Trying to Be Bezos, Ending up Bozos

In recent posts, I’ve explored the way the concentration of investment in just a few huge companies, and their high-end economic activity in a few superstar cities and metro areas, have warped regional economies and commercial real estate.  In addition, the example of those few hugely-valued firms has apparently warped the practice of business management in general.  One characteristic of information technology software is that it costs very little to replicate.  Once an app, a program, a website is built, it doesn’t cost much more to serve 50 million people than it does to serve 50 people.  As a result, the valuation of the largest internet-based and software-based firms have rocketed to insane heights, and provided their founders and early backers with unprecedented wealth.

One consequence is that just creating and operating a middle-sized firm with solid profits, and being normally rich, isn’t good enough anymore.  Not for founders, and not for venture capital investors, all of whom want the next Amazon or bust.  As a result, firms that could have been solidly profitable on a modest or mid-sized scale have expanded to the point where there are only two possible outcomes:  predatory monopoly, and bankruptcy.  Including two in the so-called “prop-tech” sector.


The founder of WeWork, and his backer Softbank, have already been exposed as clowns.  But WeWork was actually a good idea to start with.

In most U.S. cities there is an abundance of space that no longer meets the needs of large corporations, who want large floorplates and plenty of capacity to wire up the latest in information technology.  The obsolete space includes older office buildings, industrial loft buildings, and former multi-story department stores.  Some of these spaces have been converted to housing, but more of it is available and looking for another use.

At the same time, new business formation is down across the U.S. economy, leading to greater oligopoly, higher prices, lower wage growth, and lower investment returns.  Creating an environment that fosters an entrepreneurial culture, by providing a low cost place for small and new firms to cluster, is therefore an idea with substantial social value.  In the past, many “incubators” have been publicly funded, owned and operated, but most “economic development” attention goes to subsidies for large existing companies, not places for new ones.

WeWork was set up, supposedly, to take over that role.  And at first, that is what it did, often in spaces it owned.  But there are only so many low-cost buildings in good locations available for reuse, and so many people looking to start new businesses.  The size of that market was not enough to satisfy Adam Neumann’s ego and Softbank’s ambitions.

WeWork started leasing regular office space all over the country, at high least rates, on the assumption that a huge share of the office market would turn out to be “flex” space that could be rented or abandoned on short notice as business needs changed.  Soon it was the number one source of net office demand in many metro areas all over the country, and even in other parts of the world.  It thus became a real estate “bank” with short-term assets – its customers, who could leave at any time – and long-term liabilities – the leases.  In a recession, it would likely have been bankrupted by a “bank run,” as the large companies that were now its customers abandoned “flex space” to concentrate into space they leased themselves, but WeWork’s long term leases still had to be paid.

Moreover, unlike Google’s programs, WeWork’s business model could not be patented.  Many competitors have since emerged.  One website listed Impact Hub, Your Alley, Knotel, District Cowork, Make Office, Industrious Office, Techspace, Serendipity Labs, Green Desk, and SomeCentral.   I’m also familiar with Convene.  Then there are the growing “female only” co-working locations.  Hera Hub, The Coven, The Wing, New Women Space, evolve Her, etc.

Soon WeWork was losing huge money.   It nonetheless tried to go public and sell itself to ordinary investors for $47 billion.  But the reality of the losses appeared in the IPO documents required by the Securities and Exchange Commission, and the company went from $47 billion to bankrupt and taken over by Softbank in weeks.

The WeWork disaster has been widely chronicled.  Just use a search engine to look for “WeWork what went wrong.”  Most of the discussion is focused on speculative excess, and Neumann’s unrestrained ego and mismanagement.

What isn’t said is this.  WeWork was a good idea for a mid-sized real estate company profitably serving a niche market.  It was ruined because that size, and that level of wealth, was just not good enough.  We can only hope that post-bankruptcy, a smaller firm will emerge to serve the market Neumann and Softbank weren’t satisfied with.

Meanwhile, I recently found out that real estate listing site Zillow is losing huge amounts of money.  How could that be?

The firm had a good idea, use the internet to make residential for-sale and for-rent housing listings available to the general public cheaply, and data on actual sales to provide a rough estimate of home values. This is a valuable service, and Trulia provided competition assuring fair prices for sellers.  By providing analyses and mapped data to the media, the firm became widely known despite a limited advertising budget. Though I’m not buying or selling a home, I sometimes check out Zillow to see that is happening in a housing market.  Others do the same.  Zillow, it seemed, had a sure route to a consistently profitable mid-sized service firm.

Apparently, however, that wasn’t enough.  First the firm bought up competitors Trulia and Streeteasy. It now has $1.3 billion of $19.9 billion market in online real estate ads, according to this article.

That sounds like a pretty good business to me, but $1.3 billion in annual revenue isn’t much compared to the amount Uber paid ex-CEO Travis Kalanick and WeWork paid ex-CEO Adam Neumann to go away.

