Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Hallaway Tracy nineteen. There's
Speaker 1: been a lot of interesting things that have happened in
Speaker 1: markets so far this year, but one of the defining
Speaker 1: characteristics I think has to be that it's really been
Speaker 1: the year of the I p O, or at least
Speaker 1: i pos have been a big story in a way
Speaker 1: that they haven't been in a long time, right, and
Speaker 1: not just any I p as We've had quite a
Speaker 1: few tech company I p o s. Right, so we
Speaker 1: had let's see Uber beyond Meat both like relatively uh,
Speaker 1: I guess some people would call it unsuccessful giving the
Speaker 1: share price performance since then. Well, Uber, I guess has
Speaker 1: been a little bit unsuccessful in the fact that it
Speaker 1: didn't have a pop and b on Meat is unsuccessful
Speaker 1: in the other direction, in the sense that it's soared
Speaker 1: to an insane degree since when public implying that the
Speaker 1: the company left a lot of money on the table. Although,
Speaker 1: to be honest, you know, when when stocks sore, I
Speaker 1: get this argument that a company left a lot of
Speaker 1: money on the table, But I doubt anyone who's really
Speaker 1: complaining because they're all crazy rich now, so oh yeah,
Speaker 1: you hear that all the time, that the underwriter's messed
Speaker 1: up or something. But yeah, I doubt anyone who's standing
Speaker 1: there watching like the listing price, watching their net value
Speaker 1: go up, is actually upset about that one. Yeah, like,
Speaker 1: are they really that upset? And they can always sell
Speaker 1: more stock at a secondary if they want. But yeah,
Speaker 1: as you said, you know, like that, we had some
Speaker 1: like really murky I p o s this year already,
Speaker 1: Uber being the most notable uh, the largest at the
Speaker 1: time startup in the world or private company in the world,
Speaker 1: I think, or close to it. Uh, it's kind of fizzled.
Speaker 1: But actually it's been a pretty kind of euphoric year
Speaker 1: now between Beyond Meat and Zoom Video and CrowdStrike was
Speaker 1: another reason. One. There's a number of companies that have
Speaker 1: found very enthusiastic receptions on the public market this year, right,
Speaker 1: and I believe there's another one that's sort of waiting
Speaker 1: in the wings. And this is a you know, even
Speaker 1: compared to Uber, this is a really interesting company that
Speaker 1: sort of generates a lot of very different opinions. Let's say, yes,
Speaker 1: so you're talking about we Work, which is the famous
Speaker 1: or maybe infamous commercial real estate company that's gigantic. I
Speaker 1: don't know how many tens of billions it's worth right now.
Speaker 1: I think maybe just under fifty billion, but right they're
Speaker 1: known for taking out these big leases from building owners
Speaker 1: and then re renting the space out to startups, and
Speaker 1: it's a hip office environment and there's a lot of beer,
Speaker 1: and they the company is incredibly controversial, to say the least.
Speaker 1: There have been numerous profiles written of its c O,
Speaker 1: who himself seems to be quite a character. Like many
Speaker 1: uh these startup c e o s are lots of
Speaker 1: people extremely skeptical that it's going to be a long
Speaker 1: term money making business. But after Uber, it really is
Speaker 1: the gigantic one sort of sitting out there waiting in
Speaker 1: the wings. I don't think anyone knows exactly when it
Speaker 1: will become public, but at some point it almost certainly
Speaker 1: will have to file for an ip O. I like
Speaker 1: that your description of we work office space is there's
Speaker 1: a lot of beer, but but it's like a big
Speaker 1: thing like of of it's office space, but it's supposed
Speaker 1: to be cool and start up a start that means
Speaker 1: beer taps and cold brew coffee on tap and stuff
Speaker 1: like that. But I'm just going to point out you've
Speaker 1: already sort of betrayed a slight bias because you called
Speaker 1: it a commercial real estate company. And of course, the
Speaker 1: big debate over we Work and its valuation and its
Speaker 1: future is whether or not it's actually something more than
Speaker 1: a commercial real estate company. Because if you're attaching a
Speaker 1: fifty bill in dollar evaluation to something, you know it's
Speaker 1: probably going to have the words tech in it or
Speaker 1: some sort of like all encompassing lifestyle brand, and that's
Speaker 1: the huge debate currently raging, right or it's got to
Speaker 1: be a platform in some way to justify that. So
Speaker 1: the interesting thing about we Work to me is, you know,
Speaker 1: it's like, if you're talking about Uber, there's very easy
Speaker 1: to come up with the bull in the bear case.
Speaker 1: You say, okay, the bowl case is that sort of
Speaker 1: on demand mobility is going to be gigantic and it's
Speaker 1: barely even started, and that there's all other kinds of
Speaker 1: businesses that they can layer into their UM ride sharing business,
Speaker 1: like food delivery and other logistics things. And then the
Speaker 1: bear cases, well, they're losing a lot of money, and
Speaker 1: you can have a real debate and there seems to
Speaker 1: be very legitimate. Two sides to it. And what's really
Speaker 1: striking about We Work is it's extremely rare to find
Speaker 1: a bowl or even a partial bowl, or an optimist.
Speaker 1: It's universally, I think people are skeptical about this company.
