Weekly readings – 30th November 2019

The bus ticket theory of genuis

What to Do When a Work Friendship Becomes Emotionally Draining

Do Ridesharing Services Increase Alcohol Consumption? Do they add net benefits to our societies?

Why Are Canadian Construction Costs So High?

The California DMV Is Making $50M a Year Selling Drivers’ Personal Information

A Brief Cartographic History of Hai Phong 1898–1968

Inside the fall of WeWork. It’s mind blowing that there continues to be more investigative pieces on how dysfunctional WeWork is. It’s inconceivable to think without public scrutiny how the company would be and how it would harm public investors’ interest. One notable quote from the piece is that WeWork’s operations make the current White House look like a well-oiled machine.

Platforms and Publishers: The End of an Era. A pretty long yet interesting read on platforms and publishers

Comparing unit economics of food delivery companies

The climate crisis has sparked a Siberian mammoth tusk gold rush

How Disneyland got its start

Prisoners have to pay to….read. This kind of heartless and soulless opportunism is morally corrupt and distasteful

PayPal Acquires Honey, What Honey Is, PayPal’s Play

The making of Bloggi

Interactive map of Apple’s supply chain. I attempted to make such a map, but Apple makes it super difficult to get the data from their weirdly designed PDF instead of a CSV. Kudos to The Prepared for this tool

Weekly readings – 16th November 2019

150 years of nature

The Slowness of Literature and the Shadow of Knowledge

It’s Not Enough to Be Right—You Also Have to Be Kind

Wework pitch deck

Wework’s issues with the SEC before IPO. It’s mind-blowing that this didn’t get reported at the time

Uber Hit With $650 Million Employment Tax Bill in New Jersey

If You’re Busy, You’re Doing Something Wrong: The Surprisingly Relaxed Lives of Elite Achievers

Rules that are likely to increase transparency in hospital pricing

How Google turned its back on its own founding philosophy for search results

Credibility of SoftBank called into question

SoftBank has been known for being a big money player. Their investment fund, the Vision Fund, worth of $100 billion is made of mostly money from the Middle Eastern governments. They have poured money into startups around the world, including big names such as ByteDance, WeWork, Uber, Slack, Flipkart and Brandless, as well as established companies such as Sprint in the US.

By all means, being able to the tune of $100 billion is a massive undertaking. It shows the trust of investors in Son, the founder and CEO of SoftBank, and his team. However, three years after the money was raised, there have been concerning signs of SoftBank’s investment strategy and execution.

SoftBank’s most infamous flop is WeWork. After pouring $9 billion into the startup, the Japanese firm had to see WeWork’s IPO scrapped, its CEO and founder ousted and to plan another $10 billion bailout at a valuation that is significantly lower than what Son and his team expected (per WSJ). It’s mind-blowing that billions of dollars were invested with what seemed to be insufficient scrutiny and due diligence

SoftBank executives were alarmed by what they found looking deeper into the company’s financials, people familiar with the matter said.

Source: WSJ

In addition to WeWork, other high profile investments such as Uber and Slack haven’t met expectation either. Uber had to scale back its valudation upon going public and since being on the stock market, neither Uber nor Slack has been trading above its initial price

Source: Financial Times

Six years ago, SoftBank bought a controlling stake in Sprint. This paragraph below from CNBC summarized how the move is six years later

SoftBank successfully engineered a sale of Sprint for $6.62 per share to T-Mobile in 2018. (State attorneys general are in court attempting to quash the deal on grounds that it will unacceptably decrease competition.) But SoftBank acquired its majority stake in Sprint for $7.65 a share in 2013. When SoftBank bought Sprint, it was the third-largest U.S. wireless carrier by subscribers. When SoftBank sold, Sprint was a distant fourth behind VerizonAT&T and T-Mobile.

But Sprint’s annual revenue has shrunk since SoftBank took over, from $35.3 billion in 2012 to $33.6 billion in the latest fiscal year. Recently, subscriber numbers have been dropping, and the company recorded a $1.9 billion loss last year. Still, Claure made over $40 million in compensation from 2015 through 2017, primarily because of stock awards that resulted from keeping the shares above $8 per share, which was only marginally higher than the price SoftBank paid in 2013.

Sprint even acknowledged in April it didn’t have a sustainable path forward in a filing to the Federal Communications Commission, asking for the regulator to approve its sale.

