🎙️ EP02: How the WeWork Meltdown Shook Up Venture Capital | InvestHer Podcast

Welcome to Market Roundup. This is episode 0 of our monthly series that we're going to do with Inma Martinez, who is a deep tech. fantastic investor with a lot of insights into the financial markets, where we are going to share with you what's been happening in the markets, what do you need to know, what are the key insights, and how can they help you in your startup moving forward when it comes to looking for funding. In this very first episode, you're going to hear all about Inma, why you should listen to her, her depth of experience and expertise, and then she's going to dive into the WeWork SoftBank fiasco, where we're going to learn what really happened, what happened behind the scenes, What are the key insights you need to know from it? And what can you learn so that you don't make those mistakes as well moving forward? We can't wait to hear what you think, so enjoy this next episode and check the show notes to the link to the free download where you can get the takeaways. So welcome everybody to episode 0 of Market Roundup, a new podcast at Global Investor that will cover the money markets and the economic news affecting innovation, funding and startups' capital requirements. GIH is all about empowering entrepreneurs with the right tools and the insights to hone their skills when capitalizing their companies. And so we approached someone internationally recognized as a tech pioneer, entrepreneur, but also a funding and M&A executive, Inma Martínez, Venture Partner at Deep Science Ventures. Inma, you're one of the most compelling figures in the innovation and technology sectors. After a career in financial services industry and telecoms, you became part of the first group of European tech entrepreneurs that successfully disrupted and created the mobile internet industry.

It was, and it was a very, very homebrewer's sector. We were about 24 people. Remember Brent Hoverman and Martha Lane Fox and other people, Michael Acton-Smith, and we used to know each other by name. and get together in a dive bar in SoHo that later on that became the meetups of the First Tuesday. So it was a very, very, very grassroots scene. There was no support whatsoever for a young person setting up something called a startup. Like, just to give you an example, my co-founder and I went around every single retail bank in in London and nobody would allow us to open a bank account because the banking laws at the time in London requested that we had to have been trading for a year before we were allowed to open a bank account. And I used to ask, you know, these people, I'm like, so where do we put the money? Under the mattress? Like, how can someone trade for a year and not have a bank account for the company? So, so these were the days. And yeah, indeed, we built the first AI personalization system for mobile content services, which was like supersonic. I mean, when I used to explain what— this is what we do. And in the meantime, people were setting up dot-coms. We were like the rocket scientists.

I love it. And you also worked in the digitalization of sectors like music, video, and multimedia. Tell us about that.

Yeah, my investors, 3i, approached me to be the CEO of a startup. Literally, there were like 7 people in the office the first time I showed up in Oulu in northern Finland. And these guys had managed to create a software for Nokia phones that was able to pick up live radio music signals. But also broadcast video images that were in parallel to the track. So imagine this was, and this is before Spotify and this is before video cell phones and iPods. And so again, it was another of those super radical things. And we were really lucky because our efforts were paid off. We launched in Asia, our first market with Media Star, the massive media company out of Singapore. And then we started launching in every country in Europe and then we launched in America and then by the time we were in America, I think that Nokia thought, let's buy them. And thank God they did. So yeah, it was, it was a story of 5 people in Lapland to a 50-people company launching globally, sweating bullets, you know, intense work.

So you like to be someone at the frontier of tech and innovation by the sounds of it. So wow. And when And when you came back to London, you also worked with VCs and private equity firms in some of their portfolio companies. Isn't that right?

Yeah, actually, I remember I met with Michael Acton-Smith, who's now super famous with Calm, the super amazing app to breathe. So Michael said, Inma, what are you going to do now? And I said, I don't know. I'm so tired. You know, you end up really tired after you sell a company and everything is done and dusted. And so he introduced me to Robin Klein. who was at the time still an angel investor. And I met Richard Morross when he was setting up Moo. And I went from super uber tech to the world of cards and amazing designs and the concept of a bricks and mortar, the power of a card and the power of design. So yeah, I went in because of the investors and I also worked with a private equity firm that had invested in a handset manufacturer in Finland. You know, it was the— It was BeneFon, the only handset manufacturer in the world that was manufacturing GPS phones. These are the phones that the trackers and the people in logistics always had, but they wanted to create a small phone, a smaller one for the consumer. So I ended up designing a phone, Twig. Nobody knows this.

Wow!

You've designed phones? Yeah, I've designed phones.

Like patents and all? Like, have you got a patent under your name?

I think it's probably in the documentation of the company. And so yeah, and we launched that We launched it at Mobile World Congress and I bump into some people, you know, sometimes and they're like, Twig, I remember Twig. I was like, yeah, exactly. So yeah, yeah. I love it.

And it's cool because, okay, let me make sure I've got this right. You've been entrepreneur turned helping turn around amazing startups and helping them, you know, create even more value and get bigger at Moo and Benefon. And then you also have invested directly in startups as an angel investor.

