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No Mercy No Malice

WeWTF

August 16, 2019

Really? Really?

I’ve started nine firms and I’m, generously, 3-4-2 (win-lose-tie). In retrospect, and I think about this a lot, the only reliable forward-looking indicator of our firm’s success or failure was … timing. Specifically, the part of the economic cycle at founding. The firms we started in recessions had an easier time finding talent, controlling costs, and getting immediate feedback about if this thing worked as clients/consumers held their purse strings closed. Then, armed with a battle-tested value proposition, as the recession ended, we enjoyed the afterburner of confidence to spend more and try new things. #disco. 

In frothy markets, it’s easy to enter into a consensual hallucination, with investors and markets, that you’re creating value. And it’s easy to wallpaper over the shortcomings of the business with a bull market’s halcyon: cheap capital. WeWork has brought new meaning to the word wallpaper. This is more reminiscent of the cheap marbled panelling you’d find in Mike Brady’s home office — panelling whose mucilaginous coating will dissipate at the first whiff of a recession, revealing a family of raccoons or the mummified corpses of drug mules. 

The features of seventies sitcom panelling:

Cult

WeWork’s prospectus has a dedication (no joke): “We dedicate this to the power of We — greater than any one of us, but inside each of us.” Pretty sure Jim Jones had t-shirts printed up with this inspiring missive. Speaking of idolatry, “Adam” (as in Neumann) is mentioned 169 times, vs. an average of 25 mentions for founder/CEOs in other unicorn prospectuses. Uber’s CEO, Dara Khosrowshahi, is mentioned 29 times in their prospectus. Granted, “Adam” is super dreamy, in sort of an Argentinian polo player way (he’s Israeli). But he’s not 6x dreamier than Dara, who has a whole “Omar Sharif, if he went to Brown” thing going on. But I digress. We’s mission is “to elevate the world’s consciousness.” Maybe, but it’s clear the mission of the prospectus is to dampen our consciousness ahead of the sh*tshow that is “The Story of Us: We.” 

Nomenclature 

Find the hottest sector, and if you don’t have the insight, IP, genius, capital, code, skills, human capital, or a clue, then just borrow the words. SAAS firms trade at a multiple of revenues (yay), vs. real estate firms, which trade at a multiple of EBITDA (boo). So, We isn’t a real estate firm renting desks, it’s a Space as a Service (SAAS) firm. I know, use the word “technology” over and over, despite having little R&D and computers and stuff, and voilà … we’re Salesforce. 

Today I froze water and used this technology to reconfigure the environment encapsulating my Zacapa and Coke. So, I’m Bill Gates. Better yet, today I began calling my wife Gisele, which I’m pretty sure means I’m the starting QB for the Pats. 

At WeWTF, you’re not a guest, but a member. Member has a more “recurring revenue” sound to it. So, I plan to be a member tomorrow night at the Marriott in Boston, where I will then get membership to the TD Center so I can watch a 21-year-old Canadian (Shawn Mendes) with my 8-year-old son — also a member of the Marriott and TD Center, for tomorrow at least. 

Invented Metrics

GAAP accounting standards got you down? No problema at WeWTF. We has begun reporting “Community-based EBITDA,” profitability before the BITDA, but is also taking out expenses, including real-estate, that comprise the bulk of cost required to deliver the service. A more honest description of the metric would be “EBEE, Earnings Before Everything Else.” As someone who follows stocks and goes on TV to pretend I have any idea which direction a given stock is going, I’d like to suggest a few metrics to provide insight into We:

  • EBG, Earnings Before Gluten
  • EBBG, Earnings Before the Big Dawg (tennis balls, pig’s ears, etc.)
  • EBEPW, Earnings Before Equal Pay for Women

Red Flags

My goddaughter informed me she’s dating a club promoter, a red flag. Occasionally, red flags marry each other, the Biebs and Hailey Baldwin — what could go wrong? So now, imagine red flags the dimensions of Kansas. Buckle up:

— Adam Neumann has sold $700 million in stock. As a founder, I’ve sold shares into a secondary offering to get some liquidity and diversify holdings. Ok, I get it. But 3/4 of a billion dollars? This is 700 million red flags that spell words on the field of a football field at halftime: “Get me the hell out of this stock, but YOU should buy some.”

