Are We the Greater Fool?

I finished listening to my ebook of Billion Dollar Loser this morning. It’s a book about Adam Neumann and WeWork, and it’s one of this past decade’s wildest startup stories. It’s in the same vein as Bad Blood, the book about Theranos, and Super Pumped, which is about Uber. I’d recommend all three - books, that is, not companies.

One of the concepts that gets discussed in the book is the Greater Fool theory, which is a statement of what seems to be a clear reality of finance these days: buying assets that you think are overpriced can be a money-making strategy as long as there is a “greater fool” out there who thinks that the overpriced asset will continue to rise in value. In many cases, the valuation of assets that this theory applies to are already nebulous - in the WeWork example, that asset was shares in WeWork itself as it secured round after round of private equity financing from companies like Goldman Sachs and SoftBank before finally striking out on a couple of attempts at an IPO. One story in Billion Dollar Loser has the founders of WeWork telling an early investor that their company was worth $45 million when, in fact, they had little evidence to point to such a valuation. That investor, Joel Schrieber, agreed to invest $15 million in return for a 1/3 share of the company. Was he a fool? Perhaps, but he made plenty of money on the deal by selling that equity later, so a greater fool was indeed present.

The cover of Billion Dollar Loser

There’s something else quite popular these days that I think the Greater Fool theory applies to, and you may have already figured out what it was. From my perspective, the entire NFT craze of the past year is a perfect encapsulation of the Greater Fool theory. I’m no fan of NFTs on multiple levels, but it’s clear that many people have made unimaginable amounts of money by trading Bored Apes, Lazy Lions, and whatever else people have come up with. NFT creators have found the sweet spot of scarcity, though that scarcity is transparently artificial, with these limited run tokens, creating exclusive communities online based around ownership of the apathetic animal of your choice. But are these “communities” ones worth investing tens or even hundreds of thousands of dollars to join, especially when what you’re “buying” is a glorified link that could go dead at any time? I’m sure you’ve seen the “name on a star” certificate analogy, and I think it’s apt.

At the end of the day, someone is going to be left holding the bag with NFTs. At WeWork, it was the employees who lost out big, taking under-market salaries in exchange for equity that would never be valued at the inflated figures predicted by private equity companies. In some cases, people took out loans to buy out their stock options in an attempt to become millionaires - when WeWork finally went public in late 2021, a full two years after its first attempt to do so, it was valued at $9 billion, less than 20% of what SoftBank valued it at in 2019. Employees, like other investors, were bamboozled by a charismatic leader, Adam Neumann, who had a plan for his own financial security but not much else. In the NFT space, there’s not one single leader - instead, the charisma is appropriately decentralized across various influencers and artists who’ve jumped onto the burgeoning trend in an attempt to make some quick cash. I won’t go into the various crypto and NFT-related pump-and-dump scams, but rest assured, they’re out there.

All that said, there seem to be plenty of private equity funds pumping money into companies like WeWork and Theranos, so who’s to say the predatory NFT culture is going anywhere?