“Sprint is in a very difficult situation that is only getting worse,” the company said in the letter. “Sprint is losing customers — which then reduces revenues and cash flow — further limiting its ability to invest in its network and service its debt. Simply put, Sprint is not on a sustainable competitive path.”

Source: CNBC

Furthermore, troubles have surfaced at other startups that SoftBank invested in. Fair, an online car-leasing startup, announced that it would lay off 40% of its workforce this week. Wag, an on-demand dog walking firm, laid off more than 50 employees this year already. Brandless saw declining revenue by 54% compared to the same period last year and planned to cut marketing budget.

On the other side of all the problems that hit SoftBank lately, the Japanese firm does have success in the form of its investments in Alibaba and Flipkart. Plus, its capital allowed ideas and founders to come into life. Nonetheless, the struggles at companies listed above do call into question its hype, strategy, execution and credibility. When you want to raise an unprecedented amount of money and invest in an unprecedented fashion, you are put under unprecedented scrutiny and expectations.

Weekly readings – 26th October 2019

AWS Customers Rack Up Hefty Bills for Moving Data. Cloud spending isn’t as cheap as some may think.

The Heart of a Swimmer vs. the Heart of a Runner

Source: DuckDuckGo

Craftmanship in 1930 Vietnam as Seen in Paris Specialized Municipal Libraries. If you want to see a little bit of how Vietnam looked almost 100 years ago, here is a great article

Jeff Bezos’s Master Plan

Is Amazon Unstoppable?

News tab on Facebook

A great post with usrprising details on the spectacular fall of WeWork

Weekly readings – 5th October 2019

Grab Accounts for 73% of Ride-Share Trips in First Half of 2019 in Vietnam.

Retailer Adoption of Apple Pay Quickens. Since I was able to use Apple Pay on my phone, I have been using it as the first payment method, even in a city as small as Omaha. I have been a pretty happy user ever since.

Source: Loup Ventures

Comparison of smart digital assistants by Loup Ventures

Meet the Women Leading Netflix Into the Streaming Wars

The man who built his own Lamborghini

Dog-walking startup Wag raised $300 million to unleash growth. Then things got messy. SoftBank doesn’t seem to be the Midas that some hyped it to be with its massive checkbook, does it?

Latest memo from Howard Marks: On the Other Hand

Researchers Discover the Tallest Known Tree in the Amazon

Measuring Apple’s Content Distribution Arm

WeWork Used These Documents To Convince Investors It’s Worth Billions. A long but good article on the accounting jujitsu that WeWork employed

Weekly readings – 28th Sep 2019

Bike crash left Spokane man unconscious, so his Apple Watch called 911. One of those examples that will catapult the value and appeal of Apple Watch to a new height.

The Slow-Burning Success of Disney’s Bob Iger. I love the part where the article’s author talked about Bob’s work ethic and ability to keep his ego in check

The Milky Way Has Giant Bubbles at Its Center

7 Things You Didn’t Know About Plastic (and Recycling)

A Taxonomy of Moats

WeWork and Counterfeit Capitalism

Importance of governance/checks and balance

Business schools should use WeWork as a useful case study for multiple reasons. Once revered and valued at $120 billion, the startup pulled the plug on its own IPO after backlash from the market knocked its monstrous valuation down to around $15 billion. Today, its CEO resigned from his position while still remaining as the non-executive chairman.

There are several reasons that can contribute to the spectacular fall of WeWork. One of them is the severe lack of governance. The CEO controlled too much power, including leasing his buildings back to the company, charging the company $6 million for the trademark of WE brand, giving his wife power and buying companies that don’t seem to align with WeWork’s business. You can read more about WeWork in its tremendous take-down.

If there were proper checks and balance of his power, the litany of scandals and problems that contributed to the incredible stumble of the startup wouldn’t have existed. Only after its attempt to go public did the market, analysts and investors put pressure on the company and did things start to change.

The WeWork saga is very much similar to the story about Uber that I read in Super Pumped: The Battle for Uber. Uber’s founder and former CEO was ousted because of his abuse of power and behavior detrimental to the health of the company. Kalanick was removed because the Board and investors decided to put check and balance into Uber after years of keeping blind eyes.

