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Old 09-19-2019, 04:44 AM
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WeWork, Theranos, and the myth of modern meritocracy


So... the CEO of WeWork sure is saying some wacky shit, huh?
Neumann, after spending an international flight on a private jet toking, reportedly left a cereal box stuffed with so much weed on the plane that when crewmembers found it in Israel, they called the plane’s owner. The plane’s owner ordered the plane back, leaving Neumann stranded, because he was worried about becoming involved in international drug trafficking.

According to several of the Journal’s sources, Neumann hopes to live forever. He also talks of becoming “president of the world.” (The story only talks about Neumann’s consumption of tequila and weed, despite these being cocaine thoughts.)

Neumann once fired 7 percent of his staff. At the end of an all-hands meeting announcing the cuts, he had employees carry trays of tequila shots into the room. Then, Darryl McDaniels of Run-DMC walked out and played a set, and workers reportedly danced to “It’s Tricky.”
It's worth noting that this man became filthy rich running a "tech" company that is basically just a glorified renting company. This makes its valuation, as the verge article points out, kind of fucking crazy. But I just want to zoom in on Adam Neumann, the person. Throughout all this, Adam Neumann has amassed a personal net worth of something like 4.1 Billion Dollars. And he's insane. Not crazy like a fox, crazy like your hippie grandma who smoked weed her whole life. Randomly firing people because he doesn't like their "energy", smuggling massive amounts of marijuana into Israel on accident, firing one in 14 of his staff then throwing a party with live music and tequila shots... Were anyone who wasn't already filthy rich to show this kind of behavior, we sould wonder what meds they had stopped taking. But because he's a billionaire, it's "eccentric".

To which my question is... Why did serious people give billions of dollars to this lunatic? And can we please stop pretending that the ability to make billions of dollars proves that someone is a genius? This guy slapped some fancy marketing on a rental establishment and is now a billionaire as a result.

Why?

We had a not dissimilar case not too long ago with a little company called Theranos. A "prodigy" from Stanford started a company to create improved blood-testing machines and had a personal valuation in the billions of dollars. It turns out it was all a big scam, and countless people with far more money than sense (and far more money than anyone with that lack of sense should be allowed to have) poured massive amounts of cash into something that wasn't just a scam, but was a really obvious scam:
It should have been obvious that Theranos could not actually revolutionize the blood-testing industry. There were more red flags than a Soviet street parade. The company never made it clear exactly how it planned to surmount the considerable chemical and engineering problems involved, and potential investors who pressed for proof that its new testing machines actually worked were given the runaround. When Holmes herself actually tried to explain the new method, Carreyrou points out that she sounded like a high school chemistry student. Here is how she explained the technology to the New Yorker: “A chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel.” A chemistry, then a result! Voilà!
There is serious rot within the monied establishment of financial investment. Many of the people being elevated to positions of extreme wealth and power are frauds, nutjobs, or both. The CurrentAffairs article ends on a note I personally find quite enlightening:
Theranos, though, gives us a small glimpse into a possible alternative reality. Theranos really could have done significant good in the world. The people who came to work for Theranos thought that’s what they would be doing. And Theranos did amass a small fortune to do that. The money was there to improve blood testing and people were willing to do the work—they could have saved lives and lived comfortably for their trouble. But the money wasn’t really there to improve blood testing. The money was there to find a unicorn disrupter who could cement Silicon Valley’s narrative of itself and relieve some of the burden on its conscience. If Theranos had been reasonably and productively managed it could have saved lives, but it never could have raised its money. Holmes had to be both pandering and toxic. She had to be a charismatic non-expert in a black turtleneck. Not because of some fact about the world, but because the only way to get money for this project was to appeal to people with exponentially more ego than expertise or sense.

The money exists. The expertise exists. Everyone would be thrilled to do the work. There is even money to be made, value created, by improving existing systems and possibly even being a little disruptive. But the people and systems for allocating those resources are compromised, maybe beyond repair. And those compromised people and systems demand that inspiring young people be Elizabeth Holmes. Without greed, power-hunger, and workplace tyranny, people can actually get things done. But a culture of hype, always searching for the next Genius, will only give us Elizabeth Holmes and her miracle machine.
Again, I'm left, mind boggled, wondering how the world functions when people with so much money are so easily duped by such utter nonsense. What do you do with that? How do you fix a system where there are no incentives for those responsible for fixing it to act? :/
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Old 09-19-2019, 06:28 AM
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Some people are good at sales, some of the people they sell to are greedy, and humans are inherently irrational creatures. In theory, professional investors would have an investment evaluation process that would protect them from impulsive urges. Many of them probably do. However, nearly all of them will have gut reactions to an investment opportunity, and will have the human tendency to want to go with their gut reactions. And once they’ve bought into an idea, just like nearly every other human, they want to go forward with that idea and prove that their instincts were right. Successful professional investors such as venture capitalists probably do have better gut instincts towards investments than the rest of us. However, that doesn’t make them immune from irrationality.

Also, investment in new companies is intrinsically speculative. After a certain point, investors can look at a company’s financials. However, at the beginning, all they can evaluate is the idea, how it’s presented, and the people pitching the idea. You would think that the people doing the selling would be the least influential factor in evaluating an investment. However, the human brain isn’t wired to work that way.

It’s not like this is unique to business investment. You’d expect movie studios to be great at evaluating scripts and sports teams to be great at evaluating athletes. Generally they are. But they’re just as likely to make “bust” decisions as professional investors.
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Old 09-19-2019, 07:26 AM
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I would also check out some of the documentaries on the Fyre Festival. Google John McAfee, insane founder of McAfee. And of course the stories of Bernie Madoff, Enron, Arther Andersen, etc.

