Unlimited Capital

This post on the WeWork IPO ends with the following observation:

In fact, I would argue that the WeWork bull case and bear case have more in common than it seems: both are the logical conclusion of effectively unlimited capital.

I don’t think there is unlimited capital. If that were the case, every idea, every startup, every person would be able to get the capital they need/want.

And I see proof every day that is not the case.

But it is true that for some things, some companies, some ideas, there is effectively unlimited capital.

Probably the biggest change I have seen in my 30+ years in VC is the huge amounts of capital that are available to “big ideas” like WeWork, Uber, Bird, etc

And the questions to ponder are whether this is a temporary phase based on global macroeconomic conditions or the new normal and whether it is only true for companies at certain stages of their development.

Does Uber, now that it is a public company subject to the rules of rational capital markets, have the same unlimited access to capital it had while it was a private company?

Will WeWork, once it becomes a public company, have the same unlimited access to capital it has had in the last five years?

And what does the next economic downturn look like? Will capital availability dry up like it normally does?

I have heard the arguments why the business cycle has changed, why monetary policy is more effective now, and why rates will remain near zero for a long time.

I just don’t know if they are correct. I suspect we will find out in the next few years.


Comments (Archived):

  1. pointsnfigures

    They aren’t governments who seemingly have unlimited capital. An old professor from the Gies College of Business Paul Magelli used to say “If you don’t generate bottom line profit, what you are doing is a hobby.”

    1. Tom Labus

      and the public market should remind those companies that they are suppose to make some money.

      1. JLM

        .The problem is quite systemic. The Business Roundtable which since 1997 has published annually that the purpose of corporations is to increase shareholder value, just published a new idea wherein the purpose of shareholders is to serve stakeholders with shareholder value becoming a distant #5.This is what happens when we allow CEOs to also be the Chairman of the Board without being substantial owners of the company’s stock.http://themusingsofthebigre…I think it’s Trump’s fault.JLMwww.themusingsofthebigredca…

        1. Tom Labus

          Well call me old fashioned but how would we review and analysis a public company if that was the case? I saw that yesterday but dismissed it as some kind of misguided IR.

          1. JLM

            .We used to fixate and worry about the machines taking over and controlling mankind.The CEOs have effectively written both sides of the Employment Agreements.Where once the yardstick was the increase in shareholder value determined CEO value sharing comp. Now, the CEOs have redefined the criteria to some amorphous “do good” element for stakeholders.”Sure, we didn’t make a profit, but damn did we help the community.”This is exactly why companies like Etsy threw the B Corp overboard. It doesn’t drive performance.Remember, this is not Elon Musk saying this stuff. This is Jamie Dimon, the Chair of the Business Roundtable, the CEO/Chairman of JPMorgan Chase Co.The CEOs are taking over the machines that are taking over mankind.JLMwww.themusingsofthebigredca…

  2. Vitor Conceicao

    Yesterday I was reading that Softbank is lending 20 billion to its own employees to allow them to buy stake in their new 108 billion fund. It really looks like they are having some trouble to close the funding for the fund, might be an early signal of the end of unlimited capital.

    1. Matt A. Myers

      They just keep stacking that card pyramid higher and higher…The Saudi money I understand being invested as they likely don’t care if they even lose half the money – they just want it out of Saudi – however when their investments completely fail I do wonder if they will try to murder anyone.All the other money being invested into this scheme, structure, is just a sign to me that there’s an excess of money available that no one knows what to do with – because they didn’t actually earn the value they were able to extract from society by understanding these mechanisms.Anyway, sooner than later it will all collapse.Oh and I’d appreciate if you read my longer comment here that I just got posted, so it didn’t get in front of many people. Respond if you have time – https://avc.com/2019/08/unl

  3. Jean Petreschi

    It seems to me that “unlimited capital” has arisen for the same reason that soccer players now all sell for $100m…: because opportunities are now global. Whether it’s because of TV rights for soccer clubs or customers for startups like UBER or WeWork. Even if there is a backlash against globalisation, this opportunity is unlikely to radically change. So I suspect “unlimited capital” is here to stay.

  4. David C. Baker

    I just shake my head at WeWork. But I shook my head at other companies that turned out to be valuable contributors to the economy. The craziest thing about WeWork, too me, is to contrast it with IWG. There could not be a more stark difference, and you have to wonder what people are smoking.

    1. John Burns

      I think in time we may look back at WeWork as the poster child for unlimited capital the way we look back at the heyday of Studio 54…everyone was dying to get in and be seen and when it went bad and fell apart everyone said “I told you so.” When I think of WeWork I can’t help but think of the song, Disco Inferno. Heck, the founders already cashed out to the tune of $700 million. He got paid before having a deal with the public market. As for the investors, the unicorns have left the building, and it’s time to start racing for the exits. WeWork? I don’t think so. Will the last person at WeWork please turn out the lights?

    2. jason wright

      https://www.businessinsider…A snippet of fun;”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.”

      1. JLM

        .What kind of guy shakes down a company he founded to use the name “We” when he named the company “WeWork”.SOB charged the company — his own company — $5.9MM to use the name “We.”Where is the Board of Directors on this kind of obvious conflict of interest?The founding CEO has whipped out $700MM to date, is going to be a mega-billionaire and shakes down his own child for $5.9MM to use the name “We.”And, you would consider buying this POS?BTW, the We (WeWork) CEO does not even have an employment agreement. The entire Board needs a group rate, couples lobotomy. Who hires a guy to run a $47B company and doesn’t get a freakin’ employment agreement?How can something like this happen and nobody raises Hell about it?JLMwww.themusingsofthebigredca…

        1. jason wright

          It’s all ‘Me’.This is an abuse, of that ‘freedom’ thing, but who (‘nobody’) is there to challenge this POS, not in principle, but in reality? Be on the right side of this ‘rubric’ and all is fine and dandy, and that’s the reason why no one raises hell. Only those on the inside may, but they are all on the right side. The asymmetry of this is almost perfectly drawn. Game theory perfected.

