Bad News for Crypto, Tech Startups, and Marcus Lemonis

Coinbase tells crypto investors they may not actually own their crypto. Employees at tech startups are dumping their stock. And another lawsuit targets "The Profit."

Good morning!

Here are today’s highlights:

• A Chinese online retailer with a smart business model is taking over fast fashion.

• But China’s weakening economy offers a double-whammy: “Everyone has exposure.”

• A “legacy” pot dealer tries to go legal.

THE ECONOMY

China’s slowdown is rippling around the world: “China’s deceleration represents a double whammy for the global economy. The country isn’t just a huge market for the rest of the world’s goods, components and raw materials, but it is the manufacturing dynamo at the center of global trade. That means its weakening economy is bad news for commodity exporters such as Brazil, Chile or Australia that supply China with oil, copper and iron ore. It is bad news for manufacturing powerhouses such as Germany, Taiwan and South Korea that rely on China as a huge market for machinery, cars and semiconductors, as well as a critical link in world-wide supply chains for their companies.”

• “And it is bad news for the U.S., where galloping inflation is squeezing household budgets. Federal Reserve Chairman Jerome Powell warned last week that, alongside the war in Ukraine, China’s economic woes could aggravate inflationary pressures in the U.S. if they prevent the healing of supply chains that is essential to help cool inflation.”

• “‘Everyone has exposure,’ said Carlos Casanova, senior economist for Asia at Union Bancaire Privée in Hong Kong. ‘Whatever happens in China significantly impacts global growth.’” READ MORE

OFFICE SPACE

For businesses that serve office workers, Wednesday is now the day: “In a world of hybrid work, many companies that allow employees to split time between the office and their home let them choose which days to come in. But many firms would like it to be about three. ‘Some [companies] are saying Monday, Tuesday, Wednesday. Some are saying Tuesday, Wednesday, Thursday. Some are saying Wednesday, Thursday, Friday,’ said Brian Kropp, chief of human-resources research for advisory firm Gartner. There’s one common day in these scenarios: ‘All the natural rhythms of work say that Wednesdays are going to be the day when we’re together,’ Mr. Kropp said.”

• “An average of 46 percent of U.S. office workers went to work on Wednesdays in March, said Kastle Systems, a security firm that monitors access-card swipes. That trounced Monday’s meager 35 percent.”

• “In Florida, Breakwater Hospitality Group is planning to add Whiskey Wednesday and Wine Wednesday events at its restaurants in Fort Lauderdale and Miami’s Brickell business district to capitalize on the trend.” READ MORE

REAL ESTATE

Home prices are up 33 percent since March of 2020, but the increase has been most pronounced in warm suburbs: “The covid-19 pandemic, and the lockdowns and restrictions it inspired, have changed where homebuyers want to live. In Florida's Collier County, a haven for golfing pensioners, house prices were flat in the two years to February 2020. Since then, they have risen by 57 percent. Warm-weather areas across the American south have seen some of the biggest increases in house prices.”

• “Covid itself has hurt the market mainly in hard-hit areas. In the 100 counties with the highest official death rates from covid, price changes were four percentage points lower than you would otherwise expect.”

• “Covid has also led people to spend more time outdoors. In turn, buyers have bid up homes in areas where it seldom rains, summers are balmy or, like Collier, winters are mild.”

• “Since covid emerged, price gains have been large where housing was previously cheap, and smaller elsewhere. This supports recent research showing that remote workers tend to move to reduce their cost of shelter.” READ MORE

ECOMMERCE

Launched in 2012, Chinese online retailer Shein has claimed 28 percent of the U.S. fast-fashion market: “‘The company is the largest online-only fashion retailer, according to Euromonitor. And its ascendance is in large part due to its business model and an ecommerce explosion during the pandemic. The company's manufacturers scan all corners of the internet for new clothing trends, and once they spot a piece with viral potential, they produce it in small batches. Depending on how that piece sells, they either expedite its production or stop entirely. Their supply chain management software allows them to monitor customer search data and share it with manufactures in real time, Insider's Mary Hanbury reported last year.” READ MORE

PROFILE

For an established pot dealer in New York, trying to go legal brings challenges: “Mr. Bronson, 39, and Mr. Cantillo, 31, run Buddy’s Bodega, one of the most prominent illicit cannabis wholesalers serving the New York Metro area. Known for bringing buzzy designer strains from California, like the potent El Presidente, to the East Coast, the business has tens of thousands of followers on Instagram. It employs about 25 people who bag, dispatch, and deliver that limited-quantity supply to hundreds of customers — many of whom then resell their products — on an invitation-only basis.”

• “The owners of Buddy’s are interested in joining the legal market as soon as the law allows it in New York, which will soon follow New Jersey in embracing recreational cannabis sales.”

• “‘Our goal has always been to go legal,’ Mr. Cantillo said. But as they prepare to apply for a license, which can be a complicated and expensive process, they said they feel conflicted about making the transition.”