I did, I did. I, not massively because I'm very cautious, but I have invested. I have invested in businesses led by women, led by men, businesses that have gone bust, you know, they couldn't fulfill their destiny. And then others were super successful. Like last year, one, you know, the one investment that I still had going on, Albert, which was a fintech company, mobile accounting, was acquired by Santander. And I remember I was coming back from Helsinki and I was at the Helsinki airport and I got a phone call from, from the CEO, very secretive. He was like, hi, you need to sign a bunch of papers. I'm like, sure, I'm at the airport. What papers are those? Okay, on Monday we're being acquired. I was like, what? So yeah, so that was like, you know, signing papers at friends' houses that had printers and my God, you know, the craziness of everything. But yeah, very successful exit and everybody very happy.

Oh my goodness.

Yeah, yeah, it was a Mangrove investment. Michael Jackson, fabulous European VC, you know, was the Series A, and we couldn't be happier. We couldn't be happier.

And then you went back to the city then, I think it was, as a partner?

So in between these fabulous shenanigans, a headhunter said to me, look, this boutique investment bank, super reputable, massive list of clients, you know, they want a partner. with banking experience, but also technology experience, because sometimes a client enters through the door and they bring their technology and their CTO and they start talking tech and nobody understands.

Hmm.

So they're like, you are an ex-banker and you're a technology person, you know, why don't you join us? And it was good because I joined as a non-full-time. So I was joining per deal basis. So whenever there was a tech deal, I was there. I brought deals to the business as well. And there were many other kinds of deals that I was involved in. that I was involved, but it was basically an M&A firm, meaning we were representing entrepreneurs selling their companies most of the time or funding for them. So it was a, it was, you know, I was doing both. I'm always doing a multitude of things. I love being active. So, and I love, my mind is incredibly neotenic, meaning— What does that mean? I thrive when I'm doing a multitude of things. Otherwise I get really bored.

I hear you. I love it. I feel I'm similar to that one. And last but not least, we've covered— my goodness, you've lived so many lives. You're like a cat. I know you like dogs, but you're like a cat.

I love cats as well. I love, I love cats as well. I totally love them.

But last but not least, you've also mentored entrepreneurs across many of the different accelerator programs.

Yeah, and it's something that it started with Seedcamp when Seedcamp was formed. I was working with Richard at MOO and obviously Seedcamp was the brainchild of the London VCs and the active angels. And so we got involved and I always felt that it's good to give back.

Hmm.

And I felt, okay, I'm a seasoned serial entrepreneur. I know how to raise money. I know how to sell companies. I want to give back to others. So mentorship for me has been a personal decision, has been a completely pro bono decision. And I have been involved in as many accelerators that have asked me to get involved. It got to a point I had to turn down things because I was like, listen, you know, I'm just gonna go bananas here. But I have worked with, you know, BBC Labs, Microsoft Ventures, Impact was an Italian spinoff Spanish accelerator funded with the Europe 2020 funding. Imperial College has its own accelerator program, UCL, and Deep Science Ventures, where I'm venture partner. It literally is a scientific institute where we fund but also accelerate projects, scientific projects. So there is mentorship there as well. It's— I think all of us have to give back somehow.

Let's get started. What are you keen to bring forth with Market Roundup?

Well, I think that if you are an entrepreneur today or a business owner, the way innovation is driving progress and the economy, you need to come to terms with understanding the money markets. Because if you are in the disruption business and innovation is running the money markets, you need to understand the money markets. And also, I always felt that A CEO, once you get to the top of running the business, you're actually not running the day-to-day. Your mission, your number one job is the firm's capitalization. I always tell my mentees, okay, you're the CEO and you're doing the marketing and sitting in front of clients. That's all fantastic. But as soon as you hire the right person to do all of these tasks, your one job is to always make sure that there's money in the bank. to pay everybody and to continue trading. So you have to be the money person. Not the CFO, you're not an accountant, you need to be the funding helmet. And this is why, you know, I think that Market Roundup will be a very useful tool for anyone listening to, to the podcast because what we're gonna do is look at the markets, what has happened every 4 weeks, and then see the ripple effects that affect, you know, your business or the sector, and then understanding the language of money. You know, many, many people that don't come from investment banking, they sit in front of CNBC News or Bloomberg News and they're like, what are they saying? What are these lingo? Well, there is a lingo and we're going to show it to you.

Yeah.

We're going to show you terms. We're going to show you concepts. And I remember, When I fundraised the first time, because I was straight out of banking, I would be sitting in front of VCs and I would use the language of money so masterly that some of them came from like consultants at Bain, you know, but I came out of a house called Goldman Sachs. I was a stockbroker. So I would really approach talking about the money and the use of proceeds, you know, and et cetera, the capitalization with professionality. And I think That this is a new skill that people need to master. So what we're going to do is we're going to read between the lines. You know, if something happens in the market, what does it mean for you?

Hmm.

How is that going to affect the world of VCs and startups and disruption? Because everything has a cause and an effect, and sometimes the media doesn't really cover that. So we will cover it here.

I love it. I love it. So it's really about, you know, making, as you say, those financial markets and all the concepts, making it clear. So because we want our entrepreneurs to really leverage it strategically. I love the way you say that. So let's kick off with today's episode, the WeWork IPO fiasco. All right, tell us, Inma, what happened there?

