Why WeNotWork’ing in Energy

by kirkcoburn
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By the time this post gets launched, it will be weeks into the WeWork meltdown. To summarize my post and position on WeWork, I reference Roberto R. who put it best when he said, “I work at a WeWork competitor called the f**king public library. Fast internet, great workspaces, many have coffee shops, and they are free.” Sounds like my kind of bootstrapping entrepreneur.

What can we learn from the troubled IPO of WeWork as an energy entrepreneur and investor? 

As someone that has personally guaranteed office space for multiple startups and owned an office building and leased it to an accelerator and an incubator, I can say with authority that leasing office space to early-stage companies is the most volatile, least dependent, and economically poor business models. There is nothing new about this model, but does a facelift and irrelevant life lessons from a 40-year old shaman justify a company’s unicorn status?

Sandy Leeds, my favorite business school professor, taught me never to finance long-term assets with short-term debt… In WeWork’s case, they are financing long-term leases (obligations that do not go away for 15 years, which is their average lease length) with short-term focused startups that most will not last 2 years. For a technical read of the WeWork total meltdown, please go jump onto the Scott Galloway bandwagon like I have.

What part of WeWork makes sense? This is a story of greed that turns quickly into fraud (what say you?)…and we have seen it time and time again. BTW, if interested, watch the train wreck documentary on another completely misled millennial startup, Theranos: The Inventor: Out For Blood In Silicon Valley?

As an energy entrepreneur, there are important lessons to be learned here of what NOT to do. Does WeWork sound familiar in the energy industry? What is the first company that comes to mind when I say: Energy tech startup, raised too much money from cool investors, valuation is way too high, delivered a product that was too expensive and did not really work as well as promised and had a governance model protecting the CEO that was self-absorbed? You should probably text it to me unless you are so bold to Tweet it or broadcast it on LinkedIn.

There Will Be No Unicorns in Energy Technology

It is a Silicon Valley strategy to back one winner in a large market. As the latest PwC / CB Insights MoneyTree™ Report shows is that it continues to be the trend that mega-rounds, defined as $100M or more, maintain a high percentage of all venture capital deals (47% in Q2, 2019). 2018 set a record for annual mega-round funding at $55.4B. 2019 is on pace to break the 2018 record. This is one of the reasons why the number of Unicorns remains at record levels (167). The problem is that this just doesn’t work in energy. How many energy startups are on this list? Get out your slide rule.

Unlike general tech and consumer startups, energy technology startups suffer from prolonged sales cycles, slow customer appropriation, unsuccessful value-based pricing, and longer exit timelines. The time it takes to move from 1st funding to liquidation for energy startups is too long, well beyond the average ~7.5 years for everyone else. Yes, this is changing; however, it is still early. 

In order to control the spice, whether it be oil & gas, electricity generation from renewables, biofuel production, you have to own something that is physical. And physical assets do not scale.  In oil & gas, there is an established operator (the asset owners) and service company model. As an energy technology entrepreneur, you are selling to the asset owners and/or the service companies. Your addressable market is usually not large enough to justify raising a mega-round. And none of us will value your company at tech multiples. Most likely, we will start with a service company valuation which is usually based on a few times revenues. In other words, you are not going to be a unicorn.

[I will start tracking the ICARUS list in energy since there are a few startups getting very close to the Sun ($1B valuation). However, unlike a Unicorn, an Icarus will eventually crash and burn. In O&G, the industry fundamentals are not there, yet. What do you think?]

Tesla, Amazon, Uber, etc…can be debated and should. Time has yet to solve many of their scale and cash problems, but this is outside of this post. Stay tuned for my upcoming post on “Venture Capital Can Be a Good Business Model, But Does It Work in Energy” and we can debate the numbers and logic. 

Energy Has Already Been Burned on Bad Governance

I am with Scott Holloway. Softbank has completely missed on their fiduciary responsibility by allowing a cultish-type leader to get away with so many ridiculous investments and decisions.