I am actually glad to see this kind of developments take place. It means that the market and investors are doing their job to keep the founders and CEOs in check. As I grow up, I tend to believe that humans are prone to being power drunk and greed. We cannot be trusted with power without governance and checks and balance. That’s why the three-branched government was designed the way it is now. The sad thing is; however, that when you look at what is happening in politics, I really doubt the checks and balance is properly working as it should.

Weekly readings – 24th August 2019

Spotify’s pitch to podcasters: valuable listener data

Netherlands’ Building Ages. How cool is this? It must have taken quite some time and effort to build this map.

OuiWork? The quick case for WeWork as an actually disruptive business

Apple Targets Apple TV+ Launch in November, Weighs $9.99 Price After Free Trial

Where Top US Banks Are Betting On Fintech

Manufacturers Want to Quit China for Vietnam. They’re Finding It Impossible

Apple’s New TV Strategy Might Just Work

MoviePass database exposes 161 million records. Much as I am grateful to MoviePass, perhaps it’s time for the company to be shut down

Starbucks, monetary superpower. Let me give you a notable quote to get an idea of what this article is about

Starbucks has around $1.6 billion in stored value card liabilities outstanding. This represents the sum of all physical gift cards held in customer’s wallets as well as the digital value of electronic balances held in the Starbucks Mobile App.* It amounts to ~6% of all of the company’s liabilities. 

This is a pretty incredible number. Stored value card liabilities are the money that you, oh loyal Starbucks customer, use to buy coffee. What you might not realize is that these balances  simultaneously function as a loan to Starbucks. Starbucks doesn’t pay any interest on balances held in the Starbucks app or gift cards. You, the loyal customer, are providing the company with free debt. 

Now bigger than eBay, Shopify sets its sights on Amazon

Inside India’s Messy Electric Vehicle Revolution

WeWork S-1

This week, WeWork, that famed coworking space startup, filed its paperwork to go public. Here are my takeaways

The Positive Stuff

WeWork grew dramatically in terms of revenue, workstation capacity, memberships, run rate revenue and committed revenue backlog which as of June 30, 2019 is approximately eight times that as of December 31, 2017.

Enterprise memberships which refer to companies with more than 500 employees make up of 40% of all memberships and new locations seem to be filled up quickly

Net Capex per WorkStation added has gotten smaller

The not-so-positive stuff

While revenue grew fast, so did losses. WeWork lost money as quickly and almost at the same rate as they generated revenue. And the company continued to lose money to the tune of approximately $1.7 billion last year and $1.3 billion in the first half of 2019.

The company is projected to continue losing money from its operations and keep investing in new leases and workstation. The contractual obligations run up to $47 billions in the future. It remains to be seen whether the company will start generating profit and honor such a sizable obligation. On top of that, the majority of WeWork’s revenue comes from the US and recently, the inverted yield yesterday which caused one of the worst drops in the stock market’s history is seen as a sign of upcoming recession in two years. One of the concerns about WeWork is whether they can operate in recessions with huge fixed costs in the form of long-term leases.

Additionally, what stood out from WeWork’s S-1 for me is the influence of the CEO and his wife. Here is what the S-1 has to say about the Neumanns

We have entered into a number of transactions with related parties, including our significant stockholders, directors and executive officers and other employees. For example, we have entered into several transactions with our Co-Founder and Chief Executive Officer, Adam Neumann, including leases with landlord entities in which Adam has or had a significant ownership interest. We have similarly entered into leases with landlord entities in which other members of our board of directors have a significant ownership interest, such as through ARK (as defined in “Business—Our Organizational Structure—ARK”).

In the event that Adam is permanently disabled or deceased during the ten-year period commencing upon the completion of this offering, a committee will be formed for the sole purpose of selecting a new Chief Executive Officer. The composition of this committee will be as follows:

Bruce Dunlevie and Steven Langman, who are currently members of our board of directors and members of our compensation and nominating committee, to the extent they are then serving as our directors, will serve on this selection committee with Rebekah Neumann (with the size of the committee fixed at two or three, as applicable); and

if neither Bruce nor Steven is then serving as one of our directors, Rebekah will choose one or two board members who are serving at the time to serve on this selection committee with Rebekah.
In the event that Rebekah is not able to serve as described above, the trustee then acting on behalf of Rebekah and Adam’s estate will serve in all such capacities and make all such determinations. In addition, Adam and our board of directors have a process in place to designate an interim CEO in order to give the selection committee time to select a long-term CEO. Any selection of an individual to serve as our Chief Executive Officer must be made with the unanimous approval of the selection committee.

