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Westlake Legal Group > WeWork Companies Inc

‘It’s Definitely Pretty Empty’: Why Saving WeWork Will Be Hard

Westlake Legal Group 24wework1-facebookJumbo ‘It’s Definitely Pretty Empty’: Why Saving WeWork Will Be Hard WeWork Companies Inc SOFTBANK Corporation Real Estate (Commercial) Neumann, Adam Mergers, Acquisitions and Divestitures Initial Public Offerings Co-Working Brooklyn Navy Yard (Brooklyn, NY)

Even as WeWork was scrambling to secure a financial bailout last week, Sebastian Gunningham, one of its co-chief executives, made time to oversee the opening of Dock 72, an immaculate shiplike building on the Brooklyn waterfront that houses one of the company’s newest shared working spaces.

As Mr. Gunningham posed for a ribbon cutting with the building’s owners and a local city councilman, WeWork’s expansive offices loomed over them — an embodiment of how the company overextended itself and now must try to make money after nearly burying itself in losses.

WeWork’s 220,000 square feet of space at Dock 72, about a third of the building, is far from full. The common area, offering spectacular views of Manhattan, was bustling on the day of the ribbon cutting. But it was sparsely used in the days before and after. Some firms are moving in, but most of the private offices that WeWork aims to rent out to businesses were vacant on Thursday. WeWork said the space was over 30 percent occupied, roughly the industry standard for openings.

“It’s definitely pretty empty,” said Jurrien Swarts, who moved his start-up, Stojo, which makes collapsible cups, into Dock 72 from another WeWork space in Brooklyn.

Including Dock 72, WeWork is expected to add about 10 million square feet of new office space to its bulging property portfolio in the United States and Britain this year alone. These locations, often built out at great cost, highlight the knife-edge economics confronting executives who are trying to save the company, which this week received a last-minute lifeline from SoftBank after being forced to scrap an initial public offering.

The frenetic growth under the company’s founder, Adam Neumann, may weigh it down for years and hamper the attempts to remake WeWork, which until recently was widely considered one of the world’s most valuable start-ups.

Those efforts will be overseen by Marcelo Claure, a top executive at SoftBank, which agreed on Tuesday to take control of WeWork and invest and lend the company billions of dollars. That is on top of the $9 billion that SoftBank has already put into WeWork, enabling the breakneck expansion under Mr. Neumann.

SoftBank now wants WeWork to slow its growth, focus on its core business — leasing office space, refurbishing it and renting it to “members” — and devote its energy to major markets like New York and San Francisco.

At a meeting with employees on Wednesday in Manhattan, Mr. Claure said he would focus on profits over growth. He also said there would be layoffs, but didn’t say how many, according to four people with knowledge of the event. One WeWork employee leaving the office said she was on her way to a job interview. Several senior executives besides Mr. Neumann have already left the company or have said they were on their way out.

Now, Mr. Claure, who was appointed WeWork’s executive chairman, must decide what to keep and what to excise. But stabilizing WeWork will not be simple.

Documents for the company’s initial public offering showed that WeWork was racking up huge losses and burning through billions of dollars a year.

One big reason for those losses is that WeWork is on track to add 9.9 million square feet of space this year in the United States and Britain, according to data from CoStar, which specializes in commercial real estate information. That is more than three times the space in Apple’s spaceship-shaped headquarters, and it is well more than the 6.3 million square feet WeWork added last year. In New York City, where WeWork is the largest private tenant, it has committed to take on an additional 2.6 million square feet in 2019, according to CoStar’s data.

Elsewhere, occupancy at WeWork’s prime spaces, including at several locations in Boston and San Francisco, appears to be robust. At the company’s 126th Street location in Harlem, the common area and private offices were practically full during a recent visit. A small sign on the bare wood bookshelves read, “Every day I’m hustlin.”

The emphasis on community appeals to many WeWork members. Entrepreneurs say working in one of the company’s locations can offer the prospect of collaborating and meeting new investors and customers.

Mr. Swarts, the Dock 72 tenant, said WeWork had been a huge help to his firm. Through his participation in WeWork Labs, a service for start-ups, he obtained a $75,000 investment from the company’s venture capital arm.

“I feel no small amount of appreciation, gratitude and loyalty for what the WeWork ecosystem has created for the company,” he said.

But it is not clear whether even WeWork’s busiest locations are solidly profitable.

In its securities filings, WeWork did not disclose the financial performance of its older locations, which would have had the chance to fill up and, in theory, prove themselves. International Workplace Group, one of WeWork’s biggest rivals and a publicly traded company, does provide such details.

Making money in the “shared space” business involves ruthless cost management, and a measured approach to growth, industry executives said. WeWork’s critics say it has had neither. While the company creates attractive spaces, these people said, it has spent too much doing so — and will struggle to achieve average industry profit margins.

Mark Dixon, chief executive of International Workplace Group, likens WeWork’s approach to running a hotel where room service is free. “You might have a full hotel, but you just cannot make any money,” he said.

If some locations are hopelessly unprofitable, WeWork could try to leave them before the end of the lease. But if the company does that too often, landlords will grow skittish about doing business with it. In addition, building owners have financial safeguards against WeWork’s walking away, like guarantees from the company, letters of credit and security deposits. At the end of June, such protections totaled $6 billion, according to WeWork’s securities filings.

In a statement, a WeWork executive said that given enough time, his company’s prime office spaces would be successful.

“Location and market maturity play a significant role in driving building occupancy and profitability, which we are highly focused on under our new direction,” said Nick Worswick, global head of sales at WeWork. “We look forward to delivering an even better workplace experience for our members.”

Indeed, having more streamlined operations could lead to considerable savings.

With the departure of Mr. Neumann, whom SoftBank agreed to hire as a consultant for four years at a cost of $185 million, WeWork may no longer veer into projects that distracted staff and cost the company money. Under him, WeWork set up a private school in Manhattan, WeGrow, which was run by his wife and which the company plans to shut down. It also recently scrapped a plan to expand its residential offering, WeLive, into Seattle.

And new management may save money simply by not engaging in costly acquisitions. WeWork paid $43 million for Spacious, a small co-working company, this year, according to deal documents reviewed by The New York Times. Spacious’s expenses far exceeded its revenue, according to financial statements.

