I rarely mention this, but Heejin and I started a tech company called WeDrink – and we were actually billionaires…for a while.
We would get our clients (WeDrinkers) to download the “WeDrink” app, and then we’d ship them a plastic cup.
Every 30 minutes, the app would remind WeDrinkers to drink water, and then yell “Woohoo” really loudly so non-WeDrinkers would know that WeDrinkers were having way more fun than non-WeDrinkers.
It was awesome too! SoftBank gave us $10 billion of funding, and our valuation hit $47 billion! Heejin and I would wander around the office in our bare feet, extol the virtues of yoga, brag about our surfing exploits, and tell everyone that we were going to end world hunger on our way to becoming the first trillionaires!
But then, some jerk stock analyst dug into our company and realized that all we were doing was shipping plastic drinking cups – and it all came crashing down. We were sad because we were definitely going to end world hunger.
WeWork Files For Bankruptcy Protection
I told our WeDrink startup story because it is exactly parallel to the WeWork story. WeWork was a short-term furnished office rental company that pretended to be a tech company with enormous ESG ambitions. WeWork did so to garner massive investments from venture capitalists while also cultivating a $47 billion valuation.
What makes the story so fascinating is that it worked – even though WeWork was really nothing more than a glorified executive office suite company in an already crowded field with numerous small landlords and companies like Regus already offering similar space.
WeWork came crashing to earth after analysts like Scott Galloway exposed it for what it really was. WeWork tried to come back after its initial fall from grace, but only stumbled further until its bankruptcy filing.
In economics and finance, contagion refers to an adverse financial event spreading to other sectors of the economy – often making adverse impacts much worse than anticipated.
And WeWork will foster much contagion, as venture capitalists, regular investors, landlords and banks throughout the world will suffer. In addition, all of the smaller firms catering to WeWork will suffer too. These firms include snack vendors, janitorial services, and restaurants near WeWork offices, as well as office supply, copy machine, IT, and office furniture firms.
Cheap Money Fosters Malinvestment
What made WeWork possible was the prevalence of very “cheap money,” or money that is considered almost free when interest rates are very low. When rates are way too low, investors don’t effectively account for the cost of money and they tend to throw money around everywhere in an effort to find more yield. And this in turn fosters what is called malinvestment – or investments in entities that have little probability of making money and that can only garner funds in very low-rate environments.
Malinvestment on a grand scale is extremely dangerous, as it can bring down entire economies. We saw this with the dotcom crash in 2000 when everyone poured funds into any company with “dotcom” in its name no matter how viable the company was, with the subprime crisis in 2008 when everyone speculated in real estate, and with China’s housing market over the last ten years, which will very likely bring China’s economy to its knees.
Over the last 15 years since the 2008 financial crisis, we have had a continued period of the lowest interest rates the world has ever seen – and there is no telling YET how much malinvestment that fostered. It has yet to be exposed too because rates stayed so low for so long that firms were able to continue to go back to the well to get more and more funding. And, as we all know, the era of cheap money ended in 2022 and we are just now starting to feel the full effects.
So, my broader point is that I am fairly sure that WeWork is only the tip of the malinvestment iceberg and that we will see a lot more WeWorks implode over the next year or two – and that is another reason why I remain so convinced that the coming recession will be worse than many people think. The contagion effects of all that malinvestment imploding are always worse than everyone anticipates – especially after an unprecedented 15-year ride of very low rates.
And, a worse-than-expected recession means lower-than-expected interest rates – at least in the short term.
If there are any readers out there who still expect a soft landing (no recession), I’d like to offer them a chance to invest in my and Heejin’s latest startup – WeBreathe (you just need to download our breathing app, and we’ll send you a paper bag full of air).