a very useful tool from the startup toolkit that millions of people find very helpful when starting a company. Having experienced the process of renting and furnishing a 2-4 person office before and after the rise of WeWork, I, for one, hope that they will stick around.
WeWork's advantage over other similar coworking places in large part came from their ability to burn investor cash to provide you with a premium experience.
I don't want WeWork to die, it would be better for it to figure out how to run in a sustainable manner. But once that happens, you may well find it's no longer differentiated from its many competitors.
As a former customer, WeWork really got me offside. So much so that I switched coworking spaces to an independent provider. They made me feel like cattle in an abbatoir, not a paying customer that is central to their business.
They demanded that everything be done their way. Long story short, WeWork acquired the coworking space we were using and then used incredibly obnoxious tactics to "require" us to sign new contracts and move to the WeWork model (that removed a lot of benefits, like the meeting room booking credit system). Things like sending e-mails saying "This contract will expire in 24 hours, you must sign this today".
Or even afterwards, preventing my part-time employees from sitting next to my full-time desk. I could understand if the space were at capacity, but I was literally sitting in a row with 12 empty desks.
Not to mention the constant noise interruptions from community managers laughing, the music from the lobby, the printer requiring a driver installation, and so many more.
Coworking spaces are commercially viable, but I'm only going to fork over money to businesses who actually treat customers well (and not like a box in a spreadsheet to please investors). The whole WeWork company can die in a fire. Good riddance.
wework isn't the first company to do this, and not even the largest. Regus does the same thing but instead of elevating the world's consciousness they actually make money
Executive suites have been around for at least 30 years. Other than the startup sheen, they offer little new.
Hey, nothing wrong with turning Saudi money into free beer.
Forgive my ignorance, but why is WeWork a PoS? I don't have much awareness on the situation.
I'm a WeWork customer and I really like the service ... their financials I understand have been controversial for a number of years -- the service itself is great though!
It's a long story, but:
First, sometimes people build (or buy) office buildings, and then lease the space in them to companies. Office buildings (and the land they're built on) tend to be very expensive, so landlords tend to be levered (ie, they borrow money to build/buy them), and they like to sign long term leases to try and lock in revenue so they know they can cover their loan payments. Companies like flexibility (who knows how many staff you'll actually have in 36 months?), so they don't like that, but what are you going to do?
Being a landlord is a big business, and profitable enough, on average. In the US, there are a lot of large REIT (Real Estate Investment Trusts) that do this.
Second, some people had the bright idea of getting some office buildings in hot markets, and renting space in them flexibly - short term, no lengthy contracts, with the ability to grab more (or less) space as tenants need it. This is risky for the landlords, so they have to charge more rent to make up for it; to soften the blow they try and spruce up the buildings, offer services, and otherwise try and compete on things other than price (since they'll never be as cheap as just leasing a floor of a skyscraper for 5 years).
This is also a big business, although it traditionally hasn't been super profitable. The biggest player in this space was traditionally been IWG (also known as Regus or Spaces in some markets I believe), which had 3000+ buildings in 1000 cities, ~600k desks, and was worth, as of last year before stuff went weird, around $4B with $0.5B of profits on $3.5B in revenue.
That's not an amazing valuation considering! Basically 1x earnings, or 8x profits. Then again, a business like IWG is always going to be vulnerable to a downturn; the customers can stop paying, but you still have to pay off your loans. In any case, big, multi-billion dollar business, it's been around since 1989, it's doing fine. So are all their many competitors.
Then WeWork popped up. WeWork's big idea was to do exactly what IWG was doing, but to somehow be a little cooler, and explain very loudly to anyone who was listening that they were a tech company, and should be valued like a tech company (ie, at a crazy high multiple of earnings), and also spouted a lot of weird stuff about wanting to change the world, and to be the first "physical social network", and just generally spun a lot of guff, but ultimately they bought (or in some cases, leased) buildings, sliced them up into offices and desks, and rented them short term, which is what IWG does.
SoftBank listened and, inexplicably, believed WeWork. They pumped an eyewatering amount of money into WeWork. They spent it trying to grow to match IWG, but they never made it; at one point about six months ago they had about $2B in revenue, were losing $2B a year, and were being valued (by SoftBank, if no one else) at almost $50B. Growth is valuable, yhs, but if IWG is worth $3.5B, and WeWork $50B, then presumably WeWork is going to grow to be 15 times the size of IWG...except IWG (again) has been around since 1989 and seems to be in a pretty mature market. Where's the growth coming from? (WeWork's answer was "everywhere", and they started a bunch of spinffos, like WeGrow (a school), WeLive (apartments), and some other weirder ones. None worked out.)
Anyhow, $2B of revenue is a lot less than $3.5B. And negative $2B is a LOT less profit than $0.5B. And yet, $50B is a lot more than $4B! What gives?
Answer: It was all just a borderline scam. SoftBank gave a stupid amount of money to WeWork, and they basically piled it into a bonfire and lit it on fire. There was no secret tech; no cunning plans. Some have suggested that WeWork spaces tend to be nicer than equivalent IWG properties (famously they offered free beer, and I think in one case in London they paid to have a live band just perfoming in the lobby of a building all day?), but that was all being funded by SoftBank's money faucet. When the money ended, so did all the parks that separated them from IWG (and their competitors). Now they're just another company offering flexible office space.
