The post-WeWork economy
In 2015 the World Economic Forum surveyed more than 800 business executive and technology experts, asking respondents if they believed if certain technologies would reach a tipping point of social integration before 2025.
Would at least ten percent of reading glasses connect to the internet by 2025? 86.5 percent of respondents said yes.
Would driverless cars equal ten percent of all cars on U.S. roads before 2025? 78.2 percent said yes.
How about a functional 3D-printed liver by 2025? 75.4 percent said yes.
2025 is only a four years and a month away. I am confident in betting against the above predictions. One reason: Who wants to wear glasses connected to the internet? Another reason: The American venture capital industry is buckling under its own weight. (I’ll leave to others if they would like to use the term, “bubble.”)
The New Yorker’s Charles Duhigg expose of WeWork, published last week, sounded an alarm. In painting a picture of a company in disarray, complete with predictable stories of WeWork employees having sex in the stairwells and CEO Adam Neumann openly smoking marijuana in his office, Duhigg points the finger squarely at the people responsible for WeWork’s catastrophic collapse: the board that enabled it by putting its own short-term profit ahead of its responsibility to provide oversight.
Stories like that of WeWork don’t happen in a functioning economy. Here are a few worrisome trends that make me believe the WeWork implosion marks the beginning of troubles ahead:
Venture capital is a very popular asset class and accumulating in very few hands
You are aware of the alarming trend of extreme wealth and capital accumulation of the top .01 percent, but take a moment to consider the consolidation of capital investors.
When he launched Softbank’s VisionFund, CEO Masayoshi Son made the entire venture capital industry stop what they were doing when he announced his plans to invest $100 billion into technology companies. While no single, privately-managed fund has reached that size, the consolidation of venture capital is clear.
Pitchbook recorded 35 different venture capital funds of more than $500 million in the third quarter of 2020, and all-time high. Among those 35 funds is Amazon’s $2 billion climate fund. Nearly one third of all venture capital raised in 2019 went to ten firms, according to Duhigg.
Many market observers wondered if the VC market would collapse after the COVID-19 outbreak. We’re still early, but there’s no indication of a collapse.
So what capital managers going to do with all this cash?
As capital managers hold more and more money, they are making more and more big bets
It took only a 12-minute visit to company headquarters to convince Masayoshi Son, CEO of Softbank, to invest $4.4 billion in WeWork.
Other venture capitalists are exercising a bit more caution and due diligence, but writing bigger and bigger checks. And doubling down after their initial investments.
The median angel and seed round check has quadrupled in size, from about a half million in 2009 to more than $2 million in 2019, according to Pitchbook. Later-stage venture capital investments have also tripled and quadrupled in size since the end of the Great Recession.
With these big bets, capital managers are demanding companies scale as quickly as possible and dominate a market
Getting big fast worked for Amazon. Supported by early investors willing and able to tolerate year after year of losses, Jeff Bezos spent the 1990s and 2000s building warehouses, connecting a global supply chain, and taking hold of e-commerce before incumbent retail companies like Wal Mart knew what happened.
To get big fast means to capture a new market before anyone else can compete. What Masayoshi Son didn’t need more than 12 minutes to understand is that there was an exploding market for coworking spaces and WeWork had an opportunity to monopolize it.
On some level, getting big fast makes sense even after the cautionary tale of WeWork. If the U.S. federal government is not going to step in the way of acquiring a competitor — something it had prohibited, by law, before the Reagan Administration — then worry about profits later. Get big now.
But understand that no amount of early-stage capital can stop inevitable reckonings with reality. WeWork collapse was hastened by its crackpot CEO, but I’m skeptical that any CEO could have justified a $49 billion IPO for an overpriced, glorified coffee shop.
If investors are going to pour record sums into venture capital — $136.5 billion in 2019 in the U.S. alone, according to Pitchbook and the National Venture Capital Association — with the promise of capitalizing on new technologies, they we should probably do a better job of actually delivering new technologies.
Getting big fast to own a market is a senseless business strategy if there’s not a real market to own.
Science is not keeping pace with these big ambitions
Investors valued Theranos at around $9 billion with the promise that it’s Edison machine could run a broad set of diagnostic tests with just a single drop of blood.
I get light-headed whenever I give blood, so few more than I wanted the technology to be legit. Alas, it wasn’t, and more than $700 million was set alight because investors were enthralled by the star persona (and artificially deep voice) of Elizabeth Holmes.
If $100 billion is going to deliver a, say, 20 percent return, that will mean Softbank, alone, will need to find about $20 billion in future value. That means finding technologies that consumers value, technologies that excite them but also technologies they’ll use in their real lives and ultimately that they’ll pay for.
Without support for the research that makes this future value creation possible, we have instead gone searching for value through new business models and snake oil salesmen.
More money is going into venture capital while fewer federal dollars go into basic and applied research. Investing in the former only makes sense when we’re doing a lot more investing the latter.
— TD
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Supplementary Readings:
“Here come the private space stations,” by Miriam Kramer (Axios).
“Biology Starts to Get a Technological Makeover,” by Steve Lohr (New York Times).
“Finding From Particle Research Could Break Known Laws of Physics,” by Dennis Oberveye (New York Times)
“America’s richest men are brawling over the moon” by Marina Koren (The Atlantic).
“Jeff Bezos is not my astronaut” by Scott Galloway.
“The Way the Senate Melted Down Over Crypto Is Very Revealing,” by Ezra Klein (NY Times).
“Waymo Is 99% of the Way to Self-Driving Cars. The Last 1% Is the Hardest,” by Mark Bergen and Gabrielle Coppola (Bloomberg).
