> WeWork then used this cash to underprice competitors in the co-working space market, hoping to be able to profit later once it had a strong market position in real estate subletting or ancillary businesses.<p>> This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market.<p>This is wrong, wrong, wrong. The difference is Amazon saw what the marginal costs could be, and had a specific roadmap to drive investment into bringing them down. WeWork fundamentally has no way to drive down the margin on real estate in any meaningful way. Especially as a lessee.<p>> The goal of Son, and increasingly most large financiers in private equity and venture capital, is to find big markets and then dump capital into one player in such a market who can underprice until he becomes the dominant remaining actor. In this manner, financiers can help kill all competition, with the idea of profiting later on via the surviving monopoly.<p>A bold assumption with no citations. There are just as many counterfactuals to this strategy as there are examples. The scooter market is an especially bad - there is so much capital from so many companies - if you were trying to establish monopolies that would be a bad bet.<p>> Endless money-losing is a variant of counterfeiting, and counterfeiting has dangerous economic consequences. The subprime fiasco was one example.<p>The subprime crisis is completely unrelated! And if anything it was proof that <i>money-making</i> assets should be scrutinized more.<p>WeWork is a garbage, charlatan company. But don't misunderstand what is happening here.
For me, this whole WeWork fiasco has shown just how valuable the SEC and the S-1 filing process is. Let's be clear -- Neumann was fired because any investor who read the S-1 was mortified and wouldn't touch the company with a 10 foot pole. If anything, this shows how lawless the private markets are and the lack of guardrails that are present to protect private investors -- perhaps this will lead to some reform in the private market and more transparency, but either way I'm glad that the SEC provides such a breath of fresh air when evaluating companies with large valuations.
I really wish the author had sensed the limits of his argument, because I think the point he's trying to make is basically correct. He's just stretching it to the breaking point by invoking Amazon and the subprime crisis.<p>If he'd left the stretch goals out of it, it would have stood as a perfect foil to the avalanche of "meta-meta-meta analysis of everything except where the money's gonna come from" in the Stratechery article [0] also up on HN now.<p>[0] <a href="https://stratechery.com/2019/neither-and-new-lessons-from-uber-and-vision-fund/" rel="nofollow">https://stratechery.com/2019/neither-and-new-lessons-from-ub...</a>
> This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market.<p>This is false.<p>First, Amazon is far from controlling the whole market. They control close to 50% of e-commerce which itself represents less than 12% of total retail sales.<p>Second, Amazon didn't predatory price, or if it did, it didn't for long, certainly not long enough to achieve its current market share. The author is mistaking Amazon's lack of profit for its propensity to reinvest all of its profit into other businesses (e.g. AWS), or its willingness to take short-term losses in order to reach economies of scale where profits exist (which, as Amazon's retail business has shown, they do).
This doesn't excuse WeWork being excessively unprofitable but low or negative returns don't directly imply anything "Counterfeit".<p>I like to point out that low or negative real returns on stores of value have historically been the norm. Before financial systems existed, almost all investment had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.<p>Even more recently, it has often been difficult to get low risk, hassle free, liquid, positive real returns. From a basic science perspective this seems to reflect the laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.<p>The 20th century may have been an outlier. Because of unprecedented demographic and technological growth, positive risk free real returns on liquid assets were easy to find. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.<p>While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket even if they degrade over time, they can’t seem to accept the normalcy of negative returns on longer term assets despite the tendencies inherent in the laws of physics. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Returns tending towards the negative are natural even if they can seem unusual for people just out of the 20th century.
Despite a bit of exaggeration and unnecessarily salty language, I found the OP to be a though-provoking piece, well worth the read.<p>This passage, in particular, struck a chord with me -- it criticizes all the money-burning unicorns selling products and services below cost:<p>"What predatory pricing does is to enable competition purely based on access to capital. Someone like Neumann, and Son’s entire model with his Vision Fund, is to take inputs, combine them into products worth less than their cost, and plug up the deficit through the capital markets in hopes of acquiring market power later or of just self-dealing so the losses are placed onto someone else. This model has spread. Bird, the scooter company, is not making money. Uber and Lyft are similarly and systemically unprofitable. This model is catastrophic not just for individual companies, but for their competitors who have to MAKE money."<p>Highly recommended.
