NYU professor calls WeWork 'WeWTF', says any Wall Street analyst who believes it's worth over $10 billion is 'lying, stupid, or both.'

adam neumann wework we company ceo

  • Scott Galloway is a professor of marketing at NYU’s Stern
    School of Business,
    bestselling author and well-known tech
    industry pundit.
  • He analyzed WeWork’s S1 filing as it prepares for an IPO under
    its new name We Company.
  • He summarized most of the major criticisms that have been
    lobbed at the company: its losses, culture, corporate structure and
    disclosures about its business dealings with founder CEO Adam
    Neumann.
  • But Galloway, in his famous shoot-from-the-hip style takes it
    further: he also criticized the bankers involved in this deal,
    writing, they “stand to register $122 million in fees flinging
    feces at retail investors.”
  • The following is his blog post in full republished by
    permission. It originally ran on his own blog “No Mercy / No
    Malice.”

  • Read all of BI’s WeWork coverage here
    .

Really? Really?

I’ve started nine firms and I’m, generously, 3-4-2
(win-lose-tie). In retrospect, and I think about this a lot, the
only reliable forward-looking indicator of our firm’s success or
failure was … timing. Specifically, the part of the economic
cycle at founding.

The firms we started in recessions had an easier time finding
talent, controlling costs, and getting immediate feedback about if
this thing worked as clients/consumers held their purse strings
closed. Then, armed with a battle-tested value proposition, as the
recession ended, we enjoyed the afterburner of confidence to spend
more and try new things. #disco.

In frothy markets, it’s easy to enter into a consensual
hallucination, with investors and markets, that you’re creating
value. And it’s easy to wallpaper over the shortcomings of the
business with a bull market’s halcyon: cheap capital. WeWork has
brought new meaning to the word wallpaper.

Read:
How WeWork paid Adam Neumann $5.9 million to use the name
‘We’

This is more reminiscent of the cheap marbled paneling you’d
find in Mike Brady’s home office — paneling whose mucilaginous
coating will dissipate at the first whiff of a recession, revealing
a family of raccoons or the mummified corpses of drug mules.

The features of seventies sitcom paneling:

Cult

WeWork’s prospectus has a dedication (no joke): “We dedicate
this to the power of We — greater than any one of us, but inside
each of us.” Pretty sure Jim Jones had t-shirts printed up with
this inspiring missive.

Speaking of idolatry, “Adam” (as in Neumann) is mentioned 169
times, vs. an average of 25 mentions for founder/CEOs in other
unicorn prospectuses.

Uber’s CEO, Dara Khosrowshahi, is mentioned 29 times in their
prospectus. Granted, “Adam” is super dreamy, in sort of an
Argentinian polo player way (he’s Israeli). But he’s not 6x
dreamier than Dara, who has a whole “Omar Sharif, if he went to
Brown” thing going on. But I digress. We’s mission is “to elevate
the world’s consciousness.” Maybe, but it’s clear the mission of
the prospectus is to dampen our consciousness ahead of the sh*tshow
that is “The Story of Us: We.”

Mentions of Founders CEO

Nomenclature

Find the hottest sector, and if you don’t have the insight, IP,
genius, capital, code, skills, human capital, or a clue, then just
borrow the words. SaaS firms trade at a multiple of revenues (yay),
vs. real estate firms, which trade at a multiple of EBITDA (boo).
So, We isn’t a real estate firm renting desks, it’s a Space as a
Service (SAAS) firm. I know, use the word “technology” over and
over, despite having little R&D and computers and stuff, and
voilà … we’re Salesforce.

Today I froze water and used this technology to reconfigure the
environment encapsulating my Zacapa and Coke. So, I’m Bill Gates.
Better yet, today I began calling my wife Gisele, which I’m pretty
sure means I’m the starting QB for the Pats.

At WeWTF, you’re not a guest, but a member. Member has a more
“recurring revenue” sound to it. So, I plan to be a member tomorrow
night at the Marriott in Boston, where I will then get membership
to the TD Center so I can watch a 21-year-old Canadian (Shawn
Mendes) with my 8-year-old son — also a member of the Marriott
and TD Center, for tomorrow at least.

Invented Metrics

GAAP accounting standards got you down? No problema at WeWTF. We
has begun reporting “Community-based EBITDA,” profitability before
the BITDA, but is also taking out expenses, including real-estate,
that comprise the bulk of cost required to deliver the service. A
more honest description of the metric would be “EBEE, Earnings
Before Everything Else.”

