WeWork Invents a New Valuation Methodology

Facebook's Algorithm, EB-5 Investing, Gibson Brands

Midweek Freemium Briefing - 2/28/18
(Read Time = 3.883 a$$-kicking minutes)


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On Sunday we discussed Tops, Toys, Amazon & Owning the Robots.

Other recent awesome content:

  1. Gibson Brands’ Swan Song?

  2. Walmart and Trucking Issues (Short Grocers)

  3. Remington Outdoor File for Bankruptcy

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News of the Week (3 Reads) - Sponsored by B. Riley FBR

1. EB-5 Visas & Bankruptcy/Distress Part II

A week ago we highlighted the bankruptcy filing of Lucky Dragon Hotel & Casino LLC. In that bit, we wrote the following:

“All of which is all to say that there may be an opportunity for some industrious lawyers seeking an untapped niche as the distressed EB-5 experts.”

We were more prescient than we thought.

Yesterday Greentech Automotive Inc., an electric car company that heavily relied upon 283 EB-5 investors (to the tune of $141.5 million of funding), filed for bankruptcy in Alexandria, Virginia. And the company’s downfall is, in part, an interesting case study in the weaponization of political media.

The debtor noted in its bankruptcy papers that a conservative digital media company named Franklin Center for Government and Public Integrity - through its watchdog.org web site - posted 76 negative articles about the debtor which, at one point, was affiliated with liberal Virginia gubernatorial candidate, Terrence McAuliffe. And contrary to what 50 Cent may say, all publicity is apparently NOT good publicity.

In this instance, the attention from watchdog.org avalanched into public scrutiny from the SEC and the Office of the Inspector General of the Department of Homeland Security. Regarding the former, the SEC investigation never led to further action. In the latter, the OIG conducted an investigation of GreenTech and the involvement of Mr. McAuliffe in communications with the DHS’s Citizenship and Immigration Services (“USCIS”). A subsequent report added additional bad publicity. All of which affected the company’s ability to raise more capital AND affected the view of the USCIS toward the investor petitions for permanent residency under the EB-5 program. Whoops. The company blew through a lot of funds combating these various issues and other litigation - including litigation the company lost defending lawsuits from a subset of its EB-5 investors. One such lawsuit resulted in a multi-million dollar judgment; others remain outstanding.

So now the company has filed for bankruptcy to pursue a possible sale of its assets and deal with its outstanding litigation. It sure sounds like they’ll have to deal with several hundred angry EB-5 claimants whose immigration status in the U.S. is now in limbo and who will now become intimately acquainted with the automatic stay.* Have fun with that.

*Nerd alert: when a company files for bankruptcy, an “automatic stay” immediately goes into effect serving as an injunction against claimants pursuing claims against the company.

2. Digital Media is Hard (Long Algorithmic Disruption)

Women-focused dIgital publisher, Little Things, a producer of Facebook-based feel-good content (think recipes), announced yesterday that it is shutting down after failing to find a buyer. If it had a First Day Declaration in a bankruptcy filing, it could theoretically start with “What Facebook Giveth, Facebook Taketh Away.”

In case you haven’t heard, Facebook ($FB) has been under a bit of scrutiny lately. Something to do with bots, Russians, influenced elections, and heaps of societal division. So, recently, Mark Zuckerberg announced a tweak to the Facebook algorithm meant to prioritize friends and family content in your newsfeed and de-emphasize other content - including media content. This, naturally, is a big problem for media brands native to the Facebook platform. How big? Quantifiably big: Little Things apparently lost 75% of its organic traffic. Revenues and profit took a corresponding plunge. Yes, tech can obviously disrupt tech too. That’s the beauty of being the platform as opposed to be ON a platform.

In the company’s words,

“Unfortunately, as we were receiving those offers a full on catastrophic update to Facebook's algorithm took effect. The prioritization of friends/family content over publishers was the last straw. Our organic traffic (the highest margin business), and influencer traffic were cut by over 75%. No previous algorithm update ever came close to this level of decimation. The position it put us in was beyond dire. The businesses looking to acquire LittleThings got spooked and promptly exited the sale process, leaving us in jeopardy of our bank debt covenants and ultimately bringing an expedited end to our incredible story.”

Ouch. Like we said, media is hard.

P.S. Have we mentioned that you can become a Member and help PETITION avoid this fate?

3. WeWork (Long Free-wheeling Sex, Flowing Beer, Unicorns and Idyllic Pastures).

Yes, we’re obsessed. And how can you not be with #longform pieces like this on the company. Choice bit,

“‘Adam’s explanation for the valuation of WeWork speaks for itself,’ said Chris Kelly, co-founder and president of Convene, a company that offers flexible event spaces and is backed by major real estate firms. ‘This is not an Excel spreadsheet calculation. He believes there’s an energy behind the brand, and he’s gotten people to invest at that valuation. He has not tried to explain it in traditional financial terms.’