Speaker 1: And that's pretty unusual because usually there's someone or a
Speaker 1: good contingent that says, no, you don't really get this right.
Speaker 1: I mean, someone is clearly giving this company money, right,
Speaker 1: So you know, bowls must be out there somewhere. They're
Speaker 1: just not very vocal, I guess. So the good news
Speaker 1: is we have a bowl, or at least a modest bowl.
Speaker 1: We found one. We're going to hear the uh, the
Speaker 1: less pessimistic case on we Work. He tweeted about it
Speaker 1: a few weeks ago, and it was like it was
Speaker 1: it was the true unicorn, someone saying something positive about
Speaker 1: we work on the internet. The real unicorn, the real unicorn.
Speaker 1: And so I knew we had to get him on
Speaker 1: the show. So without further ado, let's bring him in.
Speaker 1: I want to welcome to Odd Lots Sandy Corey. He
Speaker 1: has a managing director at Horizon Partners. Out in the
Speaker 1: Valley is a Silicon Valley investment banker, and we're going
Speaker 1: to be talking about why perhaps the doom and gloom
Speaker 1: story about we Work is overrated. So, Sandy, thank you
Speaker 1: very much for joining us. Thanks a lot for having
Speaker 1: me So, Sandy, I mean, as I sort of alluded to,
Speaker 1: everyone kind of knows the pessimistic story about we Work,
Speaker 1: and it really is relentless. And there's so many sort
Speaker 1: of classical red flags that caused people to think that
Speaker 1: this company will eventually fizzle or that it's a house
Speaker 1: of cards. They come up with their own bespoke metrics
Speaker 1: of how to measure their business. They have something I
Speaker 1: think it was called community adjusted but uh, they lose
Speaker 1: tons of money. Um. Their CEO is all kinds of eccentricities.
Speaker 1: They announced recently they're launching a new off balance sheet
Speaker 1: vehicle to buy buildings which will then be leased back
Speaker 1: to WE Work. And somehow that's supposed to make the
Speaker 1: buildings more valuable. Uh. The CEO had some questionable related
Speaker 1: party transactions because he owned some buildings that which questions
Speaker 1: about whether WE Work was getting a fair deal or
Speaker 1: not in renting them. It's just like the red flags
Speaker 1: with this company, which has become ubiquitous and cities all
Speaker 1: around the world are so numerous, and that is why
Speaker 1: it seems like almost nobody is willing to step up
Speaker 1: and say, wait, there might be something here, This might
Speaker 1: be really something valuable and growing. So, Sandy, what is
Speaker 1: it at its core that people misunderstand about We Work? Well,
Speaker 1: thanks a lot, Joe. It's a fascinating company, and it
Speaker 1: certainly is polarizing. And I think, you know, I like
Speaker 1: to try to take historical lens and looking at some
Speaker 1: of these businesses, and a lot of the critiques that
Speaker 1: you are presenting, I think have also been applied to
Speaker 1: other companies over history, you know, that have been misunderstood.
Speaker 1: You know, in the eighties, there was this wacky financial
Speaker 1: metric that was being promoted by operators in the cable
Speaker 1: industry because those businesses weren't really making money. It was
Speaker 1: called IBADA and in people thought that was pretty wacky.
Speaker 1: And of course now everyone uses ebitda as a as
Speaker 1: a pretty reasonable financial metric, and that the cable industry
Speaker 1: really did take off. Um, you know, back then and
Speaker 1: for many years after. So um, I think that the
Speaker 1: book case with We Work is that, look, you know,
Speaker 1: in Q one, they released some financial information and Q one.
Speaker 1: They they were annualized to three billion in revenue and
Speaker 1: they were growing a year every year. UM. So I
Speaker 1: think that's the start of something that potentially could be
Speaker 1: very valuable. They're in a massive industry, commercial real estate
Speaker 1: that's very fragmented, UH, and I think that they are
Speaker 1: in a position to build you know, leverage in that
Speaker 1: ecosystem in a really unique way. UM. They have a
Speaker 1: growing brand UH that you know, gives them an advantage
Speaker 1: in acquiring new customers or new users. You know. I
Speaker 1: think they have built a little bit of technology that
Speaker 1: can give UM leverage. I think they're probably still just
Speaker 1: scratching the surface there. And in fact, that might be
Speaker 1: one of the biggest bullish UH factors for the company,
Speaker 1: which is that if they can dig in in technology
Speaker 1: in an industry that historically has been allergic to technology,
Speaker 1: there's a there's a big source of advantage there. So, Sandy,
Speaker 1: you mentioned this notion of we work building up leverage
Speaker 1: in the real estate industry, and Joe and I were
Speaker 1: talking earlier about how if you have evaluation of this magnitude,
Speaker 1: it's usually because you have a sort of growth story
Speaker 1: attached to it, a growth story that might be you know,
Speaker 1: a big brand, a platform of some sort, or some
Speaker 1: sort of tech disruption angle. So talk to us about
Speaker 1: how exactly we work is disrupting the real estate industry
Speaker 1: and how exactly are they building up leverage within real estate. Sure, well,
Speaker 1: I think on the leverage aspect, it's mostly a function
Speaker 1: of scale. And I think that you know, coming across business,