— Gross margins are a pretty decent proxy for how good or bad a business is. And this is a sh**ty business:

— Adam has several family members working in the business who make “less than $200,000.”

— The ownership structure chart is similar to a hieroglyphic on a cave wall about the survival of the species: Harvest the crops when the sun is high in the horizon, do not venture over the hills, hostile tribes live there, and … don’t buy this stock. The corporate governance structure of WeWTF makes Chinese firms look American, pre–big tech.

— The related party section of this prospectus reads like the Trump administration. Adam owns 10 buildings, several that he leased to WeWTF at a handsome profit. Adam also owned the rights to the “We” trademark, which the firm decided they must own and paid the founder/CEO $5.9 million for the rights. The rights to a name nearly identical to the name of the firm where he’s the founder/CEO and largest shareholder.

YOU. CAN’T. MAKE. THIS. SH*T. UP.

— Mismatched durations. The founder of Kohlberg Capital, Jim Kohlberg (total gangster), taught me investment firms go out of business because of “mismatched durations.” It’s about raising money short (customers who can stop buying your product service soon/tomorrow) and investing money long (10-year leases). WeWTF is an especially risky business going into a recession, when the ability to variabilize costs is limited, but revenue decline is unlimited. WeWTF has $47 billion in long-term obligations (leases) and will do $3 billion in revenue this year. What could go wrong? 

There are other businesses like this (real estate, Hertz), and they are good businesses. Businesses that trade at, I don’t know, 0.5 to 2x revenues. However, WeWTF is claiming it’s not in this neighborhood, or even the same planet. So, let’s talk valuation.

Insane. Seriously loco. Ok, let’s assume WeWTF is onto something, better than peer IWG or Hertz. But is this firm, trading at 26x revenues, superior to Amazon, which trades at 4x revenues? There appears to be no scale effects, as losses have kept pace with revenue growth. There is little pricing power, as they are still a mole on the elephant of commercial real estate. There is no defensible IP, no technology, no regulatory moats, no network effects, and no flywheel effect (the ancillary businesses are stupid, just stupid). 

The last round $47 billion “valuation” is an illusion. SoftBank invested at this valuation with a “pref,” meaning their money is the first money out, limiting the downside. The suckers, idiots, CNBC viewers, great Americans, and people trying to feel young again who buy on the first trade — or after — don’t have this downside protection. Similar to the DJIA, last-round private valuations are harmful metrics that create the illusion of prosperity. The bankers (JPM and Goldman) stand to register $122 million in fees flinging feces at retail investors visiting the unicorn zoo. Any equity analyst who endorses this stock above a $10 billion valuation is lying, stupid, or both. 

Adam’s wife is Gwyneth Paltrow’s cousin, meaning Adam is two degrees removed from Goop, an assault on humanity.

Ms. Neumann created controversy when she went on CNBC and said: “A big part of being a woman is to help men [like Adam] manifest their calling in life.”

Ok, fine … whatever works for you and Adam. But it’s not retail investors’ role to help Adam realize his calling — he should feel pretty manifested with $700 million. The panelling is compelling and cool, but it’s beginning to curl and the substance behind the wood veneer stinks. I mean, stinks.

Life is so rich,

P.S. I’ve started doing short video hot takes on Twitter: 

To see past or upcoming ones, search “from:@profgalloway #hottake” on Twitter. 

And we’re back on YouTube:

Subscribe, bitches! 

37 comments

  1. Klay says:

    What a terrific article! I would like to propose that WeWTF re-label “Community-based EBITDA,” to WeBITDA where the ‘W’ would be “Wishful” because we all need to live our dreams.

  2. jamal sarraf says:

    Great articles. So enjoyable to read. Can learn so much insight about how things really work in the financial markets. And what a talent to write such facinating prose that captures and tells the reader so much with so few but markee words. God bless you, professor Galloway.

  3. Praveesh says:

    Brilliant! Fantastic! review of WeWork offering

  4. Victoria says:

    first time here and just have to say, you are a really good writer. I’m still laughing at “Granted, “Adam” is super dreamy, in sort of an Argentinian polo player way (he’s Israeli). But he’s not 6x dreamier than Dara, who has a whole “Omar Sharif, if he went to Brown” thing going on.”