I think we need to start saying, what is it that did not happen? Because so many things happened. So basically, in a nutshell, WeWork is an almost 10-year-old company, started in 2010. Architect founder, Israeli serial entrepreneur guy, you know, itching to really hit it big time with some kind of startup. They come together and they think people want to work in cool buildings. Fantastic statement and very truthful. People, we all want to work in super cool offices. That, the case has been proven.

Hmm.

But what happened is, you know, SoftBank, which was the lead investor, had to withdraw the IPO, had to rescue the company pre-IPO because when the prospectus went around Wall Street, and asset managers were reading their prospectus, they definitely read very clearly what was printed there.

Hmm.

And what was printed there was a company where the CEO and founder was rampant and out of control. For example, he was buying buildings and then leasing them back to his own company, WeWork, and registering brands That then the company had to buy off him. Basically, he was self-enriching himself, which if he was the CEO of a normal publicly traded company, that would be illegal.

Totally. Nobody would do that.

But why on earth he was allowed to conduct himself in such manner is what everybody began to question. And this obviously cascaded into systemic mismanagement. You know, before the IPO, the CEO withdrew $700 million out of the bank accounts of the company. What is that? So all of these began to be discovered and revealed either by the Wall Street Journal, by investors themselves reading the prospectus, and it began to shine a super negative light onto the company. But what really, what really put the brakes was the actual business model. Somehow SoftBank and Benchmark were bankrolling a money-losing company operating under a lunatic business model that would never make any money. It's kind of like Uber. It's going to affect SoftBank in a hugely damaging way. So The business model is what really backfired for everyone, apart from disclosing across 10 pages in the IPO filing that the CEO is doing all these crazy things. And people were like, I'm sorry, who's stopping this?

Hmm.

So we went from, oh yes, we're going to go IPO with a super billions valuation, to the company having to be rescued by SoftBank because the stock Basically, the shares were worth zero. So SoftBank had to then rescue the company. The valuation sank. Anyway, big bailout. And now a lot of unknowns as to how this company is going to be saved and restructured, which is possible.

It's crazy. And so it sounds like, you know, Adam was a rampant, out-of-control founder and CEO. Like, tell us a bit more about some of the things that that came out? Because I think that's important to name some of that behavior so that we can learn from it.

Well, apart from enriching himself, well, he was, for example, one day he fired about 7% of the headcount and then he threw a party where he invited like all rappers, you know, Run-DMC was a group that I used to go to concerts in Queens, and then drank tequila and then Another— on another occasion, he put everyone on a plane and they went into an offsite where he kind of preached about saving orphans and world poverty. You know, like, I think when I say loose cannon, it's not so much of a loose cannon. It's also that he actually allowed himself to be turned into one of these—

A martyr.

almost quasi-iconic religious figures that Silicon Valley loves to put on pedestals. Because, you know, why on earth you do things like that is just beyond me.

And do you think that Silicon Valley's culture of this founder worship, do you think it's gonna stop after this? Like, I mean, why do investors in the tech culture do this?

Well, I think because Silicon Valley has had a lot of these super alpha founders. I'm talking about Steve Jobs. I'm talking about Larry Ellison from Oracle. Outrageous guys. Steve Jobs used to drive his Porsche without license plates. I mean, for God's sakes. What's going on in America? So I think that these triple alpha mentality of, yeah, you can be Tarzan and beat your chest and be the king of the jungle and unaccountable. This is a story because everybody loves cool people. I love cool people, you know? But when cool people start infringing the law, that's when I don't like them. And apparently in the Valley, everything is going under the carpet. Oh yeah, drive without a license plate. That'll be cool. You know, stuff like that, you know? And, or yeah, lease the brand out of your own name and let's move on. What's the next item at the board meeting today? You know, it's like, so, so yeah.

How bad behavior, how bad you can behave like.

Exactly. I think we do not have that culture in Europe to that extent. Some of our most iconic CEOs, like I'm thinking about Daniel Ek from Spotify, he's the most modest low-key person you'll ever meet. Daniel was one of our developers at a Swedish startup that I got involved in. And Daniel was 18 at the time. And I remember he went up to Mattias Mischke, the CEO, and said, hi, can I just work part-time? I really want to work on a project in the afternoon at home. That was Spotify.

Wow.

So, so we have super cool CEOs that are humble, they're polite. You know, we're not— we don't have those super Jesus CEOs that the US likes to, you know, propel into the world. And thank God for that, because now it's backfiring. It's backfiring in their faces.

And about time. I mean, really about time. Like, how bad or even illegal would you say was the company management at WeWork?

Completely. But the problem is, this is the problem. The problem is when you're a startup or you're a company that is funded by not the markets, though, by private investors like VCs or your family, basically nobody from the outside knows how things are run because you don't need to publish it, right?

Yeah.

And then one of the funny gaps in the market is When you raise money, your investors do not become NEDs. They don't become directors. They become board—

Board members.

Board observers. And you may ask why exactly, because they do not want to be legally liable for any mismanagement of the company. They are just the money. So then as a founder and CEO, You have to be super cautious of who your NEDs really are, because you need to put people that know how to run companies from the corporate liability perspective. Most entrepreneurs fail here because they think, oh, my NEDs are sector experts, because then when I raise money, I say, these are the members of my board and they're all, you know, from the sector.