The company might also have to do away with another expensive business practice — offering deep discounts to lure tenants.

Jamie Hodari, chief executive of Industrious, a rival co-working business, said Mr. Neumann had tried hard to tempt his customers away. In 2017, Mr. Hodari said, he flew to Atlanta with Mr. Neumann on a corporate jet — a luxury that few start-up executives enjoy. During the flight, Mr. Neumann asked to speak to him alone, Mr. Hodari said. What came next seemed as if it had been ripped from a made-for-TV drama: Mr. Neumann told him that he was going to “bury” Industrious, Mr. Hodari said.

First, Mr. Neumann said he would offer a year’s free rent at WeWork to Industrious customers, according to Mr. Hodari. If any stayed at Industrious, he would offer them two years free, and if any remained after that, the free period would go up to three years.

Mr. Hodari said that just under 5 percent of Industrious customers had left, and that he had easily filled their space.

“That was a scary day,” he said. “It was a really bad strategy. It suggested to customers that it was a discount brand.”

A representative for Mr. Neumann declined to comment.

WeWork may still need to offer deals to get people to sign leases, especially if the economy weakens.

A recently opened location in downtown Atlanta had few members present during two visits this week. And another new WeWork, in Moscow, was about half full.

Three members at Dock 72 said they had gotten discounts when signing up. WeWork offered 15 percent to 20 percent off the rent, one said. (The company’s published rate for use of “hot desks” at Dock 72 is $475 a month; private offices start at $930 a month.)

Kenford Peli, the chief executive of a small consulting firm, moved in as soon as Dock 72 opened, leaving another co-working company in Manhattan. Mr. Peli said he was looking forward to the chance to meet potential clients and partners. He said discounts WeWork offered were also attractive.

“It was so sweet that we immediately moved,” Mr. Peli said, declining to provide details.

Reporting was contributed by Ben Berke, Max Blau, Conor Dougherty, Oleg Matsnev, Noam Scheiber and David Yaffe-Bellany.

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

WeWork, Rejected by Wall Street, Accepts Lifeline From SoftBank

Westlake Legal Group 22wework-sub-facebookJumbo WeWork, Rejected by Wall Street, Accepts Lifeline From SoftBank WeWork Companies Inc SOFTBANK Corporation Co-Working

WeWork has agreed to be taken over by its largest outside investor, SoftBank, two people with knowledge of the matter said, in a deal that ends weeks of uncertainty for the troubled shared office space company.

SoftBank had invested about $10.5 billion in WeWork; it will now have to pour billions more into the company, cut costs and stabilize the business.

The sale marks a humbling moment for WeWork. It values the company at just under $8 billion, compared to the $47 billion that SoftBank reckoned it was worth in January, people with knowledge of the bid said on Monday.

Not long ago, WeWork had been seeking to sell shares to stock investors to keep funding its growth. But that initial public offering was scrapped last month after Wall Street investors balked at its huge losses and unusual corporate governance structure.

In addition to the takeover offer from SoftBank, WeWork’s board had also been considering a $5 billion debt financing offer from JPMorgan Chase.

The SoftBank deal will mean a huge payout for Adam Neumann, WeWork’s co-founder who stepped down as chief executive last month. Under Mr. Neumann, the company grew at a breakneck pace, drawing ardent backers like SoftBank’s chief executive, Masayoshi Son, and making Mr. Neumann wealthy.

But prospective investors for the company’s initial offering were skeptical of his leadership, and existing WeWork backers — including SoftBank — pushed for his ouster.

Yet Mr. Neumann will receive roughly $1.7 billion in consideration as part of the SoftBank deal, according to the people with knowledge of the offer. The Japanese technology giant will buy roughly $1 billion worth of WeWork shares from him, and give him about $500 million worth of financing to repay a credit line he had taken out from JPMorgan. Mr. Neumann also will receive a $185 million consulting fee.

In exchange, he will back the SoftBank deal and step down from WeWork’s board.

The Wall Street Journal previously reported the terms of the deal.

This is a developing story and will be updated.

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

WeWork Considers Rescue Plans From SoftBank and JPMorgan

Westlake Legal Group 14WEWORK-HFO-facebookJumbo WeWork Considers Rescue Plans From SoftBank and JPMorgan WeWork Companies Inc SoftBank Capital Real Estate (Commercial) Neumann, Adam JPMorgan Chase&Company Initial Public Offerings Co-Working Boards of Directors

The board of WeWork, the cash-starved purveyor of shared office space, is weighing competing financial rescue packages from SoftBank and a financial consortium led by JPMorgan Chase, according to two people with knowledge of the matter.

SoftBank, a Japanese technology giant that is already the largest outside shareholder in WeWork, is offering to take a controlling stake in the company by accelerating a $1.5 billion investment it had planned to make next year and by buying up to $3 billion in shares held by other investors, the people said. SoftBank is also offering to put together loans totaling $5 billion from a consortium of financial institutions, including SoftBank.

The JPMorgan proposal consists of several parts, including new bonds, some of which would carry high interest rates, according to people with knowledge of its plans.

The potential cash infusion comes at a critical time for WeWork, which scrapped an initial public offering and ousted its charismatic chief executive last month after Wall Street balked at its huge losses and unconventional corporate governance structure.

WeWork, once considered one of the world’s most celebrated start-ups, was valued by SoftBank at $47 billion in January but had considered selling shares in its initial public offering at a valuation as low as $15 billion. SoftBank’s latest offer to the company values it at a little less than $8 billion.

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

WeWork Considers Rescue Plans From SoftBank and JPMorgan

Westlake Legal Group 14WEWORK-HFO-facebookJumbo WeWork Considers Rescue Plans From SoftBank and JPMorgan WeWork Companies Inc SoftBank Capital Real Estate (Commercial) Neumann, Adam JPMorgan Chase&Company Initial Public Offerings Co-Working Boards of Directors

The board of WeWork, the cash-starved purveyor of shared office space, is weighing competing financial rescue packages from SoftBank and a financial consortium led by JPMorgan Chase, according to two people with knowledge of the matter.

