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The Markets Have Called The Bullshit

A weekend topic starting with the Wall Street Journal. “We Co. is a New York company that subleases office space, and Juul Labs Inc. is a San Francisco based-seller of vaping products. But the resignations this week of the CEOs running two of the most valuable U.S. startups share common roots: a Silicon Valley ethos bent on disrupting existing industries and pursuing torrid growth.”

“Juul and We are the most visible examples of extreme behavior ‘because here are the most zeros involved,’ said Steve Blank, adjunct professor at Stanford University and mentor to startups and venture capitalists. ‘When capital is flush the people getting the capital get to make the rules.'”

From Quartz. “Adam Neumann almost got away with it. For years, he convinced private investors that WeWork, a company that leases space from landlords, renovates it, slices it up into offices, and rents them out at a premium, was worth more than every other office-rental company.”

“He has spoken about WeWork Mars, running for president of the world, and becoming the first trillionaire—that built WeWork into one of the world’s most valuable startups, with operations spanning 111 cities in 29 countries. Then, in August, WeWork filed for an initial public offering, and in doing so exposed a raft of curious and troubling details about the inner workings of the company, which rebranded earlier this year as The We Company, or We.”

“WeWork is the logical endpoint of this: Silicon Valley’s great unicorn bubble. Neumann’s wildest ambitions found a fellow traveler at Softbank, whose enigmatic CEO Masayoshi Son showered him with cash and told him to make WeWork ‘ten times bigger than your original plan.'”

“(Yes, WeWork is based in New York and not technically part of Silicon Valley—but its rise directly follows a Silicon Valley playbook and involves many of the same principal actors.)”

“In the system set up by Silicon Valley and reinforced by its most powerful investors, Neumann and WeWork were the ultimate synergy, mysteriously increasing each other’s value. Neumann set the vision, collected the checks, preached the gospel. He went to great lengths to arrange things—power, money, connections—in his own favor. And why wouldn’t he? There were no barriers to his behavior, or interest in setting them up. So long as the company grew and its valuation rose, he was winning.”

The Sunday Times. “Adam Neumann threw his feet up on his desk, leaned back in his chair and had two words for a chief executive who had come in to pitch for work: ‘Impress me.'”

“The visitor was stunned. He had known Neumann for years, but by the time of their meeting in late 2016, the founder of the office-sharing upstart WeWork (aka We Co) had ascended to a new level — at least in his own mind. The company was worth billions.”

“The following year, Masayoshi Son’s SoftBank Vision Fund would invest $4.4bn — the first tranche of an astounding $10.6bn the Japanese bank would plough into the New York start-up. We know what has happened since. Public market investors went cold on a proposed $47bn float for a company that last year lost $1.9bn on $1.8bn in sales. Bankers pulled the listing earlier this month amid uproar over excesses revealed in WeWork’s stock market filing.”

“What is most instructive about the WeWork fiasco, however, is what it tells us about a certain type of ‘tech’ company, and the interloper backing them: SoftBank. WeWork tried hard to convince the world that it was something other than it was. WeWork was, according to its prospectus, a ‘worldwide platform’ that fuelled a productivity revolution for its members.”

“Sound familiar? Uber, another SoftBank investee, whose stock is down 30% since its May listing, held an event in San Francisco last week where chief executive Dara Khosrowshahi laid out his vision. It was not a ride-hailing giant, he said, but ‘the operating system for your everyday life.'”

“The markets have, in effect, called the bullshit. Software-as-a-service companies typically earn gross margins of 70% because once code is written, it costs virtually nothing to sell and service it. Uber and WeWork are entirely different. Uber has to pay its 2m drivers to keep the platform alive, and insurance costs escalate with each new car that uses the app. In other words, it has huge costs that grow in line with sales — the opposite of what happens with software companies.”

“This is an issue for SoftBank. The conceit of its $93bn Vision Fund was not just that it could pick winners, but that it could make them by choosing one company in each sector and arming them with enough cash to spend everyone else into oblivion. Even if this works, the problem is that SoftBank has promised venture capital-like returns, and many of its bets are not on tech companies.”

“Instead, it has booked ‘disruptors’ of sectors such as food (it put $200m into indoor farming company Plenty) or residential property ($400m to start-up Opendoor), where the economics are less sexy.”

“Technology may enable those upstarts to do amazing things, but they’re not tech companies, and the latest lesson is that the public markets will not value them that way either. As SoftBank seeks to raise its second mega-fund, this is a problem.”