To think how close Wall St was to selling this turd to Investors....<p>JP Morgan says the company was worth somewhere between 46 -63 Billion, Morgan Stanley estimated 43-104 Billion. Their lease obligations are over $40 Billion and the company loses billions every year. The next recession in Commercial Real Estate space will wipe them out sticking Landlords with billions in losses including upgrading buildings to accommodate them.<p>If it weren't for SoftBank using money from the Saudis Vision Fund as well as other sovereign funds like Abu Dhabi's, I have no idea if they would/could exist. These funds are going to take a bath unless they can convince someone to buy into it.
I got halfway through, but I'm stopping. There's some valid points in here, but I don't find the author credible.<p>> If you know Dimon’s actual reputation, him getting suckered isn’t surprising.<p>Jamaie "doesn't give a shit about Bitcoin" Dimon. So he won't just hop on any bandwagon.<p>> [Masayoshi Son is] an owner of Sprint, and he’s currently trying to force an illegal merger of Sprint with T-Mobile<p>Not sure how it's "illegal," it's a healthier merger than the previous T-Mobile-AT&T attempt, and a lot of people don't think Sprint is a sustainable business than can last as the number four player, so giving AT&T and Verizon a run for their money is the best outcome for consumers.
While the writer is a irritating in how he presents info, he does have good points. WeWork never looked like a real business to me, I thought the IPO as presented was such a great work of fiction. In the end the "business" is renting office space. It's not worth any more than that. At least Uber and Lyft provide something new (calling taxis from phones, I guess you could think of that as not terribly new) but it did change how people travel in cities. WeWork is basically shared office space but the business is mostly the founders scamming money out of investors.
> This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market.<p>Amazon's model is to be better at ecommerce and logistics than everyone else, including Walmart, which itself gained market share through incredible skill at logistics. They reinvest what would be profits into getting better, and frequently succeed at it.<p>Most companies don't actually do that once they're mature.
The whole thing about subprime mortgages and how jp was slow to get in isn't entirely accurate. I mean I guess it could have been the actual reason since there's always a disconnect between management and the ones actually doing the work, but the structured credit team at jp Morgan was acutely aware at the time how the whole cdo business was going out of control. This was because they were also the team who invented the cds and knew the whole cdo business made 0 sense and active chose to refrain. It's documented very well in the book "fools gold" which is a pretty good read.
I am so glad that the author of this piece doesn't limit his criticism to just Neumann, but he also goes after the people and firms propping up such obvious dumpster fires. Neumann would not be able to siphon off so much investor money if he weren't given legitimacy by big players. This issues at play here are absolutely systemic, and any analysis that doesn't acknowledge that fact is fundamentally flawed.
> Part of what’s going on with WeWork is that monopolies and private equity have eliminated profitable opportunities for investment, which is why the Federal Reserve is increasingly powerless.<p>No, you are confusing "monopolies and private equity" with the natural result of Sarbanes-Oxley. If you make going public too costly... companies are less likely to go public.
The business model of these companies goes something like this...
In phase 1, sell $1 at deeply discounted rates of 50 cents. Sell a lot of them to show tons of revenue.<p>In phase 2, sell $1 at slightly less disconted rates of 40 cents and show growth in margins.<p>In phase 3, establish monopoly but still sell $1 at 80 cents and show both topline and bottom line growth.<p>Finally, go belly up after not able to overcome the fixed costs in their business.
Trying to corner a market is not a new idea. A forgotten incident from the 1980s: the Hunts brothers thought they could corner the market on silver. They spent about $6 billion buying up silver futures. That's about $30 billion in today's money. They briefly controlled the majority of all the silver coming out of silver mines, and thought they could dictate terms to industries that needed silver (such as the photography industry, which needed silver for film development). The price of silver skyrocketed. However, over the last century, silver has become fairly democratic. Most families have some items of silver lying around. When the silver price peaked, millions of families began rummaging around their homes, finding what silver they could, and then selling it. The price of silver crashed, and the Hunts brothers were forced to declare bankruptcy.<p>Cornering a market works if the supply of something is really limited and new supplies can not be quickly created. Maybe WeWork thought it could do this with office rentals? If so, it seems it lost the bet.
