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Analysis: A broken system

By Paul Mackintosh  
November 13, 2019

According to UK’s The Guardian newspaper, the “WeWork debacle should be an indictment of modern finance.” With its intimate involvement with Saudi Arabian money, it’s certainly not the first indictment that SoftBank has been involved in. But there’s no sign that anyone is feeling particularly chastened.

From the US$1.7 billion payoff to WeWork’s co-founder Adam Neumann to give up control of the company whose value he destroyed, to news that WeWork’s parent We Co. is forming a gaming division, everybody seems convinced that slightly trimmed business as usual can justify the $13 billion that SoftBank has ploughed into it.

And WeWork isn’t alone in this. There’s Uber, whose rollout of its new financial products team is reported in TechCrunch’s “Startups Weeklynewsletter and elsewhere. The firm, which was hailed by TechCrunch as “one of the largest companies to ever emerge from the Silicon Valley tech ecosystem” is splurging into yet another business area in quest of that elusive thing called profits.

It’s not like this floundering about in search of a workable business is anything new. Neither Uber nor WeWork had much to offer in the way of an actual technology. Sorry, apps do not count. Business models do not count. These companies and their ilk have nothing to do with technology. What they are about is the slavering search for returns in a global financial market of moribund capital. The money is there: it can pour into any gimcrack vehicle that shows the slightest chance to pull ahead of the pack. Is it any wonder that SoftBank came out of Japan, the global poster child for massively underperforming stagnant assets?

Yet the numbers show that the model isn’t working. Look at the cognitive dissonance at TechCrunch that couples “startups” with an $82 billion valuation. There is no financial, or moral, justification for heaping sky-high valuations on businesses that show only a capacity to destroy value.

Warnings from the likes of venture capitalist Nick Hanauer that “I see pitchforks” become even more pointed in the context of Mr. Neumann’s payout. For any investor or plutocrat even slightly concerned about geopolitical instability, where do you think the kind of resentment that helped fuel Brexit, and Donald Trump to the US presidency, is coming from? Not only does that kind of disproportionate return for effort fuel resentment, it also spotlights how broken the system is.

It’s time to get money, and growth, back into the kind of assets and financial areas that the public at large will accept, and that can deliver a remotely realistic match of valuation to value. The global economy and financial system may need a jumpstart, but not from the likes of Uber and WeWork.