This Post Has 98 Comments
  1. ‘last week…chief executive Dara Khosrowshahi laid out his vision. It was not a ride-hailing giant, he said, but ‘the operating system for your everyday life’

    Jeebus, are these guys done for.

    1. ‘the operating system for your everyday life’

      Does their app require a user to have a chip implanted under his skin?

  2. ‘Juul and We are the most visible examples of extreme behavior ‘because here are the most zeros involved,’ said Steve Blank, adjunct professor at Stanford University and mentor to startups and venture capitalists. ‘When capital is flush the people getting the capital get to make the rules’

    I bet Steve here doesn’t realize this is freaking nuts.

  3. “In the system set up by Silicon Valley and reinforced by its most powerful investors, Neumann and WeWork were the ultimate synergy, mysteriously increasing each other’s value.

    All of these MSM pieces have one thing in common: they adhere to the journalistic omertà against mentioning the central role played by the Fed and limitless Yellen Bux in enabling such scam unicorn companies and insane valuations.

      1. I think Neumann walks with 700 million. WeWork well that is going to almost zero.. So nicely done, 40 years old never ever in his life run a profitable company but almost a billionaire.

        Misallocation of capital symptom of ???

    1. that is the mysteriously omitted common denominator

      It’s just that kind of omission that makes the narrative factories run

    1. Rett Wallace, CEO of the analyst firm Triton Research, told Bloomberg, “The prospectus is a masterpiece of obfuscation.”

      LOL!

  4. The conceit of its $93bn Vision Fund was not just that it could pick winners, but that it could make them by choosing one company in each sector and arming them with enough cash to spend everyone else into oblivion.

    Gee that sounds kind of anti-competitive. Using economic power to sell at a loss and drive your competitors out of business isn’t really a new idea…it’s actually a classic business technique from the good old days. I wonder why it fell out of fashion?

          1. That’s a given. They were brought about by legislators representing a lot of infuriated voters who were finished putting up with it. We’re almost back there again. But now the ability to manipulate the media to engineer consent is far far beyond what it was then. So maybe we have to go much farther to the dark side first.

    1. What I don’t understand is why these negative profit companies shot up in value to begin with. Perhaps it’s somehow connected to negative yield bonds, and airboxes in the sky which were never intended for human habitation? Yellen bux need a toetag home, just like the rest of us.

      IPO market has begun pushing back on growth-at-all-costs private companies
      By Ciara Linnane
      Published: Sept 29, 2019 1:03 p.m. ET
      Struggles at WeWork and Peloton’s lackluster debut suggest the IPO window is closed for highly valued, loss-making companies
      MarketWatch photo illustration/iStockphoto

      Would-be investors in newly issued stocks have suspended their receptivity to highly valued but loss-making private companies.

      Endeavor Group Holdings canceled plans for an initial public offering Thursday, the latest sign that the IPO market is slowing down.

      The move came as Peloton Interactive Inc.’s stock (PTON, -2.02%) struggled in its trading debut, and after We Co., the parent of the office-space company WeWork, postponed its IPO and forced its chief executive to step down amid mounting concern about its huge losses and high leverage.

      “The IPO window is closing on growth-at-all-costs, highly valued private companies that are trying to come to market with excessively valued pricing,” said Kathleen Smith, principal at Renaissance Capital, a provider of institutional research and IPO exchange-traded funds.

      1. “The IPO window is closing on growth-at-all-costs, highly valued private companies that are trying to come to market with excessively valued pricing,” said Kathleen Smith, principal at Renaissance Capital, a provider of institutional research and IPO exchange-traded funds.”

        How did the Window get opened in the first place? The only logical answer is Yellen bux looking for a home. You are seeing the same thing in the oil patch. No longer are the “investors” throwing money on companies who cannot make money at existing oil prices.

        1. “How did the Window get opened in the first place? The only logical answer is Yellen bux looking for a home.”

          “… logical answer …”

          Bahahahahahahaha … Shirley, you are looking in the wrong place.

          1. Well if you were early in Amazon you did well, if you were early in Google you did well, if you were early in Facebook you did well.. Like movies they keep spitting out sequels usually with steadily less merit until they stop making $$.

    2. If you reach a point where it’s clear that the muppets are never going to shower you with money in accordance with the original plan lots of things change fast. It’s kind of fun to watch at least until the tsunami hits my paycheck.

      1. I worry about that too, though I expect the trendy money losing “tech” companies to take most of the clobbering. If you make real stuff, it will be lean times, but your chances are better.

        1. Until you realize the consumers buying the “real stuff” were the ones being funded in unicorn land, and those making “real stuff” take a pounding as well.