The company entered into leases with some buildings as soon as Adam acquired ownership of those buildings

For one of these four properties, we entered into a lease agreement with the landlord/partnership entity within one year following Adam acquiring his ownership interest, and in the other three cases we entered into a lease agreement with the landlord/partnership entity on the same day that Adam acquired his ownership interest. During the years ended December 31, 2016, 2017 and 2018, we made cash payments totaling $3.1 million, $5.6 million and $8.0 million to the landlord/partnership entities under these leases. During the year ended December 31, 2018, we received payments from the landlord/partnership entities in the form of tenant improvement reimbursements of $11.6 million related to these leases. During the six months ended June 30, 2019, we made cash payments to the landlord/partnership entities totaling $4.2 million under these leases and received no tenant improvement reimbursements related to these leases. As of June 30, 2019, future undiscounted minimum lease payments under these leases were approximately $236.6 million, which represents 0.5% of the Company’s total lease commitments as of June 30, 2019.

The company paid almost $6 million for the We trademark which was owned by WE Holdings, which is controlled by its own directors

In July 2019, WE Holdings LLC assigned residual rights related to “we” family trademarks to the Company, which we desired to obtain following our rebranding in early 2019. In consideration of this contribution and in lieu of paying cash, the Company issued to WE Holdings LLC partnership interests in the We Company Partnership with a fair market value of approximately $5.9 million, which was determined pursuant to a third-party appraisal.

Even though he will function without an employment contract, Adam will have total control over the direction and decisions of WeWork due to his ownership of B and C class shares. His influence isn’t particularly reassuring given how much has been written about the chaos at WeWork. I had one here

The grand vision which sometimes seems closer to delusion than ambition to me is reflected within the first sentence of the S-1 form.

Mission: “We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness”

I literally have no idea what “elevate the world’s consciousness” means and how a real estate company, not a tech one no matter how much they try to portray themselves so, can turn those words into actions and reality.

WeWork – Is its story credible?

In business, I find that all companies strive to tell a compelling story and work to back it up. Apple wants us to believe that it is a luxury brand and it is here to make our life and world better. Uber wants to be the Amazon of transportation and changes the world with its services. On a higher level, a lot of companies sell the story of their operational losses on the promise of future growth and profitability. Each firm tells its story in a different way. Each tries to differentiate themselves from the herd. Whether a company succeeds is a matter of producing evidence to back up the story.

Want consumers and investors to believe in a growth narrative in exchange for present losses?

  • What is your economies of scale?
  • How is your revenue growth?
  • How does your expense compare to revenue?
  • How are this year’s numbers compared to last year’s?
  • How big is the Total Addressable Market?
  • What is it that you do makes your company better than competitors?
  • What are some success stories from your customers?
  • What is the credibility of your team?
  • What is your plan for innovation?
  • How is your free cash flow?
  • So on and so forth

The more pieces of evidence are presented to back up the story, the more likely the story can stand the scrutinizing eyes of investors, analysts and the public. In this sense, I don’t buy the story of WeWork.

It’s tricky to put a definition on WeWork, but essentially, it rents or owns a real estate and allows individuals or companies to use the space in exchange for some fees. It has grown significantly fast since its inception and is about to go public soon this year.

WeWork now has 466,000 members working out of 485 locations in more than 100 cities in 28 countries. Its revenue has grown from $75 million in 2014 to $1.8 billion last year. Three years ago, it had 1,000 employees; today, it has 12,000 and is adding 100 every week. It has installed 22 million square feet of the glass partitions that have defined an era of workplace aesthetics, and last fall, it became Manhattan’s largest tenant. (In Central London, it is second only to the British government.) In the wake of Uber’s (disappointing) debut on the New York Stock Exchange, the We Company is now America’s most highly valued start-up, at $47 billion — at least for the moment.

Source: New Yorker

On the less sexy side, WeWork lost a staggering amount of $1.9 billion in 2018, even more than Uber, and $700 million alone the first quarter of 2019 (Business Insider). The economics of the model can pose trouble, particularly in times of an economic downturn. If an economic crisis forces knowledge workers and companies to retreat from renting out WeWork space, the company will be saddled with fixed costs which are their leases or related to owning buildings. Regus had a similar model to WeWork in 2000s, became the darling of Wall Street and went bankrupt shortly after.