To a certain extent, the system does eventually fix these aberrations. Many of these companies failed and their founders went to jail. Most large companies just tend to grind along, making a profit doing boring work. There are entire industries of auditors, law enforcement, compliance and risk management professionals who exist to make sure these companies continue to grind along. So to a certain extent, these outliers tend to get sensationalized.

I think what you are referring to is a very specific Silicon Valley culture of wealth and "disruption". And a big part of it is about weird misfits doing crazy things that no one thought could be done and becoming billionaires. I've worked for tech companies most of my career, and a lot of them have this cult-like bubble mentality. No one thinks it's "odd" because you don't know what oddness is going to make someone rich.

Also, keep in mind most people don't know what to do with a billion or even hundreds or tens of millions of dollars. Look at the threads on the subject on this board. People are like "oh I'd pay off my mortgage and college loans and give most of it to charity". So the answer is "shit most of it away". Well, you just highlighted some of the stuff people shit it on.
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Old 09-19-2019, 09:01 AM
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I suggest that the OP read this book.

There's nothing exclusively ''modern'' about scammy efforts to separate people from their money with false promises and delusions of great wealth.

Theranos at least had an appealing-sounding product. On the other hand, numerous Internet-based businesses made nothing tangible and yet were immensely profitable for their creators.
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Old 09-19-2019, 09:25 AM
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Is it possible that some of the investment in these companies isn't due to a lack of understanding on the part of investors, but due to the belief that they can get in and get back out with a profit before the house collapses? The investor isn't investing because they want to make the world a better place, they are investing to make money, right? The only time the question on validity of the company plan comes into play is "will it hold together long enough for me to sell my shares to someone else at a profit?"
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Old 09-19-2019, 10:25 AM
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I have long thought that tech investors are often not *that* savvy in how/what a company does and how they make their money because they're financiers, not techies. So they're relatively easily bamboozled by charismatic types who come up with good-sounding value propositions, and why things are transformational, or revolutionary, or paradigm-shifting, or whatever. And they desperately want in on the next big thing more than anything else.

So they are willing to invest a lot in stuff that often doesn't make sense- you can look back at the late 90s/early 2000s pre- dot-com crash era for plenty of examples of things that people invested in because they promised a lot of stuff, or sounded cool, or whatever, without actually having, you know, sound business fundamentals. There were a whole lot of what I think of as "Field of Dreams" tech companies- "if we build it, they will come" seemed to be the business proposition.

Or some companies' success isn't due to their amazing technological savvy or leveraging of technology, etc... but because of less sexy reasons. Uber and Lyft, for example are successful, but they're not successful because of technology. They're successful because they successfully convinced cities that they're not actually taxis, and that the existing taxi regulation system doesn't apply to them. All that business about the software linking the riders and drivers is smoke- that's great, but hardly revolutionary. Taxi companies do the same thing. But since Uber/Lyft aren't classified as taxis, they can let people use their own cars, don't require permits, don't have to have certain colors, don't have to have a newer car, don't have their fares regulated by city council, etc...

But I'm sure that the investors were lulled in by a bunch of nonsense about how their app was so transformational, etc...
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Old 09-19-2019, 10:35 AM
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To which my question is... Why did serious people give billions of dollars to this lunatic? And can we please stop pretending that the ability to make billions of dollars proves that someone is a genius? This guy slapped some fancy marketing on a rental establishment and is now a billionaire as a result.

...

Again, I'm left, mind boggled, wondering how the world functions when people with so much money are so easily duped by such utter nonsense. What do you do with that? How do you fix a system where there are no incentives for those responsible for fixing it to act? :/
You're seeing how people like Adam Neumann and Elizabeth Holmes are incompetent. So why assume that the people who gave them money are any better? Their investors are presumably people who are as bad at managing their fortunes as Neumann and Holmes are at managing their businesses.
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Old 09-19-2019, 10:47 AM
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When you look at the history of companies like Brilliant Light Power and Steorn, it's abundantly clear that a lot of high value investors are simply pig ignorant about science, but don't believe it when they're told that they're pig ignorant.

Both those companies were claiming to do things which every reputable physicist knew right away were impossible, and despite saying that from the very beginning, and at every opportunity thereafter, both companies still got millions in investments. BLP is still getting millions in investments.

When people can't even understand why free energy is BS, I'm not at all surprised they couldn't figure out that these blood testing systems were fake, as they are comparatively far more complex, conceptually and practically.
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Old 09-19-2019, 11:45 AM
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It’s not really that illogical. The kind of investors that back this sort of company have so much cash that even complete failure won’t affect them much. They aren’t deliberately backing bad businesses, they’re just backing everything, and the ones that succeed more than make up the losses.

Of course, you can add in healthy doses of what if, me too, fear of losing out, and follow the leader.
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Old 09-19-2019, 01:14 PM
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Most of this is hindsight bias.
Lots of successful companies looked like bad bets at one point. Fed Ex started out as a business school proposal that got a C, at one point the CEO was paying employees with money he won on a spectacular run in Vegas. Today it is worth almost 40 billion dollars.
The founders of AirBnB marketed a couple of presidential candidate cereals to stay in business at one point.
I remember at the launch of the Ipod a very smart person who had worked in IT for decades writing very convincingly that Apple was doomed
It would have been easy to write off Bezos as a dummy for trying to get rich starting a mail order book business, but he did.