          1. They definitely were buying some of the real stuff, which is why I say there will be lean times ahead. I recall HP, under Carly Fiorina, sold pricey servers on credit to dot coms that went belly up before paying for the equipment. To add insult to injury, a lot of that nearly new gear wound up for sale by creditors, and HP found itself competing with those resellers. Nevertheless HP survived while not even the bones of the defunct dot coms can be found.

        2. Even real companies over hire and over expand during good times so the inevitably cost reduction of over head to align with new lower income is coming. All one can do is hold on and weather the storm . And save your money.

          1. expand during good

            That’s a business cycle, which is like waves gently rolling onto the beach. What we’re watching here is something entirely different

    3. “Neumann’s wildest ambitions found a fellow traveler at Softbank, whose enigmatic CEO Masayoshi Son showered him with cash and told him to make WeWork ‘ten times bigger than your original plan.’”

      Because losing ten times as much money makes a company ten times more valuable? What exactly am I missing here?

  5. More MSM mendacity: Although the State Department has been investigating Crooked Hillary’s use of a non-secure private email server to send and receive highly classified emails from cronies, in direct violation of longstanding security rules and protocols, the new Narrative talking point is that this is a politically-motivated Trump administration effort to lay Hillary low, rather than simply enforcing existing laws that were ignored by the corrupt Deep State operatives at the FBI and Justice Department.

    https://www.marketwatch.com/story/trump-administration-reportedly-steps-up-probe-into-hillary-clintons-emails-2019-09-29?mod=mw_latestnews

    1. Will partisan Democrat-led impeachment proceedings make a Trump 2020 election win inevitable?

      September 29, 2019 – 06:00 PM EDT
      Why impeachment obsession could help keep President Trump in office
      By Kristin Tate, opinion contributor
      The views expressed by contributors are their own and not the view of The Hill

      Watch the nightly news and you will hear that President Donald Trump is finished for real this time. Apparently his call with Ukrainian President Volodymyr Zelensky has all of the hallmarks of a defining moment of his time in office, and comes complete with an impeachment inquiry to boot. However, the last three years of polemic and bombastic “scandals” touted by Democrats mean that many Americans have already tuned out.

      This is not because of some deep character flaw or disinterest in civic life. Instead, Democrats and their allies in the mainstream media have beaten impeachment fever on a politics weary country since before Trump even entered office. Many of the same people who would have normally been glued to the television watching acting Director of National Intelligence Joseph Maguire testify are now ignoring the impeachment circus.

      1. disinterest in civic life

        It’s a guilty verdict looking for a crime, as the joke goes, and has been for several years.

    2. the new Narrative talking point is that this is a politically-motivated Trump administration effort to lay Hillary low

      Somebody’s gotta keep pounding that wooden stake. She keeps trying to get back up.

  6. “He has spoken about WeWork Mars …”

    What’s with all these megalomaniacal morons’ fixation with Mars??

    Anybody who is not a science fiction writer, and who talks about doing anything on Mars that goes beyond sending a scientific probe, should be immediately admitted to an asylum.

    1. It allows them to say they will go to Mars if Trump gets reelected. Saying they will go to Canada just is not enough anymore.

          1. I saw a headline recently that said he thought he could get people to Mars for $200k IIRC. $1k/lb sounded awfully low to me. I wonder what he’s planning to do to improve the efficiency of the operation?

        1. Only if you do it for Uber – ba dum baa!

          Its the operating system for life, doncha know!

          Time for a reboot, with a whole lot of dead wood gone – zyklon b works wonders from what I hear.

    2. Whatever.

      Sep 25, 2019, 6:41 am
      What Will Martians Eat? SpaceX Colonies On Mars Will Dine On Insects And Fake Eggs, Says Report
      Jamie Carter Contributor
      Science
      I write about science and nature, stargazing and eclipses.
      Could we feed one million people living on Mars? A provocative new study looks at what would be needed to make a Mars population of one million people self-sufficient in food.
      A [+] NASA/JPL

      If a colony of one million humans ever does exist on Mars, it will require tens of thousands of supply spacecraft to visit loaded with food, and after 100 years, will be self-sufficient only if they eat plants, insects, algae, and make “fake” eggs and milk.

      That’s according to a new article “Feeding One Million People on Mars” by Kevin Cannon and Daniel Britt at the University of Central Florida, Orlando, which considers how, and when, a colony of one million people on Mars could be self-sufficient in food.

      Forget lettuce

      “A Martian city will not be fed on lettuce and tomatoes,” says the paper, which argues that since plants cannot be grown outdoors and raising farm animals will not be possible, food technology would be crucial. “Food computers, automated insect farms, and cellular agriculture will allow for complete, non-vegan diets produced locally on Mars.”