SoftBank, a Japanese technology giant that is already the largest outside shareholder in WeWork, is offering to take a controlling stake in the company by accelerating a $1.5 billion investment it had planned to make next year and by buying up to $3 billion in shares held by other investors, the people said. SoftBank is also offering to put together loans totaling $5 billion from a consortium of financial institutions, including SoftBank.

The JPMorgan proposal consists of several parts, including new bonds, some of which would carry high interest rates, according to people with knowledge of its plans.

The potential cash infusion comes at a critical time for WeWork, which scrapped an initial public offering and ousted its charismatic chief executive last month after Wall Street balked at its huge losses and unconventional corporate governance structure.

WeWork, once considered one of the world’s most celebrated start-ups, was valued by SoftBank at $47 billion in January but had considered selling shares in its initial public offering at a valuation as low as $15 billion. SoftBank’s latest offer to the company values it at a little less than $8 billion.

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

A Hard Lesson in Silicon Valley: Profits Matter

Westlake Legal Group 08valley-facebookJumbo A Hard Lesson in Silicon Valley: Profits Matter Wilson, Fred (1961- ) WeWork Companies Inc Venture Capital Union Square Ventures Start-ups Silicon Valley (Calif) Initial Public Offerings Entrepreneurship Computers and the Internet Bird Rides Inc Benchmark Capital

SAN FRANCISCO — Fred Wilson, a venture capitalist at Union Square Ventures, recently published a blog post titled “The Great Public Market Reckoning.” In it, he argued that the narrative that had driven start-up hype and valuations for the last decade was now falling apart.

His post quickly ricocheted across Silicon Valley. Other venture capitalists, including Bill Gurley of Benchmark and Brad Feld of Foundry Group, soon weighed in with their own warnings about fiscal responsibility.

At some start-ups, entrepreneurs began behaving more cautiously. Travis VanderZanden, chief executive of the scooter start-up Bird, declared at a tech conference in San Francisco last week that his company was now focused on profit and not growth. “The challenge is to try to stay disciplined,” he said.

The moves all point to a new gospel that is starting to spread in start-up land. For the last decade, young tech companies were fueled by a wave of venture capital-funded excess, which encouraged fast growth above all else. But now some investors and start-ups are beginning to rethink that mantra and instead invoke turning a profit and generating “positive unit economics” as their new priorities.

The nascent change is being driven by the stumbles of some high-profile “unicorns” — the start-ups that were valued at $1 billion and above in the private markets — just as they reached the stock market.

The most visible of those was the office rental start-up WeWork, which dramatically ousted its chief executive and withdrew its initial public offering last month. At the same time, shares of Peloton, a fitness start-up, and SmileDirectClub, an online orthodontics company, immediately cratered after the companies went public. And Uber, Lyft and Slack — which also listed their stocks this year — have similarly dealt with falling stock prices for months.

The lackluster performances have raised questions about Silicon Valley’s start-up formula of spending lots of money to grow at the expense of profits. (All of those companies lose money.) Public market investors, it seemed, just weren’t having it.

“A lot of these highly valued companies have run into the buzz saw of Wall Street, where they’re questioning or reminding us that profitability matters,” said Patricia Nakache, a partner at Trinity Ventures, a Silicon Valley venture capital firm.

She added that she anticipated a “ripple effect” on private start-up valuations that would start with the largest, most valuable companies and trickle down to the smaller, younger ones.

For start-ups and investors that were used to heady times and big spending, that means it may be time for a reset.

Aileen Lee, an investor at Cowboy Ventures, a venture capital firm in Palo Alto, Calif., said she considered dusting off a four-year-old “winter is coming” email she had sent to start-ups in 2015, telling them to prepare for a downturn. She hasn’t revived the warning yet, she said, because “I worry about becoming the boy who cried wolf.”

Other venture capitalists are being more forward. At Eniac Ventures, a venture firm in New York and San Francisco, the partners recently combed through their companies and identified the “gross margins” — a measure of profitability — for each one, said Nihal Mehta, general partner of the firm. This was not something the firm regularly looked at, he said, but they were inspired by Mr. Wilson’s cautionary blog post.

They ultimately decided that in future meetings with entrepreneurs, they would push for more detailed financial models, even though the companies are very young, Mr. Mehta said. While Eniac had looked at this when making investments before, “now it’s more important,” he said.

Tech start-ups have long gone through different cycles of fear and loathing. When the 2008 recession began, Sequoia Capital, one of the highest-profile venture firms, called a mass meeting with its start-ups and presented a slide deck, titled “R.I.P. Good Times,” that featured a graphic of a “death spiral” and a skull.

The event was intended as a way to shock the start-ups into reining in costs to survive the downturn. Sequoia’s presentation quickly became the talk of Silicon Valley, which did not fall into as deep an economic funk as other parts of the United States.

Yet other alarms about the state of the start-up economy fell on deaf ears.

In 2015, as unicorn start-ups sucked in billions of dollars in funding and soared to stratospheric valuations, Mr. Gurley of Benchmark bemoaned “the complete absence of fear” in Silicon Valley and said “dead unicorns” would soon appear. In 2016, Jim Breyer, a venture capitalist who was an early Facebook investor, also predicted “blood in the water” for the unicorns.

But the money continued to flood into tech start-ups from overseas investors, private equity firms, corporations and SoftBank’s behemoth Vision Fund. That allowed founders to command higher valuations and delay going public. By the end of 2018, start-ups in the United States had raised a record $131 billion in venture funding, surpassing the amount collected during the late 1990s dot-com boom, according to Pitchbook and the National Venture Capital Association.

Mr. Gurley gave up on his warnings of excess. “You have to adjust to reality and play the game on the field,” he said in an interview last year.

(Complaining about high valuations is a longstanding pastime among venture capitalists, of course, since most prefer to invest their money in cheaply priced start-ups rather than expensive ones.)

This year, the warnings are being revived. In his recent blog post, Mr. Wilson wrote that many of today’s start-ups were focused on traditional physical industries like real estate, exercise or transportation. They should not command the high valuations that pure software companies — which tend to have less overhead — have, he wrote.

In several message exchanges, Mr. Wilson said he had already seen that as criticism of WeWork mounted over the last month, some start-up fundings were taking place at lower valuations and with stricter terms than the companies had hoped for.

“What I would like to see is a bit more rationality, and I’m hopeful we are going to get it,” he said.