Speaker 1: you know, when you have massive scale, it gives you
Speaker 1: leverage to get better economics and to push around suppliers
Speaker 1: and vendors and so forth. Um So I think that's
Speaker 1: the path that they are you know, kind of taking
Speaker 1: that that should pay off, you know, with more and
Speaker 1: more leverage that can kind of squeeze into better you
Speaker 1: can unit economics in the future. Look at the core disruption,
Speaker 1: I think it's just that they're you know, they have
Speaker 1: a better a better user experience you know, for their
Speaker 1: customers and so, you know, and that starts with the
Speaker 1: flexibility of the of the product, which I think, you know,
Speaker 1: on the one hand, it looks, uh, hey, it's just
Speaker 1: month the month, what's the big deal. Well, you know
Speaker 1: historically that the you know, one of the key aspects
Speaker 1: of consuming commercial real estate, you know, renting an office
Speaker 1: is a long term commitment that can be very painful
Speaker 1: for for many many businesses, and so I think the
Speaker 1: flexibility aspect is is very important. And then you know,
Speaker 1: it also gives them a chance to reorient their business
Speaker 1: around customers, ideally you know, using the Internet and technology,
Speaker 1: and that can have really powerful implications and how they
Speaker 1: operate their business and how they can build a compet
Speaker 1: advantage of our time, you know, a Netflix or some
Speaker 1: of the other great kind of disruptors that have built
Speaker 1: service layers, you know, leveraging technology and the Internet. So again,
Speaker 1: you know, in the beginning, Tracy was talking about how
Speaker 1: to achieve such a big valuation. The idea is typically
Speaker 1: you have to like, oh, we're a tech company or
Speaker 1: we're a platform. But it kind of sounds like what
Speaker 1: you're saying is no, we were just just a really
Speaker 1: well run innovative landlord in a sense. But well not exactly. Look,
Speaker 1: it's a very hard business to understand. There's lots of
Speaker 1: sources of kind of misunderstanding. And you know, look, one
Speaker 1: is is valuation. So you can find a valuation headline
Speaker 1: of forty seven billion, but that that's a you know,
Speaker 1: kind of based on a preferred instrument that soft bank,
Speaker 1: which is kind of underrated, and they're there the complexity
Speaker 1: of their financial engineering, so they you know, they came
Speaker 1: up with that as part of the last announced round.
Speaker 1: But then that I think the real valuation for the
Speaker 1: company is more like twenty billion, which is the valuation
Speaker 1: where kind of seller's got so that I think it
Speaker 1: was a mix of common shareholders and early preferred who
Speaker 1: sold in into around a few months back, and they
Speaker 1: had a twenty billion dollar evaluation. And so yeah, look
Speaker 1: it's a great question, is you know, is this is
Speaker 1: this a tech company or not? Does it deserve a
Speaker 1: software is a service revenue multiple? And I would say no.
Speaker 1: You know, we're in the market where SASS businesses are
Speaker 1: easily getting ten twenty times revenue, and so I don't
Speaker 1: think that that is that is necessarily warranted here for
Speaker 1: we Work. But is it worth you know, maybe five times,
Speaker 1: seven times, eight times in this hyper growth mode, I
Speaker 1: think it can be. So you mentioned the magic word
Speaker 1: hyper growth, and of course I guess the key to
Speaker 1: building up leverage in real estate for we Work is
Speaker 1: growing so quickly and amassing so much market power that
Speaker 1: you sort of basically just beat out competitors talk to
Speaker 1: us about like this notion of hyper growth. How long
Speaker 1: is it acceptable for a company to not post any profits,
Speaker 1: you know, for the sake of building up its market share?
Speaker 1: And how vital is funding to hyper growth? Well, that's
Speaker 1: a great question, and I think, you know, we work
Speaker 1: is a kind of a running experiment on how far
Speaker 1: you know you can go. But I do think that
Speaker 1: you know, you've got to keep the context in mind,
Speaker 1: which is that we are in a world where money
Speaker 1: is is historically cheap um and and access to capital
Speaker 1: for hyper growth companies UM is you know, pretty open.
Speaker 1: So I think you know, you can look at we
Speaker 1: were going to say, hey, this couldn't have existed twenty
Speaker 1: years ago, and it's kind of the meat at least,
Speaker 1: you know obvious lots of these businesses UM like an
Speaker 1: uber or a lift um, you know, depend on the
Speaker 1: access to low cost capital, and so we worked as
Speaker 1: as well. Um, you know, can they continue to grow
Speaker 1: acent well into the billions of revenue um? That might
Speaker 1: be difficult. Um. I think it's it's it is hard
Speaker 1: to get too deep into the finances because while they
Speaker 1: do release some financial formation, there's a lot that we
Speaker 1: don't know about the kind of cohort economics and the
Speaker 1: economics by geography, and so my I think the bowl
Speaker 1: case is that in we Works more mature geographies, the
Speaker 1: unit economics are pretty good. I think that's also the
Speaker 1: bowl case for businesses like uber or door dash as well,
Speaker 1: and that they are investing a lot in new markets UM,
Speaker 1: and that is is kind of the big cash depleted.