WeWork looks like it is going to crash and burn, and Theranos was a scam but it is not obvious that it had to be that way. More millionaires got their money in real estate than any other way. Outsourcing commercial real estate seems like a decent idea.
The medical business is one that seems to have lots of opportunties for technology efficiencies.
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Old 09-19-2019, 01:21 PM
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I happened to catch a 2-year-old episode of Shark Tank yesterday. The pitch was a solar grill - for $500.
The Shark Tank folks went gaga over it. I turned to my wife and mentioned that the idea was at least 50 years old, if not older, and that I could find plans for something identical in my Whole Earth manual from the ’70’s. And, they weren’t practical then and they aren’t practical now.
But, she got a deal from Cuban, based on a throw-away line about some “organic” battery she was developing.

So, as mentioned above, I think most “Money” folks (even those who are supposed to be experts in a Tech field) are just completely clues about technology.
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Old 09-19-2019, 01:35 PM
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At the risk of supporting Neumann, who is absolutely a shitty businessman who's acted in bad faith, I'm going to argue against some of your points.

The comparison to Elizabeth Holmes is not apt. Theranos was engaged in straightforward fraud. They claimed to have technology they didn't have. They faked test results. The actual business they were in was bullshit.

WeWork, by contrast, isn't doing any of that (or, at least, I haven't heard that they are). They are actually leasing buildings long-term and renting them out short term. There's a lot of pretty questionable forecasting going on and the valuation they think they have is silly, but for Neumann to be on the same level as Holmes, they'd have to be like making up buildings or claiming that they had a revolutionary new skyscraper design or something.

As far as laying off a bunch of staff and then throwing a party, that doesn't strike me as obviously crazy. If you're going to lay off people, for morale reasons, it's best to do it demonstrably all at once. You really don't want the remaining employees to worry that they're going to be next. So a big layoff followed by an extravagant party is kind of a good plan. The layoffs are big enough that they plausibly can be the only ones coming. The party tells the remaining employees that the good times are not over. Whatever he spent on tequila and musicians is likely a drop in the bucket compared to the payroll he ditched and the savings in not having his best (remaining) employees fleeing a sinking ship. Like, I get that there's a certain distaste for the TechBro-iness of it all, and a strong feeling about who should be the first up against the wall when the revolution comes going on here, but this isn't remotely the worst stuff he's done. It's performative, not substantive.

The things that we really should be on Neumann for are not that stuff. It's the obvious self-dealing like getting a loan from WeWork with a sweetheart rate, using it to buy properties, then leasing the properties back to WeWork, or personally buying a trademark on the word "We", then selling it to WeWork for almost $6 million.

I don't know that Shark Tank is indicative of much. Most of the deals there are for very small amounts of money (nothing like the $10s of billions invested in WeWork) and it's done for entertainment, not as a serious treatise on how venture capital works. Mark Cuban's net worth is $4+ billion. The investment he made in that grill is not material to him.
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Old 09-19-2019, 01:59 PM
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At the risk of supporting Neumann, who is absolutely a shitty businessman who's acted in bad faith, I'm going to argue against some of your points.

The comparison to Elizabeth Holmes is not apt. Theranos was engaged in straightforward fraud. They claimed to have technology they didn't have. They faked test results. The actual business they were in was bullshit.

WeWork, by contrast, isn't doing any of that (or, at least, I haven't heard that they are). They are actually leasing buildings long-term and renting them out short term. There's a lot of pretty questionable forecasting going on and the valuation they think they have is silly, but for Neumann to be on the same level as Holmes, they'd have to be like making up buildings or claiming that they had a revolutionary new skyscraper design or something.
I don't think it's as significant of a difference as you're saying. The point of investing is to make money; an investor wants to buy something - in this case a share of a company - that's worth more than what he's paying.

So if Theranos is presenting itself as a billion dollar company when its real value is nothing and WeWork is presenting itself as a billion dollar company when its real value is a hundred million dollars, then both are bad investments. To be good investments, you'd have to expect that their future value will be higher than a billion dollars and that's not going to happen for either company.
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Old 09-19-2019, 02:38 PM
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Here's a BBC program about Theranos and the pretty much incomprehensible manner in which it was funded without the investors ever establishing that the technology worked.

As for WeWork........I've used some of their facilities when consulting and remember being quite surprised that they seemed to be thriving. I did some back-of-fag-packet calculations regarding potential income against what I knew the lease and refurb cost would be for the building. I couldn't make it work even by being fairly generous about running costs. Nice place to work, free coffee and bikkies and all sorts but when I saw the initial flotation estimate I thought it was stupidly high. I don't claim any great financial insight, just a nodding acquiantence with the cost of office space, the ability to add up and distinguish a positive from a negative. Heck, their valuation put them on a par with several major pharma companies that are turning a healthy profit........unlike WeWork.

Same thing for that stupid juicer bollocks. Juicero Utter nonsense that still managed to raise $150 million. How exactly can objectively intelligent people forget the basics?

Does it work? Can it work? what will it cost to make? how many can we sell? what are people prepared to pay for it? Will they keep paying for it?
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Old 09-19-2019, 02:46 PM
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And can we please stop pretending that the ability to make billions of dollars proves that someone is a genius? This guy slapped some fancy marketing on a rental establishment and is now a billionaire as a result.
I'm sorry if this sounds trite, but my honest and uninformed opinion is that he is a marketing genius. How else could he convince so many people to think that he is a responsible entrepreneur with a profitable business?