    3. Matt A. Myers

      Hey David – I’d appreciate if you read my longer comment here I just got posted and let me know what you think, if you have time – https://avc.com/2019/08/unl

  5. Noah Rosenblatt

    I would thinkt its tied to post 2008 crisis monetary policy.I think we are in a globally engineered marketplace where risk assets current values are distorted. What would fair value be without this intervention? The negative rates around the world seem to be a symptom of this. Gold prices seem to be a symptom of this as well; that’s more about faith in what global CBs are doing. It’s a constant chase for yield.Look at SoftBank recent news and lending to employees to invest in their next fund. Is that a normal thing or potential warning sign?

    1. Matt A. Myers

      Monetary policy set via regulatory capture from industrial complexes, especially the financial industrial – including the VC complex – is certainly an umbrella or structure helping maintain this insane status quo overwhelmed by suffering and destruction of our environment.Re: SoftBank – It’s an absolute sign that the pyramid of cards is wholly going to destabilize and begin to collapse – at least noticeably within the next decade, and I’m banking on it; everything’s lining up perfectly for it – and I already pinned myIt might interest you and I’d appreciate if you took a read of my longer comment on today’s post, and if you have time, respond: https://avc.com/2019/08/unl

  6. DJL

    The IPO shifts the funding from private to public. There should be a limited number of individual investors at the end of the money funnel. (But of course it all depends on how many money managers you can convince to buy your stock.)

  7. jason wright

    “big ideas” = big market = big returns/ quasi monopoly (a safe structure for investors and their capital).Nothing is done about Amazon,Google, Facebook, et.c. and this is the signal to investors.

    1. Richard

      In the last century we had monopoly rules built to break up corporations, in this century we might need the same to break up wealth monopolization by the top 1%.

      1. jason wright

        The problem today might be that contemporary monopolies are data driven, and by definition government is and has always been data driven. The alignment of mutual shared interest there is the danger, the reason why gov may not be willing to curb the power of data monopolies, which have become (or will become) the de facto Fifth Estate.

        1. Girish Mehta

          Old frameworks worried about supply-side monopolies (e.g. Standard Oil). Supply-side monopolies can lead to price extraction from the consumer. Those frameworks are struggling with the present demand-aggregation monopolies (where the price to the customer is essentially free or is discounted). In the old world, a demand-side monopoly did not make sense. Government and Regulations will catch up.

          1. Richard

            We should exempt Publicly traded companies from monopoly laws if their US share ownership is as large as their US customer base. It’s more or less a forced savings.

      2. JLM

        .I get what you’re saying. The problem is that the top 1% are not stupid.Good luck identifying and aggregating the wealth of the top 1%.They hold their assets in geographical places — talking to you Channel Islands, Antigua, Panama, Delaware corps — that are impenetrable and they hold them in legal forms — talking to you stockless Irish companies, faceless trusts, generation skipping trusts, family limited partnerships, old school Swiss numbered accounts — that the Federales will never, ever, ever penetrate.If the Federales get close, they will move the wealth.One thing you can count on is the top 1% being nimble AF.JLMwww.themusingsofthebigredca…

        1. Richard

          1 % sounds like a small number, but in the this amounts to 3 million families in the US; let’s call it 6-10 million people. What you are taking about is 1/50 of these folks. Do you think Fred is hiding his assets in Switzerland? Assets are relatively easily to TAX. You can will start with US homes > $5 million; or any non income producing asset > $ 5 million for that matter. Sure it will lower read estate values – but non commercial real estate is more or less a Ponzi scheme. Trump get this via the salt tax cap. Even at lower wealth strata, If homes prices were dis inflated by 3 % a year, the average American would be much better off in the long run. This is coming. Tell people that you have a plan to lower housing costs by 30% – let’s people redirect investments to retirement accounts. pitch it correctly There is only so long that you’ll hold off the Elizabeth warrens of the world, she might just get it right by mistake.

        2. Matt A. Myers

          You don’t need to know who are the top 1% to displace – you simply have to build the system that disrupts the system towards a more fluid, less stagnant, freer market system.That’s also why UBI is such a trigger of fear for people – people who are indoctrinated into the existing system, the status quo of scarcity mindset – and as you highlight with your selfish beliefs that “this money of mine” that society isn’t responsible for your having the quality of life you currently have – which is absolutely ignorant bullshit, but I get it – shit sticks, it stinks, and indoctrination leads to more or lesser degrees of ignorance is bliss. The abundance mindset in comparison is freeing.

          1. JLM

            .Not only is the money mine because I EARNED it, the disposition of the money is mine and mine alone.You have absolutely no idea of how hard I worked to create wealth, the good works I have done with my money, and yet you presume to lecture and insult me with no factual basis in reality. How dare you?I served society. I went in harm’s way to ensure that our government delivered on the promises contained in the Constitution and Declaration of Independence. I didn’t just put skin in the game. I put my ass on the line and delivered.Not only did I serve myself up for freedom, I created jobs, distributed wealth through employment, opportunity, and guidance.I did stuff.The world is divided between the makers and the takers. The world is 2% doers and 98% bullshitters.The takers, the bullshitters, the liberals all have ideas as to what to do with the money and wealth that the makers and doers have created. I call bullshit on that.That is the voice of 50 years of being productive. It is the seasoned voice of experience that has seen “great” ideas bubble to the surface and disappear.If one wants to be successful — get up early, stay late, work hard, spend an hour a day reading about your profession, seek the wise counsel of those who have gone before you, and save your money.Everybody is equal at the start line, but not at the finish line. Your place at the finish line is determined by how hard you work.JLMwww.themusingsofthebigredca…

