Some of my favorite businesses – as long-term channel viewers are aware - are fake technology companies. These are startups, usually out of California, but in recent years they sprouted all over the world where a charismatic founder takes a humdrum business, layers on a veneer of technology and pitches it to investors at an astronomical price claiming that it will change the world. Now, when I say – that these are my favorite businesses, I don’t mean favorites to invest in or own – you’d never want to do that, but they are my favorites to read about – and without these business, financial news would be boring, and I read financial news all day long, and I don’t want to be bored.
To maximize the entertainment value of a fake tech firm, the core business needs to be as dull as possible – something like a window cleaning business, a sawmill or a well… A well would make a great fake tech business… The water drawn from it could possibly be recorded on the blockchain, there could be some sort of social angle to it. Not actually social – we don’t need people actually meeting at the well – that’s out of date. It needs to be the kind of social where people only interact using their phones – or with some sort of headset, and they should only discuss how wealthy the well will eventually make them on the app. It’s 2024 and that is what people want…
Now, key to a fake tech business is a shameless and charismatic CEO who knows how to pump up the stock price when raising rounds of capital from VC ‘s. The CEO needs to be irreverent, possibly have a distinctive hairstyle, and most importantly a modern day hippy druggy vibe. VC’s require that these CEO’s at least appear to believe their own pitch when they are claiming that new product has an infinite “Total Addressable Market” – or TAM. You don’t need a guy pitching that his metaverse based blockchain well will bring water to the deserts and work on Mars if he doesn’t seem slightly drug addled, as a serious sober looking CEO might lead investors and journalists to ask difficult questions that can’t be answered in a dreamy drug addled manner by a guy with a distinctive hairstyle who claims to see the future.
Now he can’t be too wacky – if he is falling off the stage during his TED talk, that will raise too many difficult questions, there is a delicate balance to be maintained here.
There are a lot of good examples of this type of company. In 2017, Lyft announced Lyft shuttle, where passengers share a vehicle that followed a predesignated route – it involved walking to and from one of the fixed stops. It’s convenient, it’s affordable, and it is of course a bus. Later that year, Uber actually launched a service in Seattle which allowed riders to save money by waiting for their Uber at a pre-arranged stop, share it with strangers, and get dropped off at any point along a predetermined route. That was a bus too. Not to be outdone, Elon Musk invented the bus one year later, but at least he added a sci fi layer of complexity to his version.
There are other examples – Bodega – a box that can be set up in urban locations that is unlocked using an app which sells nonperishable, convenience-store-type goods. That is a vending machine. Juicero, a wifi enabled press that can squeeze juice out of fruits and vegetables. It cost $400, required a subscription, and replaces… your hands… And let’s not forget Peloton, gym equipment with a built in iPad and a monthly subscription that was more expensive than the cost of a gym membership. You can still buy that…
This all leads me to the real master of the fake technology business - Adam Neumann, the cofounder of WeWork – a shared office space with a beer tap, and an app that I am reliably told didn’t work. He described it as “the world's first physical social network” and for quite some time managed to convince investors that it was worth $47 billion dollars – because – Technology…
You will be glad to know that Adam is back in the news claiming that he wants to buy back the now bankrupt business. When we last talked about him on this channel, We Work was on the verge of Bankruptcy, Adam had walked away with $1.7 billion dollars and he had managed to talk the Venture Capital firm Andreessen Horowitz into giving him $350 million dollars for shares in his new company Flow which planned to transform the residential real estate rental market – in an unspecified manner.
Andreessen Horowitz’s 350 million dollar investment in Flow was allegedly the largest individual check they had ever written in a round of funding to a company, and the investment valued Flow at more than $1 billion dollars before it even opened its doors.
Flow claimed on their website that they would address some aspects of the US housing shortage through technology… Now, that is fairly cryptic… but, maybe it’ll be an apartment that you can rent, but with a smartphone enabled beer tap… I dunno…
As interesting as Flow sounds, earlier this week Dealbook reported that Adam Neumann through Flow has been trying to buy the now-bankrupt WeWork, allegedly with the help of Dan Loeb’s hedge fund Third Point.
The Financial Times (of course) contacted Third Point to verify their involvement in the deal and were told that the fund had only held “preliminary conversations with Flow and Adam Neumann about his ideas for WeWork.” They went on to say that they have made “no commitment to participate in any transaction.” So who knows what any of this means, but at least Adam Neumann is back in the news to entertain us. That is the most important part.
Dealbook included in their article a link to a letter which comes from Alex Spiro – who longtime viewers of this channel will know as Jay-Z, and Megan Thee Stallion’s lawyer. Spiro has also represented non rappers like Elon Musk in his case against the Thailand cave rescue diver.
I’m fairly sure that I have already covered how, Spiro and the rappers Killer Mike, Meek Mill, Yo Gotti, and Chance the Rapper sent a brief to the US Supreme Court, detailing the ways that rap music is stigmatized and stereotyped by the legal system. Spiro is highly respected by rappers and technology executives, and thus is probably the perfect lawyer for Adam Neumann.