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Old 09-19-2019, 03:00 PM
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So if Theranos is presenting itself as a billion dollar company when its real value is nothing and WeWork is presenting itself as a billion dollar company when its real value is a hundred million dollars, then both are bad investments. To be good investments, you'd have to expect that their future value will be higher than a billion dollars and that's not going to happen for either company.
The difference, I think, is that unlike Theranos, WeWork is an actual company. There's a there there. Under all the the scams and goopy bullshit, they have a product and they have people buying it, and as far as I know there's a possibility that it could actually make money at some point in the future. It's real estate, not tech - but there's money in real estate, too. Just possibly under saner management.
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Old 09-19-2019, 03:26 PM
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Were anyone who wasn't already filthy rich to show this kind of behavior, we sould wonder what meds they had stopped taking. But because he's a billionaire, it's "eccentric".
Bernard Woolley (Yes Minister): "That's one of those irregular verbs, isn't it? I have an independent mind, you are an eccentric, he is round the twist."
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Old 09-19-2019, 03:37 PM
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I would also check out some of the documentaries on the Fyre Festival. Google John McAfee, insane founder of McAfee. And of course the stories of Bernie Madoff, Enron, Arther Andersen, etc.

To a certain extent, the system does eventually fix these aberrations. Many of these companies failed and their founders went to jail. Most large companies just tend to grind along, making a profit doing boring work. There are entire industries of auditors, law enforcement, compliance and risk management professionals who exist to make sure these companies continue to grind along. So to a certain extent, these outliers tend to get sensationalized.

I think what you are referring to is a very specific Silicon Valley culture of wealth and "disruption". And a big part of it is about weird misfits doing crazy things that no one thought could be done and becoming billionaires. I've worked for tech companies most of my career, and a lot of them have this cult-like bubble mentality. No one thinks it's "odd" because you don't know what oddness is going to make someone rich.

Also, keep in mind most people don't know what to do with a billion or even hundreds or tens of millions of dollars. Look at the threads on the subject on this board. People are like "oh I'd pay off my mortgage and college loans and give most of it to charity". So the answer is "shit most of it away". Well, you just highlighted some of the stuff people shit it on.
I agree with a lot of that. And anyway I just don't see a better basic way to do things, especially innovation, than let people invest (often mistakenly, sometimes in hindsight 'obviously' mistakenly) in the ideas and people they think can make real innovations that create value. I'm pretty convinced no other basic way exists. Therefore just telling (sometimes embellished and again usually highly hindsight oriented) stories about failed tech co's doesn't much impress me as an argument against 'the system'. How else would the US, and it is particularly the US, create the gigantic tech co's with gigantic real, sustained values? I don't see any hint of that in criticisms of the failures.

Meritocracy does not mean that everyone subjectively opines that everyone else's wealth is deserved. Or even mean that there aren't cases where everyone agrees it's not. Saying 'meritocracy is a myth' based on tech co failures, even those including fraud and other wackiness, is a silly argument IMO.

Which does not mean there shouldn't be financial regulators and internal compliance depts at companies. It's also not saying that the US (again perhaps in particular) might not need to reassess antitrust policies in view of evolving challenges in preventing over-concentration in various industries and reduced competition. Although the concentration/competition problem tends to apply to well run companies that become huge and don't implode.
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Old 09-19-2019, 04:30 PM
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If I'm reading the OP right, it is not that companies fail, it is not that companies get over-valued, it is that a person who succeeds (once) is considered brilliant, not lucky. Thus the vast number of successful entrepreneurs who fail the second time.
I offer Uber as another example. Gypsy cabs (unregulated) were nothing new in New York. Uber threw an app around it. They are losing bundles of cash, try to get around the law whenever possible, and screw their drivers. Brilliant? Sure! At least their IPO bombed.

BTW lots of people knew Theranos was a fraud before it was exposed. A board who knew nothing of the technology was a dead giveaway to me.
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Old 09-19-2019, 04:40 PM
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I don't think it's as significant of a difference as you're saying. The point of investing is to make money; an investor wants to buy something - in this case a share of a company - that's worth more than what he's paying.

So if Theranos is presenting itself as a billion dollar company when its real value is nothing and WeWork is presenting itself as a billion dollar company when its real value is a hundred million dollars, then both are bad investments. To be good investments, you'd have to expect that their future value will be higher than a billion dollars and that's not going to happen for either company.
I think the difference is dramatic, not in how good the investment is, but in how culpable the CEO is.

If I go to some investors and say I have this great idea: I'm going to buy some widgets and rent them out for more than I paid for them. And I'm going to be so good at doing this and make people so happy about their widget rentals that they're going to pay me a hefty profit. Here are my financials. You'll see that I'm losing money right now, but that's because I'm buying so many widgets and getting them ready for rental. Once every man woman and child rents five widgets a day, we'll all be trillionaires! Now, that might be dumb. It might be foolhardy. There might be no serious way that I'm going to rent as many widgets as I say, or that if there were a big profit involved other people wouldn't get into the widget-rental business and compete, or whatever. But as long as I'm not lying about the existence of widgets or what I'm actually paying to buy/rent them, then it's on them to evaluate whether it's a good investment or not.

If, on the other hand, I go to investors and say I have this great idea: I'm going to breed unicorns and sell their horns for $billions, the fact that unicorns don't exist means that I'm a fraud.

The returns on both enterprises might be the same. But the first one is arguably dealing in good faith and the second one absolutely isn't.

The problem is that there's no way to objectively say what WeWork will be worth in the future. WeWork isn't lying about what they do. They're pointing to a trend line that goes up and to the right and saying "imagine where this line could go!" As someone else pointed out, lots of businesses that looked like total idiocy at one point ended up being worth a ton. But there are objectively no unicorns. A business built on overly optimistic projections might be a failure, but it's different than a business built on lies.

