1 00:00:00,400 --> 00:00:03,720 Hello and welcome you are listening to Patrick Boyle on 2 00:00:03,720 --> 00:00:08,080 Finance, a podcast exploring ideas from quantitative finance, 3 00:00:08,320 --> 00:00:11,640 examining events occurring in markets right now and financial 4 00:00:11,640 --> 00:00:15,400 history to see what lessons can be taken away, including 5 00:00:15,400 --> 00:00:18,200 interviews with some of the most interesting people in the world 6 00:00:18,200 --> 00:00:20,960 of finance. To learn more about the podcast, 7 00:00:20,960 --> 00:00:30,040 visit on finance.org. Some of my favorite businesses, 8 00:00:30,040 --> 00:00:33,720 as long term channel viewers are aware, are fake technology 9 00:00:33,720 --> 00:00:36,520 companies. These are startups, usually out 10 00:00:36,520 --> 00:00:39,720 of California, but in recent years they've sprouted all over 11 00:00:39,720 --> 00:00:43,080 the world, where a charismatic founder takes a humdrum 12 00:00:43,080 --> 00:00:48,080 business, layers on a veneer of technology and pitches it to 13 00:00:48,080 --> 00:00:51,800 investors at an astronomical price, claiming that it will 14 00:00:51,800 --> 00:00:54,640 change the world. Now, when I say that these are 15 00:00:54,640 --> 00:00:58,520 my favorite businesses, I don't mean favourites to invest in our 16 00:00:58,520 --> 00:01:00,560 own. You'd never want to do that. 17 00:01:00,800 --> 00:01:03,000 But they are my favourites to read about. 18 00:01:03,280 --> 00:01:06,720 And without these businesses, financial news would be really 19 00:01:06,720 --> 00:01:09,240 boring. And I read financial news all 20 00:01:09,240 --> 00:01:11,480 day long and I don't want to be bored. 21 00:01:11,880 --> 00:01:16,400 To maximize the entertainment value of a fake tech firm, the 22 00:01:16,400 --> 00:01:19,680 core business needs to be as dull as possible. 23 00:01:20,080 --> 00:01:24,280 Something like a window cleaning business, a sawmill or a well, a 24 00:01:24,280 --> 00:01:26,760 well would make a great fake tech business. 25 00:01:26,760 --> 00:01:30,040 The water drawn from it could be possibly recorded on the 26 00:01:30,040 --> 00:01:32,200 blockchain. There could be some sort of 27 00:01:32,200 --> 00:01:35,760 social angle to it. Not not actually social. 28 00:01:35,760 --> 00:01:38,960 We don't need people actually meeting at a well that's that's 29 00:01:38,960 --> 00:01:41,360 out of date. It needs to be the kind of 30 00:01:41,360 --> 00:01:45,080 social where people only interact using their phones or 31 00:01:45,080 --> 00:01:48,520 with some sort of a headset, and they should only discuss how 32 00:01:48,520 --> 00:01:51,960 wealthy the well will eventually make them on the app. 33 00:01:52,280 --> 00:01:56,000 It's 2024 and that's what people want now. 34 00:01:56,000 --> 00:02:01,120 Key to a fake tech business is a shameless and charismatic CEO 35 00:02:01,240 --> 00:02:05,320 who knows how to pump the stock price up when raising grounds of 36 00:02:05,320 --> 00:02:09,280 capital from VCs. The CEO needs to be irreverent, 37 00:02:09,720 --> 00:02:13,520 possibly have a distinctive hairstyle, and most importantly, 38 00:02:13,720 --> 00:02:16,640 a modern day hippie druggie vibe. 39 00:02:16,920 --> 00:02:21,960 VCs required that these CEOs at least appear to believe their 40 00:02:21,960 --> 00:02:24,800 own pitch when they're claiming that the new product has an 41 00:02:24,800 --> 00:02:28,280 infinite total addressable market or Tam. 42 00:02:28,520 --> 00:02:31,760 And you don't need a guy pitching that his metaverse 43 00:02:31,760 --> 00:02:36,200 based blockchain well will bring water to the deserts and work on 44 00:02:36,200 --> 00:02:39,400 Mars if he doesn't seem slightly drug addled. 