By last week, his words appeared to be sinking in elsewhere.

At a start-up conference held by the tech publication TechCrunch at a San Francisco convention center, around 10,000 founders, investors and “innovators” watched interviews with slightly more famous founders, investors and “innovators” from a dark, cavernous room. Onstage, entrepreneurs lamented the unforgiving stock market and challenging investment environment.

Postmates, a food delivery start-up that confidentially filed to go public in February, attended the confab. The company has not yet gone public because the markets have been “choppy when it comes to growth companies,” said Bastian Lehmann, Postmates’ chief executive, at the event.

Bird, the scooter start-up, announced $275 million in fresh funding at the conference. But its chief executive, Mr. VanderZanden, said he had been able to raise that money only because his unprofitable company had taken steps this year to shore up its losses. Many scooter companies have lost their shine this year because of regulatory pushback and safety issues.

The shift toward making a profit wasn’t easy, Mr. VanderZanden said. “I’m an ex-growth guy, and sometimes it’s painful for me,” he said.

But spending fast to grow fast was just no longer feasible, he added. It is now difficult for “a growth-at-all-costs company burning hundreds of millions of dollars with negative unit economics” to get funding, he said. “This is going to be a healthy reset for the tech industry.”

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

Silicon Valley’s Mantra of Spend Big, Grow Fast? It’s Changing

Westlake Legal Group 08valley-facebookJumbo Silicon Valley’s Mantra of Spend Big, Grow Fast? It’s Changing Wilson, Fred (1961- ) WeWork Companies Inc Venture Capital Union Square Ventures Start-ups Silicon Valley (Calif) Initial Public Offerings Entrepreneurship Computers and the Internet Bird Rides Inc Benchmark Capital

SAN FRANCISCO — Fred Wilson, a venture capitalist at Union Square Ventures, recently published a blog post titled “The Great Public Market Reckoning.” In it, he argued that the narrative that had driven start-up hype and valuations for the last decade was now falling apart.

His post quickly ricocheted across Silicon Valley. Other venture capitalists, including Bill Gurley of Benchmark and Brad Feld of Foundry Group, soon weighed in with their own warnings about fiscal responsibility.

At some start-ups, entrepreneurs began behaving more cautiously. Travis VanderZanden, chief executive of the scooter start-up Bird, declared at a tech conference in San Francisco last week that his company was now focused on profit and not growth. “The challenge is to try to stay disciplined,” he said.

The moves all point to a new gospel that is starting to spread in start-up land. For the last decade, young tech companies were fueled by a wave of venture capital-funded excess, which encouraged fast growth above all else. But now some investors and start-ups are beginning to rethink that mantra and instead invoke turning a profit and generating “positive unit economics” as their new priorities.

The nascent change is being driven by the stumbles of some high-profile “unicorns” — the start-ups that were valued at $1 billion and above in the private markets — just as they reached the stock market.

The most visible of those was the office rental start-up WeWork, which dramatically ousted its chief executive and withdrew its initial public offering last month. At the same time, shares of Peloton, a fitness start-up, and SmileDirectClub, an online orthodontics company, immediately cratered after the companies went public. And Uber, Lyft and Slack — which also listed their stocks this year — have similarly dealt with falling stock prices for months.

The lackluster performances have raised questions about Silicon Valley’s start-up formula of spending lots of money to grow at the expense of profits. (All of those companies lose money.) Public market investors, it seemed, just weren’t having it.

“A lot of these highly valued companies have run into the buzz saw of Wall Street, where they’re questioning or reminding us that profitability matters,” said Patricia Nakache, a partner at Trinity Ventures, a Silicon Valley venture capital firm.

She added that she anticipated a “ripple effect” on private start-up valuations that would start with the largest, most valuable companies and trickle down to the smaller, younger ones.

For start-ups and investors that were used to heady times and big spending, that means it may be time for a reset.

Aileen Lee, an investor at Cowboy Ventures, a venture capital firm in Palo Alto, Calif., said she considered dusting off a four-year-old “winter is coming” email she had sent to start-ups in 2015, telling them to prepare for a downturn. She hasn’t revived the warning yet, she said, because “I worry about becoming the boy who cried wolf.”

Other venture capitalists are being more forward. At Eniac Ventures, a venture firm in New York and San Francisco, the partners recently combed through their companies and identified the “gross margins” — a measure of profitability — for each one, said Nihal Mehta, general partner of the firm. This was not something the firm regularly looked at, he said, but they were inspired by Mr. Wilson’s cautionary blog post.

They ultimately decided that in future meetings with entrepreneurs, they would push for more detailed financial models, even though the companies are very young, Mr. Mehta said. While Eniac had looked at this when making investments before, “now it’s more important,” he said.

Tech start-ups have long gone through different cycles of fear and loathing. When the 2008 recession began, Sequoia Capital, one of the highest-profile venture firms, called a mass meeting with its start-ups and presented a slide deck titled “R.I.P. Good Times” that featured a graphic of a “death spiral” and a skull.

The event was intended as a way to shock the start-ups into reining in costs to survive the downturn. Sequoia’s presentation quickly became the talk of Silicon Valley, which did not fall into as deep an economic funk as other parts of the United States.

Yet other alarms about the state of the start-up economy fell on deaf ears.

In 2015, as unicorn start-ups sucked in billions of dollars in funding and soared to stratospheric valuations, Mr. Gurley of Benchmark bemoaned “the complete absence of fear” in Silicon Valley and said “dead unicorns” would soon appear. In 2016, Jim Breyer, a venture capitalist who was an early Facebook investor, also predicted “blood in the water” for the unicorns.

But the money continued to flood into tech start-ups from overseas investors, private equity firms, corporations, and SoftBank’s behemoth Vision Fund. That allowed founders to command higher valuations and delay going public. By the end of 2018, start-ups in the United States had raised a record $131 billion in venture funding, surpassing the amount collected during the late 1990s dot-com boom, according to Pitchbook and the National Venture Capital Association.

Mr. Gurley gave up on his warnings of excess. “You have to adjust to reality and play the game on the field,” he said in an interview last year.

(Complaining about high valuations is a longstanding pastime among venture capitalists, of course, since most prefer to invest their money in cheaply priced start-ups rather than expensive ones.)