As someone who follows stocks and goes on TV to pretend I have
any idea which direction a given stock is going, I’d like to
suggest a few metrics to provide insight into We:

EBG, Earnings Before Gluten
EBBG, Earnings Before the Big Dawg (tennis balls, pig’s ears,
etc.)
EBEPW, Earnings Before Equal Pay for Women

Red Flags

My goddaughter informed me she’s dating a club promoter, a red
flag. Occasionally, red flags marry each other, the Biebs and
Hailey Baldwin — what could go wrong? So now, imagine red flags
the dimensions of Kansas. Buckle up:

— Adam Neumann has sold $700 million in stock. As a founder,
I’ve sold shares into a secondary offering to get some liquidity
and diversify holdings. Ok, I get it. But 3/4 of a billion dollars?
This is 700 million red flags that spell words on the field of a
football field at halftime: “Get me the hell out of this stock, but
YOU should buy some.”

— Gross margins are a pretty decent proxy for how good or bad
a business is. And this is a sh**ty business:

WeWork Revenue and Losses
— Adam has several family members working in the business who
make “less than $200,000.”

— The ownership structure chart is similar to a hieroglyphic
on a cave wall about the survival of the species: Harvest the crops
when the sun is high in the horizon, do not venture over the hills,
hostile tribes live there, and … don’t buy this stock. The
corporate governance structure of WeWTF makes Chinese firms look
American, pre–big tech.

 

wework

— The related party section of this prospectus reads like the
Trump administration. Adam owns 10 buildings, several that he
leased to WeWTF at a handsome profit. Adam also owned the rights to
the “We” trademark, which the firm decided they must own and paid
the founder/CEO $5.9 million for the rights. The rights to a name
nearly identical to the name of the firm where he’s the founder/CEO
and largest shareholder.

YOU. CAN’T. MAKE. THIS. SH*T. UP.

— Mismatched durations. The founder of Kohlberg Capital, Jim
Kohlberg (total gangster), taught me investment firms go out of
business because of “mismatched durations.” It’s about raising
money short (customers who can stop buying your product service
soon/tomorrow) and investing money long (10-year leases). WeWTF is
an especially risky business going into a recession, when the
ability to variabilize costs is limited, but revenue decline is
unlimited.

WeWTF has $47 billion in long-term obligations (leases) and will
do $3 billion in revenue this year. What could go wrong?

There are other businesses like this (real estate, Hertz), and
they are good businesses. Businesses that trade at, I don’t know,
0.5 to 2x revenues. However, WeWTF is claiming it’s not in this
neighborhood, or even the same planet. So, let’s talk
valuation.

Insane. Seriously loco. Ok, let’s assume WeWTF is onto
something, better than peer IWG or Hertz. But is this firm, trading
at 26x revenues, superior to Amazon, which trades at 4x
revenues?

There appears to be no scale effects, as losses have kept pace
with revenue growth. There is little pricing power, as they are
still a mole on the elephant of commercial real estate. There is no
defensible IP, no technology, no regulatory moats, no network
effects, and no flywheel effect (the ancillary businesses are
stupid, just stupid).

The last round $47 billion “valuation” is an illusion. SoftBank
invested at this valuation with a “pref,” meaning their money is
the first money out, limiting the downside. The suckers, idiots,
CNBC viewers, great Americans, and people trying to feel young
again who buy on the first trade — or after — don’t have this
downside protection. Similar to the DJIA, last-round private
valuations are harmful metrics that create the illusion of
prosperity.

The bankers (JPM and Goldman) stand to register $122 million in
fees flinging feces at retail investors visiting the unicorn zoo.
Any equity analyst who endorses this stock above a $10 billion
valuation is lying, stupid, or both.

Adam’s wife is Gwyneth Paltrow’s cousin, meaning Adam is two
degrees removed from Goop, an assault on humanity.

Ms. Neumann created controversy when she went on CNBC and said:
“A big part of being a woman is to help men [like Adam] manifest
their calling in life.”

Ok, fine … whatever works for you and Adam. But it’s not
retail investors’ role to help Adam realize his calling — he
should feel pretty manifested with $700 million. The paneling is
compelling and cool, but it’s beginning to curl and the substance
behind the wood veneer stinks. I mean, stinks.

Scott Galloway is a professor of marketing at NYU’s Stern
School of Business
and bestselling author of “The Four” and
“The Algebra of Happiness.” He is a frequent commenter on the tech
industry and founder of nine firms including  L2, Red Envelope,
and Prophet. This article originally appeared on Scott Galloway’s
blog No Mercy/No
Malice
. Follow Galloway on Twitter at @profgalloway. Republished
by permission.


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NYU professor calls WeWork 'WeWTF', says any Wall Street analyst who believes it's worth over billion is 'lying, stupid, or both.'