Very well.

really helps you raise money because everybody thinks, okay, so if you're an e-commerce retail and in your board you have the ex-CEO of Selfridges or Harrods, fantastic. You know, you got— But then when it comes to running the company, once the ton of money hits the bank, which is when you're gonna go and grow exponentially and start hiring proper people and a CFO and head of legal, et cetera. Then you need to remember, I need someone that runs the corporate governance. And normally that person is the chairman.

Hmm.

And in some instances, some VCs, they say, oh, we will choose the chairman for you. I mean, they put it as part of the investment agreement, like, oh, and we reserve the right to choose the chairman, you know, whatever, if you want to fight for that one. But You have to remember, you need someone that will ensure that how a company should be run is run. Because you don't want to fail and you don't want to end up in a situation where you had no idea how something had to be done. And then, and then literally the company's house or the regulators fall upon you.

Hmm.

And I'm talking about, you know, how to fire people or how to hire people, establishing conditions of work. I mean, I had to learn ridiculous stuff that, for example, is beyond me, but everybody working in code development, people sitting on desks, if you buy chairs, they all have to have armrests. Can you believe it?

Hmm.

Because otherwise I could be sued because those are inappropriate chairs. And you learn by doing and being there. Well, the same way that you have laws protecting the office environment and the fire regulations and all of those shenanigans, the board also has ways to be run. The minutes have to be written, the minutes have to be signed, things have to be explained, documents need to be passed around all of the board members before and after, etc. And disclosure, you have to disclose how things are because if you fail to not disclose, again, you will be, you know, you will be in trouble. So some Some companies are run like clockwork, and I've been at those boards. And apparently this one— my guess, if I'm going to put my detective hat, I read something in the papers that really threw the light for me, because I respect Benchmark. I respect SoftBank. And I'm thinking, what happened here? And I read somewhere that one of the shenanigans was that Adam Neumann, the CEO, had super shares. And the way these shares were described, they were like beyond preferred stock. One super share equaled 6 shares, which meant that he always overpowered voting rights at his board.

He always had control.

So you can now imagine the board meetings. Please, let's stop the CEO from buying and leasing buildings. Who's in favor? Bam. You know, he would, I'm going to take $700 million before— you know, he's like, who can stop this madman? The question is, how hungry for this investment were Benchmark and SoftBank to have allowed that when they put money on the table? And that was their mistake. One of the things that happens in investments is that when you come across one of those sweet potatoes of a company that you're like, oh my God, we want to go into this deal. And we want— it's us. We don't want anyone else to see them. You kind of let the founder get away with crazy stuff because you want to be in the deal. Because who on earth allows a guy called Adam Neumann to have superpower shares that can control the board. It's kind of like shooting yourself already. The minute you sign that agreement, that is the day that you stop having a say in that company.

It's like, it's so unheard of. And that's why it's important that it comes out and that we kind of share it here on this podcast. So like, how come WeWork's board didn't act upon all these excesses and infringements? Like you've mentioned, like, like the board, they're observers. So they would have been sitting in, and we're not talking about— we are not talking about VCs without experience in that. So how come, you know, the WeWork board didn't act upon this?

Probably because they were outvoted. This is why I'm sharing you my thesis. Like, maybe they were like, man, this guy has had us and there's nothing we can do. But to me, not to be able to manage him, not to be able to do something, it's just too surreal. Because they also put it in writing in their prospectus, pages explaining how this guy was operating, which then, you know, when normal people read the prospectus, they were like, what kind of a horror story is this? You know? And I think that that's when everything was revealed. And the markets, the FT, for example, is blaming JP Morgan and Goldman Sachs should have stopped this show. Okay, hello FT, let me explain to you how an investment bank works. These guys do deals. That's their job. They're not Santa Claus. And they're not the angel of corrections. Okay, so if SoftBank and Benchmark give them a mandate, we want you guys to take us IPO, these guys say, righty-o. We're gonna do it. And they're like machines. And I was inside of one of those houses. So I'm sorry, FT, like, oh, well, Goldman Sachs and JPMorgan were doing their deal. Let's do an IPO. Let's take these people on a roadshow. Let's put them in front of asset managers. This is what you do every single day of the year at an investment bank.

Hmm.

But you know, the media sometimes is like putting the blame here and there. Like, stop blaming, you know, think carefully. It starts with the company's board and only the company's board. These guys are bankers that you have hired to do a financial transaction. They're not the guardian angels. You know, and now to be honest, the backfiring is going to negatively affect Goldman and JP Morgan when they go again to some, you know, Fidelity. Hello, it's us again. And this time the asset manager is going to say, what kind of a horrible prospectus are you gonna put on my desk? So really, the Ripple shame is going to affect them as well.

So what is the difference between these board observers and NEDs, the non-executive directors?

An NED has a legally binding responsibility to ensure the corporate governance of the firm, at least in the UK where I know my laws. A serious business. Okay? Now, if you're an observer, you walk into the sunshine. You're just observing the board. That's why the money only wants to be the money.