This year, the warnings are being revived. In his recent blog post, Mr. Wilson wrote that many of today’s start-ups are focused on traditional physical industries like real estate, exercise or transportation. They should not command the high valuations that pure software companies — which tend to have less overhead — have, he wrote.

In several message exchanges, Mr. Wilson said he has already seen that as criticism of WeWork mounted over the last month, some start-up fundings were taking place at lower valuations and with stricter terms than the companies had hoped for.

“What I would like to see is a bit more rationality and I’m hopeful we are going to get it,” he said.

By last week, his words appeared to be sinking in elsewhere.

At a start-up conference held by the tech publication TechCrunch at a San Francisco convention center, around 10,000 founders, investors and “innovators” watched interviews with slightly more famous founders, investors and “innovators” from a dark, cavernous room. Onstage, entrepreneurs lamented the unforgiving stock market and challenging investment environment.

Postmates, a food delivery start-up that confidentially filed to go public in February, attended the confab. The company has not yet gone public because the markets have been “choppy when it comes to growth companies,” said Bastian Lehmann, Postmates’ chief executive, at the event.

Bird, the scooter start-up, announced $275 million in fresh funding at the conference. But its chief executive, Mr. VanderZanden, said he was only able to raise that money because his unprofitable company had taken steps this year to shore up its losses. Many scooter companies have lost their shine this year because of regulatory pushback and safety issues.

The shift toward making a profit wasn’t easy, Mr. VanderZanden said. “I’m an ex-growth guy and sometimes it’s painful for me,” he said.

But spending fast to grow fast was just no longer feasible, he added. It is now difficult for “a growth at-all-costs company burning hundreds of millions of dollars with negative unit economics” to get funding, he said. “This is going to be a healthy reset for the tech industry.”

Real Estate, and Personal Injury Lawyers. Contact us at: https://westlakelegal.com 

Silicon Valley’s Mantra of Spend Big, Grow Fast? It’s Changing

Westlake Legal Group 08valley-facebookJumbo Silicon Valley’s Mantra of Spend Big, Grow Fast? It’s Changing Wilson, Fred (1961- ) WeWork Companies Inc Venture Capital Union Square Ventures Start-ups Silicon Valley (Calif) Initial Public Offerings Entrepreneurship Computers and the Internet Bird Rides Inc Benchmark Capital

SAN FRANCISCO — Fred Wilson, a venture capitalist at Union Square Ventures, recently published a blog post titled “The Great Public Market Reckoning.” In it, he argued that the narrative that had driven start-up hype and valuations for the last decade was now falling apart.

His post quickly ricocheted across Silicon Valley. Other venture capitalists, including Bill Gurley of Benchmark and Brad Feld of Foundry Group, soon weighed in with their own warnings about fiscal responsibility.

At some start-ups, entrepreneurs began behaving more cautiously. Travis VanderZanden, chief executive of the scooter start-up Bird, declared at a tech conference in San Francisco last week that his company was now focused on profit and not growth. “The challenge is to try to stay disciplined,” he said.

The moves all point to a new gospel that is starting to spread in start-up land. For the last decade, young tech companies were fueled by a wave of venture capital-funded excess, which encouraged fast growth above all else. But now some investors and start-ups are beginning to rethink that mantra and instead invoke turning a profit and generating “positive unit economics” as their new priorities.

The nascent change is being driven by the stumbles of some high-profile “unicorns” — the start-ups that were valued at $1 billion and above in the private markets — just as they reached the stock market.

The most visible of those was the office rental start-up WeWork, which dramatically ousted its chief executive and withdrew its initial public offering last month. At the same time, shares of Peloton, a fitness start-up, and SmileDirectClub, an online orthodontics company, immediately cratered after the companies went public. And Uber, Lyft and Slack — which also listed their stocks this year — have similarly dealt with falling stock prices for months.

The lackluster performances have raised questions about Silicon Valley’s start-up formula of spending lots of money to grow at the expense of profits. (All of those companies lose money.) Public market investors, it seemed, just weren’t having it.

“A lot of these highly valued companies have run into the buzz saw of Wall Street, where they’re questioning or reminding us that profitability matters,” said Patricia Nakache, a partner at Trinity Ventures, a Silicon Valley venture capital firm.

She added that she anticipated a “ripple effect” on private start-up valuations that would start with the largest, most valuable companies and trickle down to the smaller, younger ones.

For start-ups and investors that were used to heady times and big spending, that means it may be time for a reset.

Aileen Lee, an investor at Cowboy Ventures, a venture capital firm in Palo Alto, Calif., said she considered dusting off a four-year-old “winter is coming” email she had sent to start-ups in 2015, telling them to prepare for a downturn. She hasn’t revived the warning yet, she said, because “I worry about becoming the boy who cried wolf.”

Other venture capitalists are being more forward. At Eniac Ventures, a venture firm in New York and San Francisco, the partners recently combed through their companies and identified the “gross margins” — a measure of profitability — for each one, said Nihal Mehta, general partner of the firm. This was not something the firm regularly looked at, he said, but they were inspired by Mr. Wilson’s cautionary blog post.

They ultimately decided that in future meetings with entrepreneurs, they would push for more detailed financial models, even though the companies are very young, Mr. Mehta said. While Eniac had looked at this when making investments before, “now it’s more important,” he said.

Tech start-ups have long gone through different cycles of fear and loathing. When the 2008 recession began, Sequoia Capital, one of the highest-profile venture firms, called a mass meeting with its start-ups and presented a slide deck titled “R.I.P. Good Times” that featured a graphic of a “death spiral” and a skull.

The event was intended as a way to shock the start-ups into reining in costs to survive the downturn. Sequoia’s presentation quickly became the talk of Silicon Valley, which did not fall into as deep an economic funk as other parts of the United States.

Yet other alarms about the state of the start-up economy fell on deaf ears.

In 2015, as unicorn start-ups sucked in billions of dollars in funding and soared to stratospheric valuations, Mr. Gurley of Benchmark bemoaned “the complete absence of fear” in Silicon Valley and said “dead unicorns” would soon appear. In 2016, Jim Breyer, a venture capitalist who was an early Facebook investor, also predicted “blood in the water” for the unicorns.

