- Scott Galloway, the bestselling author and well-known tech industry, is a professor of marketing at New York University's Stern School of Business. His weekly business videos at Section4 and Winners & Losers have generated millions of views.
- The following is his recent blog post in its entirety, republished with permission. It originally ran on his own blog, "No Mercy / No Malice."
- In that, he argues that Softbank is linked to several unicorn properties, and some of them – such as OYO and WeWork – are on a precarious path.
- He says that the bigger picture is that an "epidemic of hubris" fueled the "Unicorn Industrial Complex", but that an antidote is on the way.
- Visit the Business Insider website for more stories.
, Section 1: SoftBank and Property
Last night I met friends with Soho House, a club that was only a member. I have always wanted to be a member and have several friends who have offered to sponsor me. But the thought of being rejected for membership in a club where all my friends are members is harm that my ego could not bear. So, no membership for dawg. As a guest I will eat a good meal and a couple of Maker's and Gingers (ie five). Then I go home and decide that the smart thing to do would be a prelude to my member-like hangover, so I get in 32 grams of water, 3 Advil and a hit of my sleeping sleeping weapon. Then I'll watch the last two episodes of Succession and get 4-5 hours of sleep.
Thursday. Night. I. NYC.
I go on Barron's TV (yes, that's one thing) Friday morning to discuss Tesla (which I think is overrated), Amazon and Apple. Since I'm not concerned about the stock, on the subway I will come via Twitter (where technology meets hatred) that I am an idiot, not a real professor, and hard to look at, from handles that are some version of @ Tesla Long. I'm pretty sure there are more fake Twitter handles managed by Tesla Longer than GRU.
Note: If it sounds strange that I'm still on TV possibly full, keep in mind that the program is broadcast on Fox. Most of their anchors seem tall when they ship.
I will also avoid making important decisions on Friday. When I have a hangover with members / guests, my judgment is reduced. This bad judgment is predictable and can, conversely, be constructed into a pattern: alcohol, marijuana, sleep deprivation. So where else can we use pattern recognition to predict what can happen in the markets?
I know, let's talk about WeWork.
The pattern of tectonic plates grinding: SoftBank, estate, red flags. Where else can we see what kind of plate collision leads to an earthquake? (Note: especially proud of the seismology metaphor in the previous sentence.) Btw, best movie involving a guy who could predict earthquakes? "Phenomenon."
What earthquake is to California is SoftBank for unicorns to real estate:
- Use technology to connect top brokers with home buyers
- to help everyone find their place in the world. "
- Real estate technology and 19% of non-broker jobs in "technology"
- Highest Glassdoor rating (4.3) for real estate companies
- Purchased 14 other brokerages
Stools (red flags)
- C-Suite turnover is a show: includes CFO, COO, CMO, CTO, CPO, General Counsel, Head of Product, VP of Product, and VP of Communications  Capital masking as growth (some brokers get entire commission, without anything coming to Compass, for the first 8 deals)
Summary / prediction : Strategy is sensible and they really buy asse ts. The SoftBank effect (full capital) probably means they have too much. The value will decline, but not implode, making it one of SoftBank's better real estate investments.
- Buy or franchise worn hotels, fix up, train staff, and take a commission (25-30%)
- "Offering tasty spaces , when you need them, at unbeatable prices. "
- Improvement of Bracket Benefits (old / outdated hotels)
- No global hotel for cheap hotels
- Uses a technical platform to help hotel partners with distribution  Feces (red flag)
- Bought Hooters Casino in Las Vegas for $ 135 million (sold $ 54 million 4 years ago, signal of overpayment)
- Leadership: Ritesh Agarwal – 25, first venture
- Lightspeed Ventures and Sequoia Capital Coming Out of Evasion: Selling 50% of its $ 1.5 Billion Ownership
- SoftBank (and Founder) Deposit Money: Ritesh Agarwal Invests $ 700 Million in Last $ 1.5 Billion Round dollars with Softbank that helped finance the rest
- SoftBank has been a leading investor in every round since 2015 (smoking on offer)
- Reviews = sh * t
Summary / prediction: [1 9459007] OYO feels like WeWork's budget hotel with red flags the size of Days Inns. A 25 year old founder and SoftBank is a toxic mixture. Yes, Zuck and Bill Gates founded their companies at the same age, but it's a bad strategy to assume the CEO is the next Zuck / Gates. The entrepreneurs who buy extra shares are a good sign, unless you are 25 years old and borrow against your existing shares to buy more. That means he is immensely engaged and immature.
Lightspeed and Sequoia also have too much capital and are under pressure to distribute additional money in portfolio companies where they have negotiated pro-rata investment rights for subsequent rounds. With OYO, they have not only gone, but have full insider information and observed the CEO, they have decided to sell shares. Customer feedback is awful, and customer purchases don't seem to scale. Here. We. Go.
- iBuying: sell your house to Opendoor in less than 24 hours in cash; company collects service fees, resells houses and offers financing to a trapping market
- "To empower everyone with the freedom to move."
- Provide immediate cash to homeowners
- Enormous ineffective market ripe for disruption
- Compulsory value proposition (liquidity in traditional illiquid asset class)
- Management and Board have little real estate experience
- The risk of iBuying is significant in a downturn
- Can algorithms replace the nuance of property valuation?
Summary / prediction : A compelling value proposition in a market that is hugely skewed / inefficient. Without knowing the average hold / margin on properties, difficult to assess. In the absence of this data, it feels like a lifted effort in the US real estate market.
The bigger story
The business story of the month is WeWork's breakdown. The bigger story will be SoftBank's weakening of the vision funds. Earlier this year, we predicted that the IPO unicorn class in 2019 would lose money – YTD is up 5%, against 13% in 2018 and 94% in 2017. The 2020 story will be a 50% + decrease in the value of privately owned unicorns. The world is not as impressed with Silicon Valley as Silicon Valley is with itself.
An 11-year expansion, cheap capital and investors chasing a Facebook / Google high have resulted in an environment that is "no different this time." People love WeWork and Uber as I loved Pets.com and Urban Fetch. A 60 pound bag of dog food and a pint of Ben & Jerry's delivered the next day / hour for less than the price was great, except for the shareholders. Value is a function of growth and margins. Many / most of today's unicorns have used massive capital to achieve the former, while showing no patience or skill to achieve the latter. Full-time record deficits are indefensible, as is capital growth that is meant to create the illusion of innovation.
It is also a larger fault line. In 1999, I was 34 years old and ran an e-commerce incubator (Brand Farm) supported by GS, JPM and Maveron. I was mistaken for my happiness – being born a white male in 60's California – for talent. My money / success was a virtue that gave me the license to demonstrate poor character and lack of empathy. The market had a quick and effective immune response to my torment.
Once again, there is an epidemic of hubris that has made the Unicorn Industrial Complex a hot zone.
The good news? Antidotes are imminent.