Speaker 1: So if in their mature markets, we Work is is
Speaker 1: hemorrhaging in cash, then that's obviously pretty worrisome. But my
Speaker 1: guess is that looking at more mature markets like a
Speaker 1: San Francisco, UM, you know, looking at buildings that they've
Speaker 1: been uh, you know, kind of leasing out for a
Speaker 1: period of time, the uneconomics are are pretty good. And
Speaker 1: I think with scale, you know that customer acquisition costs
Speaker 1: advantage gets kind of more and more meaningful. UM. They
Speaker 1: also are able to kind of squeeze out more efficiencies,
Speaker 1: you know, from various suppliers and back to find the
Speaker 1: leverage point once they are are renting, you know, fift
Speaker 1: the building from a landlord. The landlord might need them
Speaker 1: more than we Work needs the landlord. And that's just
Speaker 1: on a building. The building basis, and I think kind
Speaker 1: of similarly in a geo area. You know, we work
Speaker 1: and have a lot of leverage by you know, having
Speaker 1: a multiple buildings with with various landlords. So I think
Speaker 1: it's it's an open question just how much uh you know,
Speaker 1: better economics they can extract from suppliers, but I think
Speaker 1: they certainly can and they do. I mean, they they've
Speaker 1: said this that you know, they typically get their landlords
Speaker 1: to pay ninety percent of build out costs versus industry average,
Speaker 1: So that's an advantage. And then look on the flip side,
Speaker 1: they still need to innovate with their user experience, uh,
Speaker 1: you know, and their brand, you know, and kind of
Speaker 1: the social aspect that they offer so that they don't
Speaker 1: get caught in in a price war. You know, certainly
Speaker 1: that the bear case on an uber or a lift
Speaker 1: is that you know, they're selling a commodity there in
Speaker 1: a price war where the margins that were going to
Speaker 1: come from. And you know, with we work, you know
Speaker 1: that that the better the experience they can offer, hopefully
Speaker 1: you know, enabled by more and more technology, you know,
Speaker 1: they'll be able to command that kind of premium pricing.
Speaker 1: And I think, you know, one of those. One of
Speaker 1: the cases of skepticism is looking at hey, you know,
Speaker 1: the average member is only getting you know, fifty square feet, uh,
Speaker 1: and they're paying you know, six thousand bucks a year.
Speaker 1: That's crazy. Well, you know, I don't think it's necessarily crazy. Um,
Speaker 1: given that what they're selling to their customers is not
Speaker 1: just space, it's the the experience in the community, and well,
Speaker 1: it's easy to be able to skeptical of some of that.
Speaker 1: I do think that that that We Work users are
Speaker 1: voting with their feet, and you know, seeing their massive
Speaker 1: growth and high occupancy, it does seem like they really
Speaker 1: do have that differentiated offering. Obviously real estate. Everyone in
Speaker 1: real estate wants leverage. It's a leverage game. But that
Speaker 1: can really come back to bite you in a downturn.
Speaker 1: So I'm curious, like, let's say we were to hit
Speaker 1: a recession. The We Work defenders. Is your argument that a,
Speaker 1: they have their landlords to some extent over a barrel
Speaker 1: because they occupy so much of their space that they
Speaker 1: could renegotiate long term leases and be that obviously their
Speaker 1: tenants that they would take a hit. But because they
Speaker 1: offer more flexible terms, maybe they don't get as hit.
Speaker 1: As bad as some other uh, some other landlords. Isn't
Speaker 1: that the idea? Yeah, I think that's that's the book case.
Speaker 1: And I think that the idea is that, you know,
Speaker 1: like white bread consumption goes up in recessions because people
Speaker 1: are switching from the fancy whole weight to the whitebread,
Speaker 1: at least historically, you know, the flexible offering that they
Speaker 1: have will be more attractive, you know. And I think that,
Speaker 1: you know, intuitively, it makes sense, especially if you're a
Speaker 1: small business. And so a lot of people say, oh,
Speaker 1: what about these small businesses and startups, you know, what's
Speaker 1: going to happen in a recession? And I think that
Speaker 1: there's there's so many of them that that even in
Speaker 1: a recession, there's gonna be you know, more than enough
Speaker 1: to keep we work growing. I think that they're going
Speaker 1: to be attracted to that we work you know, flexibility.
Speaker 1: Um And and I think there's been anecdotal evidence, you
Speaker 1: know that in a few markets like Salpollo that they're
Speaker 1: in um where there was some uh, there was a
Speaker 1: kind of minor recession, you know, they did see an
Speaker 1: increase in demand. So I do think that that that
Speaker 1: is a powerful argument they have, and then yeah, I
Speaker 1: agree that they leverage they have with landlords will allow
Speaker 1: them to renegotiate if necessary, um to get better terms.
Speaker 1: And look, I mean I remember in two thousand and
Speaker 1: eight looking at all these actors across the financial spectrum
Speaker 1: and thinking all these are gonna go bust, And I
Speaker 1: mean it wasn't really something to be happy about. But
Speaker 1: as a kind of an amateur, you know, retail investor,
Speaker 1: I tried to make some trades to take advantage of
Speaker 1: these balance sheets that looked like they were going to
Speaker 1: blow up. But but guess what, you know, a lot
Speaker 1: of these institutions survived. And you know it was the
Speaker 1: old what was it? What did they say? The amend, extend,
Speaker 1: pretend And I mean it's nothing to be you know,
Speaker 1: uh too cheerful about. But I do think that we
Speaker 1: work will have that that type of flexibility where you know,
Speaker 1: at the end of the day, a lot of these
Speaker 1: landlords have their own creditors, um, and they're not going
Speaker 1: to be looking to a victim major tenant and what
Speaker 1: are their alternatives in a downturn where there aren't necessarily
Speaker 1: as many um, you know tenants you know kind of
Speaker 1: queued up for for big space. So I think I
Speaker 1: think that, you know, some of the biggest sources of
Speaker 1: of kind of misunderstanding what we work are. Yeah, this
Speaker 1: vulnerability to a recession. Look, I think we're all still
Speaker 1: scarred from the financial crisis of two, two does and nine,
Speaker 1: you know, which is reasonable given how brutal it was.
