2019 saw some very big names in the world of investing and finance end up with quite red faces as they got seduced to investing in weak business models with even weaker managements. Here are the two prime examples that have dominated the business news in 2019!
Uber – Numerous financial giants invested in this ride-hailing service. SoftBank was leading the charge, with strong support from Morgan Stanley, Goldman Sachs, and Bank of America. Unfortunately Uber lost $3B in 2018, and $10B loss in last 3 years, and there are few signs that things will improve anytime soon..
The core problem is the business model. First of all, Uber is not a tech darling; it is an inexperienced new entry into the ride-hailing business, dominated by local taxi and limo businesses. Most importantly, as one analyst summarized it: “The problem with Uber is that they cannot make money. Nobody will make money in ride-hailing with the Uber approach. It is a business model that simply doesn’t work.”
Concerning the management of Uber, here is how one respected analyst described the co-founder and original CEO: “he had a shotgun management style and unwillingness to listen.” This resulted in a series of scandals that embroiled the company, including allegations of sexual harassment and discrimination, claims from Alphabet Inc. that Uber stole its self-driving secrets and an acknowledgment that it used software to evade local regulators. The board ousted him in 2017.
WeWork - The CEO’s of the SoftBank Group and J P Morgan, and the folks at Goldman Sachs, were the main backers of the this failed adventure.
Concerning the business model, these financial wizards bought the pitch that WeWork was some brilliant technical innovation developed by some mental giant from Silicon Valley. Actually, there is nothing technical, original or proprietary about the premise of providing shared workspaces on flexible terms. As WeWork emerged, many established landlords begin to offer the same thing.
Concerning the management, as stated by a Fortune writer recently, “the co-founders/CEO’s view was that WeWork is a culture company that was going to elevate the world’s consciousness and create a communal utopia. He is a self-contained bubble – powered, we now know, by tequila and pot and dreams of trillion-dollar wealth, everlasting life, and becoming president of Israel.” Amazingly, some titans of the investment world actually bought this pitch!
Stepping back, hopefully 2019 has taught us all the following fundamental lesson: Beware of the charismatic, arrogant, supposed-tech guru with a flawed business model claiming his/her idea will disrupt a well-established industry.