Indeed, to assess WeWork by conventional metrics is to miss the point, according to Mr. Neumann. WeWork isn’t really a real estate company. It’s a state of consciousness, he argues, a generation of interconnected emotionally intelligent entrepreneurs. And Mr. Neumann, with his combination of inspiration of chutzpah, wants to transform not just the way we work and live, but the very world we live in.”

A state of consciousness. A state of effing consciousness. Being a biglaw associate is also a state of consciousness but that doesn’t necessarily mind-port you to partner after 8 years, let alone 12.

Wait, more pixie dust - this time from The Atlantic:

“Whether that’s a $20 billion business, however, is a matter of contention. Companies specializing in shared office space have come before. As The Wall Street Journal noted this fall, the office-leasing company IWG manages five times the square footage but has about one-eight the market value. Even Adam Neumann, a co-founder of WeWork and its CEO, admits that his company is overvalued, if you’re looking merely at desks leased or rents collected. ‘No one is investing in a co-working company worth $20 billion. That doesn’t exist.’ he told Forbes in 2017. ‘Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.'“

We’re sure bankers all across the world will be happy to add “energy and spirituality analysis” to the lineup of valuation methodologies like precedent transaction, comparable company and discounted cash flow analyses. What the bloody hell.

But, wait, back to the New York Times:

“If more strangers are colliding by the grapefruit water, the thinking goes, they are more likely to meet up and invest in one another’s socially responsible start-ups, and then the world will be a better place.”

Hahaha. What?!?! We were in New York last week and collided with a lot of strangers on the subway and, suffice it to say, no deals were cut and, as some dude danced on a pole, nearly kicked Nancy in the face, and a dodging Jonny spilled over into the lap of a homeless dude, the world seemed like a pretty sh*tty place. But maybe that’s because the subway car we were in didn’t have retail, free IPAs, or J.Crew threads.* Now that we mention it, maybe it should. Like the Amtrak cafe car. Brilliant.

Anyway, finally, this is obviously not investment advice (clearly, of a private company), but this:

* As for J.Crew, the WeWork partnership may actually be a great move towards injecting some life into the sleepy brand.

Ponder This

By: Ted Gavin, Managing Director & Founding Partner of Gavin/Solmonese

It’s not new information that Gibson Brands, famed maker of guitars, is struggling. And some of the coverage in last week’s PETITION sheds light on why. When Justin Bieber is the only current superstar artist of note that one points to that uses Gibson gear, that’s not a good sign for a brand built on traditional rock star names like Jimmy Page and Slash. Not that they don’t build great guitars – they do, I own several of them. But their problem isn’t aging guys holding on to their musical tendencies. Their problem is that the primary feeder of the market for guitar makers – which is new guitarists – is evaporating.

For the last decade or more, the notion of the rock star front man has all but disappeared. Today’s popular music – like it or not – is more vested in the singer and producer than the musicians. The musicians may be session pros called in for backing tracks on the recording and maybe the tour; or the music may be samples added in production and taken on tour in the form of a digital file. None of this creates the inspiration for people to find a way to pick up a guitar and learn to do that thing that the guitarist in the band they love does on every song. Once Eric Clapton and Buddy Guy are gone, there are no more Eric Claptons and Buddy Guys to influence the next three generations of hopeful guitar buyers. The Allman Brothers band isn’t the same draw it used to be, and neither is Ace Frehley. Dave Grohl plays Gibson – I have one of his guitars (which is what 1,116,000 American Express Rewards points will buy you). It’s a fantastic instrument and it’s become my primary stage instrument. But not a lot of people are going to buy a $7,000 guitar (for example, I didn’t – hence the AMEX points). John Mayer is perhaps the most well-known mass market virtuoso guitarist-performer today. He plays Fender.

Speaking of Fender, they’re geniuses. They knew they had to make it easier to attract millennials to the instrument, so they created an online lesson system that fits into every learning stereotype of what millennials want. I’ve been a musician my entire life – you generally aspire to play what your teacher plays, and that creates lifelong loyalty. Loyalty entirely unlike what Gibson’s foray into electronic equipment created (hint: if it created loyalty, it was to someone else’s equipment). Gibson makes more than guitars, but nobody’s making bank on the mandolin market. A week ago, I had a beer with a guitarist bankruptcy lawyer friend and we couldn’t remember if Gibson actually made basses. As it turns out, they do (thank you, handy Internet) – but we couldn’t remember anyone who plays one.

And there’s the problem. Gibson is doomed because their market has gone away and they haven’t done the things they need to do to invent a new market pipeline. They say that kids come out of the womb wanting Oreos – that’s great news for Nabisco, but that’s not how it is with musical instruments. If you want a market, you have to constantly create new buyers. Gibson’s efforts in that regard have been ... *sigh* … off-key.

(New!) Resource Recommendations

It was clear from our survey results that people are hungry for a$$-kicking resources on the topics of restructuring, tech, finance, and disruption. We went ahead and started compiling a "reading list," of sorts for your benefit. You can find it here. This will be a growing/evolving list. Our latest addition is Conspiracy: Peter Thiel, Hulk Hogan, Gawker, and the Anatomy of Intrigue.”