WeWork vs Webvan — 20 Years Later
History doesn’t repeat itself, but it certainly does rhyme
Chris Albinson, Co-Founder & Managing Director BreakawayGrowth
Twenty years ago this month, Webvan — the online grocery delivery service — raised $375 million dollars in a blockbuster IPO. Seven months later in June 2000, they acquired their nearest competitor — the Amazon-backed HomeGrocer.com — in a $1.2B deal that would see them serve nearly 250K customers across nine cities. And yet 24 months after its first order, Webvan filed for bankruptcy, laid off their final two thousand employees, and became part of dot-com bust lore. Five-year-old Softbank Capital was some of the last money in, investing (and losing) $160.3 million.
Fast forward to 2019. The ongoing fallout surrounding WeWork has been swift, comprehensive, and inevitable. The WeWork S1 seems cartoonish in retrospect, with sweeping statements about a revolution in every part of our life — offices and apartments and daycares, both the masters of public spaces and a genuine community. CEO Adam Neumann’s well-known and widely reported transgressions, including laundering properties with WeWork loans to lease back to WeWork and selling The We Company their new name — have made a mockery of his manufactured image as a kibbutzing idealist.
JP Morgan’s Michael Cembalestt was recently quoted as saying that “WeWork is, in truth, a real-estate company caught wearing an Actual Tech Company costume before Halloween.” Shah Gilani of Money Morning slammed them by saying that “WeWork was never going to work…because the WeWork business model, which looked good to the outside world, was nothing more than a gravy train for the company’s founders, early investors, and some bankers. As a going concern, and it is barely going these days, WeWork’s grow-at-any-cost rise to riches looks more like a Ponzi scheme in hindsight.”
For many of us who have been in the tech industry for 20+ years, we have seen this movie before and it did not end well.
When unicorns — “aka Ponzi schemes” — get slaughtered, who gets hurt?
The blast wave of the WeWork implosion is hard to calibrate, but the WeWork and Webvan comparisons are too familiar to casually discard. WeWork is reportedly preparing to layoff 4,000 employees or almost one-third of its workforce. Much like the WebVan employees, the rank and file are the first to take it in the teeth while an entitled CEO walks. Webvan’s CEO was George Shaheen, who had left his excellent 30-year tenure at Accenture to join Webvan and guide it through its IPO. He left shortly afterward with an exit package worth $375,000 annually. Meanwhile, WeWork’s ex-CEO was given $1.7B to leave the board — but he remains a board observer. Neumann will be a ‘consultant’ for the company for years to come, being paid, at ~$45M per year, more than most of the highest-paid CEOs in the world.
The largest harm so far — in raw dollars, anyway — has been done to Softbank’s $100B Vision Fund, of which WeWork comprised about 10%. So far, the average retail investor has not been impacted by WeWork’s collapse, due to the suspension of the IPO. In the final stages of Webvan’s expansion, late-stage institutional investors continued pushing what essentially amounts to a Ponzi scheme, bringing banks onboard and leading retail investors to suffer the most. The knock-on effects of Webvan and other dot-com harmed the technology sector’s growth for years, and it is not an exaggeration to say that hundreds of millions of people were harmed by the speculation, to the tune of over $5 trillion dollars.
They came within days of doing it again with WeWork.
Vision Fund is repeating again the two flawed assumptions that caused the 1999 collapse:
- The first assumption is the power-law distribution of returns. Essentially, betting on the “VC Index” — making more bets and maximizing your chances of hitting the unicorn lottery. To gain access, they overvalue and overcapitalize the companies. The resulting “pay up index” is an ever-increasing pool of capital, concentrated in increasingly bad companies at high valuations. The very idea of a “Unicorn” — private companies valued at $1B+ — has become part of the problem. Since Aileen Lee invented the idea in 2013, it became a perverse incentive for manufacturing bubble valuations, attracting more capital. This return to “Get Big Fast” and the resulting capital glut is one of the root problems of WeWork and its financial cousin Uber, just as the capital glut was in 1999.
- The second assumption is that more capital will solve everything and that growth can go on forever. Essentially this says that with enough cash, a company can crush its competitors and dominate a space, thus paving their path to profitability. VC funds have been getting larger prior to the Vision Fund, but its arrival on the scene has amplified the trend. Suddenly, single investments in an early-stage company can be larger than entire funds would have been ten years ago, and valuations have ballooned. But while it can help the short-term goal of knocking out a competitor or penetrating a market, pouring money on a company is insufficient and often counterproductive as a business strategy, particularly when profitability issues haven’t been resolved.
When “capital as a strategic advantage” is combined with the “pay up VC index” by SoftBank & others investing $100Bs of investment, the result is a structural distortion of the entire economy on a systemic level. The amplification of many flawed companies is creating the same conditions we saw in 1999. VC firms, their limited partners, their underlying portfolio companies, and most worryingly retail investors are at risk from the potential fallout.
Just how large could the fallout be?
