Editor's note: Private fantasies vs. public realities

Dec.December 01, 2018 10:00 AM

Stuart Elliott

There is so much venture capital money flowing into private real estate firms these days that you would be forgiven for turning money-colored green with envy.

Take Opendoor, a tech company that allows for automated home buying and selling. The venture capitalists who’ve bet on the startup have valued it at $2 billion, based on a miniscule $10 million in annual revenue. 

Or WeWork, which is now reportedly worth $45 billion. Compare that to the public Blackstone Group, which has more than 20 times the amount of property and has an astounding track record of profitability, but is valued at $7 billion less. (Oh, and WeWork is losing more than $1 billion a year.)

As reporter E.B. Solomont writes in our cover story this month, some observers warn that the astronomical valuations these private VC-backed companies are achieving today are an unrealistic fantasy that could come back to bite investors.

This disconnect becomes even more clear when you look at how public companies are being valued. More than a third of VC-backed companies that went public this year saw their valuations plummet, according to an analysis by TRD

Publicly traded companies like Zillow get their feet held to the fire for their real-time performance. The Seattle-based listings giant was rebuked by the markets last month, losing $2 billion in value overnight, bringing its market cap down to $6.5 billion, after a disappointing earnings report.

But private companies can spin stories about their growth with zero transparency.

And coming from leaders like WeWork’s Adam Neumann and Compass’ Robert Reffkin, it can seem expansion is limitless and the wealth they are able to create nearly unlimited. It becomes about the salesmanship.

“You can sell stories in the private market much longer without having to face the accountability of a liquid public market,” said Rett Wallace of Triton Research, which analyzes pre-IPO companies.

Selling the sizzle is nothing new, of course.

One of the best novels about financial speculation is “The Way We Live Now,” by Anthony Trollope. The tycoon at the center of this 19th-century story is Augustus Melmotte, a charming investor in railway bonds promising riches to London’s aristocrats, who clamor to put their money with him despite the somewhat opaque nature of his enterprise. 

I was reminded of the book this weekend when a friend (who started his own business) told me, “Companies are worth what someone claims they are worth.” It echoed a quote from the book that “there are men who take other men at the price those other men put upon themselves.”

Will VC-backed companies like WeWork deliver the goods? At best, the $45 billion valuation of WeWork is a kind of promise of what the fully built-out company will look like down the road. At worst, it’s akin to a delusional projection. Time (and the public market, if there is an IPO) will sort out the rest. Check out the story on page 36.

Elsewhere in the issue, we have a piece on how CEO pay is rising at public companies despite poor stock performance. As reporter Konrad Putzier writes, “there’s a growing belief, with REITs especially, that CEOs shouldn’t be punished or rewarded based on investor moods, which often fluctuate, but instead on the company’s operational performance.” See the story on page 74.

We’ve also got a story on the top retail brokerage firms amid a (finally) improving retail market (page 72); a look at the winners and losers in Long Island City following Amazon’s earth-shattering announcement (page 32); and an examination of the mighty National Association of Realtors, which has 1.3 million members but is being threatened by tech disruption — though who isn’t these days (see page 44).

Finally, check out our Closing interview with developer Jerry Wolkoff on page 130. It’s rather salty and expletive-laden, but I guess that’s what working 60 years in the real estate business does to you.

Enjoy the issue.

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