Hello and welcome you are listening to Patrick Boyle on
Finance, a podcast exploring ideas from quantitative finance,
examining events occurring in markets right now and financial
history to see what lessons can be taken away, including
interviews with some of the most interesting people in the world
of finance. To learn more about the podcast,
visit on finance.org. 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've 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 favourites to invest in our
own. You'd never want to do that.
But they are my favourites to read about.
And without these businesses, financial news would be really
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 be possibly recorded on the
blockchain. There could be some sort of
social angle to it. Not not actually social.
We don't need people actually meeting at a well that's 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out of date.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 a headset, and they should only discuss how
wealthy the well will eventually make them on the app.
It's 2024 and that's what people want now.
Key to a fake tech business is a shameless and charismatic CEO
who knows how to pump the stock price up when raising grounds of
capital from VCs. The CEO needs to be irreverent,
possibly have a distinctive hairstyle, and most importantly,
a modern day hippie druggie vibe.
VCs required that these CEOs at least appear to believe their
own pitch when they're claiming that the new product has an
infinite total addressable market or Tam.
And 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, our CEO can't be too wacky. If he's falling off the stage
during his Ted talk, that'll raise too many difficult
questions. There's a delicate balance to be
maintained here. There are a lot of good examples
of this type of company. In 2017, Lift announced Lift
Shuttle, where passengers share a vehicle that follows a pre
designated route. It involves walking to and from
one of the fixed stops. It's convenient, it's
affordable, and it is, of course, a boss.
Later that year, Uber actually launched a service in Seattle
which allowed riders to save money by waiting for their Uber
at prearranged stops, 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's unlocked using an app which
sells non perishable convenience store type goods.
That's a vending machine. Juicero Wi-Fi enabled press that
can squeeze juice out of fruits and vegetables.
It cost $400.00, 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 an actual gym membership.
You can still buy one of those. This all leads me to the real
master of the fake technology business, Adam Newman, the Co
founder of Wework, a shared office space with a beer tap and
an app that I'm reliably told didn't work, he described we
work as the world's first physical social network and for
quite some time managed to convince investors that it was
worth $47 billion because technology.
You'll 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 Adam on this channel, we work was on
the verge of bankruptcy. Adam had walked away with $1.7
billion and he had managed to talk the venture capital firm
Andreessen Horowitz into giving him $350 million for shares in
his new company, Flow, which plan to transform the
residential real estate rental market in an unspecified manner.
Andreessen Horowitz's $350 million investment in Newman's
new business, Flow was allegedly the largest individual check
that they had ever written in around the funding to a company,
and the investment valued Flow at more than $1 billion before
it even opened its doors. Flow claimed on its website that
they would address some aspects of the US housing shortage
through technology. Now that's fairly cryptic, but
maybe it'll be an apartment that you can rent but with a
smartphone enabled beer tap? I don't know, as interesting as
Flow sounds. Earlier this week, Dealbook
reported that Adam Newman, through Flow, has been trying to
buy the now bankrupt We Work, 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 we're told that the fund had only held preliminary
conversations with Flo and Adam Newman about his ideas for we
work. They went on to say that they've
made no commitment to participate in any transaction,
so who knows what any of this means, But at least Adam Newman
is back in the news to entertain us.
That's the most important part. Deal Book included in their
article a link to a letter, which comes from Alex Spiro, who
long term viewers of this channel will know as Jay-Z and
Megan D 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've
already covered how Spiro and the Rapper's 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.
That's the the kind of stuff that I cover on this channel.
Spiro is highly respected by rappers and technology
executives, and thus is probably the perfect lawyer for Adam
Newman. Last year, Newman 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 Our generation because they need to
rent. Obviously, Adam doesn't need to
rent. He walked away from his failed
business with $1.7 billion and a plane full of weed, but that's
off topic. He explained that as a solution
to the 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 more room for
more community. Now I can't be sure, but I think
by more community he means he'll 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 Newman has been working to arrange up
to a billion dollars in financing to stabilize we work,
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 he walked away from the business with,
only a fool would put his own money into a wealth bonfire like
we work. I mean, let's be real.
It's 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 Newman. His first business was Crawlers,
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. Crawlers is, to date, Newman'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 than his most famous startup.
We work, and that's good, PT Barnum famously said.
There's a sucker born every minute.
But Adam Newman didn't need one of these newborn suckers.
They probably don't have any money.
He had Masayoshi son of SoftBank, who had raised $100
billion in capital and was willing to give a big chunk of
it to Adam after spending less than 30 minutes talking to him.
Wework's valuation peaked at $47 billion, pumped up by funding
from SoftBank, who possibly love a fake tech business more than
even Kathy Wood does. It then tanked in 2019 as the
heavy spending and Newman's crazy behavior sank its plans to
go public. Note that COVID and working from
home during the pandemic were not part of the problem.
The business was on the rocks long before that, as investors
who had not travelled on Adam's private jet noticed that we work
was just renting office space and was not an actual tech
business, thus not worth anything close to $47 billion.
Adam managed to lose $14 billion for his biggest investor,
SoftBank. Well, I don't know, SoftBank
actually lost their own money by valuing some office buildings
filled with IKEA furniture as if it was a software business.
But actually, SoftBank didn't really lose their own money
either. Most of the money came from the
Saudi Arabia sovereign wealth fund.
And if the Saudi Arabian sovereign wealth fund hadn't
blown the money on SoftBank, they would have blown it on
Credit Suisse or NEON, the 110 mile long city that they're
building, which guarantees that inhabitants are always the
maximum distance from wherever they need to go.
At any point in time, one way or another, this money was going to
be vaporized. So we only have to feel so bad
now. Journalists at the Financial
Times this week spoke to a number of the creditors,
advisors and other people involved in We Work bankruptcy
who refused to comment on the record given that they are in
the midst of legal proceedings. But off the record, they
expressed doubts that Newman could regain control of We Work,
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 Newman 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 of debt
in bankruptcy. The letter from Newman's lawyer
proposes $200 million of financing, which is not nearly
enough to solve Weworks actual problems.
But this debt would come in senior to the existing debt at
We Work and would likely affect who was in control of the
company once it emerges from bankruptcy.
Amusingly, the letter wraps up by stating that Newman's
management expertise would likely add significant value to
the firm. While of course it's Newman's
management expertise that wiped out billions of dollars of
investors funds landing, We work in bankruptcy.
Matt Levine at Bloomberg argues that buying We work out of
bankruptcy would likely require paying off at least some of the
$4.2 billion in debt. The current bankruptcy does not
involve paying off any of the debt.
Around $3.7 billion at 1st and 2nd 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, or giving the lender some mix of
cash and equity in the surviving company.
The Deal Book article argues that the company could be sold
for as little as $500 million, which is pocket change for
Newman. 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. Thanks for tuning into this
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