Speaker 1: But I think that even there is recessions, very unlikely
Speaker 1: will you'll approach anything like that. And I think we
Speaker 1: work as actually pretty well positioned. So I think that
Speaker 1: that is, to me, actually kind of one of the
Speaker 1: weaker elements of the bear case. I think kind of
Speaker 1: there's a there's an adjacent part of the bear case,
Speaker 1: you know, which is, hey, they're there, you know, and
Speaker 1: if you look at you know, fin Twitter, people called
Speaker 1: a Ponzi scheme. You know, they've got these long term
Speaker 1: releases and long term releases, you know, short term rentals.
Speaker 1: That's crazy and it's like well wright liability mismatch. Yeah,
Speaker 1: a lot of a lot of businesses have done that.
Speaker 1: I mean, that's the ESPN business model. And ESPN is
Speaker 1: not doing great today, but but historically, you know, they
Speaker 1: would send these long term deals with sports leagues to
Speaker 1: pay them exorbitant rice fees, you know, when they would
Speaker 1: sign them. You know, people in media say that's crazy,
Speaker 1: but guess what, you know, they made a lot of money.
Speaker 1: And there are cases where you know, owners of assets
Speaker 1: prefer you know, the certainty of getting paid and will
Speaker 1: forego some of the short term upside um that you
Speaker 1: can get when you take risk. And so I think
Speaker 1: we work, we works path there is actually pretty common.
Speaker 1: But a lot of folks, I think in the real
Speaker 1: esty industry look at that and think and think it
Speaker 1: you know, it can't last. But in fact, I think
Speaker 1: it's actually been a path that's worked pretty well for
Speaker 1: a lot of businesses across industries. So Sandy, I have
Speaker 1: a different um sort of bear case concern, I guess,
Speaker 1: and I think when it comes to a lot of
Speaker 1: sort of disruptive company or unicorns, I think there's a
Speaker 1: tendency to think that they all come in to the
Speaker 1: market whatever it might be, you know, cars or in
Speaker 1: this case real estate, and they come in, they do
Speaker 1: something different, they disrupt the market, and that that business
Speaker 1: model can continue forever and that the market basically stays static.
Speaker 1: And of course what tends to happen is the market
Speaker 1: actually adapts quite quickly, usually to a lot of these
Speaker 1: new business models um and you also get competitors at
Speaker 1: the same time. So in the case of we Work,
Speaker 1: you know, they come in with these short term office
Speaker 1: rental offers. They come in with, as Joe puts it,
Speaker 1: office space with lots of beer available on tap in
Speaker 1: this community atmosphere. Is there not a risk that by
Speaker 1: making those two things so popular in the real estate market,
Speaker 1: that those things start becoming the norm. And we Work
Speaker 1: basically sort of arbitrage as its own edge out of
Speaker 1: the market because we've already seen some other companies like
Speaker 1: UM read us for In to start to sort of
Speaker 1: follow this model. You know, they've redone a lot of
Speaker 1: their office spaces to make them look more like we
Speaker 1: Work kind of offering. So is that a risk. That's
Speaker 1: a great question, and I think it is risk. I
Speaker 1: think that you know we Work, you know, and I
Speaker 1: think you know you you ask that question, I think
Speaker 1: in a great way, and because it really is, you know,
Speaker 1: relative to their industry peers, and so you know, I
Speaker 1: think one of the biggest sources of criticism in Silicon
Speaker 1: Valley of We Work is, hey, there's not much technology
Speaker 1: or there's no technology well, you know it's relative. You know,
Speaker 1: we Work isn't competing with Google. If they were trying
Speaker 1: to compete with Google and search, they need to hire
Speaker 1: you know, a million of the best engineers on the planet.
Speaker 1: But we're we're talking about an industry that is historically
Speaker 1: allergic to technology, and so we Works bar wasn't as
Speaker 1: high I think to to innovate and offer a better,
Speaker 1: you know, better user experience. But yeah, that's right. You know,
Speaker 1: can competitors come in and offer comparable um, you know,
Speaker 1: experiences and compete on price, and I think Regus, I mean,
Speaker 1: I think their brand spaces is you know, kind of
Speaker 1: an attempt at that. You know, there's also Industrious, which
Speaker 1: is a well funded startup that's that's taking a little
Speaker 1: bit of a different path, but it's also pretty similar.