When Webvan crashed in 2000, it was a trigger for the entire tech market. It wasn’t only the speculators and wasteful companies, or the fraudsters like Worldcom who collapsed. It was also good companies with genuine capital needs who were suddenly left without a way to move forward. While a greater degree of skepticism into capital-intensive and unprofitable business models is healthy, too much fear can act like a bad fever and harm the rest of the system, and we may be getting closer to that tipping point today. In 2000, the investor & government backlash — including antitrust actions were fast and vicious. By March of 2000, the NASDAQ lost $1.75T in value in just six months and $5T in total through the rip-tide of fraud, antitrust, and capital withdrawals.
The pending collapse of WeWork will not be isolated to tech. In the real estate market alone, WeWork is one of the largest tenants in major urban cores — from 2% of all office space in Manhattan and 2.8% in downtown San Francisco — and could impact the trajectory of whole cities, wrecking the capital structure of hundreds of buildings dependant on WeWork anchor tenancy. WeWork’s $50 billion dollars of long-term outstanding lease obligations are being weighed against an unknowable amount of cash-on-hand. WeWork makes up a third of the co-working office space as a whole in the USA, the fastest-growing segment of real estate. The entire sector will be destroyed along with the building owners and associated debt holders. They are being sucked underwater by a defaulting debt sinkhole of WeWork. In much the same way, Worldcom and its fraudulent books took down the telecom sector in the dot-com era.
In Q3 2019 alone, SoftBank reported an additional paper loss of $5B, slashing its pre-bailout valuation of WeWork by 83% in 90 days, from $30B to $5 billion Their quarterly update that was one third focused on “Governance”. After WeWork, Vision Fund’s third-largest investment is Uber, with a $7B investment at $45.00 per share private valuation. As of Friday’s price of $27.01 per share would represent an additional 40% loss of $2.8B. Uber continues to burn over $1B per quarter with no plan for profitability. SoftBank has also invested in Uber’s equally unprofitable competitors around the globe — almost $1B in Ola in India, another $5B in Grab here, another $10B in Didi there. Ironically, the Vision Fund has even invested in a couple of grocery delivery companies, including $2.5B in Flipkart and $385M an Indian competitor, Grofers. Other, relatively smaller investments, including the $300M+ invested into Wag, and $375M for robot-pizza company Zume, all suffer from the same high-burn, high-investment, no-profit combination that has put WeWork and Uber under increased scrutiny.
Chamath Palihapitiya recently tweeted a further charge that SoftBank itself is a Ponzi scheme, after part of a SoftBank investor presentation was put online. He shows how SoftBank offered to pay a fixed return to preferred investors, potentially coming from the cash of new investors, and not from growth in the value of companies. In effect, new investors would be paying old investors — the definition of a Ponzi scheme. His source at SoftBank said the fund was structured to cater to the different risk appetites of its investors — and upon closer review of its main investors, the elaborate scheme seems more about moving money around global capital controls meant to limit money laundering than investing. If true, it explains why some of SoftBank’s larger investments don’t look like investments and why real/paper losses in the billions of dollars are being tolerated by their LPs.
What’s next for Softbank and the Vision Fund? Masayoshi Son, the “risk-addicted investor” has survived through crashes before, betting on Alibaba in 2000 in a deal worth billions — more than covering his losses on Webvan. But the Vision Fund, itself looks less and less promising as an investment vehicle with no Alibaba insight. SoftBank’s $160M loss on Webvan in 2000 looks tiny compared to their $8B+ in losses on WeWork and Uber — the magnitude has leaped by 50x.
A 50x scale would impact every economic sector in every country on the planet. 50x the losses of the dot-com bust would mean $250T in equity losses — as a point of reference, it is estimated the total cost of the 2008 Global financial collapse by just the US government bailout was as much as $29T caused by only subprime US mortgages. Mark Cuban posted, that “this bubble will be far worse than…2000 because the only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity.”
When a Webvan or WeWork happens, the natural reaction is for the markets to aggressively retrench. Investors pull capital out as fast as it was put in. The last money into a Ponzi scheme is not a great place to be, as Geoffrey Moore recently posted. We also do believe that a massive retrenchment from capital markets, public and private has already started and will be long-lasting. The SEC, the major investment banks, and many of the other “fiduciaries” that caused the 2000 crash to grow are seemingly asleep at the switch yet again. When investors cannot tell what is real or fraud, both good and bad companies lose access to capital for a long time.
When times get tougher, the companies that will perform the best are those with agile founders who diligently pursue capital-efficient growth and have prepared a real path to profitability. Companies like Shopify, Atlassian, Pinterest, Supercell, and Unity all came out of the great recession of 2008. That’s why BreakawayGrowth Fund is proud to have partnered with some of the sharpest teams across North America and Europe, to help them build their businesses the right way. Keep your finger on your unit economics, an eye to profitability, and more than anything else, keep your powder dry.
We would appreciate your thoughts on this post!