45 00:02:39,600 --> 00:02:43,840 As a serious, sober looking CEO might lead investors and 46 00:02:43,840 --> 00:02:47,840 journalists to ask difficult questions that can't be answered 47 00:02:47,840 --> 00:02:51,960 in a dreamy drug addled manner by a guy with a distinctive 48 00:02:51,960 --> 00:02:54,280 hairstyle who claims to see the future. 49 00:02:54,600 --> 00:02:58,800 Now, our CEO can't be too wacky. If he's falling off the stage 50 00:02:58,800 --> 00:03:01,840 during his Ted talk, that'll raise too many difficult 51 00:03:01,840 --> 00:03:04,600 questions. There's a delicate balance to be 52 00:03:04,600 --> 00:03:07,920 maintained here. There are a lot of good examples 53 00:03:07,920 --> 00:03:12,520 of this type of company. In 2017, Lift announced Lift 54 00:03:12,520 --> 00:03:16,680 Shuttle, where passengers share a vehicle that follows a pre 55 00:03:16,680 --> 00:03:20,320 designated route. It involves walking to and from 56 00:03:20,320 --> 00:03:23,080 one of the fixed stops. It's convenient, it's 57 00:03:23,080 --> 00:03:26,200 affordable, and it is, of course, a boss. 58 00:03:26,760 --> 00:03:30,680 Later that year, Uber actually launched a service in Seattle 59 00:03:30,840 --> 00:03:34,960 which allowed riders to save money by waiting for their Uber 60 00:03:34,960 --> 00:03:39,200 at prearranged stops, share it with strangers, and get dropped 61 00:03:39,200 --> 00:03:42,560 off at any point along a predetermined route. 62 00:03:43,320 --> 00:03:47,160 That was a bus, too. Not to be outdone, Elon Musk 63 00:03:47,160 --> 00:03:51,440 invented the bus one year later, but at least he added a sci-fi 64 00:03:51,440 --> 00:03:53,840 layer of complexity to his version. 65 00:03:54,440 --> 00:03:58,200 There are other examples. Bodega, a box that can be set up 66 00:03:58,200 --> 00:04:02,200 in urban locations that's unlocked using an app which 67 00:04:02,200 --> 00:04:05,960 sells non perishable convenience store type goods. 68 00:04:06,520 --> 00:04:11,440 That's a vending machine. Juicero Wi-Fi enabled press that 69 00:04:11,440 --> 00:04:14,600 can squeeze juice out of fruits and vegetables. 70 00:04:14,760 --> 00:04:20,440 It cost $400.00, required a subscription and replaces your 71 00:04:20,440 --> 00:04:23,920 hands. And let's not forget Peloton gym 72 00:04:23,920 --> 00:04:28,120 equipment with a built in iPad and a monthly subscription that 73 00:04:28,120 --> 00:04:32,080 was more expensive than the cost of an actual gym membership. 74 00:04:32,400 --> 00:04:36,160 You can still buy one of those. This all leads me to the real 75 00:04:36,160 --> 00:04:40,400 master of the fake technology business, Adam Newman, the Co 76 00:04:40,400 --> 00:04:44,320 founder of Wework, a shared office space with a beer tap and 77 00:04:44,320 --> 00:04:48,320 an app that I'm reliably told didn't work, he described we 78 00:04:48,320 --> 00:04:52,280 work as the world's first physical social network and for 79 00:04:52,280 --> 00:04:55,680 quite some time managed to convince investors that it was 80 00:04:55,680 --> 00:04:59,640 worth $47 billion because technology. 