If you haven’t been paying attention to the WeWork melodrama, we’ll give you the TL;DR version, but you should first know that I am absolutely certain that this will all be a Netflix documentary a la the Fyre Festival scam or the Theranos debacle.
Like many of you, I have been obsessed with this wacky story, and I’m convinced that it is a fleecing of historic proportions that is complex and is (finally) unraveling before our eyes.
WeWork’s parent, The We Company announced today that they will be withdrawing their filing for their initial public offering (IPO) which initially was based on a $47 billion valuation that by this month had slid to around $10 billion. The Board successfully voted to oust CEO, Adam Neumann last week, with Neumann himself allegedly casting a vote in agreement.
The IPO failed for a number of reasons, but the meat is that the company had to disclose information in their filing that showed more of their shady underbelly than they would have preferred.
The S1 revealed made up accounting methods, wild spending, questionable dealings between WeWork and companies that Neumann owned (that benefited Neumann’s personal finances), and when investors began digging into the filings, they uncovered billions of dollars of annual losses that weren’t exactly documented or explained in a way that Wall Street was ready to invest in.
An editorial was posted on Medium.com that went viral, simply entitled “Is WeWork a Fraud?” to which the entire internet read and responded with “yep.” It was republished by countless blogs as a dramatic summation of the facts.
It empowered the average American to read and balk at Neumann’s bizarre God complex. He believes he is literally destined to be The One save the planet. He constantly played a shell game with his companies and brushed off legitimate questions about finances with answers that sound like some spiritual guru on stage.
People shared the editorial endlessly, and it was the catalyst for people becoming interested in the eccentric CEO who smokes weed in his private jet and cusses on stage like a hecka cool guy.
To really understand how all of this ties into Compass and Opendoor, we urge you to go read the original editorial before continuing- it’s worth the time, we promise.
So you’re probably asking yourself right now what WeWork has to do with anything in residential real estate.
The first common thread is Japan-based Softbank, the big bucks behind WeWork, Compass, and Opendoor.
Many fingers are pointed at Softbank CEO and Chairman, Masayoshi Son for being overly optimistic and underly diligent about companies that he personally sees as innovative.
Softbank had reportedly pressured WeWork to hold off on their IPO (and keep the noise down), as they are in the middle of raising their second $100 billion Vision Fund, hoping to attract investors who won’t notice Son’s reputation for investing in companies that don’t yield any returns.
But WeWork filed, the noise has become overwhelming, and the Vision Fund is in trouble.
Softbank has been the only real investment in WeWork, and the only one who says the company was ever worth a $47 billion valuation, investing $12 billion in 9 rounds since 2012.
The second common thread between WeWork, Compass, and Opendoor is that they are all growing incredibly quickly and are unprofitable.
That sounds like good news, but it’s not. Everyone in the startup and/or investing knows that burn rate is a critical component of a company’s sustainability.
Having a high burn rate is like a 7 year old that got their allowance, immediately rushed to spend every dime on candy, and are now in debt to their siblings because they used their allowances on candy as well. It’s corporate gluttony.
The third common thread is that they all claim to be technology companies.
They aren’t.
This is a deep point of contention for some, but let’s digest this together.
Ben Thompson offers analysis of industry topics at Stratechery, and recently dissected whether or not WeWork (and others) are tech companies or not (and included an in-depth historical perspective leading up to his criteria). Per his definition, to be a tech company, one must check all five boxes:
- Creates ecosystems.
- Has zero marginal costs.
- Improves over time.
- Offers infinite leverage.
- Enables zero transaction costs.
Thompson asserts that WeWork checkmarks exactly none of the boxes, and under this same criteria, it is hard to see how Compass or Opendoor can either.
We offered a simpler criteria earlier this year when insisting that the media stop calling it the FAANG (Facebook Apple Amazon Netflix Google), noting that most of the companies aren’t technologies.
We noted that any company whose primary function is serving up content is a media company, and any company whose primary function is hardware or software is a tech company.
Under this simplified criteria, it is clear that WeWork, Compass, and Opendoor are not technology companies, they’re real estate companies that are either knowingly masquerading as tech companies to attract investors, or unintentionally giving themselves a label because they use technology better than their competitors and/or consider their use of technology as their core identity.
The final common thread is that all three companies have major competitors that are similar (and they don’t call themselves tech companies, they operate at a profit, and all have much lower valuations), but you would think from their marketing that they’re the only one in their field.
WeWork’s Neumann claims he invented coworking after growing up in Israel in a kibbutz. The only problem is that ServCorp has been around since the 70s, IWG (fka Regus) has been around since the 80s, LEO since the 90s, The Office Group since the early 2000s, and so on.
Compass is doing really cool things with technology (again, they’re not a tech company), but they are a glossy competitor to any other major brokerage, namely Realogy which is publicly traded and according to Forbes, “had 42 times the number of transactions, 11 times the sales volume, seven times the revenue — and actually made a profit.”
Opendoor became a unicorn (valuation of over $1B) right out of the gates, and they’re definitely thinking creatively to speed up the residential real estate process, but they directly compete with Homie, Offerpad, and Movoto, none of whom have the same wild burn rate.
All that said, there’s nothing wrong with Opendoor or Compass, but WeWork has made their existence more difficult.
Because all three are in a similar camp as described above, not only will investment from anyone other than Softbank be difficult to obtain, but WeWork’s insane bookkeeping practices have had a chilling effect in that people are looking more closely at profitability and operating procedures.
That chilling effect means external pressure to improve revenues, which real estate tech journalist, Mike DelPrete asserts, “could lead Opendoor to raise its fees, or Compass to reduce its generous commission splits with agents; either move would severely limit growth. Reducing expenses would come in the form of office consolidation (Compass has over 250 offices across the U.S.), ratcheting down employee perks, or even staff layoffs.”
And it wouldn’t be unprecedented. Uber has had layoffs and struggled with an image problem as they are hand-fed money by Softbank’s CEO who is ultra aggressive with investing in potential rather than profitability.
DelPrete adds that for all three businesses to succeed, they “require an unprecedented amount of capital and a willingness to buy into a vision that is driven more by words than numbers and where the long-term validity of the business model is easier to assert than to prove. The current WeWork fiasco… shows that valuations can’t keep rising unchecked by the realities of basic economic principles—and that investor patience does have a limit.”
WeWork’s newly ousted CEO has already cashed out and is set for life, and his God complex has made for some meaty headlines, but Compass and Opendoor may also pay a price.
This all sounds like a far away Wall Street problem, but try telling that to Compass’ 7,000+ agents (and 1,000+ staff), and Opendoor’s agent partners in 21 cities (and nearly 1,200 staff).
Nice job, Adam Neumann. Thanks a bunch.
Lani is the COO and News Director at The American Genius, has co-authored a book, co-founded BASHH, Austin Digital Jobs, Remote Digital Jobs, and is a seasoned business writer and editorialist with a penchant for the irreverent.
