Hello and welcome you are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit on finance.org. Some of my favorite businesses, as long term channel viewers are aware, are fake technology
companies. These are startups, usually out of California, but in recent years they've sprouted all over the world, where a charismatic founder takes a humdrum business, layers on a veneer of technology and pitches it to investors at an astronomical price, claiming that it will change the world. Now, when I say that these are my favorite businesses, I don't mean favourites to invest in our own. You'd never want to do that. But they are my favourites to read about.
And without these businesses, financial news would be really boring. And I read financial news all day long and I don't want to be bored. To maximize the entertainment value of a fake tech firm, the core business needs to be as dull as possible. Something like a window cleaning business, a sawmill or a well, a well would make a great fake tech business. The water drawn from it could be possibly recorded on the
blockchain. There could be some sort of social angle to it. Not not actually social. We don't need people actually meeting at a well that's that's out of date. It needs to be the kind of social where people only interact using their phones or with some sort of a headset, and they should only discuss how wealthy the well will eventually make them on the app. It's 2024 and that's what people want now.
Key to a fake tech business is a shameless and charismatic CEO who knows how to pump the stock price up when raising grounds of capital from VCs. The CEO needs to be irreverent, possibly have a distinctive hairstyle, and most importantly, a modern day hippie druggie vibe. VCs required that these CEOs at least appear to believe their own pitch when they're claiming that the new product has an infinite total addressable market or Tam.
And you don't need a guy pitching that his metaverse based blockchain well will bring water to the deserts and work on Mars if he doesn't seem slightly drug addled. As a serious, sober looking CEO might lead investors and journalists to ask difficult questions that can't be answered in a dreamy drug addled manner by a guy with a distinctive hairstyle who claims to see the future.
Now, our CEO can't be too wacky. If he's falling off the stage during his Ted talk, that'll raise too many difficult questions. There's a delicate balance to be maintained here. There are a lot of good examples of this type of company. In 2017, Lift announced Lift Shuttle, where passengers share a vehicle that follows a pre designated route. It involves walking to and from one of the fixed stops. It's convenient, it's affordable, and it is, of course, a boss.
Later that year, Uber actually launched a service in Seattle which allowed riders to save money by waiting for their Uber at prearranged stops, share it with strangers, and get dropped off at any point along a predetermined route. That was a bus, too. Not to be outdone, Elon Musk invented the bus one year later, but at least he added a sci-fi layer of complexity to his version.
There are other examples. Bodega, a box that can be set up in urban locations that's unlocked using an app which sells non perishable convenience store type goods. That's a vending machine. Juicero Wi-Fi enabled press that can squeeze juice out of fruits and vegetables. It cost $400.00, required a subscription and replaces your
hands. And let's not forget Peloton gym equipment with a built in iPad and a monthly subscription that was more expensive than the cost of an actual gym membership.
You can still buy one of those. This all leads me to the real master of the fake technology business, Adam Newman, the Co founder of Wework, a shared office space with a beer tap and an app that I'm reliably told didn't work, he described we work as the world's first physical social network and for quite some time managed to convince investors that it was worth $47 billion because technology.
You'll be glad to know that Adam is back in the news claiming that he wants to buy back the now bankrupt business. When we last talked about Adam on this channel, we work was on the verge of bankruptcy. Adam had walked away with $1.7 billion and he had managed to talk the venture capital firm Andreessen Horowitz into giving him $350 million for shares in his new company, Flow, which plan to transform the residential real estate rental market in an unspecified manner.
Andreessen Horowitz's $350 million investment in Newman's new business, Flow was allegedly the largest individual check that they had ever written in around the funding to a company, and the investment valued Flow at more than $1 billion before it even opened its doors. Flow claimed on its website that they would address some aspects of the US housing shortage through technology. Now that's fairly cryptic, but maybe it'll be an apartment that you can rent but with a
smartphone enabled beer tap? I don't know, as interesting as Flow sounds. Earlier this week, Dealbook reported that Adam Newman, through Flow, has been trying to buy the now bankrupt We Work, allegedly with the help of Dan Loeb's hedge fund Third Point. The Financial Times, of course, contacted Third Point to verify their involvement in the deal, and we're told that the fund had only held preliminary conversations with Flo and Adam Newman about his ideas for we
work. They went on to say that they've made no commitment to participate in any transaction, so who knows what any of this means, But at least Adam Newman is back in the news to entertain us. That's the most important part. Deal Book included in their article a link to a letter, which comes from Alex Spiro, who long term viewers of this channel will know as Jay-Z and Megan D Stallion's lawyer. Spiro has also represented non rappers like Elon Musk in his case against the Thailand cave
rescue diver. I'm fairly sure that I've already covered how Spiro and the Rapper's Killer Mike, Meek Mill, Yo Gotti, and Chance the Rapper sent a brief to the US Supreme Court detailing the ways that rap music is stigmatized and stereotyped by the legal system. That's the the kind of stuff that I cover on this channel.