          2. Matt A. Myers

            “I did stuff.”Did you create Earth single-handedly, initiated the spark of life that lead to animals evolving, evolving humans of increasing intelligence, social, communication, and organizational skills – eventually developing money to replace bartering, sharing your goods and services between each other – and then constructed initial transportation infrastructure that evolved to what we have today, and including the infrastructure of a hospital that you likely were born in (perhaps you were home birthed) – you did all that, the money you earned wasn’t because of anything existing before you did? If you’re claiming you did all this then you’re perhaps claiming to be God?And maybe perhaps you don’t believe in evolution? Evolution certainly isn’t a concept that contradicts God or science either – those being two seeming to be the main counterarguments against evolutionary theory, as an attempt to preemptively counter an argument if you do respond that you don’t believe in evolution or a natural order of everything.It’s almost shocking that you’re so adamant and refuse to say make Amazon and other companies that are going to move 100% to automating every single task they do, that . UBI does lead to an altruistic system, where the quality of life everyone has – and that is exponentially increasing every year and with exciting innovation guiding the path of the future – shining light on how much more efficient everything will be, how quality of life through abundance mindset will – it will just be mind blowing especially when comparing how bad everything became with late stage capitalism without the counterbalance mechanism of UBI and other policies Yang has come to realize and compile for us all.Also, from my more holistic perspective you’re in the bullshitter % – but that’s just because you’re blind due to your indoctrination.What your blinders seem to be causing you to miss is that we won’t need more than “2%” of doers to take care of everything with an unimaginable quality of life, health via automation. Elon Musk’s efforts alone have initiated this path, and so long as UBI is implemented as a foundational mechanism – and “$1,000” / monthAnd least we forget that the #1 driver for this system IS STILL COMPETITION – driving people to spend money the most efficiently, where their $ buys more and more value for less and less cost, and so more and more $ will go towards systems leveraging automation to produce everything we need to not only survive but for literally everyone to thrive. People getting to decide where their “$1,000” / month goes – bypassing the inefficiency and dangers of government agencies and bureaucracy spending resources inefficiently, the regulatory capture that happens, etc..And thankfully efficiency is a beautiful thing – and only a very small few, even a single individual like Elon with this holistic understanding and the selfless drive with just enough reward to make it worth his while for all of the stress he has to deal with – a single individual like Elon moves this system forward and on an exponential growth path. And there are many more of us ready and willing to work harder than anyone else because we’re driven by caring for others, by learning these systems to understanding so we can excel ourselves and become captains of our own ship and the epic creators of the universe.And this is all tied to compassion via structures of the brain and further up along the hierarchy of the mind, soul, universe – towards reducing suffering of humanity and all beings to zero – and doing so as efficiently as possible, as our brain’s dopamine reward system being all of the reward we actually need – making the human made concept of money moot to us, quite obviously the first to find themselves on this path of accelerated learning those who are the most sensitive and who suffered great early suffering in their childhood. I say it fairly often – suffering is the greatest teacher, fortunately the majority of us don’t need to experience the extremes to then be able to learn and be guided by others role modelling how to live excellently, vibrantly, fully.https://twitter.com/ZonePhy…It’s not how hard you work, it’s how smart you work. With automation – like in mechanics beautifully demonstrated by the bicycle in the gif above – will replace the vast majority of jobs very quickly, amplifying human potential and efficiency exponentially. It’s true however there is naturally a hierarchal structure that unfolds – and in the end everyone will get what they deserve, in the positive, non-violent regard.It’s really clear to see and be open to understanding these structures if you’re not blocked from the light – it’s why #YangGang is gaining such traction, Yang isn’t just proposing UBI but his related knowledge, understanding, and important supportive policies drives the concept for his envisioned holistic system to a home run. A beautiful fucking home run.The light is going to start getting bright very soon – and you don’t have to take my word for it, you’ll see it – as role modelling and experiential learning is how people most efficiently, fluidly learn, understand.In the end I know we ultimately want the same outcome.Peace brother.P.S. You even suggest to “seek the wise counsel of those who have gone before you” yet don’t feel like you owe them nearly all of your future success from any piece of information, knowledge, that they passed onto you. You contradict yourself.

      3. Matt A. Myers

        Those kind of rules likely aren’t needed if UBI is implemented, some other interesting mechanisms might need to be put in place to guarantee there isn’t only a couple unmovable megaliths though – but even then I don’t think if a UBI-VAT mechanism is in place that will be a concern.I’d appreciate if you read my longer comment here I just got posted and let me know what you think, if you have time – https://avc.com/2019/08/unl

        1. Richard

          UBI is a fools game. Income generating assets build wealth – allowance income builds dependency

          1. Matt A. Myers

            This is a really strange argument. All of us are inherently dependant – especially dependant if using a monetary-economic system, dependant on people having money – buying power – which simply allocating permission for that permission to make things to happen once they execute on a decision for needing a product or service.We’re dependant on our environment, its resources. We’re dependent on society being stable. We’re all dependent on our parents fully until we are old enough to become more independent – but then we’re still dependant on foundations of Earth, society and its infrastructure and systems. It’s completely illogical to think anyone can ever not be dependant on something. If we all are dependent on working to be given monetary resources to then pay for things, then what happens when machines take over every role via automation – what happens to the workers and jobs that get replaced by machines? Are you suggesting the workers need to expect or demand higher pay from the companies, so they can support more and more people, protect themselves further from inevitably the growing poverty and violence – like there is now – leading to stagnancy and friction in systems, and tons of unnecessary suffering?Maybe you’re wanting to argue that it’s all part of evolution and they should suffer and die off, and we should divide into the haves and have nots via Darwinism natural selection? I don’t understand what endgame you envision with your conclusions, or what solution you propose that will solve literally all issues that giving people “$1,000” / month will?And I put the “$1,000” / month in quotes to signify that as systems and technology develops further and further including automation of more and more systems – that flow of buying power of what “$1,000” provides increases exponentially.