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Old 09-20-2019, 08:05 AM
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And can we please stop pretending that the ability to make billions of dollars proves that someone is a genius?
Mark Cuban is my favorite example of that. While he's a fine businessman and knows his shit, there's no way on earth he'd have been a billionaire without getting astoundingly lucky when Yahoo bought broadcast.com for an absurd sum of money. He basically won the lottery and has managed to wisely use that money to his advantage. He's no Elon Musk, Warren Buffet, Phil Knight, Sergey Brin or Larry Page (to name some billionaires who didn't make their money in one huge windfall)

And yet people talk about him like he's some sort of business genius, when all he's truly managed is to get lucky and then manage the money well afterward.
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Old 09-20-2019, 09:20 AM
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When Holmes herself actually tried to explain the new method, Carreyrou points out that she sounded like a high school chemistry student. Here is how she explained the technology to the New Yorker: “A chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel.” A chemistry, then a result! Voilà!
That's not a high school chemistry student, that's an HSCS called upon in class who hasn't read the homework.
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Old 09-20-2019, 12:42 PM
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Mark Cuban is my favorite example of that. While he's a fine businessman and knows his shit, there's no way on earth he'd have been a billionaire without getting astoundingly lucky when Yahoo bought broadcast.com for an absurd sum of money. He basically won the lottery and has managed to wisely use that money to his advantage. He's no Elon Musk, Warren Buffet, Phil Knight, Sergey Brin or Larry Page (to name some billionaires who didn't make their money in one huge windfall)

And yet people talk about him like he's some sort of business genius, when all he's truly managed is to get lucky and then manage the money well afterward.
Cuban was a millionaire before he started Broadcast.com. He made a billion dollars in the Yahoo deal but now is worth over 4 times that. His investment in the Dallas Mavericks is worth 10 times what he paid for it. He is someone who is good at recognizing under valued assets.
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Old 09-20-2019, 01:17 PM
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Cuban was a millionaire before he started Broadcast.com. He made a billion dollars in the Yahoo deal but now is worth over 4
Note that the numbers here are a bit deceptive because they're in nominal terms. $1 billion invested in the S&P500 in 1999 would be worth just about $3b today. So Cuban has done better than the stock market on average, but not dramatically.

I mean, beating the market over a 20-year stretch is a rare skill, so I don't want to discount Cuban's business acumen, which is real. But it's also true that he was absurdly lucky with the Broadcast.com sale. The vast majority of his wealth is still due to that one event in which he received $1b at the height of a bubble for a service and technology and user base that was in retrospect basically worthless.
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Old 09-20-2019, 01:37 PM
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I'm sorry if this sounds trite, but my honest and uninformed opinion is that he is a marketing genius. How else could he convince so many people to think that he is a responsible entrepreneur with a profitable business?
There are two ways to be the smartest person in the room. One is to be a genius. The other is to find a room full of idiots.
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Old 09-20-2019, 01:52 PM
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The difference, I think, is that unlike Theranos, WeWork is an actual company. There's a there there. Under all the the scams and goopy bullshit, they have a product and they have people buying it, and as far as I know there's a possibility that it could actually make money at some point in the future. It's real estate, not tech - but there's money in real estate, too. Just possibly under saner management.
I don't know. I think, if you look past the outright fraud, a company like Theranos is a better bet than a company like WeWork.

WeWork wasn't inventing some new idea. They were just renting real estate. Lots of companies do that. The only way a company can make a steady profit in a fully developed business like that is to do the same thing everyone else is doing and do it a little more efficiently - which is clearly not the way Adam Neumann was running his company. When you're selling the same product that dozens of other companies are selling, you need to be able to say you're offering the best management. And even with the best management, you can't realistically expect to expand your business tenfold in the short range. At best, you're going to slowly and steadily expand your business and your investors will get a slow and steady return on their investment.

On the other hand, a company like Theranos (although not Theranos in particular) has the potential for huge returns. Their product was bogus. But if it had been real, they would have had a valuable product which they held exclusive rights to. It was a product that would have sold itself regardless of how poorly the company was managed. So the signs of bad management wouldn't be a deal breaker for a company like Theranos the way it would be for a company like WeWork.
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Old 09-20-2019, 02:21 PM
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I don't know. I think, if you look past the outright fraud, a company like Theranos is a better bet than a company like WeWork.
I mean, if you look past outright fraud, a lot of companies look like pretty good ideas

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WeWork wasn't inventing some new idea. They were just renting real estate. Lots of companies do that. The only way a company can make a steady profit in a fully developed business like that is to do the same thing everyone else is doing and do it a little more efficiently
A major way that companies become giants is to catch on to a social or technological trend early and ride the wave. Like, you could make the same argument about Amazon in the early days. They were just selling books by mail. Plenty of companies did that. Obviously Amazon did it more efficiently, but what really propelled them to the stratosphere is that they realized that the future of selling stuff was on the internet, not in physical retail stores.

You can tell a story like this for WeWork. Technology workers are increasingly mobile, rootless, and global. If WeWork can expand fast enough to become the default choice for flexible office space for remote workers, they can capture a lot of the gains. Any company small enough to not devote a full-time employee to office-rental logistics will save money by going with the known quantity. Even larger companies could easily end up paying WeWork plenty because it's just way easier to have one account and know that all your sales reps and whoever else who are traveling can quickly get a day's work in a real office with solid internet and food onsite. It doesn't take very many days of missed productivity because hotel wifi sucks to pay for a WeWork membership.

In this tale, it's not exactly that WeWork will do anything better than incumbents, it's that they become a one-stop shop for a business concept that until recently was too small for hardly anyone to care about, but in the future is likely to be massive. That growth and opportunity is not driven by their efficiency or technology, but by the social changes in work and living patterns driven by other technology.

That's the argument that WeWork is worth $10s of billions. There are some obvious holes in this story, but it's not totally crazy.
  #28  
Old 09-20-2019, 03:04 PM
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I have long thought that tech investors are often not *that* savvy in how/what a company does and how they make their money because they're financiers, not techies. So they're relatively easily bamboozled by charismatic types who come up with good-sounding value propositions, and why things are transformational, or revolutionary, or paradigm-shifting, or whatever. And they desperately want in on the next big thing more than anything else.