Speaker 1: And so you know, you kind of get this attack
Speaker 1: of the clones, right, which you know, that's still I
Speaker 1: think that was referring to the old kind of laptop
Speaker 1: wars when Compact came out of nowhere to have a
Speaker 1: giant business in a couple of years, but but really
Speaker 1: got beaten up by clones. So what's gonna happen? Do
Speaker 1: we Work? Uh, They're gonna have to execute, And to me,
Speaker 1: that's the biggest question is can they execute? And you know,
Speaker 1: can they you know, focus on a few key priorities
Speaker 1: and build technology that can compound to create more and
Speaker 1: more advantage. They've got more capital than competitors, They've I
Speaker 1: think they've hired you know, arguably you know better, better
Speaker 1: folks at technology and engineering. So I think they've got
Speaker 1: the ingredients to do that. I'm not sure if they are.
Speaker 1: I just don't know, but I think that to me,
Speaker 1: the most compelling Bear criticism is that while you know
Speaker 1: that the CEO and the leadership you have a ton
Speaker 1: of credit for for building this company is so fast
Speaker 1: and doing some pretty amazing things, Uh, they haven't shown
Speaker 1: really a kind of a consistency around prioritization. And so
Speaker 1: when you look at some of the great operators in tech,
Speaker 1: like Jeff Bezos, they've been super focused and that's kind
Speaker 1: of created a culture of operational rigor, financial rigor that
Speaker 1: has um kind of percolated throughout all the different lines
Speaker 1: of business at a company like Amazon, and so for
Speaker 1: we work, I think they're getting really good people there,
Speaker 1: but that doesn't mean that they're going to be able
Speaker 1: to execute and and you know, build software and build
Speaker 1: you know, financial discipline because the growth inevitably will slow
Speaker 1: down and they will need to kind of trade growth
Speaker 1: for profitability um and they need to be able to
Speaker 1: have evidence of that as they approached the public markets.
Speaker 1: So it's a great question. I think right now, you know,
Speaker 1: their their brand does still give them an advantage. You know,
Speaker 1: it might be, you know, look a little thin, but
Speaker 1: I think a lot of times brands you know, can
Speaker 1: look thin if you look from certain direction. On the
Speaker 1: other hand, I do think that the average non expert
Speaker 1: potential you know, customer in this space would would go
Speaker 1: for we Work over a spaces or an industrious or
Speaker 1: another brand, because we Work does have that brand, but
Speaker 1: it doesn't necessarily last forever. And they really as a
Speaker 1: company are going to need to be able to to
Speaker 1: commit themselves towards focused execution, to innovate and and use
Speaker 1: more technology to build that differentiation. So to me, to me,
Speaker 1: that's really the multibility and all question is, you know,
Speaker 1: can they execute? Just so people are clear about some
Speaker 1: of the questions regarding this company's ability to focus or
Speaker 1: engage in focused execution. In two seventeen, it was reported
Speaker 1: that we Work had made an investment in a company
Speaker 1: called wave Garden, which is a company that makes wave pools.
Speaker 1: They are reading from the New York Business Journal. Spain
Speaker 1: based wave Garden is touted as an engineering company specializing
Speaker 1: mad manmade lagoons that could be used for recreation, surfing,
Speaker 1: in various water sports, other things that the company has
Speaker 1: dabbled into. I think it has like a place where
Speaker 1: you can live. They've opened up a talked about launching
Speaker 1: a grade school. So that is indeed. I mean it's
Speaker 1: almost like an understatement to ask whether this company really
Speaker 1: knows how to do uh focused execution. Joe, I can't
Speaker 1: believe you don't understand the synergy sic value of of
Speaker 1: of wave pools. I just don't think you've got this.
Speaker 1: I don't have the CEO, Adam Newman. I definitely don't
Speaker 1: have his vision any like. There have been numerous profiles
Speaker 1: of him. Business Week our publication here did a great profile.
Speaker 1: It was just a New York mad profile of him
Speaker 1: basically about you know, he's like, oh, we're not a
Speaker 1: real estate company. Where changed the world? You know, like
Speaker 1: one of very sort of classic California Silicon Valley style
Speaker 1: of talking about changing everything. I think to most people
Speaker 1: it feels like a pretty big red flag. Yeah. Look,
Speaker 1: I mean I guess the you know, the bowl case
Speaker 1: is all publicity is good publicity. But yeah, I've read
Speaker 1: a lot of this similar things, and is it is
Speaker 1: a little scary, you know that It's really hard, I think,
Speaker 1: and this is a really kind of an underappreciated phenomena
Speaker 1: when you have a startup CEO to have so much
Speaker 1: success so quickly, I think it's really hard to to
Speaker 1: not learn the wrong things, or at least some of
Speaker 1: the wrong things from success. And so that might be
Speaker 1: happening here. You know. I hope that the persona that
Speaker 1: is um that that you see when you read these pieces,
Speaker 1: you know, I hope that's kind of ironic, you know, uh,
Speaker 1: And you know, I hope he's got some people around
Speaker 1: him who are really sharp and who will question him
Speaker 1: and orn't just going to say yes. I think they've
Speaker 1: got a strong CFO. I don't know any of the
Speaker 1: C level folks personally, but I think they have a
Speaker 1: very strong discipline CFO. That's really important. So someone has
Speaker 1: to call the ce on on some of the nonsense,
Speaker 1: because I can't defend the nepotism. That yeah, that that
Speaker 1: to me, if we're talking about red flags, that's the
Speaker 1: one that I would be really focusing on because it's
Speaker 1: terrible for culture when people are being promoted and given
Speaker 1: responsibility for the wrong reasons. Now, I don't think I've
Speaker 1: got enough information to really judge if there's something that's
Speaker 1: on toward going on there, but I I you know,
Speaker 1: back to say like a Jeff Bezos, I mean, it
Speaker 1: would be ludicrous for anyone, and you know, for one
Speaker 1: of his relatives in Amazon to get promoted or to
Speaker 1: get something just because of their their last name or
Speaker 1: their their family, Like everyone would would realize that would
Speaker 1: just be kind of anathema to their culture. So I
Speaker 1: don't I hope that this is more of just kind
Speaker 1: of silly stuff that percolates in the media. Is kind
Speaker 1: of misunderstood. But but it's it's also hard because you
Speaker 1: can look at Amazon and say, well, what about Amazon,
Speaker 1: you know, and their focused I mean, aws, what the
Speaker 1: heck did that have to do with with with retail?