          2. Richard

            Good intentions are not a policy. I’ve lived in cities that accommodate homelessness and drug use and cities that do not. There were virtually no people dying on the streets in the latter, and 65k homeless in the former, living dangerously and making life dangerous. Moreover, the “undocumented folks” in LA are rarely if ever homeless. Nope it’s the US citizens who squander their benefits on drugs and alcohol (your BUI)What you fail to see is that communities will step up and create a social safety net – particularly if people are active in their communities. No one is taking about haves and haves not – movie Darwinism, and for heavens sake believe in your fellow man and woman, stop taking away the amazement of the rewards of building a family, putting a roof over your head and feeding your family. That’s going to be 95% of what life is about. Enjoy it.

    2. Matt A. Myers

      Except Amazon, Google, Facebook were first to efficiently solve foundational systems that improved efficiently exponentially with their leading metrics – and practically no one is attempting to disrupt those full ecosystems, in part because it’s a seemingly gargantuan effort – though doable.

  8. William Mougayar

    Well, we have a perfect recent case when seemingly unlimited (or easy) capital created an abundance of mediocre ICO projects, most of which have not gone anywhere. Who got funded had nothing to do with the quality of teams behind the projects.

    1. jason wright

      Yes, absolutely right.If these so-called ‘entrepreneurs’ have a care about their reputations as human beings they will be toiling away night and day to make good on their promises and deliver. We shall see.

  9. Dan Moore

    I’m curious what people think about the bullish agrument in the Stratechery post: that WeWork is essentially building the AWS of office real estate (taking a capital and planning intensive business and making it available “on demand”).That rang really true for me and if WeWork wasn’t structured the way it apparently is (I haven’t read the S-1, just reviews of it) it’d be a really attractive company because of that opportunity.

    1. David C. Baker

      The problem will come in a downturn. They are still on the hook for expensive leases and will not have sufficient capital to fund them if occupancy drops. Of course they say that in a downturn things will get BETTER because traditional companies will want more flexible RE arrangements. I’m not buying it. That argument also doesn’t account for how IWG is priced. They are a sane company, making money, and the business model is identical.

      1. JLM

        .I owned millions of SF of office space in Austin By God Texas during the 1980s and early 1990s — when the downturn came calling and settled in. Don’t cry for me, Argentina. I bought a lot of space at 20-30% of original development cost, so my numbers worked fine.I developed several “office suites” businesses that I ultimately sold to Regus. My company operated the office suites, got them full, sold the business to Regus and ended up with the profitable sale of a business and a new long term lease with Regus for the same space.It was as close to making chicken salad from chicken shit as I have ever come.The people who I leased to were, in fact, survivors from larger enterprises that were looking to downsize. They had to meet with clients face to face.Today, the big difference is this — people can work from home more effectively and meet with clients at coffee shops.You are absolutely correct.Even more importantly is the impact of price competition. When real estate goes south, the first thing that happens is the market rates dip, the troubled owners start giving space away, and the downward cycle accelerates the second a bank forecloses on a property.I watched $16/SF NNN lease rates go to $2-3/SF NNN with a year free on a five year lease with a $25/SF TIA (tenant improvement allowance). It was murder.Once prices go down, it takes a market returning to 100% occupancy before they begin to inch upward again.There is no stupidity like the stupidity of trying to catch a falling knife in the real estate business.The We (WeWork) model has no moat, no advantage, no barrier to entry. My Perfect Daughter put a deal together before she decided to found Weezie Towels.This is going to get ugly when the market demons show up. It will burn cash.JLMwww.themusingsofthebigredca…

      2. Dan Moore

        Won’t AWS be hit in a downturn, as they have built out expensive data centers and their clients may decide to cut back?Doesn’t AWS have a duration mismatch (with data center build outs being expensive and long term commitments, vs the monthly commitment I make to it)?I am not saying they are exactly the same, I am just saying the similarities are interesting.Perhaps the biggest difference is margin, where AWS gets software scale margins and we company does not. Maybe that is the key.

    2. Girish Mehta

      They have a big issue with duration mismatch. And the consequences of maturity mismatch are well known, it has happened before.

      1. JLM

        .It is even more pronounced because the underlying assets — the buildings — have a life of 100 years.The duration mismatch is exacerbated since We (WeWork) has drunk from the poisoned well of startups who are notoriously unsteady. This is fine for VCs whose numbers anticipate this vagary, but it is disastrous for commercial real estate that thinks a 5% failure rate is a disaster.JLMwww.themusingsofthebigredca…

        1. Girish Mehta

          On the other hand, WeWork is about “elevating the world’s consciousness”, (kind of like crypto is about freedom ?), so maybe there’s something there.

          1. JLM

            .Odd, I thought that was the motto of the cannabis companies. Maybe they’re smoking the same thing.JLMwww.themusingsofthebigredca…

      2. Matt A. Myers

        Hey – I’d appreciate if you read my longer comment here I just got posted and let me know what you think, if you have time – https://avc.com/2019/08/unl

    3. Matt A. Myers

      The Landlord-Rental complex is going to collapse within the next decade or so, and they won’t be able to demand, command, the rent prices.