"If you know Dimon’s actual reputation, him getting suckered isn’t surprising. From what I heard back in 2009, Dimon is a mediocrity who essentially got lucky his bank was too slow to get in on the subprime scam in 2006; he then used his bank’s incompetence at getting into the bubble as justification for how prudent he was."<p>I take issue with this.<p>Nothing to do with Dimon or the subprime crisis particularly but rather, what I think is an important logical fallacy.<p>I think (hope) there is a formal name for this - please correct me - but I internally label it the "missed extra point fallacy":<p>"My team played better but they had a weird, missed extra point and so they lost the game - but they are certainly the better team."<p>This is wrong thinking, in my opinion.<p>There was a game. The game had rules. People participated. The team with the highest score when the game ended was, by definition, the better team.<p>I don't know how much credit one should receive for not being wiped out by the subprime crisis, etc., but however much credit that is, Jamie Dimon should get it.
> If you can counterfeit something for cheap, the counterfeit will eventually take over the entire market and drive out the real commodity.<p>This is definitely true in the case of parmigiano reggiano cheese which is a $1.2 billion dollar a year business from the real cheese. The fake cheese, called parmesan, makes $100 billion. 99% of Parm cheese sold each year is fake.
The article paints a picture of how this model of funding businesses is growing and will taker over all capital markets. But then points out that mandatory disclosures and a sane public market actually stopped things in its tracks for WeWork.<p>Burning many billions of dollars before the market takes a step back and says "WTF?" is hardly a model of market efficiency, but if the market is now waking up to the problems of this sort of investment then, yes, however imperfectly the market is correcting this bad behavior. I suppose the question then is whether WeWork represents a turning point in this trend, or merely an outlier.
Author makes some good points but also comes across as quite aggressive himself. The entire article is just throwing shade on everyone in sight from their choice of clothing to their timing on the fraud boat...
WeWork and Uber are viable businesses which are heroically trying to absorb flood of excess capital sloshing around the world today. Both WeWork and Uber have potentially enormous TAMs which can justify insane valuations despite being loss-making. And both WeWork and Uber had charasmatic but highly dysfunctional (from a management perspective) leaders who were able to combine salesmanship with dirty dealing to solve the problem facing the big institutional investors - having too much money and nowhere to put it. You can't parcel up $100bn into tiny packets and participate in hundreds of thousands of series A/B/C/Ds - instead you find a business with a plausably enormous TAM, a founder who is essentially a professional PR/brand builder (so as to reassure your clients), pump them full of cash and wait for the IPO.<p>WeWork didn't quite make it over the line this time, but I wouldn't count them out just yet.<p>There is nothing stopping WeWork or Uber becoming profitable businesses, even if it means they have to forgo volume (for Uber, they almost certainly have to increase fares. WeWork would have to stop building new locations). The explaination for why they don't is the above.
I think there's a space for a one-stop business services company. Office space with utilities, with the definition of utilities expanded to include Internet access, catering, software licenses, shared IT staff, and such does make sense. I also think, though, it's a new tweak on the office real estate business and not a groundbreaking tech business that needs to be valued the way a tech company would be.
> If you know Dimon’s actual reputation, him getting suckered isn’t surprising. From what I heard back in 2009, Dimon is a mediocrity who essentially got lucky his bank was too slow to get in on the subprime scam in 2006; he then used his bank’s incompetence at getting into the bubble as justification for how prudent he was.<p>This is some backwards logic if I ever saw it. Damned if he did, damned if he didn't, I guess.
> This kind of counterfeit capitalism is terrible for society as a whole.<p>Well, so says the author, but he doesn’t make a very compelling case. He hammers WeWork, but WeWork is failing spectacularly and miserably, as Adam Smith’s invisible hand suggest it must. A lot of people have a problem with Walmart and Amazon, but I have yet to see any evidence that either of them has harmed society _as a whole_. He suggests they have the potential to, but rather than throwing out the baby with the bathwater and preventing the world from getting Amazon and Walmart, we can deal with any actual abuses (like illegal labor practices) if they occur - just like we would if they were being done by “Jim’s corner store”.
It should have been obvious to any layman that WeWork is a house of cards. My previous company moved into (what I think was) the first WeWork in East London in 2016. There is now 15!! I know they have empty floors in some of these buildings as current company got moved due to a rat infestation. If this isn't a flimsy facade I don't know what is
> if Adam and Rebekah have not contributed at least $1 billion to charitable causes as of the ten-year anniversary of the closing date of this offering, holders of all of the Company’s high-vote stock will only be entitled to ten votes per share instead of twenty votes per share.
This is the second scam that investors fell for. First Theranos and now WeWork. In both cases the founder is a cheat and a fraud. My guess is investors didn’t want to believe it’s fraud and desperately wanted it to be a real company and so kept funding them.