So they are willing to invest a lot in stuff that often doesn't make sense- you can look back at the late 90s/early 2000s pre- dot-com crash era for plenty of examples of things that people invested in because they promised a lot of stuff, or sounded cool, or whatever, without actually having, you know, sound business fundamentals. There were a whole lot of what I think of as "Field of Dreams" tech companies- "if we build it, they will come" seemed to be the business proposition.
Aye; the textbook example is Compu-Global-Hyper-Mega-Net.
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Old 09-20-2019, 03:39 PM
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There are two ways to be the smartest person in the room. One is to be a genius. The other is to find a room full of idiots.
This I'm stealing.
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Old 09-20-2019, 04:12 PM
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Two or three decades ago, I had a meeting in Manhattan at a conference facility owned by Regus, which back then did basically the same thing as WeWork. Regus has a market cap of 3.7 billion or so and even that is inflated due to the excitement over WeWork, while WeWork is worth ten times as much. Basically, though, they're in the real estate business. You might even call it the hotel business. See this article from Forbes on why WeWork's valuation is ridiculous.
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Old 09-20-2019, 04:49 PM
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The only way a company can make a steady profit in a fully developed business like that is to do the same thing everyone else is doing and do it a little more efficiently
No thy don't - they just have to be more popular than everyone else. You think Coca-Cola makes the best and most efficient soft drink in the world? You can be popular by being better, obviously, but that's not the only way to do it.

WeWork wants to be the Coke of shared business space. It wants to be everyone's first choice. How it achieves that is another story.

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Old 09-20-2019, 05:11 PM
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There are two ways to be the smartest person in the room. One is to be a genius. The other is to find a room full of idiots.
That's a much better answer than mine.

~Max
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Old 09-20-2019, 05:28 PM
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You think Coca-Cola makes the best and most efficient soft drink in the world?
"Best" is subjective, but, yes, they are quite efficient at the manufacture of soft drinks and have been at the forefront of efficiency for quite some time. They do continually look for ways to improve their efficiency as well. There's a reason why the price of Coca-Cola is lower now (adjusted for inflation) than a century ago.

That's not entirely why they are the largest soft drink company in the world, but to remain as profitable as they have been for as long as they have been, they have had to look for efficiencies wherever possible. It's not entirely marketing. Arguably, it's not even mostly marketing.
  #34  
Old 09-20-2019, 07:10 PM
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No thy don't - they just have to be more popular than everyone else. You think Coca-Cola makes the best and most efficient soft drink in the world? You can be popular by being better, obviously, but that's not the only way to do it.

WeWork wants to be the Coke of shared business space. It wants to be everyone's first choice. How it achieves that is another story.
No, I don't think Coke makes the best and most efficient soft drink in the world. Which should be obvious because I was making the exact opposite point.

Coke and Pepsi and RC and whatever other brands are out there are all essentially the same. Every soda company is essentially selling the same product.

So the company that makes the most money isn't the one that makes the best product. It's the company that manages the product the best.

The same is true for a company like WeWork. They rent office space. Lots of other companies rent office space. So you have a bunch of companies that are all offering the same product. The one that makes the most money is the one that is best at renting office space.
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Old 09-20-2019, 08:02 PM
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To which my question is... Why did serious people give billions of dollars to this lunatic?
From Robert Park:
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Investors with deep pockets and shallow brains.

Last edited by Musicat; 09-20-2019 at 08:06 PM.
  #36  
Old 09-20-2019, 08:15 PM
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Hell, I’d appreciate it if journalists stopped consulting our ‘business leaders’ every time the common man tries to voice a grievance. They want an army of people who work for no money they can get rid of at any time without any oversight either financially or environmentally and anything less than that is financial ruin for their family run business and destitution for society in general. They’re greedy, I get it, journalists have better things to do than offer them a platform for spin and equivocation. I have better things to do than read the same excuse. Fuck them, report the facts alone.

Last edited by Sitnam; 09-20-2019 at 08:16 PM.
  #37  
Old 09-23-2019, 09:09 AM
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Note that the numbers here are a bit deceptive because they're in nominal terms. $1 billion invested in the S&P500 in 1999 would be worth just about $3b today. So Cuban has done better than the stock market on average, but not dramatically.

I mean, beating the market over a 20-year stretch is a rare skill, so I don't want to discount Cuban's business acumen, which is real. But it's also true that he was absurdly lucky with the Broadcast.com sale. The vast majority of his wealth is still due to that one event in which he received $1b at the height of a bubble for a service and technology and user base that was in retrospect basically worthless.
That's what I'm saying- he's a very competent businessman, but there's no way on earth he would have ever been a billionaire in his own right, without the broadcast.com sale, which even at the time, was considered somewhat absurd.
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Old 09-23-2019, 09:27 AM
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I don't think it's as significant of a difference as you're saying. The point of investing is to make money; an investor wants to buy something - in this case a share of a company - that's worth more than what he's paying.

So if Theranos is presenting itself as a billion dollar company when its real value is nothing and WeWork is presenting itself as a billion dollar company when its real value is a hundred million dollars, then both are bad investments. To be good investments, you'd have to expect that their future value will be higher than a billion dollars and that's not going to happen for either company.
Both are bad investments, but Theranos was outright fraudulent, while WeWork is not fraudulent, but people are willing to pay huge amounts of money for unfathomable reasons.

I think there's a certain amount of people looking at a traditional business worth billions, and they see thousands of employees, hundreds of millions in plant, property and equipment, and lots of marketing, etc... and that makes sense.