    4. Matt A. Myers

      I must admit that I first read bullish as bullshit.

  10. Richard

    Fiat Chrysler sells at a p/e of 5. That means you’ll be paid back in 5 years and earn returns for perpetuity, while Italian bonds have a negative yield over these same 5 years. Like mlb, It looks like an allocation problem of swinging for the fences without any regard for the product it produces eg bird, bitcoin VC – and the tax problem behind it are largely responsible for this problem. OPM.

  11. Tyler Lyman |赖忠泰

    Unlimited capital seems to create too many opportunities for the company to pursue. While capital may be unlimited, organizational discipline and execution are not unlimited and result in poor prioritization and delivery. While capital is the lifeblood that fuels innovation and growth, scarcity forces concentration and clarity.

  12. Khalid

    We are not gonna have an economic donwturn. We have a clear slow growth worldwide. There are a lot of money to invest. But we luck very new and innovative products. I bet a lot on Blockchain as a technology, but blockchain is there for totally new concepts of businesses. 🙂

  13. JLM

    .If you have ever been around the institutional real estate office business (I was for a quarter of a century and started 4 different such businesses), you have to be shaking your head at the We (WeWork) S-1. It seems to be displaying a lot of amateurish (hubris could be inserted here) errors.I am going to print a hundred of them up, shred them, and use them for soil enhancement around my azaleas.They are total bullshit.I skewered it pretty good here: http://themusingsofthebigre…There are some things in life — like the science and rules of flight, the law of gravity, the business acumen of dentists — that are not open to negotiation or interpretation. Commercial real estate is one of those businesses.I don’t care how you slice it — good markets or bad — real estate is a 10% business. You make a ROI of 10% if you are really good, have a degree in engineering, an MBA in finance from an Ivy, know marketing, finance, get up early, stay late, work on the weekends, and are lucky as Hell.TEN PERCENTOf course 10% is just fine if your cost of capital is 4-5% (as it is today) and you have the cojones to leverage that money 3:1. Back in the day I used to leverage capital 20:1, but there is a story to that. I had GE Capital as my partner and they were often both the debt and the equity. Long story. Fabulous guys. I took over all their troubled RE in Texas.If you do 3:1, then you are making a 25% ROE (return on equity). Get it — 10% on the 25% equity, 5% on the 75% debt. OK, visualize this — 25% @ 10%, the equity, plus 3 X 25% @ 5% (the difference between the ROI 10% and the cost of capital 5%). Get it? Shorthand.This 25% ROE will grow 15% every 5 years if you have drafted the appropriate NNN (triple net) leases that pass along all operating costs to the tenants particularly taxes, insurance, and maintenance.Of course, you have to keep the buildings full. Therein lies the market challenge. If you don’t stay full, then you have to eat the hole in the donut. You can go bankrupt if you can’t keep the buildings full.You try to mitigate your risk by entering into good, legally defensible leases with creditworthy tenants. Did I mention these were long term leases? Long term means 15-30 years. That is no easy trick.To enter into long term leases, you first have to know the tenants and why they will be around in that time period. Law firms that have been lawyering for 100 years will be around. A law partnership specializing in startups that was formed a year ago, may not.You enter long term leases because you put a long term mortgage on the building (you pay less in principal amortization on a long term mortgage, get to swim in all that lovely positive cash flow) and you are building assets that will last for 100 years.LONG TERMWhat We (WeWork) is doing is taking long term assets and operating them for the SHORT TERM. This mismatch will cause a shit storm of Biblical proportions when there is a blip in the market or there is a national recession.There are a bunch of amateurs who have never lived through a market downturn or a national recession while holding a fist full of leases — good leases. It is bloody. I know I did it.I used to have creditworthy tenants coming in and begging for rent relief because they had entered into leases in the good times and now those rents were high compared to the market. They used to whisper, “All we want you to do, amigo, is mark our lease to market. Come on, pal. Be fair.”I would listen carefully, pay for lunch, be as friendly as I could, invite them to play golf, and remind them, “Y’all signed a thirty year lease with 15% automatic bumps every five years. I financed the building depending on those payments. If y’all want to lease any additional space — of which I, fortunately have none — I can do a market rate deal with you for that new space.”I could go on for hours as to what is wrong with the We (WeWork) concept from a real estate perspective, but I did in the link above.Commercial real estate has one big rule: “When the dentists get in, get out. When the institutions get out, get in.”Watch for when We (WeWork) opens dental clinics in their suites. They will eventually. Then, you’ll know.I will be short AF six months after the bloom is off this rose.JLMwww.themusingsofthebigredca…

    1. Richard

      Nice post – recommendation on any REITs today with these returns ?

      1. JLM

        .I recommend NOTHING, but an interesting family of REITs is server storage companies. They lease the real estate for server farms.The buildings have enormous uninterruptible power supply requirements, great Internet locations, enormous HVAC, bulletproof roofs, and very little wear and tear on the plant. Lots of clear height, no tenant improvements other than noted above.Worthy of your consideration are DLR, EQIX, CONE.I don’t see tenants settling into a server building and then leaving. I think server companies will be acquired and change their servers.Might be worth you consideration. I do NOT recommend shit.JLMwjww.themusingsofthebigredc…

    2. cavepainting

      Rocking comment and a great post on your blog. JLM at his very best ( and when not discussing Trump) is an absolute joy to read. Well played Sir.

    3. Pete Griffiths

      Just a terrific post. One of the best pieces of reality I’ve ever seen here from the voice of experience.And correct me if I’m wrong but this is a brutally efficient market. There is some differentiation on space but not a lot. This efficiency bounds feasible gains.