Let me digress for a moment and fill you in on a few of Adam Neumann’s prepubescent investments:

In energy, especially if you want one of your largest customers and its corporate venture arm to invest in your company, there will be a proper governance model established before or at the time of our investment. There will be no more ridiculous and out of purpose investments. We will not allow you to control voting rights. And we almost always frown upon having relatives as board members and/or executives. In my personal experience, this never works out. While WeWork’s governance model is completely a non-starter, the investors allowed it. Who do you blame?

I will write more on governance in the future; however, for this purpose, if you want to take investment from the established and credible investors in our space, we are going to ask for control provisions that prevent this complete sh*t show from happening to your company. Our industry has already suffered mighty fails from improper governance. I am surprised WeWork was allowed to get away with it for so long.

Man Falling Off Surfboard, It is Not Looking Good

HAWAII – JANUARY 27: Dave Wassel goes over the falls at Pipeline during a practice session for the Volcom Pipeline Pro Jan. 27, 2011 on the North Shore of Hawaii.

Energy Doesn’t Reward Irrational Risk

This isn’t just a failure in the leadership structure, though that’s where a lot of the blame gets directed. Another issue at play is the value proposition… or lack thereof.

WeWork developed a perceived value proposition by taking irrational risk. A value proposition is, quite simply put, something you are good and passionate at, that solves a customer problem that they are willing to purchase in the quantity necessary to make money, that is unique to everyone else. In this case, WeWork definitely has value to its customers. It offers unique office spaces in major cities (which is not something most entrepreneurs and startups can really afford in traditional real estate setups). Also, it has flexibility in terms of space and price so that businesses can get the space that fits their needs at the cost they can (at least in the beginning) afford. When you add in the amenities that WeWork offers (good location, Internet, access to office machines most startups can’t afford, etc.), it appears different from what the competition provides.

The problem, of course, is with the second part of the proposition: making money. Why does it take WeWork $2 of costs to drive $1 of revenue? There is no arguing that WeWork appeals to those who have signed up for its spaces. And, at least on a smaller scale, it did seem to be generating revenue. However, when the business model was scaled up (to a degree that no other companies who have tried using this real estate strategy have tried in the past), it resulted in plummeting earnings and serious issues. Especially when one considers that new offices typically take more than a year to fill. At the same time, WeWork made 15+ year commitments to pay for office spaces even if there were no entrepreneurs coming in the door. Instead of matching the long-term liability timeline with long-term revenues, WeWork focused on the wrong customer, startups, that have no balance sheet and cannot lease on a long-term basis. 

As an investor in energy representing one of the largest customers for your services, we look at risk and evaluate whether you adequately understand your liabilities and commitments and whether they are matched with your revenue model. 

Where does this leave you? I have invested in many companies that have not found their product/market fit, need more cash to grow ahead of profits, and are trying to scale up as it hits a step-function cost change in their business model. First, do not follow WeWork’s strategy. Instead of focusing on their broken business model and coming up with a plan to address, WeWork decided to distract everyone by launching a complete waste of money concept lifestyle brand called: WeLive, WeGrow, WeAreDying, WeArePumpingThisIPOtoSellToTheNextSucker.

I have seen this time and time again. If you are unable to sell and generate profitable customers, there is a warning sign. Instead of coming into the next board meeting with a new acquisition or idea to start another ancillary product line, present a proposal on how to fix your current woes. And please also show us how you are preserving cash in order to weather.

Take Heed and Do Not Emulate the WeWork Clusterf**k

Studying WeWork makes it clear that history is doomed to repeat itself. There is a reason why investors are trying to make risk-adjusted returns. It is not all about returns alone. This is a Ponzi scheme with lipstick and looks like a playbook out of the mortgage loan bubble that kicked off the Great Recession.

When you come to see me with a goal to raise money, understand your market (the good, the bad, and the ugly) and have a realistic view of your hockey stick and cash required to get there. Be prepared to negotiate a governance model that enables all of us to cut you off when the mezcal is starting to impact your brain. And have a defendable value proposition that withstands the sanity test.

While it remains to be seen whether WeWork will be worth less than zero, the analysis of what has happened paints an instructive picture both for energy startups who are looking to succeed, as well as for those who are looking to avoid making the same mistakes. But let me know if you think I’m wrong (seriously, you must be kidding if you think otherwise).

Edie (Ciao Baby)

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