Hmm.

They don't want to be NEDs. That's not their job. They came there to put money and take a return. It's an investment. So I'm not implying that now VCs have to be NEDs. No, no, no, no, no. What I'm saying is whomever is an NED, you need to make sure that these people know their corporate governance backwards and forwards and A to Z.

So how's all this going to affect Benchmark and SoftBank in the short and the long term?

Well, this is an interesting question because 10 years ago, big pockets like SoftBank didn't walk around Silicon Valley. These guys were doing private equity deals. They were building roads, putting deals like $200 million to build an oil gas plant. This is what the big money does.

Hmm.

And now SoftBank is not the only one. You have sovereign wealth funds like Saudi Arabia's Public Investment Fund, and you have investors like Tiger Global Management. And so the super big pockets have landed On Sand Hill Road. And that turned SoftBank into Mr. Moneybags. Basically, the portfolio of this $100 billion fund contains from real estate to insurance to bioengineering. You know, they are huge investors in Alibaba. They were massive investors in Uber. I mean, when Google wanted to get rid of their robotics, Boston Robotics, guess who bought it?

SoftBank.

It's like, oh, we need money. Call SoftBank. They're always happy to help. So SoftBank became the money bugs. They're everywhere, literally everywhere. And what's going to happen? Well, right now, the last couple of days, their stock is heavily discounted in the Tokyo exchanges. trading at 40% discount. And what some people are going to do is kind of like the hyenas. They're like, oh my God, let's buy now. 40% discount is huge.

Hmm.

If you're not buying SoftBank stock now, you're an idiot basically, because indirectly you'll get your hands on companies like Alibaba. Yes, WeWork has been a fiasco, yet Uber is going to end up in tears. But there are very good companies there. So it's going to balance out, and this is a great opportunity. Now reputation in terms of how does SoftBank manage their portfolio is what is being questioned.

Right.

But again, if they are board observers and not NEDs, you know, they need to put guardians there. You know, you can't let the kids go around like mad. And obviously, you know, Uber. Uber is going to explode. I mean, I bet you next podcast we're talking about the Uber explosion. Because Uber went IPO in May, and by September it had lost like about 35% of its value. And this is before the lockup agreement of 180 days is up. So, you know, when you take a company IPO, nobody, none of the existing shareholders, the founders can sell their shares to the market after 180 days.

Hmm.

And already the stock is going down. So imagine after the fiasco of WeWork, then 180 days, everyone that has Uber stock is going to sell it. It's going to be a downhill moment. And one of the serious situations for SoftBank is that the credit rating houses, S&P and Moody's, they hate their debt. They think that the debt, the gear in SoftBank is almost junk.

Mm-hmm.

Basically, it's worth nothing. So the company cannot afford to save.

Uber.

They can't afford to save WeWork. They put some money there that they're gonna try to fix it, but Uber is gonna go to hell. It's gonna go down.

Well, save your analysis because we're definitely gonna have a podcast episode on that one. So how does the Japanese culture come into SoftBank's, like, you know, long-term— how it's going to be affected long-term? How would you—

my Yeah, it's a great question, Anne, because when I was thinking about this, I'm like, I respect SoftBank. What happened to Mr. Son?

Hmm.

And you have to understand, SoftBank is a Japanese investment fund. They're all in Japan. WeWork is headquartered in New York with a California-based investor. and an Israeli founder. Okay. So imagine the culture clashes and Japanese people tend to be very respectful and cautious when there are bad negative things happening.

Hmm.

You know, they don't want to disturb people. When bad things happen, especially mismanagements, mistakes, you know, they take it and they just really don't know how to react to it. It takes them a huge, Time to react is typical, typical of Japanese culture. So everyone is blaming, oh, why didn't SoftBank do something? Well, you're dealing with a Japanese investor. You know, this is how they run. And you have to accept it. The ones that should have stepped were Benchmark.

Yeah, exactly.

You know, they should have slammed the table and said, yo, Because the Japanese are never going to do that at a board meeting.

Yeah.

And Mr. Son, when he addressed investors 2 days ago in the press conference, you know, he was trying to save the boat. He was like, okay, well, let's not forget that we, SoftBank, we run other companies really well, which is true. It's not that they run them, it's that they are lucky that the management teams are good. But I don't think that investors should run companies. SoftBank, Benchmark should not be any of these, but proper people should be put there with real powers to always ensure that the company doesn't sink because of mismanagement.

So this is going to be very interesting to follow and to see where this leads. And you've also mentioned when talking about WeWork that one of the key fundamental reasons that the investors withdrew the IPO was the WeWork business model. So what would you say is wrong with it?

So typical of unicorns, the business model is a loss-making model. Okay, so if you look at, for example, Uber, Uber has never turned a profit. Uber always runs negative income at the end of each quarter. And it means that when you take an Uber and you pay €10, literally costs the company €15 or €20. You know, it's subsidized. It's subsidized with investor money because nobody's making money here. Right? So that was the case of WeWork. WeWork was based on a model where you buy the lease of a huge building. And normally in America, these leases are 15 years old.