Meanwhile WeWork's CEO/founder (Neumann) was engaged in a lot of dodgy things. For example, he would borrow money from WeWork, buy office buildings, then re-sell them to WeWork. In another case, he decided to change WeWork's name from "WeWork" to "We", but it so happened someone owned the trademark to We, which just so happened to be....Neumann! So he sold them the trademark. (That last one got so much negative attention they eventually rolled it back.)
TL;DR: WeWork is a boring company that rents office space. The founder briefly convinced SoftBank they were going to change how we live our lives, got a massive investment, wasted most of it, siphoned off hundreds of millions of dollars, and then got kicked out of the company.
Pretty good summary but I think you were a little off on the Softbank side of things.
SB pioneered the practice, based on the concept of Blitzscaling, of pushing entrepreneurs to take an insane amount of money. WW's CEO likely convinced SB that it was a great idea, and then SB likely just ran it through their playbook of throwing money in. If you read up on SB, you'll hear several examples where they did this.
Their thesis is that if you pick a winner in a huge market and give it an insane amount of money, no one else can compete.
There might even be validity to the concept for some startups. But most definitely NOT in the case of WW.
I'm aware of blitzscaling, but for it to work, you've got to be looking at a market with strong network effects - that is, a "natural monopoly". Selling office space is (to my eyes) clearly not a natural monopoly.
So my theory is that "we sign long-term leases on office buildings, then rent desks on short-term contracts" didn't sound like "we're fighting to become the single dominant player in our space", and so would not have qualified them for blitzscale funds. But WeWork never played up that aspect; instead they talked a lot about wanting to elevate the world's consciousness, being the world's first physical social network, and having maximum global impact.
Now to me, that sounds even less like "we're going to crush our opponents in a brutal winner-takes-all game to dominate the market for flexible office space, and we just new a few billion dollars to do it", and more like "we're trying to run a hippy commune but accidentally started a real estate company". But apparently to SoftBank it...did? And so they invested hugely, and we got a prospectus that said:
> We are a community company committed to maximum global impact. Our mission is to elevate the world's consciousness.
And everyone who was not SoftBank laughed very hard, and refused to invest. And I have to point the blame at SoftBank here. The logic if blitzscaling is that you pick a firm that, with enough resources, can dominate their market, and then you give them the resources. I don't think WeWork was even in that sort of market. This is like trying to blitzscale the market for dog walking or something.
Oh....right. https://www.nytimes.com/2019/12/10/business/softbank-wag.htm... :)
Agreed. I'm just saying that SB pulled the wool over their own eyes rather than being victimized by these "visionary" CEOs.
Once you read this story, you'll see what I mean: https://www.bloomberg.com/news/features/2019-12-18/softbank-...
So in that case Neumann was a damn smart individual, he saw the money flood coming and tried to siphon off as much as he could in creative ways.
On one point, well done getting as much of the flood as he could, even though a lot of it was done in incredibly dodgy ways. Though these ways don't actually sound at all that ridiculous given some other accounting and financial practices that exist. He just got caught.
On another point, this shows how much of a divide there is between normal or even high earning people and the ultra wealthy. Even if you make six or seven figures working at a big company, you're not part of that ultra wealthy crowd, not even close. There is all this money and opportunity if you are already rich that doesn't seem to exist for working class people in general.
On my last point, it just goes to show how much of a divide there is between capital and society. Yes new taxes could be introduced but it will most likely hit those people earning six figures (and lower) than the ultra wealthy that got almost a billion dollar payout for failing. There are a lot things that society needs to reflect upon and consider, perhaps now is a good time because of the isolation.
Pretty much. I like to say there is a thin line between Steve Jobs and Elizabeth Holmes
Is there any evidence SoftBank actually believed them? Belief was not required for SoftBank's business model to work (take it IPO before everyone figures out which end is up). They almost got away with it too.
That question is up for debate, but I personally believe SoftBank was naive (and incompetent) but legit. The concept of blitzscaling is not entirely absurd. If you've identified a market with strong network effects, there will likely be a single winner. If you can pick one competitor early in the process, and give them all the money they need to crush the opposition in exchange for a hefty equity stake, and you don't, say, get confused and accidentally fund a bunch of their competitors, then you can probably ensure your chosen firm "wins", and the returns could be very positive. It's not clear that SoftBank managed to ever execute that strategy correctly, but it's not obviously crazy!
Excellent summary!
Love this summary
Ponzi scheme that took advantage of SoftBank, who is further attempting to prop it up to recoup something other than 0 from the investment.
> took advantage of SoftBank
Citation needed? SoftBank isn't some mom&pop shop that cant afford a lawyer to do due diligence.
That’s fair. SoftBank acted like an unsophisticated investor and goaded Neumann on, so it really is a codependent VC train wreck.
They surely didn’t. Softbank just thought they could take it public before people realized it was garbage.
but it's too big to fail
Thanks for your helpfulness, and many people other than investors will also read this as well