81 00:05:00,080 --> 00:05:03,720 You'll be glad to know that Adam is back in the news claiming 82 00:05:03,720 --> 00:05:06,840 that he wants to buy back the now bankrupt business. 83 00:05:07,240 --> 00:05:11,200 When we last talked about Adam on this channel, we work was on 84 00:05:11,200 --> 00:05:15,080 the verge of bankruptcy. Adam had walked away with $1.7 85 00:05:15,080 --> 00:05:19,000 billion and he had managed to talk the venture capital firm 86 00:05:19,000 --> 00:05:24,560 Andreessen Horowitz into giving him $350 million for shares in 87 00:05:24,560 --> 00:05:28,000 his new company, Flow, which plan to transform the 88 00:05:28,000 --> 00:05:33,000 residential real estate rental market in an unspecified manner. 89 00:05:33,680 --> 00:05:38,120 Andreessen Horowitz's $350 million investment in Newman's 90 00:05:38,120 --> 00:05:42,520 new business, Flow was allegedly the largest individual check 91 00:05:42,720 --> 00:05:46,600 that they had ever written in around the funding to a company, 92 00:05:46,800 --> 00:05:51,320 and the investment valued Flow at more than $1 billion before 93 00:05:51,320 --> 00:05:55,920 it even opened its doors. Flow claimed on its website that 94 00:05:55,920 --> 00:06:00,080 they would address some aspects of the US housing shortage 95 00:06:00,240 --> 00:06:03,800 through technology. Now that's fairly cryptic, but 96 00:06:03,800 --> 00:06:07,600 maybe it'll be an apartment that you can rent but with a 97 00:06:07,600 --> 00:06:12,320 smartphone enabled beer tap? I don't know, as interesting as 98 00:06:12,320 --> 00:06:15,480 Flow sounds. Earlier this week, Dealbook 99 00:06:15,480 --> 00:06:19,160 reported that Adam Newman, through Flow, has been trying to 100 00:06:19,160 --> 00:06:23,640 buy the now bankrupt We Work, allegedly with the help of Dan 101 00:06:23,640 --> 00:06:27,640 Loeb's hedge fund Third Point. The Financial Times, of course, 102 00:06:27,640 --> 00:06:31,720 contacted Third Point to verify their involvement in the deal, 103 00:06:31,880 --> 00:06:35,360 and we're told that the fund had only held preliminary 104 00:06:35,360 --> 00:06:40,240 conversations with Flo and Adam Newman about his ideas for we 105 00:06:40,240 --> 00:06:42,760 work. They went on to say that they've 106 00:06:42,760 --> 00:06:46,680 made no commitment to participate in any transaction, 107 00:06:47,040 --> 00:06:50,920 so who knows what any of this means, But at least Adam Newman 108 00:06:50,920 --> 00:06:53,280 is back in the news to entertain us. 109 00:06:53,560 --> 00:06:57,800 That's the most important part. Deal Book included in their 110 00:06:57,800 --> 00:07:02,040 article a link to a letter, which comes from Alex Spiro, who 111 00:07:02,040 --> 00:07:06,000 long term viewers of this channel will know as Jay-Z and 112 00:07:06,000 --> 00:07:11,200 Megan D Stallion's lawyer. Spiro has also represented non 113 00:07:11,200 --> 00:07:15,600 rappers like Elon Musk in his case against the Thailand cave 114 00:07:15,600 --> 00:07:18,560 rescue diver. I'm fairly sure that I've 115 00:07:18,640 --> 00:07:22,680 already covered how Spiro and the Rapper's Killer Mike, Meek 116 00:07:22,680 --> 00:07:26,960 Mill, Yo Gotti, and Chance the Rapper sent a brief to the US 117 00:07:26,960 --> 00:07:30,960 Supreme Court detailing the ways that rap music is stigmatized 118 00:07:30,960 --> 00:07:33,440 and stereotyped by the legal system. 119 00:07:33,720 --> 00:07:37,080 That's the the kind of stuff that I cover on this channel. 