To make even more money, Zillow is seeking to be a “market maker” in residential real estate, the way Wall Street firms make a market in stocks and bonds.  If you want to buy or sell a stock or bond you aren’t linked up directly with someone on the other side of the transaction.  The buyer and seller each do business with a financial firm, which makes a profit on the spread between what the seller gets and the buyer pays.

In April 2018, the company announced it was launching Zillow Offers and would purchase homes directly from sellers, doing any necessary repairs before turning around to resell the house itself.


The model, known as instant buying, or “iBuying,” marked a major overhaul for Zillow’s core business. Up until then, the company had operated in a purely digital realm, removed from the headaches of owning or renovating actual brick-and-mortar properties.

At the company, the dramatic shift is known as “Zillow 2.0,” and CEO Rich Barton has laid out a bold vision, painting this moment as a “new frontier in real estate.” He wants Zillow’s service to eventually transform the industry so that selling a home is as easy as trading in a car.

Houses, however, and not like stocks or bonds or even cars.   Stocks and bonds are reasonably uniform and highly liquid.  They do not require maintenance, insurance, and property taxes.  And while motor vehicles have individual repair needs and histories, there are a limited number of models from a limited number of manufacturers.  Every house is unique.

Real estate is illiquid, and it seems unlikely that Zillow will succeed in making it a liquid asset.  The firm can always buy quickly, but if the market turns it will not be able to sell quickly at anywhere close to the price expected.  And it started iBuying at what appears to be the peak of another housing bubble.  According to the article not because it wanted to, but because it felt it had to.

In a way, the company was boxed into the decision by smaller, newer competitors: OpenDoor launched in 2014 with iBuying as its core offering, followed by OfferPad in 2015. RedFin, meanwhile, had started experimenting with iBuying in 2017.

“iBuying was an existential threat to the business,” said Mike DelPrete, a real estate tech strategist and scholar-in-residence at the University of Colorado Boulder. “Zillow’s whole position is based on being the first place consumers go when they’re buying or selling a home. They need to take the oxygen out of the room for anyone else and own the space as fast as they can.”

And as a result…

In the fourth quarter, Zillow said the operating cost for each home was an average of $318,667, while the average home sold for $317,155 — a loss of $1,512 with each sale. And that’s before accounting for interest expenses and holding costs, which amounted to an additional $4,895 in losses per home.

Overall, Zillow’s Homes division lost $312 million in 2019, before taxes.

The assumption is investors, via the financial sector, will continue to pour more and more money into Zillow in the hopes it will become something of a kingpin in the buying and selling of real estate.  Unlike WeWork it has already had a successful IPO, and is a public company.

As in the case of WeWork, however, Zillow’s endlessly expanding line of credit could disappear if investors decide there might not ever be a pot of gold at the end of the rainbow.

“It’s pretty unusual to have this kind of business model change for a public company — it’s such a risky move,” said Mark Mahaney, lead internet analyst at RBC Capital Markets. “It probably helped that Rich was the one coming in to help do it. He has an enormous amount of credibility.”

For Barton, that credibility comes from an entrepreneurial success streak. Not only did he rapidly scale up Zillow during his first stint as CEO, but he also founded Expedia and co-founded Glassdoor. He’s not afraid of taking big swings.

“I’m very comfortable with risk that is tempered,” he said in an interview with CNN Business’ Rachel Crane. “I kind of think of it as courage.”

Ah well, good luck.  One can only hope that their original business will remain intact if the overall venture is bankrupted by falling housing prices as another bubble bursts. Actual securities firms have rapid trading computer programs to ensure (somehow) that each of them is the first to get out if the Baby Boomers panic and the market tanks.  It will hard for Zillow to do the same with actual houses.


Over in Germany, the economy is powered by many small and mid-sized companies, many of which sell internationally as well as locally.

About 99% of German companies are small and medium sized. There are about 3.3 million of them. 

Strictly speaking, they would have fewer than 500 employees to be classed as Mittelstand, but it’s a term that goes much deeper and has come to define a business mindset.

“In Germany a lot of those small and medium sized companies are doing exports from the beginning,” Prof Weber says.

“They try to be in the forefront of innovation, and find and define a niche, and then sell on an international level.”

And the most successful ones are world market leaders in their niche sectors, which Prof Weber says are “hidden champions”.eber says small German firms embody “patient capitalism”

This is where he believes much of Germany’s exporting prowess stems from.

“In Germany we have only 28 of the global 500 biggest companies but we have around 48% of those small world market leaders,” Professor Weber says.


No one seems to want to start a Mittlestand company in the U.S. today, it seems, and no one seems to want to fund one.  Perhaps because of the one sector in which Germany is not in the forefront if innovation. Finance, which concentrated in two countries where imports exceed imports and debts are ever-rising, the U.S. and the U.K.

WeWork went from being a real estate service provider to being a financial sector speculator, the equivalent of an office space bank vulnerable to a bank run.  And Zillow went from a real estate listing service to the real estate equivalent of a securities firm, making a market in houses.

It is the U.S. that has produced another set of colossal titans.  For every Bezos, however, there are plenty of firms that are going to be exposed as Bozos if the gusher of endless money ever dries up.