WeWork has no franchising business model nor is it acting as a middle man like Uber that pushes the risk to the users of the platform. Instead it is the worst of both worlds. They lease the office space and basically resell it at a loss.
So many gems in this.<p>> Across the West, the basic problem of a corrupted productive process is becoming a quiet crisis. The reason is simple. The people that do the work in organizations are increasingly excluded from the decision-making about the work. That is why Boeing is losing its ability to build planes<p>The best managers simply stay out of the way of the people working, but most managers these days are in it to aggrandize themselves and cause suicides. Are you listening Facebook?
He points out that if we still had Glass-Steagall, which kept banks and brokers apart, we wouldn't have some of these problems. Probably wouldn't have had 2008, either.<p>Bringing back Glass-Steagall was in Trump's platform in 2016.[1](p. 28) [2] That went away as soon as he was elected.<p>[1] <a href="https://prod-static-ngop-pbl.s3.amazonaws.com/media/documents/DRAFT_12_FINAL%5B1%5D-ben_1468872234.pdf" rel="nofollow">https://prod-static-ngop-pbl.s3.amazonaws.com/media/document...</a>
[2] <a href="https://money.cnn.com/2016/07/19/investing/donald-trump-glass-steagall/" rel="nofollow">https://money.cnn.com/2016/07/19/investing/donald-trump-glas...</a>
This article is on fire. I got a particularly good laugh out of this bit:<p>>> Dimon is a mediocrity who essentially got lucky his bank was too slow to get in on the subprime scam in 2006; he then used his bank’s incompetence at getting into the bubble as justification for how prudent he was.<p>I have never heard this theory floated. But to say JPM failed because it didn't fail like all the other banks is the most contorted sort of logic you can find anywhere...
Matt Stoller <<a href="https://mattstoller.substack.com/about>" rel="nofollow">https://mattstoller.substack.com/about></a> and Ben Thompson <<a href="https://stratechery.com/about/>" rel="nofollow">https://stratechery.com/about/></a> are two of my favorite bloggers; I find their analyses fascinating!
Engaging in such a strategy used to be illegal, and was known as predatory pricing.<p>The Sherman Act and the Clayton Act are no longer enforced in the post Citizens United world, i.e. legal US corruption: kochtopus, dark money, super-pac, 501-c-3 foundations and institutes, etc.
edit: I think the article is deeply confused about whether it wants to talk about how shitty WeWork and it's associated investors are, versus why pumping loss-leading companies full of cash is a bad idea. The former is just yellow journalism and not very interesting (also well-aired already), the latter is important (imo).<p>The point is a simple one, I think. It's well understood that capitalism breaks if an actor is able to consistently create and defend a monopoly. Pumping a loss-leading company full of capital under the expectation that it will loss-lead until it dominates the market is one such strategy. WeWork is a classic example of this strategy in action, albeit an ill-begotten one. We've made this illegal in the past, we should consistently enforce such laws as exist, and improve them to bring them into 2019.<p>Let's not get pinheaded about this thought. I'm personally bootstrapping a company from $0. That means I'm using my "deep pockets" to "loss lead" a company. Nothing about what I'm doing is "anticompetetive" in the relevant sense because of scale. Furthermore, my growth is pegged to my ability to make money (I won't hire unless I can pay a salary out of revenue). I do think capping naked investment in loss-leading companies is probably a good idea. I personally think VC culture results in bloated, unsustainable companies that over-hire overpriced engineers, and that it's long term a very inefficient strategy that is bad for the health of the economy.<p>Obviously this is a weird forum to air that view on, but here we are. At least I'm putting my money where my mouth is.
Sounds more like a cargo cult than counterfeit. And he describes it as a social problem. After Theranos, everything is possible, investing seems faith based. And incidentally, Tech is faith-based too , with some bets failing, like VR/AR, self-driving.
> Son is a powerful and connected political operator<p>Yeah no shit. Most money is built on satisfying egos than actual work. It's a house of cards which will face its greatest challenge with the climate crisis.
cargo cult - where someone sees bounty falling from the sky and then imitates the behavior without understanding it. Supposedly this happened in New Guinea during WWII where people saw parachutes of food and weapons coming down after the soldiers laid out marker panels. So they laid out marker panels in a ritual. Also this happened in 2019 when companies were constructed without understanding what was required to actually have a business.