120 00:07:37,360 --> 00:07:41,560 Spiro is highly respected by rappers and technology 121 00:07:41,560 --> 00:07:45,760 executives, and thus is probably the perfect lawyer for Adam 122 00:07:45,760 --> 00:07:48,920 Newman. Last year, Newman attempted to 123 00:07:48,920 --> 00:07:52,280 explain what Flow does to the Financial Times. 124 00:07:52,600 --> 00:07:57,160 He explained that a young cohort he once named the We Generation 125 00:07:57,360 --> 00:08:01,240 are now almost the Our generation because they need to 126 00:08:01,240 --> 00:08:04,080 rent. Obviously, Adam doesn't need to 127 00:08:04,080 --> 00:08:05,880 rent. He walked away from his failed 128 00:08:05,880 --> 00:08:10,800 business with $1.7 billion and a plane full of weed, but that's 129 00:08:10,800 --> 00:08:14,120 off topic. He explained that as a solution 130 00:08:14,120 --> 00:08:17,880 to the housing affordability problem, he had spent hundreds 131 00:08:17,880 --> 00:08:21,480 of millions of dollars buying rental apartment buildings in 132 00:08:21,480 --> 00:08:25,800 cities whose popularity among that demographic had grown. 133 00:08:26,040 --> 00:08:28,960 He said it felt like there were better ways to operate the 134 00:08:28,960 --> 00:08:33,080 buildings, and it felt like, frankly, there's more room for 135 00:08:33,080 --> 00:08:36,440 more community. Now I can't be sure, but I think 136 00:08:36,440 --> 00:08:39,919 by more community he means he'll pack more of them into each 137 00:08:39,919 --> 00:08:45,040 apartment, which sounds nice. Anyhow, based on this letter 138 00:08:45,040 --> 00:08:49,880 from Alex Spiro, it sounds like the plan for Flow has changed as 139 00:08:49,880 --> 00:08:53,160 the letter states that since October 2022. 140 00:08:53,280 --> 00:08:57,400 So for quite some time Newman has been working to arrange up 141 00:08:57,400 --> 00:09:01,360 to a billion dollars in financing to stabilize we work, 142 00:09:01,640 --> 00:09:05,160 and it would appear that the new management have been mostly 143 00:09:05,160 --> 00:09:07,840 ignoring him, which makes him sad. 144 00:09:08,200 --> 00:09:12,080 Note that the letter says arrange financing, not finance. 145 00:09:12,080 --> 00:09:15,560 With the $1.7 billion he walked away from the business with, 146 00:09:16,040 --> 00:09:20,280 only a fool would put his own money into a wealth bonfire like 147 00:09:20,280 --> 00:09:22,560 we work. I mean, let's be real. 148 00:09:22,760 --> 00:09:26,800 It's short term office leasing. The tech stuff is just made-up 149 00:09:26,800 --> 00:09:30,720 to impress Marc Andreessen now. Wework was not the first 150 00:09:30,720 --> 00:09:34,640 business founded by Adam Newman. His first business was Crawlers, 151 00:09:34,640 --> 00:09:38,800 a line of unusually ugly baby clothes with sewn in knee pads, 152 00:09:38,960 --> 00:09:42,600 pitched to parents who worried that crawling babies are in 153 00:09:42,600 --> 00:09:46,680 constant pain and they need special padded clothes to 154 00:09:46,680 --> 00:09:50,960 alleviate that pain. Crawlers is, to date, Newman's 155 00:09:50,960 --> 00:09:54,360 most successful business. I don't mean that it made money. 156 00:09:54,360 --> 00:09:57,360 Of course it didn't make money. The clothes were horrible, but 157 00:09:57,360 --> 00:10:01,320 it did lose billions less than his most famous startup. 158 00:10:01,360 --> 00:10:05,880 We work, and that's good, PT Barnum famously said. 159 00:10:06,120 --> 00:10:08,240 There's a sucker born every minute. 