When is a tech company not a tech company?

In an article around a month ago, I warned you that WeWork could be the finger that pushes the first domino that causes the next stock market correction, crash, or even recession.

Since then, its touted $47 billion valuation has fallen below $10b. It had to be bailed out by the domino it threatened to topple (Softbank’s Vision Fund). And its founder, who in the prospectus only months ago was so valuable that the possibility of his departure was cited as a material risk to the future of the firm, was paid $180 million not to work for the firm anymore.

In the olden days, bounty hunters used to collect money by capturing the people from ‘Wanted: Dead or Alive’ posters. Usually, they got a bigger pay out for bringing them in alive – it was more challenging and allowed for the justice system to claim its pound of flesh first.

In Neumann’s case though, dead is much better than alive – to WeWork.

That’s probably because, over the course of the last decade, he’s managed to lose $10 billion of shareholder wealth while enriching himself to the tune of $1 billion.

That’s a truly remarkable achievement.

So what has happened?

Well, the reason WeWork achieved its $47 billion valuation was because one man, with an incredible pile of capital and a history of speculative bets on tech companies, invested in a funding round that gave WeWork that valuation. Mayoshi Son, CEO of Softbank, who lost over $70 billion in the dotcom crash while Sotbank shares tanked over 90%, is at it again.

When the public markets got to have a look at WeWork, there were a lot of people scrutinising the company, and probably all of them cared a lot more about profitability than Mayoshi Son.

The next question though, is this. If he loves tech companies so much, why is he investing in WeWork, which seems pretty evidently to be an office leasing company? It’s actually genuinely inexplicable. I cannot understand it.

Neumann somehow managed to spin the yarn that WeWork was doing more than just leasing office space. He said it was in fact a tech company. Its chief product officer called it the ‘google analytics of space’. But it’s not, it’s an office leasing company. And it’s not the only one either…

WeWork has a competitor, called IWG. It’s not a tech company, and so doesn’t claim to be one. But it does do exactly the same thing as WeWork – lease office space. And funnily enough, it does it better.

IWG is profitable.

Its chief exec had something to say on where the difference lies…

“Essentially, the space is a break-even business and the profit comes from the services,” he said. “It’s like running a hotel and giving away the room service and having a free bar. You will have a very popular hotel but you won’t make any money.”

WeWork had been giving away the very things which IWG see as the key to generating profits.

IWG also spreads its offices around quite evenly, while WeWork is only interested in prime locations – Manhattan, the City of London etc.

But WeWork was valued at $47 billion, while IWG potential listing has been suggested to have a valuation of between 3-4 billion dollars.

How can this be?

It just seems that investors seem to prefer the promise of future profits more than real profits right now…

What’s the lesson?

In years to come, the examples of WeWork and the Vision Fund will be taught as case studies in schools.

There is of course a slim possibility that I am wrong and they will be taught as lessons of what can be achieved when brave people take on huge risks (and debts) in the hope of reward.

But as it stands, that ain’t likely.

Rather, it will be an example of a lesson that all economics graduate students learn for their exams.

That when the supply of money is plentiful, and the interest rates are low, demand for that money increases.

Money becomes ‘cheap’.

One might hope that econ grads make some friends outside of their course, and were they to pal up with a psychology grad, they might learn something about human nature: people are greedy.

Not everyone, not always, and they are many other factors too. But certain people have the propensity for enormous greed.

Combine cheap money and the outliers on the bell curve of greed, and what do you get?

People like Adam Neumann and Mayoshi Son.

And blessed are we who live in a globalised world where these two intrepid businessmen can meet and do business, thus compounding the effects of cheap money and greed.

Neumann correctly saw the biggest bubble of recent years: cheap money chasing tech companies.

And so you have to hand it to him, he rode that bubble. He took a pretty standard idea, started talking about ‘elevating world consciousness’ and the importance of AI… And when there’s blood in the water, the sharks will come. The Great White of speculative tech investing smelled blood, and he charged in. And Adam Neumann will walk away with a billion dollars.

Now, following the most recent bailout package, it looks like Softbank will have invested $18 billion in a company worth less than $10b.

And now Mayoshi Son is telling his generals to change tack. No longer will they encourage growth at all costs in their portfolio of companies. Instead, they should push the cohort of tech CEOs to start generating cash, maybe even (dare I say it) profits.

With other major Vision Fund investments like Uber and Lyft below their IPO prices, maybe Mr Son is learning that public markets value profits a lot more than he does.

And with companies like Netflix and Amazon breaking down from their highs and support levels, it may just be that the boom of growth and tech stocks, in the US particularly, is suffering from a widespread investor re-think.

All the best,

Kit Winder
Southbank Investment Research

Category: Technology

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