  14. Jud Valeski

    “now that it is a public company subject to the rules of rational capital markets” – I would argue U.S. public equities markets are very far from rational. “The majority of equity investors today don’t buy or sell stocks based on stock specific fundamentals,” said JPMorgan’s Marko Kolanovic. quote from here.

  15. Chris Phenner

    The Stratechery post (linked to atop this post) steps through the ‘AWS Bull Case,’ which is the part about WeWork I wonder about. It reminds me of the AVC series ‘Business Model Innovation,’ although I’m not sure this topic fits that series’ frame.Perhaps a separate post: If a ‘traditional’ vertical like corporate real estate has applied to it ‘SaaS Metrics’ (as WeWork does), is that enough of an ‘innovation’ to warrant a higher valuation than firms who view their business more traditionally?I think the AWS analogy is clever, but I think AWS achieves far more scale from operations than does WeWork (not that I can peer into AWS’ margins). But if WeWork’s approach significantly improves margin (scale) because it *executes like SaaS*, I wonder if their use of SaaS Metrics in-and-of-itself is a driver of that outcome.I’m wearing a raincoat as I type, awaiting tomatoes to be thrown at me to the tune of ‘We Company is not a SaaS company!’ (I know! I agree!). It’s their use of SaaS Metrics to quantify their performance that I wonder about — and if that may be more valuable.

    1. JLM

      .Most SaaS companies are not like SaaS companies think they are. One of those “S”s stands for “software.”We (WeWork) is a real estate company engaged in medieval real estate price arbitrage on the hardest asset class on the planet — a damn good business if you stay in your lane.We (WeWork) acquires control of commercial office space priced on the long end of the yield curve and tries to market it while pricing it on the short end of the same family of curves.Damn good business when it works. Shitty business when it doesn’t.More people have gone under mismatching long v short term financial pricing than any other error.This real estate stuff was invented a long time ago. It’s like sex. It wasn’t invented by this generation.JLMwww.themusingsofthebigredca…

    2. Amar

      Ben Thompson (the man behind Stratechery) clarified that in his post today. The comparison was highly superficial and even if not, Amazon is still trading 4x revenue. I don’t even know how to categorize this opportunity along that axis :)Why WeWork Isn’t AWS and the CEO ProblemThere are three important points of follow-up to yesterday’s article The WeWork IPO (although two of them are more clarifications of points I was perhaps not clear enough about, particularly the last one).First, my primary point in comparing WeWork to AWS was to emphasize just how valuable it is to convert fixed costs to variable costs; this not only provides benefits to existing businesses, it also capitalizes on and fuels new business creation. However, the comparison should not go much further than that; there plenty of other important differences between AWS and WeWork.

  16. F. Jovan Jester

    They should license the WE THE BEST trademark from DJ Khaled. That would be a great use of the IPO money.

  17. jason wright

    https://stratechery.com/201…”Everything taken together hints at a completely unaccountable executive looting a company that is running as quickly as it can from massive losses that may very well be fatal whenever the next recession hits.”Toilet paper rating classification.From the S1;”In the 111 cities in which we had locations as of June 1, 2019, we estimate that there are approximately 149 million potential members. For U.S. cities, we define potential members by the estimated number of desk jobs based on data from the Statistics of U.S. Businesses survey by the U.S. Census Bureau. For non-U.S. cities, we consider anyone in select occupations defined by the International Labor Organization — including managers, professionals, technicians and associate professionals and clerical support workers — to be potential members, because we assume that these individuals need workspace in which they have access to a desk and other services. We view this as our addressable market because of the broad variety of professions and industries among our members, the breadth of our solutions available to individuals and organizations of different types and our track record of developing new solutions in response to our members’ needs.”Isn’t AI and ML going to gut these jobs?