In addition, there are other signs that I think are troubling at the very least.

He is known for making bombastic pronouncements, like this one at an all-company event last year: “There are 150 million orphans in the world. We want to solve this problem and give them a new family: the WeWork family.” In L.A., Neumann told his employees that the newly formed We Company would now have three prongs — WeWork, WeLive, and WeGrow — with a single, grandiose mission: “to elevate the world’s consciousness.”

As Neumann recently told a person close to the company, he believes that WeWork’s size and scale could put it in a position to help deal with some of the world’s largest problems, like the refugee crisis, saying, “I need to have the biggest valuation I can, because when countries are shooting at each other, I want them to come to me.”

Source: New Yorker

What is the focus of WeWork now? Is it to be profitable in the real estate or coworking space? Or is it to change the world and help orphans? The potential “hands on multiple jars” approach is not a welcome sign in the times when the company loses a massive sum from operations every year.

The idea that countries need to come to WeWork to solve political and social conflicts seems more delusional than wildly ambitious.

In 2017, Neumann declared that WeWork’s “valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.” He has long maintained that categorizing WeWork as a real-estate concern is too limiting; it is a “community company” with huge ambitions. “We are here in order to change the world,” Neumann said that same year. “Nothing less than that interests me.”

Source: New Yorker

What does “it is based on our energy and spirituality than it is on a multiple of revenue” even mean?

It has lately been investing more in technology to better understand how people use its space, and Shiva Rajaraman, WeWork’s CTO, described a typical WeWork to me as “an Amazon warehouse with a lot more soul.” The company uses data to improve its management of conference rooms and analyze its customers’ interests to better plan community events. (Rajaraman said the company had found that WeWork members in Brooklyn and San Francisco enjoyed “urban gardening.”) The manager of a WeWork space in Flatiron told me that “one of our best learnings” since opening was that people liked sitting at several desks in the back of the room that were near the windows. This, he said, was something they hadn’t guessed, before admitting it “makes a lot of sense.”

Source: New Yorker

More demand for coffee in the morning and people preferring desks near the windows are new revelations? It doesn’t really sound like compelling evidence of great artificial intelligence or future revenue stream.

On a practical level, SoftBank’s cash infusion helped WeWork cover the increasing costs of its whirlwind expansion as the real-estate market got more expensive. It also began spending heavily to fill all the desks it was adding. Just a few weeks after SoftBank’s investment, Shlomo Silber, the owner of Bond Collective, a  New York–based co-working company, turned on his phone at the end of Rosh Hashanah to find dozens of his customers had forwarded an email from WeWork offering to buy them out of their leases and give them as much as a year of free rent. WeWork’s occupancy rate went up, but the deals made it difficult to determine the natural demand for its product. WeWork employees in multiple cities told me that savvy companies would take advantage of a few months of free rent in one WeWork, then wait for a new location to open so they could move and take advantage of another deal.

Source: New Yorker

A high valuation for a money-losing startup needs to come with robust proof of significant demand. If demand in this case is inflated, will the valuation still be reliable or justified?

Just before last Christmas, Masayoshi Son called Neumann with bad news: A plan for SoftBank to invest $16 billion into WeWork, including $4 billion it had already promised — and to become its majority shareholder — was dead. The stock market had tanked, and the Vision Fund’s investors, including Saudi Arabia, were hesitant to invest more in real estate. SoftBank ended up investing another $1 billion in WeWork, and buying another $1 billion of stock from employees and other investors. This was more money than Neumann’s smaller rivals had raised combined, but it was still a disappointment, and presented as such in the media. At the company summit in January, Neumann told employees that news coming from outside the company was often “fake or misinformed.” (In 2017, he told the Economic Club of New York he thought fake news was “a great term.”)

Source: New Yorker

When even your biggest advocate scaled back the support and confidence…

A lot more details can be found in the profile by New Yorker. Above are just notable pieces that I think can tell a lot about the company and its CEO. Kudos to WeWork for what they have done so far. Noone should deny the credit they deserve. As they already have 24% of their desks are occupied by companies with more than 100,000 employees (Wired), there is a reason to believe that WeWork will be able to stick around, even in tough times. However, the hype and the gigantic valuation, I think, are a bit excessive. The evidence isn’t convincing enough. The evidence for concern, so far, has been, though.