But the money continued to flood into tech start-ups from overseas investors, private equity firms, corporations, and SoftBank’s behemoth Vision Fund. That allowed founders to command higher valuations and delay going public. By the end of 2018, start-ups in the United States had raised a record $131 billion in venture funding, surpassing the amount collected during the late 1990s dot-com boom, according to Pitchbook and the National Venture Capital Association.

Mr. Gurley gave up on his warnings of excess. “You have to adjust to reality and play the game on the field,” he said in an interview last year.

(Complaining about high valuations is a longstanding pastime among venture capitalists, of course, since most prefer to invest their money in cheaply priced start-ups rather than expensive ones.)

This year, the warnings are being revived. In his recent blog post, Mr. Wilson wrote that many of today’s start-ups are focused on traditional physical industries like real estate, exercise or transportation. They should not command the high valuations that pure software companies — which tend to have less overhead — have, he wrote.

In several message exchanges, Mr. Wilson said he has already seen that as criticism of WeWork mounted over the last month, some start-up fundings were taking place at lower valuations and with stricter terms than the companies had hoped for.

“What I would like to see is a bit more rationality and I’m hopeful we are going to get it,” he said.

By last week, his words appeared to be sinking in elsewhere.

At a start-up conference held by the tech publication TechCrunch at a San Francisco convention center, around 10,000 founders, investors and “innovators” watched interviews with slightly more famous founders, investors and “innovators” from a dark, cavernous room. Onstage, entrepreneurs lamented the unforgiving stock market and challenging investment environment.

Postmates, a food delivery start-up that confidentially filed to go public in February, attended the confab. The company has not yet gone public because the markets have been “choppy when it comes to growth companies,” said Bastian Lehmann, Postmates’ chief executive, at the event.

Bird, the scooter start-up, announced $275 million in fresh funding at the conference. But its chief executive, Mr. VanderZanden, said he was only able to raise that money because his unprofitable company had taken steps this year to shore up its losses. Many scooter companies have lost their shine this year because of regulatory pushback and safety issues.

The shift toward making a profit wasn’t easy, Mr. VanderZanden said. “I’m an ex-growth guy and sometimes it’s painful for me,” he said.

But spending fast to grow fast was just no longer feasible, he added. It is now difficult for “a growth at-all-costs company burning hundreds of millions of dollars with negative unit economics” to get funding, he said. “This is going to be a healthy reset for the tech industry.”

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WeWork I.P.O. Is Withdrawn as Investors Grow Wary

Westlake Legal Group 24wework3-facebookJumbo WeWork I.P.O. Is Withdrawn as Investors Grow Wary WeWork Companies Inc Stocks and Bonds Real Estate (Commercial) Neumann, Adam Initial Public Offerings Co-Working

WeWork shelved its plans for an initial public offering on Monday, a startling retreat for a company that expanded rapidly in recent years as it sought to transform commercial real estate in the world’s biggest cities.

The move is the clearest sign yet that investors are increasingly wary of ambitious young companies that have run up huge losses and might not become profitable for years.

WeWork’s parent, the We Company, aimed to sell enough shares to raise as much as $4 billion, and had lined up $6 billion in bank loans that were contingent on the I.P.O. Without a large infusion of capital, the company is expected to slam the brakes on its breakneck expansion. Analysts estimate that at its recent growth rate, We could run out of cash by the middle of next year.

Last week, Adam Neumann, We’s co-founder, resigned as chief executive after the company and its investment bankers struggled to convince money managers on Wall Street to buy its shares. Investors were put off by the company’s losses and questions about its corporate governance.

[Chief executives are finding that their idealism won’t protect them from the realities of running a business.]

WeWork has expanded so fast that it is now the largest private tenant in Manhattan and a major player in London, San Francisco and other major cities. It leases office space from landlords, refurbishes it and then rents it to individuals, small firms and large corporations like Amazon and UBS. WeWork’s customers can leave after short periods, giving them greater flexibility than they might get with a traditional lease.

Mr. Neumann offered a vision of exponential growth and claimed that the company would transform how people worked. In its I.P.O. filing the company said its mission was to “elevate the world’s consciousness.” Such prospects attracted investors that included JPMorgan Chase and Benchmark Capital. SoftBank made a big investment in January that valued WeWork at $47 billion. But in recent weeks the company and its investment bankers struggled to persuade money managers to buy shares, even at a valuation as low as $15 billion.

While WeWork’s product has proved popular, its expansion has been costly — it had an operating loss of $1.37 billion in the first half of this year — and it is not clear when it might turn a profit.

“We have decided to postpone our I.P.O. to focus on our core business, the fundamentals of which remain strong,” Artie Minson and Sebastian Gunningham, co-chief executives of the We Company, said in a statement.

They said that WeWork still had “every intention” to become a public company and that it would seek to list its shares on the stock market in the future.

Reflecting investors’ concerns about WeWork’s financial position, the price of the company’s bonds has plunged in recent days. The bonds were trading on Monday at 85 cents to the dollar, down from more than 102 cents a month ago. The yield on that debt, which moves inversely to its price, has jumped to more than 11 percent, from 7.3 percent a month earlier.

“Right now, the market is telling you the horrific risk being ascribed to this name,” said Vicki Bryan, chief executive of Bond Angle, a bond analysis firm.

Standard & Poor’s last week cut the company’s credit rating to B-, from B, citing “heightened uncertainty around the We Company’s ability to raise capital to support aggressive growth and the pressure this places on liquidity.”

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WeWork Formally Withdraws Its I.P.O. After Investors Balked

Westlake Legal Group 24wework3-facebookJumbo WeWork Formally Withdraws Its I.P.O. After Investors Balked WeWork Companies Inc Stocks and Bonds Real Estate (Commercial) Neumann, Adam Initial Public Offerings Co-Working

WeWork shelved its plans for an initial public offering on Monday, days after its chief executive resigned under pressure.

It was the latest sign of trouble at the fast-growing company, which rents out shared office space, and was until recently considered one of the world’s most valuable start-ups. But investors balked at buying shares in the company, which has run up billions of dollars in losses and does not appear to be close to turning a profit.

“We have decided to postpone our I.P.O. to focus on our core business, the fundamentals of which remain strong,” Artie Minson and Sebastian Gunningham, co-chief executives of the We Company, WeWork’s parent, said in a statement.

