INSUBCONTINENT EXCLUSIVE:
What the lesson of WeWork?
Here a startup that has been a darling of Silicon Valley investors for years, whose offices and CEO have been
stunningly painted across the covers of major trade magazines and strategically deployed across major tech conference stages, including our
At its peak, the company commanded a valuation of tens of billions of dollars and was supposed to be on course for the stratosphere, joining
companies like Google and Facebook.
And then it all came crashing down, in literally a handful of days.
It easy to point to WeWork
potentially 75%+ valuation drop, its looming layoffs, the firing of its CEO, and the seeming compression of a whole heck of a lot of
investors and employee equity as a sordid disaster tale of capitalism, and venture capitalism in particular
VCs — none more so than Masayoshi Son at SoftBank — constantly overbought, oversold, and overcommitted to a company that had pretty much
no business fundamentals whatsoever.
So what the lesson of WeWork for venture capital? In a word, nothing.
Venture capitalism is about
investing in bold bets with huge, outsized returns
It meant to be risk-adjusted, both at the valuation scale but also at a portfolio scale
VCs should be buying equity at the right price to take into account every individual startup risk profile while also constructing a
portfolio that selects each of those risks for the best overall return.
For WeWork, much of those dollars were driven by SoftBank Vision
Fund, which seemed to double down again and again on the company, even at loggerheads with its own limited partners
The Vision Fund made a bet, seemingly with reasonable access to internal information, and that bet turned out to be wrong.
But a bet it
was.
Many bets in venture turn out to be duds
Sometimes you lose some of your money
Sometimes you lose all of it.
And then sometimes you make it in spades
SoftBank Son once invested $20 million into a fledging Chinese ecommerce company called Alibaba
That stake is worth around $100 billion today, excluding an $11 billion stock sale a few years ago that was recognized on SoftBank
financials earlier this year.
This is the math that Son sees in venture: 111,000,000,000 / 20,000,000 = 5,550x
There is no other asset class on the planet that will turn a dollar into thousands of dollars like venture capital.
WeWork woes don''t
Nor does the continual drop of Wag, which received $300 million from the Vision Fund and looks to be going through tough challenges.
In any
portfolio, there are going to be losses
The infamous J-curve in venture, where losses materialize far faster than gains in the early years of a fund, is alive and well — even at
the growth stage.
And WeWork isn''t even dead yet — it still has cash, and it will rebuild
Will it be the largest startup turnaround in history? Possibly
Could it go straight to bankruptcy? Sure
Will the Vision Fund make money? Well, it really depends on that preference stack and a thousand other variables to be determined in the
coming weeks, months, and years.
It all so early
My guess is that we still have about five years to go before we really start to get sufficient information to evaluate the Vision Fund
ambitions.
Along this line thoughI don''t think I just need to defend venture capitalism though, but capitalism itself.
Matt Stoller, who
has made it his mission to target big companies including Big Tech, summarizes the WeWork situation as emblematic of &counterfeit
capitalism,& a system of founding story myths and fake growth charts underwritten by venture capitalists trying to build long-term,
sustainable monopolistic companies using predatory pricing to kill off competitors.
Yet, that narrative totally misses the point of what
capital does, and what investment means
Very, very few companies (venture-backed or not) are profitable from day one
Opening a restaurant requires buying equipment and signing a lease well before any customer walks in through the front door
Ditto for software startups, which need to actually build software before a user will pay for it
Capital investment is the bridge between plans to execution and launch.
The question is how long should a company be unprofitable to goad
sales and drive revenues? A decade or two ago, it used to be that companies needed to be profitable to IPO
But why? Why precisely then should a company slow down its investment and clean up its cash flows? Why not earlier? Why not later?
In fact,
something great has happened in the last few years in the credit markets: at least some investors are increasingly positioning their
portfolios for growth rather than cash flows
They are willing to wait for profits, sometimes for years.
Or, in other words, more and more investors are thinking long-term about the
ultimate potential worth of a business.
WeWork could be profitable today
It could shutter its most recently opened locations, condense down to a handful of locations in major cities, and roll around in its
Of course the Vision Fund understands this
But why lock in small gains today when there is so much more potential lurking out there?
We should be cheering this behavior, and not
castigating it, even if WeWork itself might turn out to be a dud
The lesson of this whole saga isn''t that capitalism isn''t performing
In fact, it precisely the opposite: (venture) capitalism is performing better than ever to invest in future, long-range growth.