Speaker 1: And so we work as starting you know, a school
Speaker 1: business and this business and that business, and well, you know,
Speaker 1: I think within reason can make sense to try new
Speaker 1: products and be innovative and and so you know we work.
Speaker 1: I think actually has in many ways done a great
Speaker 1: job moving quickly. UM. They've been very aggressive on M
Speaker 1: and A. I've seen them kind of behind the scenes
Speaker 1: on some deals, and I think they're actually pretty pretty
Speaker 1: savvy as far as moving quickly. They also I think
Speaker 1: are are working with a lot of tech startups as
Speaker 1: a customer UM in ways that I think are pretty
Speaker 1: enlightened relative to most bigger companies. So, you know, so
Speaker 1: they're they're kind of ability to move fast can be
Speaker 1: a real asset. At the same time, if if they're
Speaker 1: you know, unfocused and priorities are shifting constantly, you know
Speaker 1: that that's the thing that that worries me the most.
Speaker 1: But I think they very well might have a handle
Speaker 1: that that this is an issue and they might be
Speaker 1: taking kind of proven measures to build that culture of
Speaker 1: operational discipline. If they can do that, then I really
Speaker 1: think it's a business that that could make soft Bank
Speaker 1: look really smart. But it's to me that that question
Speaker 1: around execution that is really the one that that I
Speaker 1: would be studying the most if I was trying to
Speaker 1: make a trade on the business. So there's one They're
Speaker 1: big red flag that a lot of people have focused on,
Speaker 1: aside from the sort of Silicon Valley cliche type CEO
Speaker 1: who wants to change the world, although I guess this
Speaker 1: other red flag is slightly related. But the community adjusted
Speaker 1: EBITDAW which has already been mentioned a couple of times
Speaker 1: in this conversation, this is the thing that we work
Speaker 1: trotted out ebitdawes basically earnings you know, before interest, tax,
Speaker 1: depreciation and amoritization and community adjusted ebitdas stripped out a
Speaker 1: bunch of costs, a bunch of we work costs like marketing, construction,
Speaker 1: basically things that we work. Said we're going to go
Speaker 1: away once it reached some sort of maturity level, whenever
Speaker 1: that might be. How can investors take companies seriously when
Speaker 1: it not just unveils adjusted earnings, which are, as you mentioned,
Speaker 1: you know, fairly regular in the financial industry nowadays, but
Speaker 1: when it veils adjusted earnings under the umbrella of community
Speaker 1: adjusted EBITDA because I think to a lot of people
Speaker 1: that just sounds like the company's sort of not taking
Speaker 1: itself seriously. That's a great question as well, And I
Speaker 1: don't know the strict definition behind that term. But it's
Speaker 1: really important that they are you know, very serious and
Speaker 1: incredibility building in their use of financial metrics. I think
Speaker 1: it's such an unusual business that it is reasonable that
Speaker 1: they might have some new metrics that they're sharing, you know,
Speaker 1: even when they go public and the rumor is that
Speaker 1: they've already filed, they will have to be very transparent
Speaker 1: around you know, what does that metric means specifically, and
Speaker 1: what does the business look like kind of under the
Speaker 1: you know, under more conventional metrics. UM. So that's really important.
Speaker 1: You know, they did a debt offering last summer and
Speaker 1: that you know, and so you can, you know, by
Speaker 1: I believe, you know, buy some of that debt on
Speaker 1: the open market. And it's not priced like the business
Speaker 1: is about out to go bust. Now it's not. It's
Speaker 1: not priced like treasuries. There's some risk, but I think
Speaker 1: that is a good way to look at at how
Speaker 1: does the market think about the business. And I think
Speaker 1: the um you know, the yield on that debt is
Speaker 1: is nine percent, so it's not the most high grade.
