Blain’s Morning Porridge – 11th Jan 2019 – We Work?? Please…

Blain’s Morning Porridge – 11th Jan 2019

“I laughed and shook his hand, and made my way back home..”

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I’m wondering if We Work (or the We Company as it now grandly calls itself), is likely to be the car crash that causes the almighty pile up in the Unicorn/Tech Market we’ve so long expected? The spark that ignites the conflagration to restore valuation common sense?

I didn’t have time yesterday morning to launch into an analysis of the Softbank/We Work farago, but a number of readers came back with similar concerns.

In case you missed it: We Work was expecting a $16 bln capital injection from Softbank’s Visionfund, but after the Middle East Sovereign Wealth Funds (who fund Visionfund) pointed out there is nothing Tech about funding a property rental business, Softbank had to scale back the investment to $2 bln, causing massive internal loss of face, and a scrabbling around to present a story pretending it doesn’t matter or change anything. Part of the response was the name shift from We Work to We Company to clarify just what a life-style modern tech company We Work (sorry We Company) really is…. You can put lipstick on a pig.

Softbank must be very disappointed. By, today’s convoluted millennial wisdom: the more a company loses, the more it must be worth! On that basis We Work should and must be a screaming buy! $16 bln to buy out other shareholders, fund the company to lose yet more money and give a $50 bln valuation.. what’s not to like?

There is logic to the madness of Unicorn valuations.

Stocks ratcheting up massive losses while exhibiting zero earnings growth can be massively valuable – especially if they are creating new markets and a variation of a monopoly position for themselves. That’s about the only reason I stick with Tesla – even though every single one of my neurons screams something like – it’s a crap car, it can’t make enough of them, Musk is hatstand…. But the reality may be Tesla has probably cracked the electric car. Or how about Amazon – among the most valuable companies in the world because it recognised and seized e-commerce. I could on.. Facebook…

Others, I am not so sure off. Netflix is a case in point – it moved video rental into streaming and created a whole new way to watch TV. But it’s massively vulnerable to completion – and Disney is the one I watch. Sure Netflix is making great content… but its burning through money to garner subscribers to get them to watch their programmes, while Disney leads with its Great Content attracting subscribers in. Simples…

But We Work is something else completely. It’s nothing new. It’s not innovative. But, it is very good at what it does – renting office space. I’ve been in We Work offices – and they’re fine. She-who-is-Mrs-Blain loves them. A chum who is CFO of a Tech firm swears by them – she sticks all her staff in them. But, she’s also quite happy to use a Regus office for board meetings. In fact she prefers to. Everyone is aware We Work has smashed the previous short-term office rental paradigm – a market of 3-4 firms. It leases property long term, does them up to make them attractive to the kind of workforce likely to use them – millenials, start-ups, gig-workers, consultancies, etc.

The rest of the We Company stuff is pure-bunkum – schools and residential living might be aspirational, but it’s a complete distraction. I can’t imagine a more meaningless life – everything from your home, to friends, holidays and kids, circling round your workspace.. How did we manage before We Work figured you might have a pint with co-workers.. (Maybe I get SoftBank to fund me $20 bin for my new social-dynamic inter-reactions experience-centre:

The bottom line is We Work rents property long-term and rents it out short term. End of. And very dangerous.

There isn’t anything remarkable, innovative or fundamental about renting office space. If the world is entering recession, then the first parts of the economy likely to be shaken out are… consultants, start-ups, and SMEs. It reminds me of a German Bank I used to cover in the 1990s – they told me they borrowed long and lent short and were happy to take the risk because the Bundesbank was right next door and therefore they could predict interest rates perfectly. They collapsed and went under.

The question to ask is how We Work’s CEO, Adam Neumann, pulled it all together? Marketing is a talent. Tell people what they want to believe and they will believe it. Finding the right partner even more so.

Softbank founder Masayoshi Son was the perfect mark. He and Neumann cooked up the valuations between themselves. He bought into the flaky We Work white-board Venn diagram concentric circles encompassing Work Space, Health, Sport, Friends, Etc… Somewhere he might have missed is the point we do these things anyway.. and the core of We Work was Property, Property, Property.

Nothing Tech about it.

How did he fall for it? I’m sure he was mightily impressed that Neumann was sporting a broken finger earlier this week – broken while surfing 15 ft waves in Hawaii with a top pro surfer. Wow. Aspiration lifestyle, and you can get it all, with free beer on a Friday, at We Work. I bet Son would love to do the same.

At which point its worth bearing in mind how We Work is also vulnerable to changing fashion. At the moment millennials like shabby post industrial-chic. The plus is it looks distressed today, and will still be distressed in 10-years time as We Work’s leases come up. However, the reason the Millennials’ bosses rent a board room from Regus is because they have to impress the baby boomers who still control the purse strings. (And bear in mind, Regus’s parent IWG makes money.) Toscafund has been steadily increasing its stake in IWC, even as Regus starts to do stuff We Work does, like allowing yoga pants in the office.. But, they do it profitably..

Who knows if We Work will be another “Wake up and smell the Coffee” moment… In this strange, curious and difficult to understand modern world, everything is not what it seems. There is actually value in losses to build position. There is corporate evolution, and the “Art of War” is as relevant today as ever. But, you can’t put lipstick on a property gamble and call it a Tech paradigm shift…

Out of time, and have a great weekend.
Bill BlainShard Capital