Last year Neumann attempted to explain what “Flow” does to The Financial Times. He explained that a young cohort he once named the We Generation “are now almost the R Generation because they need to rent”. (obviously Adam doesn’t need to rent – he walked away from his failed business with 1.7 billion dollars and a plane full of weed) But that is off topic – he explained that as a solution to this housing affordability problem – he had spent hundreds of millions of dollars buying rental apartment buildings in cities whose popularity among that demographic had grown. He said “It felt like there were better ways to operate the buildings. And it felt like, frankly, there’s room for more community.” Now I can’t be sure – but I think by more community he means he will pack more of them into each apartment – which sounds nice…
Anyhow, based on this letter from Alex Spiro – it sounds like the plan for Flow has changed, as the letter states that since October 2022 – so for quite some time, Neumann has been working to arrange up to a billion dollars in financing to stabilize WeWork, and it would appear that the new management have been – mostly - ignoring him, which makes him sad. Note that the letter says – arrange financing – not finance with the 1.7 billion dollars he walked away from the business with. Only a fool would put his own money into a wealth bonfire like WeWork. I mean let’s be real – its short term office leasing. The tech stuff is just made up to impress Marc Andreessen.
Now, WeWork was not the first business founded by Adam Neumann. His first business was Krawlers – a line of unusually ugly baby clothes with sewn-in knee pads, pitched to parents who worried that crawling babies are in constant pain, and they need special padded clothes to alleviate that pain…
Krawlers is to date Neumann’s most successful business – I don’t mean that it made money – of course it didn’t make money, the clothes were horrible, but it did lose billions less that his most famous startup WeWork. And that is good.
PT Barnum famously said – There’s a sucker born every minute. But Adam Neumann didn’t need one of these newborn suckers – as he had Masayoshi Son – of Softbank who had raised 100 billion dollars in capital, and was willing to give a big chunk of it to Adam after spending less than thirty minutes talking to him.
WeWork’s valuation peaked at $47 billion dollars, pumped up by funding from SoftBank – who possibly love a fake tech business more than even Cathie Wood does. It then tanked in 2019 as the heavy spending and Neumann’s crazy behavior sank its plans to go public. Note that Covid and working from home during the pandemic were not the problem. The business was on the rocks long before that, as investors who had not travelled on Adams Private jet noticed that WeWork was just re renting office space, and was not an actual tech business – thus not worth anything close to 47 billion dollars.
Adam managed to lose 14 billion dollars for his biggest investor – Softbank. Well I dunno, Softbank actually lost their own money, by valuing some office buildings filled with Ikea furniture as if it was a software business. Well, actually, Softbank didn’t really lose their own money either. Most of the money came from the Saudi Arabian Sovereign Wealth fund, and if the Saudi Sovereign Wealth Fund hadn’t blown the money on Softbank, they would have blown it on Credit Suisse or Neom, the 110 mile long city that they are building which guarantees that inhabitants are always the maximum distance away from wherever they need to go at any point in time. One way or another this money was going to be vaporized.
Now, Journalists at the Financial Times this week spoke to a number of the creditors, advisers and other people involved in WeWork’s bankruptcy who refused to comment on the record, given that they are in the midst of legal proceedings.
But, off-the-record they expressed doubt that Neumann could regain control of WeWork which is going through bankruptcy and is still plagued with problems tracing back to his time in charge. They told the FT that they had no advanced conversations with Neumann and that the firm was proceeding with its previous plan to hand over a restructured company to creditors by wiping away nearly all of its $4.2 billion dollars of debt in bankruptcy.
The letter from Neumann’s lawyer proposes 200 million dollars of financing, which is not nearly enough to solve WeWorks actual problems, but this debt would come in senior to the existing debt at WeWork and would likely affect who was in control of the company once it emerges from bankruptcy.
Amusingly the letter wraps up by stating that Neumann’s management expertise would likely add significant value to the firm, while of course it is Neumann’s “management expertise” that wiped out billions of dollars of investor funds landing WeWork in bankruptcy.
Matt Levine at Bloomberg argues that buying WeWork out of bankruptcy would likely require paying off at least some of the 4.2 billion dollars in debt. The current bankruptcy does not involve paying off any of the debt. Around $3.7 billion dollars of first and second lien debt would swap their debt into equity and own the surviving company, while the unsecured lenders would get nothing under the current plan.
Levine argues that buying the company out of bankruptcy might require paying off the most senior debt in full – the 3.7 billion dollars, or giving the lenders some mix of cash and equity in the surviving company.
The dealbook article argues that the company could be sold for as little as $500 million dollars, which is pocket change for Neumann – but let’s be serious. He’s not going to put his own money into this. It would be difficult at this point to spin the value of the company up again now that people realize that it’s just office rentals and not a tech business.
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