160 00:10:08,480 --> 00:10:12,200 But Adam Newman didn't need one of these newborn suckers. 161 00:10:12,280 --> 00:10:13,880 They probably don't have any money. 162 00:10:14,280 --> 00:10:18,920 He had Masayoshi son of SoftBank, who had raised $100 163 00:10:18,920 --> 00:10:22,680 billion in capital and was willing to give a big chunk of 164 00:10:22,680 --> 00:10:26,640 it to Adam after spending less than 30 minutes talking to him. 165 00:10:27,160 --> 00:10:32,160 Wework's valuation peaked at $47 billion, pumped up by funding 166 00:10:32,160 --> 00:10:36,360 from SoftBank, who possibly love a fake tech business more than 167 00:10:36,360 --> 00:10:41,440 even Kathy Wood does. It then tanked in 2019 as the 168 00:10:41,440 --> 00:10:45,640 heavy spending and Newman's crazy behavior sank its plans to 169 00:10:45,640 --> 00:10:49,040 go public. Note that COVID and working from 170 00:10:49,040 --> 00:10:52,360 home during the pandemic were not part of the problem. 171 00:10:52,720 --> 00:10:56,440 The business was on the rocks long before that, as investors 172 00:10:56,440 --> 00:11:00,880 who had not travelled on Adam's private jet noticed that we work 173 00:11:00,880 --> 00:11:04,800 was just renting office space and was not an actual tech 174 00:11:04,800 --> 00:11:09,200 business, thus not worth anything close to $47 billion. 175 00:11:09,640 --> 00:11:14,080 Adam managed to lose $14 billion for his biggest investor, 176 00:11:14,080 --> 00:11:17,200 SoftBank. Well, I don't know, SoftBank 177 00:11:17,200 --> 00:11:21,040 actually lost their own money by valuing some office buildings 178 00:11:21,040 --> 00:11:24,480 filled with IKEA furniture as if it was a software business. 179 00:11:24,960 --> 00:11:28,400 But actually, SoftBank didn't really lose their own money 180 00:11:28,400 --> 00:11:30,720 either. Most of the money came from the 181 00:11:30,720 --> 00:11:32,960 Saudi Arabia sovereign wealth fund. 182 00:11:33,200 --> 00:11:36,840 And if the Saudi Arabian sovereign wealth fund hadn't 183 00:11:36,840 --> 00:11:39,920 blown the money on SoftBank, they would have blown it on 184 00:11:39,920 --> 00:11:44,520 Credit Suisse or NEON, the 110 mile long city that they're 185 00:11:44,520 --> 00:11:47,840 building, which guarantees that inhabitants are always the 186 00:11:47,840 --> 00:11:51,320 maximum distance from wherever they need to go. 187 00:11:51,320 --> 00:11:55,360 At any point in time, one way or another, this money was going to 188 00:11:55,360 --> 00:11:58,040 be vaporized. So we only have to feel so bad 189 00:11:58,640 --> 00:12:00,480 now. Journalists at the Financial 190 00:12:00,480 --> 00:12:04,120 Times this week spoke to a number of the creditors, 191 00:12:04,120 --> 00:12:08,480 advisors and other people involved in We Work bankruptcy 192 00:12:08,800 --> 00:12:12,440 who refused to comment on the record given that they are in 193 00:12:12,440 --> 00:12:16,320 the midst of legal proceedings. But off the record, they 194 00:12:16,320 --> 00:12:20,160 expressed doubts that Newman could regain control of We Work, 195 00:12:20,320 --> 00:12:23,160 which is going through bankruptcy and is still plagued 196 00:12:23,160 --> 00:12:25,520 with problems. Tracing back to his time in 197 00:12:25,520 --> 00:12:29,720 charge, they told the FT that they had no advanced 198 00:12:29,720 --> 00:12:33,200 conversations with Newman and that the firm was proceeding 199 00:12:33,200 --> 00:12:37,480 with its previous plan to hand over a restructured company to 200 00:12:37,480 --> 00:12:42,720 creditors by wiping away nearly all of its $4.2 billion of debt 201 00:12:42,720 --> 00:12:46,160 in bankruptcy. The letter from Newman's lawyer 202 00:12:46,160 --> 00:12:51,000 proposes $200 million of financing, which is not nearly 203 00:12:51,000 --> 00:12:53,880 enough to solve Weworks actual problems. 