Market Irrationality & VC Insanity
Talking about the latest from Flow, plus Carvana has had a really, really crazy year.
Fool Me Twice
If the public equity markets are irrational at times, then I would say that the venture capital market goes through purposeful fits of insanity.
Let’s say you, as a VC, had an entrepreneur before you pitching a deal. The guy pitching had the following background:
He previously helmed one of the world’s largest and most public-facing unicorns1 in history.
Unfortunately, he bailed from that company with a cool $400 million severance package after the S1 filing caused the public markets to laugh to company out of the room.
The company he ran incinerated cash from other VCs like… some kind of crazy incinerator on steroids.2
In the wake of his leaving, the company filed for bankruptcy.
Oh, and there was nothing particularly novel about the business. It was essentially real estate packaged as a tech enterprise.
By now you almost certainly know I’m talking about WeWork and Adam Neumann. So, what would you do? Would you fork over money?
Well, you say, it depends. Maybe the first idea crashed and burned, but he could have learned his lesson! This next venture could be the genuine article.
Per The Real Deal:
As WeWork weaves through bankruptcy, Adam Neumann is hoping to cash in on his latest venture, Flow.
Neumann will officially launch the first property under the Flow banner early next year, Insider reported. The 639-unit Society Las Olas property in Fort Lauderdale is already owned by the startup, home to residents and a plethora of staff.
The vibe of the property is not far from the familiar WeWork aura: The lobby is adorned with neon signs on the wall, colorful furniture and ample greenery, though an updated redesign is already in the works. Amenities include those commonplace at luxury multifamily properties, such as a pool and an outdoor garden.
There’s also a technology bent to Flow: An app is being developed as the core of the company and the resident experience, a place for messages between tenants, maintenance requests for management and a virtual key to elevators and rooms.
Ah. Well.
Soooo we’re talking about a multifamily real estate project (which is coming into existence while a glut of multifamily is coming online) that has… an app.
Oh. So, like NextDoor, you say?
No, no, no! Not at all like NextDoor, they might reply. This app will create real community. You can chat! Request maintenance! And so on.
I mean, if you’re lucky then that’s what he’ll say. Get a load of the gobbledygook Neumann had to say regarding the community app and tech experience:
At a summit earlier in the year, Neumann said the startup wanted “to create an elevated experience for the resident, and we want to find a way to share with the resident a portion of the value that they create.” What that means remains a mystery.
Anyway, what would you do given this pitch? Well, if you’re famed Charlie Brown lookalike and legendary VC investor Marc Andreessen then you invest $350 million, of course!
Andreessen’s fund is a16z, and I mean it sincerely when I say that Andreessen is a legend. But this one just seems… I don’t know? Obviously bad? I’ve said before that being a good VC requires one to see things that nobody else does, but… man. Take a look at what a16z has to say about Neumann following the fund’s investment:
Adam is a visionary leader who revolutionized the second largest asset class in the world — commercial real estate — by bringing community and brand to an industry in which neither existed before. Adam, and the story of WeWork, have been exhaustively chronicled, analyzed, and fictionalized – sometimes accurately. For all the energy put into covering the story, it’s often under appreciated that only one person has fundamentally redesigned the office experience and led a paradigm-changing global company in the process: Adam Neumann. We understand how difficult it is to build something like this and we love seeing repeat-founders build on past successes by growing from lessons learned. For Adam, the successes and lessons are plenty and we are excited to go on this journey with him and his colleagues building the future of living.
We think it is natural that for his first venture since WeWork, Adam returns to the theme of connecting people through transforming their physical spaces and building communities where people spend the most time: their homes. Residential real estate — the world’s largest asset class — is ready for exactly this change.
Like I said, I don’t know. I haven’t met Neumann (who I’m sure is incredibly affable and persuasive in person), so, maybe? It’s also fully possible that I have absolutely zero idea what’s going on here and wildly off base, but… I don’t think so3.
Anyway! The colloquial definition of insanity is doing the same thing again and again and expecting a different result. With that in mind, I struggle with this one.
Carvana?
This year has flown by and it seems like just yesterday we were all writing eulogies for Carvana CVNA 0.00%↑. Remember that? The used-car retailer was being called out as insolvent at best and fraudulent at worst from virtually every corner of the market.
Well, if you’re like me and didn’t follow the story super closely after the hype faded, you’ll probably be surprised (like I was) to look at this chart:
That’s right. 938%.
So, what happened? Per Barron’s last week:
A group of J.P. Morgan analysts led by Rajat Gupta lifted their rating on shares of Carvana to Neutral from Underweight and raised their price target to $40 from $25 following a facility tour and meetings with executives. The used-car retailer is making progress on “productivity, costs, and culture,” the team said in a Monday report.
This comes on the heels of the company completing a restructuring of its debt, slashing $1.3 billion off the books.
Anyway, if you would have asked me what the future held for Carvana at the start of 2023, a near 1,000% return scenario wouldn’t even have made the list.
What I’m Reading
Here’s an interesting article from Amrita Roy over at The Pragmatic Optimist that gives an interesting counterpoint to my generally bullish stance on Google:
While generative AI gets the lion’s share of the headlines, the computational needs (and a looming, massive set of refresh cycles) are astounding. Herb Greenberg breaks it down well:
Here’s a great reading list compilation from Brinker Advisor:
Final Thoughts
Per Jerome Powell, the rally will continue as the Fed has its own ‘Mission Accomplished’ moment. The market seems to be discounting Google’s ability to translate AI to sales. Disney’s proxy battle is in full swing with Nelson Peltz nominating himself to the board. OPEC+ isn’t nearly as influential as it once was.
A VC backed private company with a value of over $1 billion.
Sorry, running low on good analogies today.
I also don’t have $350 million to invest and a track record of recognizing talent like Andreessen. But hey, that’s the beauty of getting to have an opinion.