Hmm.

And then you refit it and then you rent it in memberships. Unfortunately, the numbers didn't work because even though the membership fees were covering the cost of refitting and redecorating, interior design, the whole building, they were never ever sufficiently able to sustain the real cost of the lease over 15 years because the members, the average member of a WeWork office tends to be an individual and tends to take a 15-month lease, not a 15-year lease. So basically the company was overexposed. It had lease obligations worth $47 billion as of June. And only about $3.4 billion worth of sold office space.

Crazy.

I mean, it's really crazy.

It's like, I mean, how can we let this happen? It's like, I remember you and I were discussing this before, and for me it sounds a bit like the financial crisis all over again. It's like, how did we let these guys get away with this stuff? It just doesn't make Common sense, not even business sense, common sense.

I never liked unicorn businesses based on, you know, millennial pockets. I'm gonna say outrageous things here, but I honestly, Deliveroo, I mean, what is that? A guy on a moped that brings you Chinese food home? I used to have that in 1984, you know, like, Yeah. And if the company is making money and has a business model where they make money, then I am happy. But I hate that mature companies, even companies that go IPO like Snapchat, they are negative income companies. I'm sorry. When are you going to be positive EBITDA? When are you going to be, you know, All the little people, people in startups, they get hammered. When are you positive? When are you cash flow positive? You know what? I would say, hey, why don't you ask that to WeWork?

Yeah.

'Cause we're from the same school, yo. It's like, why these massively funded companies are allowed to trade in the mature markets? Because I have a problem with that also. Going NASDAQ is the dream of every Silicon Valley boy, yeah? I wanna ring the bell. I want to be trading next to IBM. Oh my goodness. I wanted to be with the Avengers, but I guess that was your dream. You know, if you're bringing into the market negative income companies where no one can still figure out if this is ever going to make money, don't put that stock next to IBM. Because when you go bust, like Uber is going to sink, guess what happens to NASDAQ? It goes down and it brings everybody else down. So, you know, if Silicon Valley wants to do unicorn crazy IPOs of companies that are negative, why don't you create your own stock exchange for tech IPOs? And then when you sink, you all sink together very merrily. And you also drink tequila with Adam Neumann. You know? Don't put yourselves next to the decent—

I agree.

decent companies that sweat blood and tears to make revenue, to provide growth, you know, proper blue chips that are 100 years old, some of them, do not come to the realm of the gods. I mean, I definitely, I hate it. I love the markets. I respect NASDAQ. And another Uber and people are just gonna are going to blow up in Wall Street.

Alex, do you think this is really going to start affecting some of the unicorns as well that have been overfunded? Like, yeah, to sustain their business model? Like, they've just been— this is what— okay, this is what's crazy. It's like they go and raise crazy rounds of money, and then, as you say, it just overly inflates. So this bubble is here. So is this bubble, this kind of Inflatory bubble, is this going to start affecting the other IPOs? Because we're going to start saying which ones are real and which ones are fake.

Well, that's a discussion you need to have with your board. But I don't like businesses that do massive rounds of funding and you don't really see the use of proceeds, meaning like you know exactly every penny where it's going to go. And the truth of the matter is that if, you know, CBI Insights, they did an analysis of, you know, all of the $1 billion-plus IPOs, yeah?

Mm-hmm.

From 2013 to 2018. And they discovered that all of those companies that had raised over the $1 billion, when they went IPO, the multiple that they were able to generate was huge. In 2013, it was like about 16, yeah? But in 2018, it had come down to just 9. Basically a 57% drop in just 6 years, meaning that that money is not working with efficiency.

Mm-hmm.

This is one of my magical sentences, everybody, and I take the pen.

Not if you're driving. If you're driving, use our cool search button to be able to search through this podcast and just put in the word that you're looking for.

But remember that magical word you need to drop so that people think, oh my God, this person really knows. It's company's efficiency. So basically, if you want to measure how well a company is able to turn its investors' capital into real value for the shareholders, is the ratio between the money that has been invested and then the valuation that you get at the exit. That is company's efficiency.

Hmm.

Yeah? And everything is just sinking. It's like, what is that? So many, many of the success stories involving companies that raise relatively little money is now performing much better than these super monsters of funding. And I think that is also a derailing mentality. Well, if you have a loss-making company, yeah, you need to chuck money at them. And probably Benchmark and SoftBank were just trying to save this sinking boat with this horrific business model.

So what would you say, I mean, given So with all that amazing expert insights you've just shared with us here, what would you say are the big takeaways from this massive disaster? What do we need to learn?

Fundamentally, the story shows that you need to learn how to put proper corporate governance in your company and how to make your NEDs accountable. NED, non-executive director, is literally— go on the internet and just find the responsibility of this person. It's serious. But also, you know, the regulators are going to have some thinking to do because imagine what it is for the markets and for serious investors. You know, these are asset managers that manage billions worth of funds of people's pensions, the majority of them.

Yeah.