Spiro is highly respected by rappers and technology executives, and thus is probably the perfect lawyer for Adam Newman. Last year, Newman attempted to explain what Flow does to the Financial Times. He explained that a young cohort he once named the We Generation are now almost the Our generation because they need to rent. Obviously, Adam doesn't need to rent. He walked away from his failed business with $1.7 billion and a plane full of weed, but that's
off topic. He explained that as a solution to the housing affordability problem, he had spent hundreds of millions of dollars buying rental apartment buildings in cities whose popularity among that demographic had grown. He said it felt like there were better ways to operate the buildings, and it felt like, frankly, there's more room for more community. Now I can't be sure, but I think by more community he means he'll pack more of them into each
apartment, which sounds nice. Anyhow, based on this letter from Alex Spiro, it sounds like the plan for Flow has changed as the letter states that since October 2022. So for quite some time Newman has been working to arrange up to a billion dollars in financing to stabilize we work, and it would appear that the new management have been mostly ignoring him, which makes him sad. Note that the letter says arrange financing, not finance.
With the $1.7 billion he walked away from the business with, only a fool would put his own money into a wealth bonfire like we work. I mean, let's be real. It's short term office leasing. The tech stuff is just made-up
to impress Marc Andreessen now. Wework was not the first business founded by Adam Newman. His first business was Crawlers, a line of unusually ugly baby clothes with sewn in knee pads, pitched to parents who worried that crawling babies are in constant pain and they need special padded clothes to alleviate that pain. Crawlers is, to date, Newman's most successful business. I don't mean that it made money.
Of course it didn't make money. The clothes were horrible, but it did lose billions less than his most famous startup. We work, and that's good, PT Barnum famously said. There's a sucker born every minute. But Adam Newman didn't need one of these newborn suckers. They probably don't have any money. He had Masayoshi son of SoftBank, who had raised $100 billion in capital and was willing to give a big chunk of it to Adam after spending less than 30 minutes talking to him.
Wework's valuation peaked at $47 billion, pumped up by funding from SoftBank, who possibly love a fake tech business more than even Kathy Wood does. It then tanked in 2019 as the heavy spending and Newman's crazy behavior sank its plans to go public. Note that COVID and working from home during the pandemic were not part of the problem.
The business was on the rocks long before that, as investors who had not travelled on Adam's private jet noticed that we work was just renting office space and was not an actual tech business, thus not worth anything close to $47 billion. Adam managed to lose $14 billion for his biggest investor, SoftBank. Well, I don't know, SoftBank actually lost their own money by valuing some office buildings filled with IKEA furniture as if it was a software business.
But actually, SoftBank didn't really lose their own money either. Most of the money came from the Saudi Arabia sovereign wealth fund. And if the Saudi Arabian sovereign wealth fund hadn't blown the money on SoftBank, they would have blown it on Credit Suisse or NEON, the 110 mile long city that they're building, which guarantees that inhabitants are always the maximum distance from wherever they need to go. At any point in time, one way or another, this money was going to
be vaporized. So we only have to feel so bad now. Journalists at the Financial Times this week spoke to a number of the creditors, advisors and other people involved in We Work bankruptcy who refused to comment on the record given that they are in the midst of legal proceedings. But off the record, they expressed doubts that Newman could regain control of We Work, which is going through bankruptcy and is still plagued
with problems. Tracing back to his time in charge, they told the FT that they had no advanced conversations with Newman and that the firm was proceeding with its previous plan to hand over a restructured company to creditors by wiping away nearly all of its $4.2 billion of debt in bankruptcy. The letter from Newman's lawyer proposes $200 million of financing, which is not nearly enough to solve Weworks actual problems.
But this debt would come in senior to the existing debt at We Work and would likely affect who was in control of the company once it emerges from bankruptcy. Amusingly, the letter wraps up by stating that Newman's management expertise would likely add significant value to the firm. While of course it's Newman's management expertise that wiped out billions of dollars of investors funds landing, We work in bankruptcy.
Matt Levine at Bloomberg argues that buying We work out of bankruptcy would likely require paying off at least some of the $4.2 billion in debt. The current bankruptcy does not involve paying off any of the debt. Around $3.7 billion at 1st and 2nd lien debt would swap their debt into equity and own the surviving company, while the unsecured lenders would get nothing.
Under the current plan, Levine argues that buying the company out of bankruptcy might require paying off the most senior debt in full, the $3.7 billion, or giving the lender some mix of cash and equity in the surviving company. The Deal Book article argues that the company could be sold for as little as $500 million, which is pocket change for Newman. But let's be serious, he's not going to put his own money into this.
It would be difficult at this point to spin the value of the company up again now that people realize that it's just office rentals and not a tech business. Thanks for tuning into this week's podcast. If you enjoyed it, please forward a link to a friend so that the podcast can grow. Have a great day and talk to you again soon. Bye. If you enjoyed this episode, be sure to subscribe so you're notified when a new episode is
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