  18. Matt A. Myers

    “I don’t think there is unlimited capital. If that were the case, every idea, every startup, every person would be able to get the capital they need/want.”I agree with that statement only if you’re in a scarcity mindset – where adequate resources aren’t being distributed or allocated efficiently via a frictionless but managed free market, allowing abundance to flow as it is the truth, reality; energy and matter is plentiful in the universe.Obviously at this time of late stage capitalism before the 4th industrial revolution completes its transition that kills rent-seeking and regulatory capture behaviour, then this statement on the surface pattern matches with the status quo.”And the questions to ponder are whether this is a temporary phase based on global macroeconomic conditions or the new normal and whether it is only true for companies at certain stages of their development.”This scarcity mindset and thus the status quo of what systems will be “successful” is therefore an illusion. The bloat and inefficiency of the VC industrial complex will thankfully collapse over the next decade or so, allowing for capital to more efficiently allocated. Allocating capital more efficiently is in fact the main mechanism of UBI, the $1,000 / month that Andrew Yang will give to everyone – is equivalent to people literally voting with their dollars that will deliver and fund systems and organizations that they experience real benefit from – and their decisions made via micro-decisions and analysis specific to their very specific use cases, needs, and not via inefficient government programs and bureaucracy making not the best to bad decisions for them; this is how I understand of Conservatives wanting “smaller government” – in reality this mantra and understanding needs to evolve to what I said above – “let us make decisions with the money (even if it has constraints to make sure certain systems are getting funding), so we can pick who leads each agency or organizational system a healthy, successful, thriving democratic nations requires.””And what does the next economic downturn look like? Will capital availability dry up like it normally does?”It will be driven and accelerated efficiently through the foundational purpose of crowdfunding, and through trickle up mechanisms – to where UBI will fuel this powerfully like no other mechanism ever implemented so far in history and why a rapid, global transformation will stem from America’s frontier, at the lead of innovation and democracy; the most extreme cycle between the yin-Yang balance that flows constantly.”Does Uber, now that it is a public company subject to the rules of rational capital markets, have the same unlimited access to capital it had while it was a private company? Will WeWork, once it becomes a public company, have the same unlimited access to capital it has had in the last five years?”Of course not. They’re symptoms of late stage capitalism: the financial industrial complexes including the VC complex scaling companies as quickly as they can, so stock brokers/funds can transact, making fees on buying/selling – and not on actual successful investments; profit motive isn’t aligned – leading to waste and inefficiency.The only possible way they or anyone else will garner the support of unlimited capital would be if they gain support by the population, ultimately which will be determined by governance – the final layer of competition, and not merely price point which will be the initial leading metrics – and current leading metric people follow; this is also why UBI will lead to an exponential acceleration towards automating everything necessary for an ever-increasing quality of life, and where “$1,000” / month will have an exponentially growing buying power. It will be the best leaders who govern the best who will be given permission to direct whatever resources we allow them to pool because we trust them and the systems, their oversight and attention to detail including compassion.An interesting but true in the pattern matching sense is the organization/company of government of a nation/country: if Andrew Yang continually is reelected for forever – which I know isn’t a legal possibility based on US law, however could be a possible scenario for Canadian leadership – and assuming a secure democratic election process, then it’s because enough people trust his leadership to write policy and enact laws based on his methods: math with compassion.Another symptom of automation and late stage capitalism is how automation leading to pooled resources to companies, as well as pooled tax resources to governments, the first leading to regulatory capture, leading to suffocation of life, suffering, war, and careless destruction of our planet.These pooled resources on all sides has also lead to the shallow two-party system – a system that will be blown apart once Andrew Yang’s main policies are implemented, counterbalancing the influence the money of lobbyists aiming for regulatory capture, and alleviating the suffocation of structural poverty – which otherwise damages individual and community health, engagement.https://twitter.com/andrewy…Removing the suffocation/stranglehold of poverty is one important factor of UBI, the other most important factor is that it will begin to breakdown the scarcity mindset of even those who aren’t poor – as their mind will connect the dots, and baseline stress of society will decrease dramatically in a short period, which on its own will improve health outcomes as stress is tied to inflammation is tied to practically all dis-ease states.https://twitter.com/AndrewY…”And what does the next economic downturn look like? Will capital availability dry up like it normally does?”It will be driven and accelerated efficiently through the foundational purpose of crowdfunding, what’s most important, and scale through trickle up mechanisms – and to where UBI will fuel this powerfully, beautifully like no other mechanism ever implemented so far in history.People who are rent-seekers, who aren’t doing the work efficiently for the value they’re extracting – and don’t deserve that power as part in the earned position in hierarchal structure that exists in the universe, won’t exist for much longer – it won’t be acceptable to society. And it will be the leaders who are entrepreneurs – who love doing work, solving complex problems – who will be the ones to efficiently shift society from the status quo – and they will be funded exponentially more and more quickly as automation advances in depth and breadth, and compounding as different important systems for survival come into better and closer alignment.Elon Musk is clearly such a leader, as is Andrew Yang. In comparison, Elon clearly has some emotional trauma, unhealed emotional wounds, that he can heal with the right guidance to allow him to become even more efficient, powerful – while Andrew is already more grounded, balanced, and doesn’t have the same escapist path and strategy, more fear and trauma driven direction, that Elon’s developed with his quest to colonize Mars; failsafes of course are important and his work, effort, with Tesla has exponentially increased shift away from unsustainable energy practices – and likewise with SpaceX allowing us to have access to the abundant resources of the universe; his other work is equally impressive, important.https://twitter.com/AndrewY…I responded to someone who disagreed with Andrew’s take, here was my response – excluding their counters:’Something ready for disruption doesn’t mean it’s being disrupted. Can plow $ billions into seemingly “disrupting” an industry when all you’re doing is utilizing tools of VC industrial complex to “look & act as if” towards high valuation, exit market & dump risk to public market.Discovering a gap for a market needing to be filled, however valuable to society for it to be facilitated and seeing its a useful model, doesn’t equate to it being a profitable business model nor how it’s implemented being profitable.Also to add, there are solutions that do disrupt the VC and Landlord-Rental complexes, it just will take time to organize and allocate the resources necessary.Indeed, people who are rent-seekers and not entrepreneurs aren’t going to be the one to shift society from the status quo. I’m not hiring yet for my city plans – but follow or bookmark me to check back at later date. :)’On August 9th I pinned to my Twitter account a tweet predicting that Andrew Yang will win the election, and that global peace is nearing rapidly. The #YangGang already liked it 240 times, and retweeted it 45 times.@JLM:disqus – Am I starting to convince you I know what I’m talking about, just a smidge? 😛

    1. JLM

      .@mattamyers:disqusNot a chance, dude. I am getting a posse together as we speak to conduct an intervention. Where would you like to have it? I am having it catered — cold shrimp in shot glasses with cocktail sauce. Very chi chi.I love that Andy Yang is going to “give” me $1,000 as my part of the American Dream. Wow, I am so excited as to what I am going to do with it.Wait, it’s “my” money, right?JLMwww.themusingsofthebigredca…

      1. Richard

        UBI is soo wrong for soo many reasons

        1. Matt A. Myers

          I’d really like if you or JLM went through what you consider your opponents’ policy, every detail, to then breakdown for us your concerns – however like the pro-Bitcoin crowd – no one’s actually willing to expend that level of energy to help us understand your point of view, which is merely an avoidance mechanism.