Speaker 1: But I don't think the folks that are are looking
Speaker 1: closely at the numbers and really have seen the most
Speaker 1: I don't think they're showing, um, you know, too much
Speaker 1: concerned about that, but certainly you know when they are
Speaker 1: public and filing as a public company that they're gonna
Speaker 1: have to be really rigorous in their metrics and and
Speaker 1: they're not gonna be able to be kind of cute
Speaker 1: and cheeky about about their differential metrics. So yeah, I mean,
Speaker 1: I'm with you on being pretty curious, if not skeptical,
Speaker 1: on how they're using that metric. Sandy, Corey really appreciate
Speaker 1: you coming on the Odd Lots podcast. I actually think
Speaker 1: I don't know if I would say I'm what we
Speaker 1: work bowl after talking uh to, but I feel like
Speaker 1: I have a little bit more of a grasp about
Speaker 1: why the whole thing might not be some house of
Speaker 1: cards that's on the verge of inevitable inevitable collapse. I
Speaker 1: appreciate your contrarian take and thank you for coming on. Well,
Speaker 1: thanks to Left for having me. I appreciate it. Thanks Sandy. So, Tracy,
Speaker 1: are you convinced? I mean, this is such a cop out.
Speaker 1: I think there's some value there, but I'm not necessarily
Speaker 1: convinced about the valuation. I mean, after that conversation, I
Speaker 1: sort of come out thinking that we work is sort
Speaker 1: of a leveraged play on the health of the wider economy,
Speaker 1: but also on free flowing liquidity from venture capital funds,
Speaker 1: which is sort of like a double risk to me. Yeah,
Speaker 1: I mean it seems like the way I think about
Speaker 1: it after talking to him is the at if they
Speaker 1: I guess it kind of goes back to the focused execution.
Speaker 1: But the basic offering of here is a very nice
Speaker 1: office space that has a pleasing aesthetic that it's very
Speaker 1: flexible and easy to get in and out of. It's
Speaker 1: not a bad product to offer. You could see the
Speaker 1: appeal and that if they can just make that brand
Speaker 1: really synonymous with good office space. And we've all been
Speaker 1: to most offices across New York City or whatever, excluding Bloomberg,
Speaker 1: which is fantastic, but most offices are very boring and
Speaker 1: the lighting is bad and the sort of dreary. So
Speaker 1: if you could have this sort of very good aesthetic
Speaker 1: to an office and scale it up, uh, you could
Speaker 1: see the appeal. You could see how that might be
Speaker 1: something that could scale up. It's definitely a product. I
Speaker 1: think again, like the danger in this case when it
Speaker 1: comes to the valuation is basically when this like huge
Speaker 1: story starts getting attached to what is actually a relatively
Speaker 1: simple product and the CEO is actually quite keen on
Speaker 1: on that story. You know, the things that come across
Speaker 1: in the Business Week profile and also the New York
Speaker 1: Mac pieces that he's the sort of self proclaimed visionary
Speaker 1: who wants to change the world and is starting all
Speaker 1: these new other businesses in order to do that. So
Speaker 1: I think the story is sort of part of the
Speaker 1: selling point of the company, but probably also its biggest risk. Well,
Speaker 1: and also, you know, we're talking about what would happen
Speaker 1: in a downturn, and you know, you could make the
Speaker 1: argument that, um, you know, because they're flexible offerings, maybe
Speaker 1: they won't get hurt as bad. On the other hand,
Speaker 1: you have to wonder, like how many of the we
Speaker 1: Work tenants are themselves startups, tech startups who themselves may
Speaker 1: have visions of one day selling to an uber or
Speaker 1: we Work, or getting a really big investment from soft
Speaker 1: bank one day. And so when you think of like
Speaker 1: a house of cards, you're like, how much is this
Speaker 1: all just a really leveraged bet on the same pool
Speaker 1: of money, the same pool of cheap capital, the same
Speaker 1: end where you're going to sell to a Google or
Speaker 1: Facebook or an Uber or lift for or an Amazon.
Speaker 1: And if that sort of if the liquidity evaporates, if
Speaker 1: one day SoftBank doesn't want to fund all these startups
Speaker 1: or keep backing all these unicorns, or there is a
Speaker 1: real downturn among major tech companies that could be due
Speaker 1: to regulation, whether that would just sort of ripple like
Speaker 1: a bomb through all of their you know, the bread
Speaker 1: and butter tenants that they have in New York City
Speaker 1: and Silicon Valley and other big cities around the world.
Speaker 1: Like it feels just in some sense like an incredibly
Speaker 1: concentrated bet on a particular style of doing business that
Speaker 1: we've really seen to merge over the last decade. Really
Speaker 1: it's startups all the way down, and all those startups
Speaker 1: end up going back to you know, Starbucks coffee shops
Speaker 1: when the when the bubble bursts, right like, if it's
Speaker 1: really bad, they're just gonna scope out free disks where
Speaker 1: with a power outlet and WiFi forget we work alright
Speaker 1: well on that happy note, This has been another edition
Speaker 1: of the Odd Loots podcast. I'm Tracy Alloway. You can
Speaker 1: follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthal.
Speaker 1: You can follow me on Twitter at the Stalwart, and
Speaker 1: you should follow our guests on Twitter. Sandy Corey, He's
Speaker 1: at Sandy Corey with a K. He was. It was
Speaker 1: his tweets where I saw the contrary and we work case,
Speaker 1: so you definitely want to check him out and be
Speaker 1: sure to follow our producer on Twitter, Laura Carlson at
Speaker 1: Laura M. Carlson, as well as the Bloomberg head of podcast,
Speaker 1: Francesco Leavy at Francesca Today and Bloomberg Podcast has a
Speaker 1: new home on Twitter. The handle is at podcasts. Thanks
Speaker 1: for listening, O