Meanwhile, some Svengali-like internet guy plays up his moderately successful business with a combination of inflated claims, an opaque and/or byzantine business plan, and no small amount of personal charisma. So he gets investors to go along with it, and then there's probably a certain amount of cognitive dissonance- they hear billion dollar company, but see some web stuff, a handful of employees, and can't reconcile it in their minds, unless they assume that the guy running the show is some kind of genius whose plan may not be understandable by you and me, but clearly someone understands it, or it wouldn't be worth a billion dollars.

It's that peer signaling that tends to both drive the value up and cultivate the image of these guys as geniuses.
  #39  
Old 09-23-2019, 10:51 AM
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Some of the smartest people in the world have spent a lot of time and money trying to figure out what separates a successful start up from one that is a failure. For the most part they are unable to and find that the best investment strategy is to expose themselves to as much upside as possible. This means investing in 20 companies, 19 of which fail and the 20th makes them 100x their investment back. From the outside it looks like they were dumb to invest in the 19 failures but that is just the cost of doing business.
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Old 09-23-2019, 11:22 AM
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Some of the smartest people in the world have spent a lot of time and money trying to figure out what separates a successful start up from one that is a failure. For the most part they are unable to and find that the best investment strategy is to expose themselves to as much upside as possible. This means investing in 20 companies, 19 of which fail and the 20th makes them 100x their investment back. From the outside it looks like they were dumb to invest in the 19 failures but that is just the cost of doing business.
No, that's the cost of doing business really poorly. The investor you're describing is basically hoping a miracle will save him from his general inability to make good investments. That's not a sound strategy. And it usually won't work; miracle companies that produce 10,000% returns are far rarer than you describe. Your investor is not going to invest in nineteen bad companies and one miracle; he's far more likely to invest in twenty bad companies and lose everything he had. Investors like that look dumb because they are dumb. The fact that a handful get lucky and do stumble into a miracle doesn't make them any smarter.

Smart investors put their money into nineteen low-risk boring companies; companies that aren't going to make them a fortune but also aren't likely to disappear. Then, if they're feeling sassy, they will invest in one miracle company and hope it will make them a billion dollars. These smart investors will treat the miracle company like a lottery ticket. It can be fun to spend a little money that you can afford to lose on a dream but you don't bet everything you have on them.
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Old 09-23-2019, 11:52 AM
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No, that's the cost of doing business really poorly. The investor you're describing is basically hoping a miracle will save him from his general inability to make good investments. That's not a sound strategy. And it usually won't work; miracle companies that produce 10,000% returns are far rarer than you describe. Your investor is not going to invest in nineteen bad companies and one miracle; he's far more likely to invest in twenty bad companies and lose everything he had. Investors like that look dumb because they are dumb. The fact that a handful get lucky and do stumble into a miracle doesn't make them any smarter.
puddleglum is talking about Venture Capital, which really does invest in 20 fledgling companies expecting 19 of them to lose everything and the last one to provide huge returns. It's a high risk high reward strategy that is suitable only for the very wealthy who have at least some skill in telling probable winners from losers. But even the best in the world have a poor track record when it comes to counting companies. When you score them in dollars, they do very well.

You're talking about the average person investing for their old age. It's a totally different thing.

In order for little companies to become big, the first type of investor is very useful. But only the very deep-pocketed should be doing that.
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Old 09-23-2019, 12:41 PM
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puddleglum is talking about Venture Capital, which really does invest in 20 fledgling companies expecting 19 of them to lose everything and the last one to provide huge returns.
Nah, most venture capital companies also invest in mostly boring, low to mid risk ventures.

It's true there have been a few, especially 20-40 years ago in Silicon Valley, that made riskier plays and got lucky, but these are the exception, rather than the rule. The idea of the wheelin'/dealin' cowboy VC is an inaccurate stereotype for all but a vanishingly small number of cases.

These companies are looking to take a bit of risk in exchange for 25-30% returns, i.e. taking on a bit more risk for higher returns. They may also get involved with a few high risk ventures, but those aren't going to form the primary investments for most VC groups.

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  #43  
Old 09-23-2019, 04:08 PM
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Mark Cuban is my favorite example of that. While he's a fine businessman and knows his shit, there's no way on earth he'd have been a billionaire without getting astoundingly lucky when Yahoo bought broadcast.com for an absurd sum of money. He basically won the lottery and has managed to wisely use that money to his advantage. He's no Elon Musk, Warren Buffet, Phil Knight, Sergey Brin or Larry Page (to name some billionaires who didn't make their money in one huge windfall)

And yet people talk about him like he's some sort of business genius, when all he's truly managed is to get lucky and then manage the money well afterward.
The cult of personality of internet/tech/start up type billionaires on outlets like CNBC etc is annoying. But I just don't listen to stuff I find annoying. I also doubt Cuban is a font of wisdom on a lot of stuff he's asked about, and I have no argument with the general concept that luck plays a serious role in success (on his scale, or any smaller scale).

My push back comes when people try to use that to push for more collectivism, which I think is generally knocking down a straw man which says that because somebody like Cuban made a huge amount of money he must proportionally 'deserve' it. I don't think half way intelligent people really think that's a reason for the collective to have a relatively light hand wrt outsized successes like his. The fact that he's lucky doesn't fundamentally affect the efficacy of taxing people like him more or less IMO, which is what it eventually comes down to. Otherwise I just don't care if he's lucky or what other people think about that. The question is whether society is better off if those brass rings are out there. I think it is, basically. Though that general argument doesn't imply some particular tax rate in % points. A higher one might make sense, or not, but it's the silly side of politics to make that it central issue in that debate how 'lucky' he or people like him are/were.