Mr. Minson and Mr. Gunningham took the reins of the company last week after Adam Neumann, We’s co-founder, resigned as chief executive.

This is a developing story and will be updated.

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The Week the C.E.O.s Got Smacked

One wanted to “elevate the world’s consciousness.”

Another aspired to “make a bigger difference around the world.”

A third, speaking of climate change, said, “We owe it to our children to find the right answers.”

This soaring rhetoric did not emanate from motivational speakers or religious leaders. It was uttered by wealthy chief executives hoping to curry favor with a public desperate to be inspired.

Ultimately, their idealism counted for little. Over the past week, the three men behind these lofty sentiments discovered that high-mindedness didn’t protect them from the harsh realities of running a business.

Adam Neumann stepped down as chief executive of WeWork after a botched attempt to take the company public. Devin Wenig left his role as chief of eBay after the company’s board grew impatient with poor performance. And Herbert Diess, the chief executive of Volkswagen, was charged with stock market manipulation and misleading investors. Mr. Diess remains in his job, but all week, smartphone push alerts seemed to ping with the news of executive heads rolling.

Those three executives joined the recently departed chiefs of Juul, Nissan, comScore and HSBC as reminders that at the end of the trading day, corporate chieftains are there to make shareholders money.

That seemingly rudimentary premise — that chief executives are responsible for delivering strong financial returns — has been easy to overlook in recent years. As the business world has engaged more in social and political debates, some C.E.O.s have come to believe that it is no longer enough to simply run a profit and loss statement. Instead, they are trying to inspire employees, combat climate change and take stands on moral issues, too.

“We’re in a world where we need leaders to improve the state of the world, not just the state of the bottom line,” Marc Benioff, the co-chief executive of Salesforce, said in an interview. “Every C.E.O. has this on their mind right now.”

Mr. Benioff was at the vanguard of this shift. In 2015, Salesforce was among the most vocal of the companies protesting a proposed Indiana law that he and other opponents said would permit discrimination against gay people. Since then, brands have begun taking stands more often. Soon after President Trump took office, Google, Microsoft and others protested his immigration policies. That summer, a group of chief executives who had agreed to advise the president disbanded their councils after Mr. Trump blamed “many sides” for the white supremacist violence in Charlottesville, Va.

Last month, the Business Roundtable, a group of influential chief executives, sought to redefine the role of business in society. And after a series of mass shootings, Walmart stepped into the national gun debate by limiting ammunition sales and calling on Congress to increase background checks.

“Companies, and by extension their management teams and their C.E.O.s, have a moral obligation to try to be a force for good,” Dan Schulman, the chief executive of PayPal, recently said. “I don’t think there’s any way that we can shirk that responsibility, and I don’t think there’s any way to fully stand away from the culture wars around us.”

There’s a catch, of course. Before C.E.O.s can change the world, they need to satisfy investors. “You have to deliver performance in your business,” Mr. Benioff said. “That’s table stakes.”

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Adam Neumann stepped down as C.E.O. of WeWork after a botched attempt to take the company public.CreditCole Wilson for The New York Times

That’s been easier to do of late. With the stock markets up sharply in recent years and venture capital flowing freely, some companies with mediocre — or even dismal — performance have been able to get by with little more than a good narrative.

But today, as the stock market wobbles and steeply valued start-ups face discerning public investors for the first time, not every company with an inspirational story is standing up to scrutiny.

Mr. Neumann found that out swiftly, when WeWork’s I.P.O. discussions with investors indicated the company might be valued at just $15 billion — a staggering erasure of value since January, when the co-working venture was said to be worth $47 billion. WeWork, known formally as the We Company, became something of a laughingstock in investing circles after issuing a prospectus that began, “We dedicate this to the energy of we — greater than any one of us, but inside all of us.”

“People’s radar for yoga babble is on high alert right now,” said Scott Galloway, a marketing professor at New York University.

And what is yoga babble? “It’s as if my yoga instructor went into investor relations,” Mr. Galloway said.

Devin Wenig left his role as chief executive of eBay after the company’s board grew impatient with poor performance.CreditJacob Kepler/Bloomberg

Another company that is testing the public market’s appetite for aspirational rhetoric and nonexistent profits is Peloton, which makes an internet-connected exercise bike and other gear.

Peloton bills itself as “an innovation company transforming the lives of people around the world.” The hope is that investors will focus more on that mission statement, and less on the fact that it lost $196 million in the last full year.

So far, it’s not working. Peloton started trading on Thursday and promptly fell 11 percent. Wall Street, it seems, is becoming less susceptible to the tech industry’s reality distortion field.

“Peloton is talking about delivering happiness and connecting people,” Mr. Galloway said. “No: You sell exercise equipment.”

But Peloton is hardly alone. Many of the most prominent technology companies today position themselves not so much as best-in-class operators in their category, but as virtual revolutions unto themselves.

Dropbox, an online storage company, says its mission is to “unleash the world’s creative energy by designing a more enlightened way of working.” Lyft, the ride-sharing app, says it aims to “improve people’s lives with the world’s best transportation.” Uber claims to “ignite opportunity by setting the world in motion.”

Spotify says it aims to “unlock the potential of human creativity.” Not to be outdone, Snap says that its social media app will “improve the way people live and communicate.”

Since going public over the last two years, the stock in all five of those companies has plummeted.

“Companies need a mission statement that is concrete enough to describe what they will do, as well as what they won’t do,” said Brad Smith, Microsoft’s president and chief legal officer. “If you promise too much, you risk having something that’s meaningless.”

The fact that utopian mission statements are now so commonplace stems, at least in part, from the fact that company founders are lionized, no matter their antics.

A generation ago, many founders were regarded as brilliant if crazy savants — product geniuses who weren’t to be trusted with operating a real company. The prevailing wisdom was that once a company was mature or went public, a seasoned executive should be brought in to run the show.

That changed after the success of companies like Google, Facebook and Amazon, all of which had founders who managed to turn their creations into world-eating behemoths. Now, tech-company founders are practically untouchable.

“Founders are now assigned this Christ-like association,” Mr. Galloway said. He added that this is not just a question of perception — tech founders often possess powerful voting rights that secure their control of the companies. “They’re given way too much rope to hang themselves and everyone around them.”