204 00:12:54,240 --> 00:12:58,160 But this debt would come in senior to the existing debt at 205 00:12:58,160 --> 00:13:01,720 We Work and would likely affect who was in control of the 206 00:13:01,720 --> 00:13:04,760 company once it emerges from bankruptcy. 207 00:13:05,160 --> 00:13:08,840 Amusingly, the letter wraps up by stating that Newman's 208 00:13:08,840 --> 00:13:12,880 management expertise would likely add significant value to 209 00:13:12,880 --> 00:13:15,440 the firm. While of course it's Newman's 210 00:13:15,440 --> 00:13:18,840 management expertise that wiped out billions of dollars of 211 00:13:18,840 --> 00:13:22,600 investors funds landing, We work in bankruptcy. 212 00:13:23,280 --> 00:13:26,960 Matt Levine at Bloomberg argues that buying We work out of 213 00:13:26,960 --> 00:13:30,920 bankruptcy would likely require paying off at least some of the 214 00:13:30,920 --> 00:13:35,200 $4.2 billion in debt. The current bankruptcy does not 215 00:13:35,200 --> 00:13:37,280 involve paying off any of the debt. 216 00:13:37,560 --> 00:13:43,000 Around $3.7 billion at 1st and 2nd lien debt would swap their 217 00:13:43,000 --> 00:13:47,040 debt into equity and own the surviving company, while the 218 00:13:47,040 --> 00:13:49,680 unsecured lenders would get nothing. 219 00:13:49,680 --> 00:13:54,080 Under the current plan, Levine argues that buying the company 220 00:13:54,080 --> 00:13:58,160 out of bankruptcy might require paying off the most senior debt 221 00:13:58,160 --> 00:14:03,680 in full, the $3.7 billion, or giving the lender some mix of 222 00:14:03,680 --> 00:14:06,800 cash and equity in the surviving company. 223 00:14:07,320 --> 00:14:10,840 The Deal Book article argues that the company could be sold 224 00:14:10,840 --> 00:14:15,320 for as little as $500 million, which is pocket change for 225 00:14:15,320 --> 00:14:17,920 Newman. But let's be serious, he's not 226 00:14:17,920 --> 00:14:19,840 going to put his own money into this. 227 00:14:20,000 --> 00:14:23,280 It would be difficult at this point to spin the value of the 228 00:14:23,280 --> 00:14:27,360 company up again now that people realize that it's just office 229 00:14:27,360 --> 00:14:31,440 rentals and not a tech business. Thanks for tuning into this 230 00:14:31,440 --> 00:14:33,840 week's podcast. If you enjoyed it, please 231 00:14:33,840 --> 00:14:37,320 forward a link to a friend so that the podcast can grow. 232 00:14:37,520 --> 00:14:40,040 Have a great day and talk to you again soon. 233 00:14:40,160 --> 00:14:43,360 Bye. If you enjoyed this episode, be 234 00:14:43,360 --> 00:14:46,200 sure to subscribe so you're notified when a new episode is 235 00:14:46,200 --> 00:14:48,440 posted. Thank you to everyone who is 236 00:14:48,440 --> 00:14:50,560 supporting this content on Patreon. 237 00:14:50,920 --> 00:14:53,760 If you enjoyed this content, you can find more like it on 238 00:14:53,760 --> 00:14:58,280 YouTube, on the Patrick Boyle on Finance channel or follow us on 239 00:14:58,280 --> 00:15:01,480 Twitter at Patrick E Boyle. Thanks for listening. 240 00:15:01,480 --> 00:15:01,880 Bye.