• “For legacy businesses like Buddy’s — that is, those who made up the industry before legalization — the costs of legalizing may outweigh the benefits. A licensed business comes with start-up costs, high taxes, administrative demands, and fierce competition from well-capitalized companies.” READ MORE

HUMAN RESOURCES

Microsoft is considering sweeping pay raises: “The raises would be in response to growing competition for talent, the people said, primarily from Amazon. Amazon in February more than doubled its maximum base salary to $350,000 in response to widespread angst over what employees there saw as comparatively low pay. The change didn't amount to significant raises for everyone, but some engineers told Insider they got pay increases as high as 90 percent. Amazon has also been doling out record stock awards to employees lately.” READ MORE

Meanwhile, employees at tech startups are dumping their stock: “Start-up workers came into 2022 expecting another year of cash-gushing initial public offerings. Then the stock market tanked, Russia invaded Ukraine, inflation ballooned, and interest rates rose. Instead of going public, start-ups began cutting costs and laying off employees. People started dumping their start-up stock, too.”

• “The number of people and groups trying to unload their start-up shares doubled in the first three months of the year from late last year, said Phil Haslett, a founder of EquityZen, which helps private companies and their employees sell their stock.”

• “The share prices of some billion-dollar start-ups, known as ‘unicorns,’ have plunged by 22 percent to 44 percent in recent months, he said.”

• “‘It’s the first sustained pullback in the market that people have seen in legitimately 10 years,’ he said.” READ MORE

LITIGATION

Marcus Lemonis and The Profit have been hit with a $30 million fraud claim: “In 2015, Dean and Keith Lyden’s Allentown, Pa., design company was featured on the CNBC show ‘The Profit,’ a popular, eight-season-long show about struggling businesses that swap a stake in the company for cash and the guidance of presenter and entrepreneur Marcus Lemonis. Seven years later the company, Precise Graphix, is in bankruptcy and its trustee is pinning the blame for its misfortune on NBC and Lemonis.”

• “‘NBCUniversal and, subsequently Machete, created a mob-style scam that disparaged, denigrated, and falsely portrayed the businesses they promised to help, like Precise Graphix,’ Lynn E. Feldman, the Chapter 7 trustee, said in the lawsuit.”

• “The company allegedly had to complete projects at a loss, most of which were for entities Lemonis controlled. In 2021 the debt-burdened company filed for bankruptcy owing $6 million after Lemonis did not sign a credit line renewal.”

• “Lemonis said that the claims are baseless. ‘I will not continue to allow people to create their own narrative based on a false reality,’ Lemonis said in a statement. ‘I work hard for and respect money and take any attempt to unethically extract it from me very seriously.’”

• “The case joins a string of complaints involving the reality TV show ‘The Profit,’ NBC and its star frontman.” READ MORE

CRYPTO

Coinbase warns its customers: “Cryptocurrency trading platforms might look and feel like regular brokerage apps to everyday users, but regulators have long warned they lack the oversight and investor protections that are built into traditional financial services. Coinbase Global acknowledged that reality this week. In its quarterly filings, the crypto trading firm suggested that the digital tokens it holds for its users might not really belong to them if push comes to shove. ‘Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings, and such customers could be treated as our general unsecured creditors,’ the company said.”

• “By contrast, securities held for customers by a registered brokerage are legally segregated from the assets of the brokerage, meaning they can’t be touched in bankruptcy proceedings.”

• “‘When you trade on a crypto exchange—and I’m saying this to the investors who might watch this—you no longer own your crypto asset,’ [SEC commissioner Gary] Gensler said in an interview with The Wall Street Journal last year. ‘If that exchange gets hacked, if somebody steals the underlying token…you’re just a creditor. And when crypto exchanges fail, you’re just in line in bankruptcy court.’”

• “Coinbase’s stock fell 30 percent on Wednesday after it reported on Tuesday evening that it lost hundreds of millions of dollars in the first quarter. So far this year, the exchange’s stock price has plunged 80 percent.”

• “‘Your funds are safe at Coinbase, just as they’ve always been,’ [Coinbase CEO Brian] Armstrong said. ‘We have no risk of bankruptcy.’” READ MORE

THE 21 HATS PODCAST

Does Firing People Ever Get Easier? This week, Shawn Busse, Jay Goltz, and William Vanderbloemen discuss whether the old line about hiring slow and firing fast makes sense during a labor shortage. As William puts it, “What if you do have to hire fast? How do you do that? What if you do want to keep people even if you might have wanted to get rid of them before? How do you do that without ruining your culture?” Plus: How do you know it’s really time for someone to go? And what happens when employees share their salaries with each other? Anything good? And as we all binge watch the real life dramas about WeWork and Theranos, the question inevitably arises: Is it still okay to fake it until you make it? If so, where do you draw the line?

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

If you see a story that business owners should know about, hit reply and send me the link. If you got something out of this email, you can click the heart symbol, you can click the comment icon below, and you can share it with a friend. Thanks for reading, everyone. — Loren