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.
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.
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.
I mean, if you look past outright fraud, a lot of companies look like pretty good ideas
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.
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.
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.
“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.
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.
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.
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.
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.
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.
