The WeWork Implosion is a Spectacular Example of a Cycle Top (and Era’s End)

Oct 30, 2019 Investing Strategies

WeWork was, at one time, a Silicon Valley “unicorn” of legendary status. Now it is unicorn roadkill.

In August, we argued that “The WeWork IPO Sums Up Everything Bad About the Unicorn Bubble.” That was more or less on point apart from one thing: The IPO never actually happened.

Instead, WeWork self-destructed in one of the most bizarre and spectacular implosions of any company in Silicon Valley history.

It wasn’t just that the WeWork IPO got called off. It was also that Wall Street investors were horrified by revelations that included:

  • Ridiculous helicopter trips to the Hamptons;
  • Fights with printers over organic recycled paper;
  • Smoking weed on the company’s $60 million private jet;
  • The company’s implied $47 billion valuation that was slashed by more than 80%;
  • The charismatic founder-CEO who was not just demoted, but forced out;
  • His wife, an imperious executive within the company who greenlit a number of whack-a-doodle projects that had nothing to do with WeWork’s actual line of work and was also forced out;
  • A billion-dollar-plus payoff that the parent company had to give the fired CEO-founder just to make him go away (as he still controlled a supermajority of voting shares);
  • And the fact that, after pumping in $9 billion worth of original investment, the parent company is shelling out another $10 billion to orchestrate a new bailout.

And after all that, which still only scratches the surface, it remains unclear whether WeWork will survive, let alone ever turn a profit.

The WeWork saga is fascinating in all its twists and turns. The story will make a great movie at some point, or perhaps an HBO or Netflix mini-series.

But more importantly, and more usefully, WeWork is an example par excellence of a blow-off cycle top — and in this case, the actual “end of an era.” The implosion of WeWork is the kind of thing that both caps a cycle and brings about its end through psychological reinforcement. Such events are exotic and rare.

When financial historians look back, they will roughly peg the Silicon Valley “Unicorn Era” as a 10-year period running from 2009 to 2019. (For our purposes, this era, and the cycle that has peaked with the WeWork implosion are one and the same.)

So let’s take a quick look at the genesis of the Silicon Valley Unicorn Era in terms of its origins and drivers. Over the course of the decade that followed the financial crisis — roughly 2009 to 2019 — a number of things happened all at once. It was this confluence of events, all working together simultaneously, that powered the Unicorn Era as a kind of emergent property (which is normally the case in terms of how eras work — it is almost never just “one thing,” but a combined host of things).

Here is a partial list of factors:

  • Airbnb and Uber, founded in late 2008 and early 2009 respectively, pioneered new business models that set the stage for the “gig economy” and “sharing economy,” both made possible by new technology.
  • As the iPhone exploded in popularity, and Apple surpassed Exxon as the most valuable company in the world, smartphone apps became a growing force in people’s lives.
  • After a semi-disastrous public offering in May 2012, Facebook figured out how to pivot from a desktop-based experience to a mobile, smartphone-based experience, and profits took off.
  • Silicon Valley found itself awash in capital, in part thanks to an ongoing flood of stimulus and easy money from central banks. At the same time, the falling cost of boot-strapping a startup led to new venture capital models far more tolerant to founder control.
  • The SoftBank “Vision Fund,” powered by a wild-eyed billionaire visionary from Japan named Masayoshi Son, talked of 300-year business plans and merging with the singularity while writing huge checks from a $100 billion war chest, completely up-ending the traditional economics of venture capital investment.
  • As capital flooded Silicon Valley, the ratio of money to ideas grew so lopsided that founders of hot startups found themselves treated like rock stars, with venture capitalists giving them ever greater levels of power, influence, and control, in order to win the right to invest.
  • Thanks, in part, to the spectacular success of Airbnb and Uber, the “cult of the founder” was created, in which Silicon Valley elevated the tech company founder-CEO to a place of myth and legend. That led the founders, mostly young males in their 20s and 30s, to behave as if they were, themselves gods.

WeWork, which was founded in SoHo, New York, in 2010, sat at the nexus of all those trends. It was one of the earliest and best positioned startups of the unicorn era.

And when the tragicomic history of WeWork is written — a combination of tragedy and farce — it is likely that Masayoshi Son, the man behind the SoftBank Vision Fund, will receive as much blame as WeWork’s founder, if not more, for how things turned out.

From all accounts, it seems that when Son first heard about Adam Neumann’s wild vision for WeWork, the essence of Son’s reaction was: “That sounds crazy, it’s great. Can you make it ten times crazier and grow ten times faster?”

Son then began the process of having his Vision Fund pump billions into WeWork, money it had mostly gotten from the Saudis and other Middle East-based sovereign wealth funds (SWFs). These deep pocketed investors had no idea what was actually happening with their money; they were just desperate for good returns.

What happened here was, in some sense, the essence of what a boom-bust cycle is and how it works.

The Silicon Valley Unicorn Era had a beginning, a middle, and an end. It also had a powerful confluence of narratives behind it, based on forces and trends that were real: The proliferation of smartphones and apps; the rise of the sharing economy and gig economy; the flood of easy money from central banks; the “cult of the founder” dynamic powered by a mismatch of too much money chasing too few ideas; the messianic ravings of Masayoshi Son; the flood of cash from the $100 billion Vision Fund; and more.

And then, after a heady 10-year run, in which the levels of excess only grew weirder and wilder, the Silicon Valley Unicorn Era finally came to its end, with the spectacular implosion of WeWork.

But it is not the “spectacular” part of the WeWork implosion that matters so much as the clear, indisputable evidence that the myth-making assumptions of the Unicorn Era are now dead. WeWork embodied those assumptions on steroids, and then destroyed them.

The hunger to throw billions into private companies that lose money hand over fist for years on end? Gone. The willingness to see the charismatic founder-CEO as a kind of demi-god leading investors to a technology “promised land”? Gone. The ability to point at an impossibly large market and say, “Our company is worth tens of billions because our addressable market is worth trillions” and have investors cheerfully believe it, or at least pretend to believe it? Gone. All of those assumptions were taken to the outer limit with WeWork, and then smashed.

This is what happens at boom-bust cycle tops and “end of the era” finales. It has happened countless times in the past, and it will happen over and over in the future. The pattern never repeats in exactly the same way, but the basic thrust is the same:

  • A combination of events creates something exciting and new.
  • A backdrop of easy money and credit causes capital to flood in.
  • Legitimate reasons to be excited are blown out of proportion.
  • After a period of years, greed dominates and caution is thrown to the wind.
  • Optimism reaches a point of silliness, and something big then implodes.
  • Investors wake from their delusion like revelers the day after a party.
  • Great piles of capital are lost amid feelings of intense regret.
  • There is a period of consolidation and attempts at sober reflection.
  • Eventually the whole thing starts again.

As the old saying goes, they don’t ring a bell at market tops. But when it comes to the Silicon Valley Unicorn Era, the season finale for WeWork was not a bell. It was more like a four-alarm fire in a three-ring circus tent. The Unicorn Era is over, and a period of reflection and regret has begun.

And this is yet another example — a historic one — of the fact that, for investors tasked with the job of preserving capital (you have to hold onto it in order to grow it), understanding “where we are in the cycle” is a paramount aspect of knowing what to invest in — and what to avoid and why.

TradeSmith Research Team

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