      1. Sounds like a blast. You will spend the rest of your life either indoors in a cramped, controlled environment or wearing a space suit outdoors, and you get to eat bugs. Sounds like something out of the Bladerunner sequel.

        So what’s the downside?

          1. I’ve read that the ISS is kind of stinky, in a BO sort of way. I imagine that a stationary space station on the Martian surface would be no better.

            Welcome to BOTown!

          2. “I’ve read that the ISS is kind of stinky, in a BO sort of way.”

            Just needs an ozone flush, a chamber at a time.

    3. What really gets me is that they claim that Mars will be some kind of safe haven for humanity. The place is utterly uninhabitable.

      1. https://www.weather.gov/fsd/mars

        “The Martian atmosphere is composed primarily of carbon dioxide. However unlike Venus, the Mars atmosphere is very thin, subjecting the planet to a bombardment of cosmic rays and producing very little greenhouse effect. Mariner 4, which flew by Mars on July 14, 1965, found that Mars has an atmospheric pressure of only 1 to 2 percent of the Earth’s. Temperatures on Mars average about -81 degrees F. However, temperature’s range from around -220 degrees F. in the wintertime at the poles, to +70 degrees F. over the lower latitudes in the summer.” (emphasis added)

          1. Yes that is where you want to buy and set up an Airbnb. Mr Banker will help you with financing and a Realtor will do the rest.

      2. “The place is utterly uninhabitable.”

        Certainly no worse than planet Earth after 3 degrees Celsius more global warming?

        1. There is no comparison even in that case. Mars will still be much more terrible. Climate change can be devastating to human civilization and perhaps to a very large number of Earth’s species, but life itself will continue to thrive on Earth for about the next 1-1.5 billion years.

  7. “Juul Labs Inc. is a San Francisco based-seller of vaping products.”

    Health
    Juul Accepts Proposed Ban On Flavored Vaping Products As CEO Steps Down
    September 25, 201912:06 PM ET
    Bobby Allyn
    Juul announced that its CEO is stepping down and the company will stop advertising its popular vaping products. The announcements come as regulators work on new rules to curb the use of flavored vaping products among young adults.
    Samantha Maldonado/AP
    Updated at 1:01 p.m. ET

    Juul Labs has agreed to stop advertising its popular e-cigarettes in the United States and announced that its chief executive officer is stepping down as state and federal regulators examine hundreds of cases of people who are sick from what appears to be a vaping-related lung disease.

    The company also said in a Wednesday statement that it will not push back on a Trump administration plan to pull flavored e-cigarettes from the market until the controversial products win approval from federal regulators.

    In the statement, Juul officials said the company will be “refraining from lobbying the administration on its draft guidance” that proposes banning fruit-flavored vaping products, unless approved by the Food and Drug Administration, in an attempt to make the e-cigarettes less available to young consumers.

    1. “By the end, clothes that once sold for as much as $100 were going for $5.99, and $600 designer shoes for $99.”

      In six months this “stuff” will be at the Salvation Army.

    1. “An illegal alien who crossed the United States-Mexico border as a ‘family unit’ is now accused of impregnating and beating a 16-year-old girl in Louisiana.”

  8. The markets have, in effect, called the bullshit. Software-as-a-service companies typically earn gross margins of 70% because once code is written, it costs virtually nothing to sell and service it.

    Maybe the successful ones. And there are fixed costs. You need to buy hardware to run that software, since clients no longer have to buy and maintain servers, storage, networks, etc. Those huge cloud data centers are not free.

    1. Isn’t that where outsourcing to AWS, Oracle, Azure, etc make more sense (until you reach some particularly large size)?

          1. Yes. That’s the beauty of the guitar: Like on the piano, a performer can access high, low and in-between notes simultaneously (up to six or so on the guitar, ten on the piano), providing a rich harmonic underpinning for the melodic line. This is much more challenging to do on the violin, though J S Bach figured out a way.

            I am intrigued by the position of Tárrega’s left thumb in the old photo, along the side of the fingerboard, rather than behind it. I suppose there were no Taylor cutaways back then, making it difficult to access the high register with your thumb behind the neck.

          2. I have a couple of personal connections to The Romeros, including a very memorable performance with them on stage in Modesto of Joaquín Rodrigo’s Concierto Andaluz, a work that was comissioned by a member of their family and first performed by them. I was sitting maybe 20 feet away from the quartet during the performance, and it has subsequently remained one of my all time favorite musical memories.

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