To The Moon

What Are They Thinking?

Editorial

There was much surprise this week when Marc Andreessen announced his firm’s $350m investment into Flow, Adam Neumann’s newest venture. The details of the business model have not been fully revealed but it seems to be another real-estate-based idea, except this time it focuses not on offices but on residential property.

Neuman’s infamy, after taking WeWork from startup to multi-billion dollars in value, only to see it shrink again, is of course huge. Most reactions are questioning the sanity of any venture fund, never mind one with as good a reputation as A16Z, to back him again.

In explaining the decision Andreessen says:

“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,”

So this week I want to take a step back and ask whether the investment is mad or bad (in the Michael Jackson meaning of the word).

The answer depends a lot on understanding how venture capital works. Many of the readers here understand that so I won’t belabor the point. Suffice it to say that venture investors need to make large multiples on large investments in order to deliver the returns that their investors are looking for. Unless an investment could theoretically return 100x or more a venture fund really has no business thinking about putting money to work in it. 100x on $350m is $35 billion. And A16Zs share is probably between 15% and 30%. So for the plan to work the company must become worth between $120 billion and $230 billion.

Is this possible?

Well to answer that you have to look at the market being addressed, the cost of execution, and the likely upside. You also have to think about timing.

Residential real estate is a very large market. It is dominated by mortgage-backed lending and rental income. The market is clearly large enough to imagine revenues in the billions of dollars, and possibly a lot larger.

The rate of growth of Flow and its ultimate size over time will be part of the equation. But, on the back of an envelope, if it can get to $10 billion in revenue in 10 years then it is not impossible that it can achieve growth-driven multiples of 10–20x. That would certainly achieve the goals of A16z.

So let’s start by saying this investment could make sense.

But there is more. In this sector, the numbers are astoundingly high. If Flow can disrupt rents and mortgages then trillions of dollars are available. And if it can move debt-based financing to a new model of ownership, then it can be hundreds of trillions.

These are scary numbers to most startup founders. But not to Neumann. He thinks big and has shown a prior ability to deliver. In this world, A16Z gets to 1000x or maybe more.

So what is the lesson here? There is no shortage of ideas. But there is a shortage of big ideas delivered by big thinkers who can be trusted to really try to execute them. Whatever you may think about Neumann’s past. He qualifies. And as in baseball, hitting and missing is all part of the sport. You only have to hit once to deliver a home run.

A16z is betting big on Adam Neumann’s new real estate startup 

Andreessen Horowitz is betting big on Adam Neumann’s return to the real estate startup game.

A16z co-founder Marc Andreessen wrote in a Monday blog post that the firm would partner with Neumann on a new startup called Flow, which is focused on the residential real estate market. Neumann was famously pushed out as leader of WeWork in 2019 after the firm pulled its IPO plans, and his personal and professional antics — padding around barefoot, investing in a wave-pool startup — have provided fodder for books and an Apple TV+series.

“We think it is natural,” Andreessen wrote, “that for his first venture since $WeWork(WE)$, 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.”

While the blog post did not disclose the size of the investment, The New York Times reported it at $350 million at a $1 billion valuation. That deal is the largest individual check a16z has written to a startup, according to the Times. Andreessen will also join Flow’s board.

“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,” Andreessen wrote.

A Case Study On The Venture Process

I want to throw out an important level setting: Do I believe that Adam Neumann can build a multi-modal real estate empire that revolutionizes the way we live? No.

Would I have invested $350M with the guy who lit $20B on fire? No.

Do I believe the investment case I’m about to lay out? No. 

So why write about this? I think the story and the numbers represent a fascinating opportunity to illustrate “the venture process.” 

There are people who write off venture as largely a “greater fool’s” game of passing the bag. There are other people who ask the honest question, “how does something like this happen?” I want to try and help answer that question.

I’m not going to address every aspect and controversy surrounding Adam Neumann, WeWork, and Flow. And I’m certainly not a bull on this investment. I’ve never found myself typing “Say what you will about…” so many times. I found myself using it over and over again.

“Say what you will about Adam Neumann, but he loves those amenities.”

“Say what you will about Adam Neumann, but the man knows how to drive splashy marketing.”

Instead I want this to be a case study to walk through how a lot of VCs think. Is the thinking right? Are they making the right decisions? Are they weighing the right variables? Unclear. Time will tell. But this is likely the structure for how some of this process is being justified.

Investing in Flow | Andreessen Horowitz

Marc Andreessen

Our nation has a housing crisis.

The demographic trends driving America’s housing market are impossible to ignore: our country is creating households faster than we’re building houses. Structural shortages in available homes for sale push housing prices higher, while young people are staying single for longer and increasingly concentrating in highly desirable urban centers. These factors put enormous pressure on rents in the nation’s most dynamic cities, starkly revealing the troubling realities of both sides of the housing market’s two historical models.

The first model is: you own a home you call your own, typically with a multi-decade mortgage, near your current employer. IF you can find a house, as these locations often aren’t building new housing. IF you can afford that house, as housing prices in many such places have skyrocketed. And even then, you’re now stuck — you can’t move, even if your economic opportunity or life path wants to take you somewhere else.

The second model: you rent an apartment, but: it’s a soulless experience; do you even meet your neighbors, much less have any friends in your complex? Does it feel like home, or just a place to sleep? Are you proud to bring friends and family to visit, or hesitant? And you can pay rent for decades and still own zero equity — nothing. There’s a reason the federal government started subsidizing home mortgages: someone who is bought in to where he lives cares more about where he lives. Without this, apartments don’t generate any bond between person and place and without community, no bond between person to person.

Now drop the impact of the post-COVID world into this. Many people will live in places far away from where they work and many more will shift to a hybrid environment. As a result, they will experience much less, if any, of the in-office social bonding and friendships that local workers enjoy. For many of these people, increased screentime and reduced in-person interaction will cause challenges that are not just limited to work, such as alienation and loneliness. This is not a good path for anyone and it needs to be addressed directly, right now.

At the same time, in the last two years, we have seen a shift in life priorities. For hundreds of years, ambitious young people have had to move to immediate geographic colocation with employers to have access to the best jobs for their skills and talents. That is suddenly no longer true. This newfound flexibility has triggered the “Great Resignation”, where people prioritized other factors over professional considerations.

Many people are voting with their feet and moving away from traditional economic hub cities to different cities, towns, or rural areas, with no diminishment of economic opportunity. My partner Katherine Boyle has written about this, and I think she’s right: Can Zoom Save the American Family?and Can Starlink Save the American Mother?

The residential real estate world needs to address these changing dynamics. And yet virtually no aspect of the modern housing market is ready for these changes.

$SPX FLOW Inc(FLOW)$  $WeWork(WE)$ $Zoom(ZM)$