If somebody is trying to score a goal with them, putting them like a little you know, puppet under the door like WeWork, like, oh, here's a lovely IPO, and then the company has holes like a cheese. You know, how ethical is that? You know, I'm sorry, who are you trying to kid here? This lunatic of a CEO, is that the CEO that is gonna stay at the helm after the IPO, for goodness sakes? What's the plan to put a proper one? Exactly. So corporate governance. Obviously, the financial industry is one of the most heavily regulated industries in terms of doing the job without infringing too many laws. Yeah?

Mm-hmm.

But these are the new laws that are coming finally for the startup world where there were never any laws. I remember reading investment agreements that I was like, Oh my God, I've never seen an investment agreement with these clauses. And I would compare it to funding that I have done in banking and, oh my God, I said like, what are these clauses? They don't exist in the, in the, in the muggles' world. And yeah, I remember I was told, welcome to raising money with VCs, Inma. I'm like, okay, thank you very much. Lesson learned.

So the Wild West is gonna be tamed. The Wild West is gonna have its its new set of laws are just going to have to come into line because people are, as you say, it's people's pensions that are now going to be at risk. And I think in our world that is very, very volatile, people need more stability. So they're going to be asking more questions, more hard questions of those NEDs and, you know, making sure that if they do invest in these public companies that they're not going to lose their money, their hard-earned life savings.

Yeah. Yeah. I mean, if you want to run a company to the ground by throwing money at it from VCs, like by all means, by all means, you know? And, but if you take it to the markets, if you take it IPO, you cannot, you cannot try to score a goal and it's like, oh, here's the hot potato.

Hmm.

No, no, no, no. We already had a financial crisis. The markets do not need companies like Visa are just going to explode 180 days post-trading. It's like, no, I mean, have some bloody respect. That's what I think.

I love it. Okay, so we need to reevaluate the responsibility of the NEDs. What about the business models? Again, let's recap on that point.

Business models need to be reassessed. I mean, it's true that when you're trying to build up a business and you're trying to build up a customer base and a market share, well, obviously you you're losing money because the numbers don't add up. But there has to be a point in which very quickly you start generating income. And it cannot be subsidized for 10 years.

Yeah.

I mean, I'm going to mention an example so that people understand it. When Jeff Bezos was building Amazon, I remember because that was 1998. And it was exactly when I was thinking of leaving cable and wireless for my startup. I was like, not yet the right time. I left at the end of '99, but not that year. And for about 7, 8 years, investors were challenging Jeff because, when is Amazon going to be profitable? And Amazon had an IPO, and then these were like NASDAQ investors. But Jeff Bezos has a modus operandi that is extremely clear. He totally reinvests every penny back into the company.

Yeah.

And in that moment, when the market thought that he was building a company that sells books, duh, what he was really building is the world's biggest fulfillment platform ever seen by mankind.

Yeah.

And because he's such a secretive person, I'm giving this, I have met Jeff Bezos and he has relayed this information. Well, he couldn't say, well, this is actually what I'm building, yo. Yeah, of course. Because then people will be like, oh my God. So he kept it totally under wraps. He took all the heat. He took all the negative comments. The analysts He just hated Amazon. And he was put, yeah, we're selling some appliances now, hair dryers.

Okay.

And then when the Amazon Markets joined in, meaning not just Amazon, but anyone else can sell because the platform was ready, because the logistics were ready, and Amazon began to create cash like it was Christmas, that's when the world realized, oh, now we understand why every penny was going back to the company.

Yeah.

But he never really— no, because he's a secretive person. I mean, it's taken him 10 years to really explain what Blue Origin is up to in the space industry. I mean, I remember wondering, oh, Is there gonna be a launch today? They would never tell you until probably like 2 hours before. And we would all be online like, my God, what's gonna happen? And they will never share any information on the new rocket or the model. He's a secretive dude. And because he's like a poker player, he's not gonna show his cards. He's gonna take over the world. So he's not gonna go and do like a second quarter announcement. What we're really building.

What it sounds like, well, what we know he's doing is he has built tremendous value. He has shifted, he has created a mechanism by which consumer behavior and consumer experience and expectation has completely changed around the world. And as you say, he's done that stealthily. And at least, at least, as you say, the investor will say, okay, I put money in this end and it's coming out 500x or 5 million x the other end. So yeah, this is a good investment. So it's like, at least this— there are business models that work. And I suppose the investors now need to be very careful as to which are the, the real business models that create real value and not just fake value on paper and ego-driven value.

Exactly, exactly. We need more realistic IPOs.

Yeah, exactly. So touch up on that final point for us. So What does a realistic, more realistic IPO look like to you for us in the future? What should we be doing?

Okay, so I'll give you an example. When I was doing— when I was a stockbroker doing emerging markets, my portfolio was Latin American companies, companies that were in negative growth, but then they had a growth story. And usually the growth story was about 2 years. It's not 10.

Yeah.

You know what I mean?

Yeah.

So investors are like, okay, what are these guys building? Yeah, okay, they have reinvested everything to be able to do all these things or build a new bottling plant. You know, I had a lot of breweries at the time in South America. But then in 2 years' time, exactly, nobody's going to hold for 10 years for you to show a couple of dollars in your hand.

Yeah.

