The spectacular collapse of WeWork over the past 30 days has garnered few headlines in Pittsburgh. That makes sense, if you consider that the company isn’t headquartered here, has few employees here, and is only beginning to build out its first co-working space in Pittsburgh now. But the story of WeWork’s rise and fall sent a chill through me, reflexively dredging up memories of the bursting of the dot.com bubble in 1999-2000. WeWork’s story may be an isolated case of a founder’s vision intoxicating investors but, if it is not, the problems that WeWork’s business exposed could be more structural.
The highlights of the story are that WeWork was the Apple or Uber (more on that) of the co-working trend. In New York and Chicago, WeWork was the largest single leaseholder in those cities. Sit with that for a moment. Its rise, and the vision its founder spun, attracted one of the wealthiest venture capital sources, SoftBank’s Vision One Fund. The company was preparing for an IPO next month. Goldman Sachs was telling investors that the company would be worth $60-90 billion once public. The Securities Exchange Commission’s S-1 filing showed that WeWork was a one-company bubble. As the business media and public investors began to digest the company’s financials, the wheels fell off. There was no sustainable business model. Within a couple of weeks, the CEO was fired/resigned, selling his stake for $750 million. This unicorn of commercial real estate saw its value decline by $30 billion, and is likely heading to zero.
There is an excellent interview in New Yorker magazine with an NYU Stern Business School professor who first rang the alarms on WeWork in August. (Note: the professor’s language is salty)
What is frightening about WeWork’s story is what it says about investors. The biggest losers in the collapse will be WeWork’s 15,000 employees. Right behind them is SoftBank, which provided $11 billion to WeWork from its Vision One Fund. As a capital source, SoftBank will be fine. Its investors will also be fine, but the Vision One Fund, which raised $100 billion for unicorns like WeWork and Uber, is damaged. It’s the latter unicorn that should alarm Pittsburghers. Uber has seen about $9 billion from SoftBank and the fears are growing that Uber is another company that is peddling an unsustainable business model and unlimited growth without a foundation. Uber’s footprint in Pittsburgh is several times the 105,000 square feet that WeWork signed on for at 600 Grant Street. Of greater concern is what might follow if Uber’s value falls dramatically too.
The concern is not about individual tech companies flaming out, it’s that investors will flee from emerging technology companies in general. Stocks aren’t really an asset class in the way that bonds or commercial real estate is. Value isn’t as sturdy. But stock investors aren’t spooked by the occasional corporate flameout. It happens. When there are several spectacular flameouts in a short time period, however, investors naturally suspect that the problem is the industry rather than the companies. That was what burst the dot.com bubble. Tech companies lost 80 percent of their value on average. That made growing and expanding difficult. Investors don’t have a lot of places to put their money with comfortable returns today, but that has lulled many investors into forgetting that the risks aren’t always commensurate with the returns. It’s a frothy time and investors are susceptible to pitches that forecast solid returns. The problems come when it takes a highly risky investment to get a solid return.
That’s the chill that WeWork sends through me. Pittsburgh has seen a new era of prosperity arise from the successes of emerging technology. Emerging technology relies upon fresh investment to capitalize growth and the ultimate profitability that is sustainable. Many of the most promising technologies being developed in Pittsburgh are unfathomable to the average person (and maybe even the average genius at a VC firm). Artificial intelligence, robotics, advanced manufacturing, and autonomous vehicles are mysterious to most of us, and that includes some segment of the investor class. It’s important that investors remain confident that the breakthroughs being researched and developed in Pittsburgh can make it into the marketplace some day. Otherwise, our up and coming success stories could end up becoming the Lycos or FORE Systems of the 2010s. Keep an eye on the WeWork story. It may have ripples that reach Point State Park.
In construction news, A. R. Building has started construction on about $20 million in new apartments – Fox Plan and Evergreen Road – in Monroeville. The Buncher Company started work in the 20,000 square foot second phase of retail at Jackson’s Pointe north of Zelienople. Massaro Corp. was awarded the $1.5 million revolving door/entrance renovations at Fifth Avenue Place, the enabling project for Highmark’s $20 million lower level upgrade. W. K. Thomas & Associates started construction on a $1.2 million new facility for Butler Eye Care.