  5. joe says:

    i love love love your writing and the way you think !!!

  6. Jeff Chrzanowski says:

    Is there an investment maxim that says something like “Don’t invest in a company whose top people regularly get excessively drunk, high, or stoned at company events?”

  7. madvee says:

    Brilliant and hilarious reality takedown of unicorn sh**pieces

  8. Eric Hilf says:

    In my simple mind, the purpose of a secondary offering is to raise further capital to be used to operate/expand the business — how does a founder selling $700m of his own personal stake in the company (what are the details of that transaction?), money that apparently ended up more or less in his pocket, help with that? — I can see why you labeled that a Red Flag.

  9. Sharon Royal says:

    My goodness, that was a delightful article. I’ve read a lot of scathing criticism of this deal, but yours takes the cake. What I wonder about is the Softbank angle. I see that you mentioned a preferred out for them, but that doesn’t explain to me why they were so involved in the first place, does it?

  10. Chhadi ram says:

    Hi

  11. Gilad says:

    THE textbook example of The Greater Fool Game valuation method.

  12. indi says:

    Fantastic read…. and then we say that the venture bubble funded IPOs are the worst performing….. I just hope they don’t pass this to retail with all the hype….corporate governance does not exist it seems..

  13. amandeep gupta says:

    Are location operating expenses is equivalent to losses? If no, Is the title of your chart is misleading?

  14. Lezang says:

    As the old saying goes « When there is a doubt, there is no doubt ».

  15. S.Morgan says:

    There is no “I” in TEAM, but there is a “ME” – Hugs, your, I mean, We… CEO- Adam

  16. jaron says:

    Checked this on BI…interesting….coworker of mine used to work there, raves about it, similar to articles published about the company..hard #s, stats tend not to lie, subscribing to your blog, and youtube channel, maybe twitter…

  17. Steve Leeke says:

    We seems to be short for W(hat, M)e? So WeWork must be short for W(hat, M)e Work(?)

  18. MLI says:

    after hanging with SB’s Masa-son too long, everyone turns into a crook

  19. BlarryG says:

    The text blisters on contact. There is always a greater fool … until there’s not. It’s been a 10 Econ ride but a Trump dump looms ahead.

  20. Roxy says:

    Accurate. This site is a bunch of malarky. WeIPO is the new Ponzi scheme

  21. Eléonore says:

    Love it. As always !

  22. Wojtek says:

    Why do you mix Zacapa with Coke?? Even technology cannot make this look acceptable!

  23. Tj says:

    Awesome, you nailed it. WE is short for weep, after any investors in it loses all their money.

  24. rick says:

    refreshing

  25. Larry says:

    From my Financial Accounting course from Harvard, GAAP *is* required to be listed on the stock exchange.

  26. Bob Walters says:

    Just about pure genius. Content rich and perfect tone. Who knew that this was even possible? Sub’ed. BTW, shouldn’t their be a law requiring GAAP in an S-1?

  27. Peter says:

    A young child overheard my explanation of these ‘unicorn’ companies, and said out loud ‘unicorns are pretend, they’re not real, everybody knows that’. After a great laugh, we all looked at each other, shrugged our shoulders, and said ‘well, that about sums it up’. …from the mouths of babes.

  28. Nate Dog and Warren B says:

    I don’t think “EBEE” is the right acronym as they are technically not earnings.It should be RBEYE or perhaps RIBEYE would be more appropriate which will likely be consumed in excess if this IPO gets done.

  29. Fabri says:

    👏👏👏👏👏👏👏 loved this one. You get ever more meta and refined each time. So good 👌

  30. Hobo says:

    You forgot the value of brand. Especially since you misspelled the forgettable name of their top competitor. It’s IWG.

  31. Michael Shear says:

    Great article. I’ve seen this play out before. Do the numbers and they don’t add up.

  32. Matthew Holt says:

    I was a bit confused by this as I had no idea who Shawn Mendes was or why you’d buy a membership in him. But I cannot wait to short WeWork

  33. Mark Scott says:

    I second Keith. “As a culture, we are much easier to fool, than convince we’ve been fooled.”

  34. keith says:

    This has to be one of the funniest/cleverest missives yet….you can repost when they have their first ‘miss’ and the stock dumps 🙂