[tolmasky]

If you just thought about the "false market" like advertising, it wouldn't seem so perverse.

Coca-Cola "wastes" millions on advertising, something that doesn't directly generate profits. From a cash flow perspective, it's giving money away to advertising agencies. The theory is that you have an indirect return through building mindshare. Same goes for "good will" deeds like charitable actions by corporations or taking a hit on a product to use a more environmentally friendly component. From a completely superficial perspective, this is a deliberately inefficient action that makes the market "more false".

You could imagine a scenario where you take in a lot of VC money to jump-start the initial production of a more environmentally friendly product while still selling it at a competitive price that really isn't justified by its production costs. Is this a false market? Perhaps, but it may serve to build out the necessary pipeline enough such that the unit economics eventually work to be self-sustaining and also build a lot of brand loyalty along the way.

These are bets. Advertising is a bet on brand recognition, one that can similarly take years to materialize (see the mattress industry). Facebook was a bet that paid off. Everyone laughed at how much they took in originally too.

Of course, like all bets, there can be bad bets, and even good bets that just don't pay off. In some sense, the WeWork story should be considered a great success: the public market did exactly what it was supposed to do, shine a light at the appropriate time on a bet that had been going on too long. The real danger is when these initial stages are funded incorrectly: if a VC Fund makes a stupid bet, well, that's the game, but if a pension fund had invested in this, then it would be dangerous.

[chii]

> Coca-Cola "wastes" millions on advertising

but they don't overspend on advertising, unlike those VC funded companies. Each can makes a profit for coke, and therein lies the difference.

[marcusverus]

The poster isn't saying that companies should never buy growth by selling $2 for $1. He's saying that VC seems to be bad at avoiding companies that only grow because of this. Consider PayPal. Early on, they would pay a $20 referral fee to anyone if they could get a friend to join and use PayPal. That's insane at first glance, but it worked because those new users kept on using the product; because the product itself was viable without the subsidy. Coca-Cola is the same way. They advertise, but they turn a profit after baking that into the price of the product. MoviePass was never going to work. The subsidy was the product. That's the concern.

[tolmasky]

Are they bad at avoiding that though? Or are we greatly extrapolating from one VC in one high profile case: because that is the actual hilarious part of WeWork, it was basically entirely funded by just one VC that kept doing more rounds.

Additionally, the nature of VC is that it is high risk: you're supposed to have 9 failures for every success. So just from an "amount" of companies perspective, they're always going to seem "bad" at this I guess. That's why I used Facebook as an example. It's unfortunate that it takes very little time for everyone to forget, but the valuation of Facebook seemed ridiculous at the time. That's the nature of the beast: it's really hard to tell the winners from the losers, and thus VC is a necessarily risky enterprise. PG talks about this here: http://www.paulgraham.com/swan.html

That's why my point is that the true problem is if the capital comes from the wrong place, namely non-traditional sources of capital funding these funds due to loss of any other viable more conservative investments.

[jonas21]

And even WeWork isn't that bad. Each new location they open has large startup costs: they have to lease a large space, build it out, hire staff, do a lot of marketing -- only then can they start collecting rent from members, and it takes time to fill the space to capacity.

There's no reason to believe that they wouldn't be profitable if they stopped growing so quickly (they opened 200 locations in 2018 alone).

[TheOtherHobbes]

WeWork was profitable - for Adam Neumann.

Using WeWork funding to buy property that he could then lease to WeWork was brilliant. So was selling the branding and IP back to the company. So was borrowing money against his share ahead of the IPO - although it's not obvious how that's going to work out long term.

Was WeWork ever a serious business? Was there ever a plausible path to consistent profitability? Or was it just a cover story?