I have probably spent as much time as anyone on earth making fun of WeWork, so now, for variety, I think I am going to pivot to being a wild-eyed WeWork bull. To be fair, I have always had sort of a soft spot for the business model. The business model is, like, you rent a building, you divide it into a lot of small offices and individual workstations, and you rent the pieces out to customers for more than you pay to rent the building. It is not insane to think that that would work, and while WeWork’s financial disclosures were never exactly a model of clarity, it was not even really insane to think that it did work, that WeWork was basically able to do exactly that trade when it put its mind to it, though it was never profitable because it chose instead to funnel all of its money into opening new buildings. But it always said that would change, and why not? Last September, as WeWork’s initial public offering was going poorly, but before it was pulled in disgrace, I wrote:
One possibility here is that SoftBank Group Corp., its affiliated Vision Fund and WeWork’s other private investors own stakes in a high-quality business with fundamentally sound unit economics. Given the attractive market opportunity, they would like it to raise another giant slug of money to continue its rapid growth. But public investors have started to doubt the quality of its business, and are not willing to fund its growth at a price reflecting its strong fundamentals. So WeWork can step back, remain private, slow its growth, flip to profitability and just harvest the rich rewards of renting out office space for more than its costs. …
One nice thing about postponing the IPO is that you get to find out. Missing out on the $10 billion of public money would slow down WeWork’s growth plans, but if WeWork is right then there is just a dial that it can turn between “Growth” and “Profit,” and dialing down the growth automatically dials up the profits. If you are confident that you possess this dial and that it works this way, then delaying the IPO is a no-brainer: Sure you delay your positive-expected-value growth, but you get to keep ownership of a good lucrative business rather than selling it too cheap. On the other hand, if the dial turns out not to work, then you’ll end up wishing you’d sold it cheap.
Well, after I wrote that, events occurred that might cause you to have some doubts. For instance, after the IPO was pulled in October, WeWork more or less immediately needed a giant bailout from SoftBank; it turned out that huge frequent cash infusions were not just a nice-to-have way to boost growth but a necessity to keep WeWork going. And then the coronavirus happened, people stopped going to work, open shared offices in particular became less attractive, and the WeWork model seemed a bit doomed.
But! The Financial Times reported yesterday:
WeWork is on track to have positive cash flow in 2021, a year ahead of schedule, after it cut its workforce by more than 8,000 people, renegotiated leases and sold off assets, its executive chairman said.
Marcelo Claure said in an interview that the SoftBank-backed office space provider had seen strong demand for its flexible work spaces since the start of the coronavirus pandemic.
In February, Claure set a target of reaching operating profitability by the end of next year and he said WeWork remains on track to meet it. …
“Everybody thought WeWork was mission impossible. [That we had] zero chance. And now, a year from now, you are going to see WeWork to basically be a profitable venture with an incredible diversity of assets,” said Claure.
Even the pandemic isn’t all bad news. One story that you could tell about WeWork is that it is in the business, specifically, of office management, that it allows companies—small startups or big multinationals—to outsource their office-management function to WeWork. In normal times some companies will find that appealing and others will say “no, it’s fine, we can manage our own office space, that is not an especially difficult or high-value-add job.” In pandemic, though, office management is both harder and higher-value-add; if you can say “as specialists in office management, we have figured out how to make offices safe,” you can sell that service to a lot of companies that haven’t. (I don’t know that WeWork has figured that out, by the way, but if not they really should!)
And while you might think that it’s bad, for an office-rental company, that no one is going to the office, the upside is that if and when anyone does go to the office, flexible office space—WeWork’s product—will be in demand. From the FT:
While the shift to homeworking has seen a reduction in office space demand, some companies turned to WeWork to provide satellite offices closer to where their employees live and to spread out their staff beyond their main offices, said Claure. ...
“We have companies like Facebook, Google and Amazon who have told their employees that they can work from wherever they are. We have a lot of those employees who basically now come to a WeWork facility to use it one day, a week, two days a week, three days a week,” Claure added.
Man, good for them. I hope it works. There is an obvious standard story of WeWork in which it was a symbol of tech-bubble excess, with a huge valuation based on growth and hope and fundraising rather than business fundamentals, and then it came crashing down when it finally met the reality of the public markets. But there was always an alternative story available, something like “public markets are not good at long-term thinking and dismiss real innovators, so public investors couldn’t understand the value of WeWork’s story.” I am not a big believer in that story, generally, but it would be really funny if it was true here. Public markets couldn’t understand real innovation like renting office space at a loss, why not.
There are even funnier possible stories. I have told the WeWork story as a win for founder Adam Neumann, who handed SoftBank his broken company and walked away with vast riches. But perhaps you could tell it the other way? Perhaps SoftBank saw WeWork’s value the first time Masayoshi Son met with Neumann, and Son wanted to appropriate all that value for SoftBank. But WeWork was a fast-growing, popular, successful business that was on track to go public; the question was how could SoftBank gain control of it for cheap. The answer “buy a big stake at a series of insane and ever-increasing valuations, puff up the founder-CEO so that he believes that he’s invincible and starts to behave irrationally, let the company file to go public with a silly prospectus that is short on business plan and long on conflicts of interest, watch the proposed IPO collapse and then buy the whole thing on the cheap” is not exactly intuitive! But maybe it worked! (If this is your story, you might find it intriguing that WeWork’s private valuation was pumped up by SoftBank’s Vision Fund, while the October bailout ended up with SoftBank itself owning the biggest chunk of the company at fire-sale prices.)
Anyway now that things are good WeWork should totally do an IPO, that is what the world needs now. Honestly WeWork should try an IPO every year, we deserve it.
There are a lot of banks, and they compete with each other. Each bank has two desires: Not to lose money by making bad loans, and Not to lose market share by refusing to make good loans.
These desires are in tension. If you don’t lend money to some dodgy customer, your competitor will, you will lose market share and develop a reputation for being too tough, everyone will go to your competitor, and your business will dry up. You can try to be a little bit better at underwriting and managing credit risk than your competitors are; you can try to be smart around the edges so that fewer of your loans go bad than theirs. But you can’t try to be vastly better, because then you won’t do any business. (And conversely: If you are rapidly growing market share, something has gone terribly wrong, or is about to.)
This leads to many, many stupid consequences—“As long as the music is playing, you’ve got to get up and dance,” is Chuck Prince’s infamous line just before the financial crisis—but at least loans get made. If you have no commercial imperatives to do loans, it is too easy to focus all your attention on not losing money, and then this happens:
Disagreements between leaders at the Federal Reserve and Treasury Department in recent months slowed the start of their flagship lending initiative for small and midsize businesses, according to current and former government officials.
The differences centered on how to craft the loan terms of their $600 billion Main Street Lending Program to help support businesses through the early stages of the coronavirus pandemic.
Fed officials generally favored easier terms that would increase the risk of the government losing money, while Treasury officials preferred a more conservative approach, people familiar with the process said.
Treasury, which has put up $75 billion to cover losses, resisted recent changes to relax loan terms.
Bloomberg