      2. Matt A. Myers

        You understand the premise of the Freedom Dividend though, right? That “we” are owners of the nation and should . And you hopefully see how that replicates the pattern of a company on the stock right – yes or no, do you see that pattern match/similarity? I just want to see if you can at least be honest about that – or if you’re blocked from even acknowledging that pattern because of your stubbornness or bias.And as long as your posse are practicing non-violence and won’t lead to a violent civil war with unnecessary violence – then go at it, community engagement is important. Ultimately your misguided efforts will fail if you think you can compete with thinkers and doers of the likes of Elon Musk – that you may or may not be aware of, last week publicly stated his support specifically of Yang, his policies. I know you’re on the losing side because any amount of unnecessary suffering being allowed isn’t acceptable.

        1. JLM

          .Like all liberals when somebody does not agree with a liberal, they personalize it and begin to call names and make personal aspersions.Why can’t we just intellectually disagree and leave it at that?There is no Freedom Dividend. It is a creation meaning nothing.Andrew Yang is not going to get within a three wood of the Dem presidential nomination. Not really an insult, mind you, just a reality. The fact that Elon Musk supports Yang, means exactly what?Andrew Yang will not become the Dem nominee. Andrew Yang will not become President. Andrew Yang will not further the UBI. The UBI will not become public policy in this century.I am available to wager on any of the above.JLMwww.themusingsofthebigredca…

          1. Matt A. Myers

            Please point out the name calling I supposedly did in any of my replies to you? If it’s my observations of behaviour, that isn’t the same thing as name calling – though it’s certainly an easy claim to make that someone is name calling to try to build support for yourself, to try to strengthen your argument by weakening people’s view of me that I’m name calling.I’m asking the above too – because you may be misinterpreting things I have said and honestly believe or feel them as name calling or put downs, when they are not – and so I’d want to make sure to clarify – or at least double-check for myself, to make sure I am keeping myself in check, in line.”Why can’t we just intellectually disagree and leave it at that?”Because engagement is important – as it allows understanding to develop, whether for all parties involved or only a few. It’s also important to practice articulating via language, to develop and reflect, to check yourself on your thoughts – and for others to hopefully point out incongruencies in ones thinking.Everyone strengthens through engagement – especially if it’s uncomfortable, it’s important work everyone must do – so community can then be strong too.P.S. “Like all liberals” – labeling with me with a group is also a cheap trick to rally people emotionally, weak argument tactic.

  19. Mike

    Interesting discussion. I think there is an element of Greed and Fear in all markets. This is not rational behaviour but the markets in aggregate act rationally and will self correct, in most cases. Not without significant pain in some cases.What I find interesting, perhaps alarming, about this cycle is the lack of inflation and continued monetary easing. Seems unusual in an extended economic expansion. I recall easing in the early 2000s following the tech crash lead to the housing bubble which lead to the last recession. It’s been up and to the right since then.

  20. Pete Griffiths

    “I have heard the arguments why the business cycle has changed, why monetary policy is more effective now, and why rates will remain near zero for a long time.”I don’t buy it.

  21. Richard

    Fed Debt servicing / GDP is at a comfortable levelFed gov owns 20-35% of all retirement accounts- thus US equities, bonds, Corp debtSafest investment in the world

  22. Matt A. Myers

    I agree about the commentary – today’s post really initiated a lot of people for a topic that must be on many minds.We’re able to get away with it because their institutional structures and other systems aren’t mature, and it’s all just a very complex game of hype, of “act as if” – and there are globally new people every day being indoctrinated deeper and deeper into these systems with perverted knowledge created within the indoctrination.There’s crazy shit going on – perhaps a recent “highlight” being Jeff Epstein’s possible suicide. Luckily we won’t have to understand the deeper workings of what’s going on in order to counter it, we simply have to focus on building the systems that prevent such bad behaviour and stagnancy in systems – health, education, etc..It’s all part of a game the VC industrial complex has evolved into – which ultimately doesn’t care about long-term cycles, not longer than 10 years that is – and their goal really is the perception of successful investments, while offloading risk and the unsustainable structures to the public markets – while raising excessive amounts of money from LPs who capture so much excess value and pool it, that they don’t know what to do with – and practically give it away to whomever paints the prettiest hype picture for them – who entertains them with exciting stories and numbers and theories and so on.. and perhaps the more successful VCs leverage a track record that stems from previous investment thesis they followed – and executed on well enough – perception wise anyhow, for a 10 year period, selling that as proof points to raising further funds.It’s turning into a pretty magical ride for me seeing all of this unfold, my journey first starting so many years ago, evolving into a Man Crush – https://mattamyers.tumblr.c… – on Fred as my first introduction and teachings through Fred, AVC, and the community here – utilizing the tools that USV’s prior portfolio helped bring into existence by supporting them – now finding myself as one of the more vocal individuals attempting to counter the insanity that is the global, decentralized Ponzi-Pyramid schemes that the growing indoctrinated army of “HODLers” are trying their best to fight for – for their profits, greed as their financial incentive mechanism to be “willing” to collaborate and “work together” to make the world a better place. Sigh. Inevitably that too will collapse, sooner than they think, too.Also, I’d really appreciate getting your thoughts if you have time on my longer comment/reply I posted – I only made it more recently so it missed most of the eyeballs – https://avc.com/2019/08/unl… – thanks in advance if you’re able to. And also to say, it’s been a pleasure reading your comments and seeing your thinking evolve over these years.

  23. JLM

    .The paper is not “worthless.” That’s the problem.It is the best paper in the world.JLMwww.themusingsofthebigredca…

  24. JLM

    .Haha, sorry, Charlie. Not even close.You described that “paper” — meaning American Treasury securities held by “other countries” — as “worthless.”The blog post you link to had to do with the Obama era budgets and deficits.Not even close. Lame.Be well, amigo. Keep looking for the spots on my khaki cuffs. I’ll own up to them if you find them. Just don’t make them up, eh?JLMwww.themusingsofthebigredca…