Witness Uber, Theranos and WeWork. Their charismatic founders raised billions of dollars and won over A-list investors before crumbling under pressure.

“We’re in a world where we need leaders to improve the state of the world, not just state of the bottom line,” Marc Benioff said.CreditEric Risberg/Associated Press

This shouldn’t have been hard to predict. Though several big tech companies have been similarly idealistic — think Google (“don’t be evil”) and Facebook (“make the world more open and connected”) — they are also wildly profitable.

When, on the other hand, aspirational rhetoric is paired with middling financial performance, there is rarely a happy ending.

The online marketplace Etsy went public in 2015. A quirky company from the outset, Etsy was helmed by Chad Dickerson, a beloved leader who prioritized generous employee benefits and earned the company B-Corp status, signifying a high level of social and environmental responsibility.

“I thought a lot about what, in addition to building shareholder value, a company can contribute to the world,” Mr. Dickerson said.

He didn’t have long to ruminate on such matters. Once Etsy was public, its stock started to fall. Soon, private equity firms were circling and activist investors were agitating for change. The Etsy board, which had been supportive of Mr. Dickerson’s agenda until then, reversed course, and he was unceremoniously fired.

“It’s not Milton Friedman’s 1970s shareholder value world anymore,” Mr. Dickerson said. “Except when it is.”

Last year, Nike made Colin Kaepernick the face of its Just Do It 30th anniversary campaign. “Believe in something. Even if it means sacrificing everything,” the ad read.

Mr. Kaepernick, the former N.F.L. quarterback who became a social justice icon for kneeling during the national anthem to protest police brutality, was a risky choice. Some customers called for a boycott and burned their shoes. Mr. Trump went after the company on Twitter, writing, “What was Nike thinking?” In the days after Nike unveiled its partnership with Mr. Kaepernick, the stock fell, losing $3.3 billion in market value.

For a moment, it looked like Nike had made a real sacrifice, putting its values on the line and paying for it with real money.

Yet after the initial furor died down, the stock rebounded. Online sales at Nike jumped 31 percent in the days after the Kaepernick ad debuted. Analysts upgraded the stock, which reached new highs.

It turns out Nike hadn’t sacrificed anything. One of the great marketers of the last 50 years, the company clearly knew what it was doing. Signing Mr. Kaepernick was a marketing tactic, and in the year since, it has done virtually nothing more with the star.

“There’s a great risk of this type of language being employed in a cyclical and opportunistic way,” Mr. Dickerson said. “I worry that these displays of conviction might actually be a lack of conviction, that it’s actually just based on market analytics.”

Sometimes efforts to support a higher purpose fail doubly, coming off as both opportunistic and ham-handed.

Johnson & Johnson introduced a Listerine mouthwash bottle sheathed in a rainbow flag to celebrate gay pride, drawing ridicule from the L.G.B.T.Q. community. Starbucks has clumsily waded into race relations more than once.

McDonald’s turned its golden arches logo upside down for International Women’s Day last year, “in honor of the extraordinary accomplishments of women everywhere and especially in our restaurants.” Online critics pounced, saying that if the fast food chain valued women so much, it should give them better pay and benefits.

“All of these companies finding their woke values is not a function of their principles,” Mr. Galloway said. “It’s a function of shareholder value.”

And then there are the companies that have decided that it is better to say nothing at all.

Blackstone, the private equity firm, did not sign on to the Business Roundtable statement.

Indra Nooyi, the former chief executive of PepsiCo, said she was willing to engage in third-rail debates only if they were relevant to the company’s broader mission. “Not all companies need to speak up about everything,” she said. “If the lofty rhetoric is not linked inextricably to the core business, you should question it.”

And Visa, the credit card processor, has assiduously stayed out of the social debates roiling the business world. “Our job is not to be dividing the country,” Al Kelly, Visa’s chief executive, said recently in an interview. “Our job is not to lecture people about what to do or what to buy. And the minute you give on guns, then what about soda? What about fur coats? What about birth control pills? What about? What about? What about?”

Mr. Kelly has reason to be worried. After all, when C.E.O.s do push for real, meaningful change, the judgment can be swift and harsh.

In 2015, David Crane was chief executive of NRG, one of the country’s largest power producers — and one of its largest polluters. Mr. Crane believed that NRG had a moral and business imperative to transition to renewable sources of power generation.

His vision for a clean energy company made Mr. Crane the talk of the industry, and animated idealistic employees. But when Mr. Crane asked the board to endorse a plan for NRG to be carbon neutral by 2040, they balked. One board member took him aside and said, “Are you crazy? You can’t say that.”

That director was right. When it became clear to investors that Mr. Crane was serious about his plans, NRG stock started to fall, and Mr. Crane was out.

In the end, it didn’t matter that Mr. Crane believed he was on the right side of history, or that his staff was behind him. “The fact that employees liked it was overwhelmed by the fact that the board didn’t like it, and investors didn’t care,” he said. (Mr. Crane, though, may have simply been ahead of his time. Since he lost his job, the cost of renewable energy has continued to decline, and several large utilities have pledged to become carbon neutral.)

Mr. Dickerson can relate. For all his efforts building Etsy’s culture and advancing environmental causes, his investors just weren’t that interested.

“At the end of the day, it’s still mostly about stock price if you’re a public company C.E.O.,” Mr. Dickerson said. “When the rubber meets the road and you’re sitting in the room with investors, they are looking at spreadsheets and asking you about what the numbers are going to look like.”

It is a lesson that many start-ups are just starting to learn. WeWork, Uber, Lyft, Spotify, Snap and Dropbox all had high hopes of becoming public market darlings. Instead, they’ve become dogs.

To some, the weak public appetite for idealistic, money-losing companies is a failure of imagination. Even on his way out, Mr. Neumann, who will keep a position as nonexecutive chairman, said his belief in the transformative power of WeWork had never been more intense.

“We have an opportunity to expand our global business to more people than ever before,” he said. “I have never believed in our business, our people and our future more.”

For others, however, the tepid response from public investors is a refreshing sign of good judgment.

“The market is prone to fits of sanity,” Mr. Galloway said. “We’re having that right now.”

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