Is Flow a Timeshare in New Clothes?

Headlines were swirling last week with Andreesen Horowitz sinking its largest first investment ever- $350MM into Adam Neumann’s next venture- Flow. With so much controversy around the spectacular implosion of WeWork and Softbank’s massive loss while Adam cashed out as a billionaire, the easy story to report is that he’s conned investors again. Because there sure as hell isn’t a lot to report about what Flow actually is.

But given that it’s a residential proptech startup, The Proptech Scout is on it. There’s a trail of clues that keep leading me to the same question- is Flow a Timeshare?

Origins

In late 2020, Adam Neumann invested $30MM into Alfred, a software based residential property management and concierge platform. Greystar invested in the same round, and they ran a little experiment together in an apartment complex in Norwalk Connecticut. There were apparently lots of lessons learned by all parties, and Alfred expanded and refined their software platform from there.

Neumann is their largest single shareholder, and at first I thought this was a synergistic opportunity to nurture his investment and utilize the platform on Flow’s portfolio. He was maneuvering to take a controlling stake in Alfred, until a March 2022 fundring round of $125mm explicitly blocked him out of gaining control.

Neumann is likely taking all the insider info and lessons learned from Alfred to apply the ideas to Flow. He’s since distanced himself from Alfred and poached a couple board members and consultants. Leading us to last week, when Neumann and Andreesen Horowitz publicly announced Flow.

What is Flow?

Some outlets are saying Flow is a direct competitor to Alfred. That may be true, but I think Neumann had far greater ambitions. a16z founding partner Marc Andreesen wrote a post defending the investment, and provided some vague hints at what Flow is attempting to do.

The a16z Memo on Flow

Andreesen bifurcated the residential experience into owning vs renting, claiming that there’s more buy-in to a community when people own. (As a co-living developer, I disagree with how black and white his characterization is). Layer the sudden shift to remote work, and there is a need to create community to fill in the social void of endless screen time.

There are several hints throughout Andreesen’s article explaining what Flow is:

Only through a seismic shift in the way industry relationships are structured and the mechanisms through which value is delivered can we hope to address the underlying problems of the current system and build the solution. Doing this requires combining community-driven, experience-centric service with the latest technology in a way that has never been done before to create a system where renters receive the benefits of owners. This means rethinking the entire value chain, from the way buildings are purchased and owned to the way residents interact with their buildings to the way value is distributed among stakeholders. And given the fragmented nature of the ecosystem today, we can only hope to accomplish any of this by bringing every aspect of the living experience together.

Andreesen suggests that there needs to be a third option besides rent vs own, where people have the flexibility to move based on their work, but not miss out on the benefits of ownership.

Benefits of Homeownership

Well let’s think through what the benefits of home ownership are:

• You own real property
• You have more financial security
• You make paper gains when the property appreciates
• You get a tax shelter from depreciation
• You don’t have to deal with a landlord
• You can rent it out if you’re not living there

Now how can Flow structure a rental with these benefits built in, assuming they can restructure everything about real estate transactions?

It’s Probably a Timeshare

Given Adam’s shady salesmanship, this sounds like a timeshare in new clothes to me. My assumption (and I’ll go with this for the remainder of the article) is that renters will purchase fractional ownership in a portfolio of apartments with a down payment.

Monthly payments will allow them to accrue more and more equity over time. So Flow might structure a typical payment like a mortgage payment. Instead of principal and interest, it may be principal and rent. The more of the principal you’ve paid off, the less rent you’re actually paying into the system. The benefit of owning a portion of this portfolio though is that members will probably be able to freely move between apartments within the portfolio, as well as freely trade shares if they want to get out.

Additionally, Flow will layer community features on top of the portfolio to encourage renters to mingle together. Much like what Adam did with WeWork.

Why give Adam Neumann another chance?

Despite all the negativity in the headlines questioning how such a notorious and disgraced founder could raise ridiculous sums again, it’s important to keep two things in mind: 1) controversy sells news and 2) repeat founders get funded way more often than first time founders.

Here’s Marc Andreesen’s defense of Adam Neumann:

...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.

Translation: Like it or not, Adam Neumann created huge changes in the office sector, and it was incredibly difficult to pull off. So difficult that it failed. He also failed at getting WeLive, The We Company’s coliving brand, off the ground. And failure is a rite of passage in Silicon Valley.

There’s Strings Attached

But ‘lessons learned’ goes both ways. Someone doesn’t just raise $350MM without strings attached. The operational missteps at WeWork were very public. So I’m sure a16z built some safeguards into the investment to prevent profligate spending. Marc will be on the board babysitting Adam.

Furthermore, this deal includes equity ownership in Adam’s portfolio of over 4,000 residential apartments across Miami, Atlanta, Nashville, and Fort Lauderdale, to name a few. So as renters buy into Flow (assuming that is the model), both Adam and a16z will cash out of their portion of ownership at a higher valuation. It’s a REIT that they’re selling shares of to renters.

And lastly, Adam’s experience with Alfred and WeWork will allow him to execute on the plan quickly. He’s setting up extremely tall operation moats faster than any first time founder could. Arguably the only other competitors that can execute on this model right away would be large private equity shops like BlackStone or institutional landlords like Avalon. But they’re not techy enough to dress it up the way Adam can.

How Adam Neumann will make money

The WeWork pre-IPO disclosures revealed that Adam was doing a lot of self-dealing- buying up office properties and renting them back to WeWork to personally cash flow. There’s a slightly different structure here. Adam likely got a fantastic basis on his apartment portfolio pre-pandemic, and now by packaging it up as a massive REIT/Timeshare in disguise as a proptech company, he’ll have access to stupidly cheap debt. And he’s sold off a chunk of the equity to Flow and therefore a16z at a profit already.

a16z just started Flow off at a 1B valuation, so he’s likely already made quite a bit of paper gains. Other investors may be more skeptical this time around, but I wouldn’t bet against him in growing it to a multi-billion dollar valuation and cashing out at some point.

How a16z will make money

a16z can make money two ways here- first as a traditional REIT investor. It’s unclear whether all $350MM went straight to Flow or if Adam’s apartment portfolio is backing some of that investment. But once renters start buying shares, a16z’s investment can’t go to zero like other VC investments.

On the VC side, a16z is counting on this model having a large enough competitive moat and an experienced founder to pull off WeWork like growth without the WeWork like mistakes. It’s a long road to IPO, but that’s likely when they’ll cash out.

How Flow will make money

Being a landlord and underwritten dozens of institutional deals myself, there are so many ways for Flow to make money:

• Sell off shares of the REIT at a profit
• Charge 1-3% fees on every transaction of said shares
• Collect rent. And since there’s a community aspect, that rent will be at a premium.
• Charge 2% asset management fees
• Charge 3-5% property management fees
• Charge a monthly community fee in the form of common charges (very typical for condo owners)

Adam will not be the only landlord contributing his buildings to Flow. It could likely be a platform for landlords everywhere to either exit by a direct sale to Flow or a slow exit by contributing buildings and selling off shares gradually. If Flow structures the financials competitively for landlords, the platform could scale pretty quickly.

And when you nickel and dime a real estate asset with so many fees, the cash on cash return of the investment shoots up by multiples. So it looks like a fantastic investment for Adam and a16z on paper. It’s not quite a zero sum game, but the renters buying ownership into the portfolio will sacrifice returns to Flow in exchange for mobility. And I’m assuming that’s the origin of the name Flow. There’s probably some tongue-in-cheek subtext about the ridiculous cash flows that Adam will be getting too.