This is key:
"The goal of Son, and increasingly most large financiers in private equity and venture capital, is to find big markets and then dump capital into one player in such a market who can underprice until he becomes the dominant remaining actor. In this manner, financiers can help kill all competition, with the idea of profiting later on via the surviving monopoly."
> Adam Neumann is not “quirky,” he is not “charismatic,” and he does not have “an unorthodox leadership style.” He is an untalented and abusive monster who lies to get what he wants. And he was given an unlimited credit line from which he could legally steal.<p>'Charismatic' is often a trait found in sociopaths. I'd say Adam IS charismatic, but that is often a problem - charisma charms people and blinds them to the bad parts.<p>> Time to Restore Honest Capitalism<p>It takes a long time to scale something, and it inevitably loses money in the beginning. How do we tell the difference between 'counterfeit' companies and real ground-breaking concepts?
He is making an interesting point but misses the source of this ‘counterfeit capitalism’... it’s not “capital”, it’s a printing press run wild leading to misallocations of hard earned productivity surpluses
I prefer calling it "Poker Capitalism". What he's describing is a situation where a player with a big stack can bully his way to taking the other players' money, even when his cards are not particularly good or well played.<p>In any case I think he's got a good point. The main thing I'd say is that capitalism requires both freedom and true signalling. We focus a lot on the former but tend to forget the latter, despite lessons learned since the 1800s.
Lost me at calling the Sprint/T-Mobile merger "illegal" ... I mean, I was pretty interested in the content up until that point. WeWork itself lost me at "no meat" will be reimbursed or paid for.<p>The WeWork CEO is in my opinion a charlatan douchebag, but the author just feels like a twice burnt socialist by the time you get halfway through, and I stopped reading.
> And if we restore laws against predatory pricing and centralized financial control, the entire counterfeit capitalism model will go away.<p>What's something the average person can do to help make this a reality?
“ There are laws, like Robinson-Patman and the Clayton Act, which, if read properly and enforced, prohibit such conduct. The reason is very basic to capitalism.”<p>This is critical in this issue. Societies have grown but our legal systems have not. Justice today is conditioned on the interpretation of judges and on the enforcement of some bureaucrats. These are vulnerabilities and they are being exploited.
Counterfeit capitalism is a nice term. I think neoliberalism will be labeled as such by historians in the future. The collapse of Bretton Woods and the subsequent neoliberal laissez faire economics set off a chain reaction which led to the 2008 sub prime crisis and the current climate crisis. The world will eventually move away from that. Friedman was wrong. Society is not built on greed.
"The company is losing an enormous amount of money and 'has no path to profitability at scale'." - well if there is no path to profitability, how is it still worth 10-15 billion ?<p>"If you know Dimon’s actual reputation, him getting suckered isn’t surprising. From what I heard back in 2009, Dimon is a mediocrity who essentially got lucky his bank was too slow to get in on the subprime scam in 2006; he then used his bank’s incompetence at getting into the bubble as justification for how prudent he was." - Dimon is the most respected banker and he led JPM to become the largest bank in the western world. Well somehow that is mediocre.<p>"WeWork ostensibly became more valuable because Son said it was more valuable, and bought shares for higher prices. " - well isn't this how market pricing works.<p>And then whole blurb on Counterfeit Capitalism - which in essence described capitalism. The stronger player aims to get market share at the expense of a weaker player.<p>The author is just another one with a big mouth writing clickbait articles !
> owns buildings personally he leases to WeWork<p>This part bugs me. This is standard procedure for small businesses, having a real-estate business leasing property to your main business. If you want to succeed, you own the building. Otherwise, you are on borrowed time.<p>Edit: alright, great points, thanks!
I really enjoyed the author's perspective on this, and I like well-reasoned arguments from people whom I probably don't align with politically. To confirm my assumptions, I checked the About page<p>> Matt Stoller is a Fellow at the Open Markets Institute<p>Ok, what's that? A Koch sounding name, but I'm guessing more Soros because of the repeated calls to government action on this (and the Dodd-Frank connection). A quick search led to a Politico article <a href="https://www.politico.com/story/2019/06/14/open-market-institute-silicon-valley-monopolies-1507673" rel="nofollow">https://www.politico.com/story/2019/06/14/open-market-instit...</a> which contained this nugget:<p>> Despite its small size — 15 or so employees operating out of a shared WeWork space in downtown D.C. — Open Markets...