It's just like, no. So if you already go, for example, one of the things that completely annoyed me is when I think 2 quarters ago, or maybe in the springtime, when Uber, yeah, when Uber had to go IPO and then, okay, hello, this is us. Someone says, what is this subsidy business model? And at that point, the CEO of Uber, had the audacity to reveal to investors, you know what? This business model is never gonna make money because it was never meant to make money. That's what he said.

God.

It was meant to disrupt transport and to disrupt the way people move in cities. Again, this is the Kool-Aid of Silicon Valley. You know, Coca-Cola is a world brand and Silicon Valley has a brand. It's called Kool-Aid. And they drink it and they party with it and they think it's like, you know—

The best thing.

The best thing ever. But this is what he says, this business model was never meant to be profitable. I wish I would have been there in that room to just look at the faces of men in suits, you know, men and women in suits, Wall Street people. My old people thinking, who is this joker? We're gonna kill him.

So in this very first, in our episode 0 of the Market Roundup, you've covered the WeWork story. What's the truth behind the veil? Why it happened? Your analysis of, you know, the key learnings, what we should learn from it. And I love the way you have really brought us in deeply behind, you know, the importance of corporate governance, about, you know, capitalisation. This is about making money. We've got to be capital efficient.

Yeah.

Capital efficient. And, you know, some of your key learnings around— again, this is going to be— this is definitely going to affect the whole world of IPO. So as we wrap up, what would you suggest would be your kind of key resources that our listeners can go to to find out some, you know, to keep up to date on what's happening in the markets? Because they need to get up to date with you as well for our future episodes. They need to know where they're gonna learn all this stuff.

So you have 2— I love 2 sources of information when it comes to startups funding, what's going on in Silicon Valley. So in Europe, we have the wonderful TechEU, founded by Robin Wouters, was, you know, one of the first tech journalists. And what I like about TechEU is that they do very good reports.

Yeah.

So they actually condensate the information and then they say, well, this week 17 fundings happened. So they allow you to say who is raising money, which investors are investing in what, who had an exit, which companies are going to file for IPO. It just gives you the sense of what's happening in my sector money-wise.

Yeah.

Yeah. And then in the US, I love CB Insights. I think they're hilarious and they have a very good staff of writers. They cover the news from Silicon Valley without any veils in front of their eyes. They really call what it is.

Yeah.

And I enjoy very much their analysis and they're very good when they analyze stuff. And then, you know, if you really want to begin to notice, you know, what the grown-ups are doing, like what the real corporations, you know, just read the financial sections of the papers.

Yeah.

You start noticing that even in the higher places, people mess up. That people, you know, they just derail companies. I, one of the classes that I teach at Imperial College in the MBA, is about the human capital and how this is like the biggest attribute that companies have. And then I always put examples, you know, people make or break companies.

Yep.

People run companies. Companies don't run themselves. They're not robots.

Yeah.

If you put an excellent CEO, things are going to go up. If you have someone that is like a complete lunatic, the company loses market vision and starts derailing.

Yeah.

One of the best examples today is Microsoft. The minute Satya Nadella entered the door, in 5 years it has brought it back from the closet of vampires, you know, the zombie.

Yeah.

There it was, the leader of the world in a closet like a zombie, and in 5 years leading cloud infrastructure. I mean, unstoppable and with such an incredible vision, very fresh, completely well above their peers in the sector. You know, buying GitHub, I remember when that happened, I used to get the phone calls.

Yeah.

Why do you think Microsoft bought GitHub? And I used to be asked by, you know, CEOs and I was like, well, it's not about going against the grain. You're selling software for a price and now you buy the open source platform of the world. You know, you're not, you're not crazy. What you're doing is expanding, expanding. If the world loves open source, let's embrace open source. That is Satya's vision. So people, it's about people.

Yeah, so I love it. The 3 key resources you've mentioned: TechEU, CB Insights, read the financial You know, sections of what's happening. And where can people— and we will put links to all of these in the show notes, so just look below in the show notes to see links to these sources— where can people connect with you, Inma?

People can connect with me on Twitter, so it's @inma_martinez. We will put all these details on the Global Investor. But for next podcast, if you have any questions, all you need to do is send us— follow us, follow Follow Global Invest Heart on Twitter. Use the hashtag #GIHMarketRoundup and just put us the questions there. We will happily, happily address questions that you have in particular situations. You know, this is an interactive podcast that we want you to be part of it.

Absolutely. And the other place, so And also check with us on your phone. You can use the new Flick app. So it's flick.app/investher. That is a cool chat service for podcasters to connect with your audience. So you can connect with myself, with Inma, and with your other listeners to kind of put forward suggestions, to ask your questions, and we will get back to you. So do put in your questions in either, in either of those spaces, and then we can Definitely pick them up for future roundups because we want to absolutely build this with you, the listener. So thank you so much, Inma. It's been fantastic to have you with the first roundup, and I can't wait to have more and to hear the reactions of what people think, because I think you're gonna stoke the fire here after the WeWork fiasco. And I'm looking forward to more. So let's keep doing this, and looking forward to Thank you. And we look forward to having you all with us very soon.