Scott Galloway is an NYU business professor and entrepreneur whose commentary I love!
Recently, he has been beating the heck out of WeWork and what he says is a ridiculous over-valuation.
For those of you who don’t know, WeWork is a shared-office-space-provider that caters to entrepreneurs and small business people, and it is currently booming.
It has a valuation of $47 billion even though it is losing over $200,000 PER HOUR. Yes, per hour.
Galloway thinks its value should be no more than $10 billion for a variety of reasons.
First and foremost, WeWork is locked into very expensive long-term leases all across America, but they earn money by renting short-term primarily to individuals.
As soon as a recession hits, most of those individuals will abandon their WeWork spaces and return to Mom and Dad’s basement, per Galloway, and WeWork will get killed.
WeWork gets its ridiculous valuation by pretending to be a tech company as well as a subscription company – two things the markets love.
Galloway also says to be leery of some major red flags such as the founder selling $700 million of stock prior to their IPO (something that should scare anyone).
You can read Galloway’s entire analysis in this Business Insider article here, and please do b/c it is both comical and fascinating.
I am blogging about WeWork b/c it illuminates something we all deal with – the temptation to over-expand during good times!
(I also just wanted an excuse to talk about WeWork b/c I find it so interesting.)
WeWork is expanding like crazy b/c the market seems limitless, but that will of course change instantly as soon as the economy softens.
There are actually two related issues for those of us in mortgages and real estate: (1) the temptation to over-expand; and (2) the fear of crashing during a downturn.
FEAR OF CRASHING:
In the 1990s, I had read so many horror stories about companies and individuals over-expanding during good times, that I was far too afraid of taking on fixed overhead in the form of assistants and a larger office.
When my friends in the industry practically forced me to take on three assistants and a larger office in the late 1990s though, my income quickly doubled and then tripled and remained higher even though a recession hit shortly after I expanded.
I survived by ramping up my selling during slow times, and by offering lower rates, better service and more niche products than my peers. In other words, I did what all businesses need to do during downturns.
I only wish I had not let my fears keep me from expanding for so long b/c I left way too much easy money on the table.
TEMPTATION TO OVER-EXPAND:
I see real estate and mortgage companies over-expand constantly. The best example was all of the subprime companies that over-expanded prior to the 2008 meltdown
Their business models required a permanent environment of ever-increasing home-values and ever-decreasing interest rates.
That environment was of course impossible to count on forever so it was crazy for those firms to expand like they did.
So businesses should not over-expand if they know their market will shrink significantly at some point and if they plan on doing the same things after the market contracts.
But, over-expansion should be less of a concern for businesses with a sound plan of attack for downturns.
TAKEAWAYS FROM THIS BLOG:
- Don’t be too afraid to expand during good times b/c you will leave too much money on the table. Leveraging yourself with qualified help is both freeing and lucrative.
- Make sure you have a plan of attack for downturns.
- Short WeWork stock after its IPO. 😊
Lastly, is JVM over-expanding?
Maybe, but we don’t think so.
We in fact spend several hours every week preparing for the next downturn. No matter how low rates go, we will remain heavily focused on the purchase market; we will continue to significantly improve our offerings and value props to Realtors and borrowers alike; we are continuously working to improve our systems and technology to make sure we are a low-cost producer and to make sure our borrowers have silky smooth experiences; we are tapping into new markets; and we are building a super-powered sales and marketing machine that will drive business in all markets.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 310167