Last edited by Corry El; 09-23-2019 at 04:08 PM.
  #44  
Old 09-23-2019, 08:26 PM
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Two or three decades ago, I had a meeting in Manhattan at a conference facility owned by Regus, which back then did basically the same thing as WeWork. Regus has a market cap of 3.7 billion or so and even that is inflated due to the excitement over WeWork, while WeWork is worth ten times as much. Basically, though, they're in the real estate business. You might even call it the hotel business. See this article from Forbes on why WeWork's valuation is ridiculous.
Regus is very different from WeWorks. Other than the basic (and admittedly essential) similarity that they're both leasing space in bulk and renting it out in small chunks, they serve entirely different markets.

WeWorks serves, basically, hipsters. Regus serves actual businesspeople who want turnkey office space, with internet connections and cleaning services and office furniture and all that stuff all there, ready to move in on a days' notice.

I mean, small law firms rent office space at Regus facilities. There is no possible way a law firm could work out of WeWorks and be taken seriously.
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Old 09-23-2019, 09:59 PM
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puddleglum is talking about Venture Capital, which really does invest in 20 fledgling companies expecting 19 of them to lose everything and the last one to provide huge returns. It's a high risk high reward strategy that is suitable only for the very wealthy who have at least some skill in telling probable winners from losers. But even the best in the world have a poor track record when it comes to counting companies. When you score them in dollars, they do very well.
How much of their assets are the putting into fledgling companies? If they're putting most of their money into these companies then I'm sticking by what I said; they are not following a smart business plan and they're almost certainly going to lose most of their money.

That doesn't apply if they're putting most of their money into safe investments and then putting a small fraction into high-risk investments. As I said, "Smart investors put their money into nineteen low-risk boring companies; companies that aren't going to make them a fortune but also aren't likely to disappear. Then, if they're feeling sassy, they will invest in one miracle company and hope it will make them a billion dollars. These smart investors will treat the miracle company like a lottery ticket. It can be fun to spend a little money that you can afford to lose on a dream but you don't bet everything you have on them."
  #46  
Old 09-23-2019, 10:56 PM
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...Coke and Pepsi and RC and whatever other brands are out there are all essentially the same. Every soda company is essentially selling the same product.....
Ew. No. RC maybe, but I won't drink even free Pepsi. Too much lemon-lime, not enough vanilla.
  #47  
Old 09-24-2019, 11:58 AM
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Nah, most venture capital companies also invest in mostly boring, low to mid risk ventures.

It's true there have been a few, especially 20-40 years ago in Silicon Valley, that made riskier plays and got lucky, but these are the exception, rather than the rule. The idea of the wheelin'/dealin' cowboy VC is an inaccurate stereotype for all but a vanishingly small number of cases.

These companies are looking to take a bit of risk in exchange for 25-30% returns, i.e. taking on a bit more risk for higher returns. They may also get involved with a few high risk ventures, but those aren't going to form the primary investments for most VC groups.
That link is from 1998 and mentions CD-ROMs as a hot new investment. Its description of the life cycle of a company is quite outdated.

Angel investing/VC is not really comparable to investing in a diversified portfolio of publicly traded vehicles.

In an typical angel investor's/VC's portfolio of 10-20 companies, the majority of the returns will come from 1 or 2 of them. A few will break even or return a modest amount, and assuming 50% will fail completely is very realistic (most reports range between 25%-75% failure). Angel investing/VC is about home runs, not singles.

Last edited by Trom; 09-24-2019 at 11:59 AM.
  #48  
Old 09-24-2019, 12:06 PM
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How much of their assets are the putting into fledgling companies? If they're putting most of their money into these companies then I'm sticking by what I said; they are not following a smart business plan and they're almost certainly going to lose most of their money.

That doesn't apply if they're putting most of their money into safe investments and then putting a small fraction into high-risk investments. As I said, "Smart investors put their money into nineteen low-risk boring companies; companies that aren't going to make them a fortune but also aren't likely to disappear. Then, if they're feeling sassy, they will invest in one miracle company and hope it will make them a billion dollars. These smart investors will treat the miracle company like a lottery ticket. It can be fun to spend a little money that you can afford to lose on a dream but you don't bet everything you have on them."
A dedicated angel/venture fund is going to put nearly all of their assets into a relatively small amount of companies with extremely high risk/reward profiles.

However, most people that invest in these funds do so as part of an overall asset allocation strategy. An individual with $10mm net worth might only allocate a few percent of their portfolio to alternative assets like angel investing/VC.
  #49  
Old 09-24-2019, 01:21 PM
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The CEO of WeWork, Adam Neumann stepped down today, but will still be chairman of the parent company. He's losing most of his votes (which were granted through special shares with twenty votes each, but that's been reduced to three each).
  #50  
Old 09-24-2019, 01:36 PM
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Commentary about Elizabeth Holmes and Theranos: it was not just venture capitalists who fell for her scam...

I work for the European Patent Office as a patent examiner. The E.P.O. gives every year a series of awards to important inventors.

Elizabeth Holmes was nominated for the 2015 “European Inventor Awards” (category “non-European inventors”) and was ==)(== this close to winning it (!!). This link takes you to the website of the awards, and her entry as finalist (under “non-European inventors”) is still there, although all the information about her is now missing; only her name appears.

What is really worrying is that, just to be nominated, you must have had a granted EPO patent in your name. This means that somehow she managed to bamboozle some fellow examiners into granting her a patent related to her bullshit (!!!) [or, alternatively, that she was lucky enough to have her patent application looked at by a bunch of incompetents], and that the jury of the contest (who, at least in part, is supposed to be made up of people who are competent in science and engineering) did not see her bullshit for what it was (!!!).

So... all in all, a sobering experience.
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