Life is determined by a few key moments. That was the case when in 2016, Masa Son met Adam Neumann in the WeWork offices. Masa had only twelve minutes to decide whether to place a $4 billion bet on WeWork! With the usual coolness, Adam Neumann - a tall guy that felt ok in walking barefoot without a shirt in the middle of the street - played his cards at best. A few minutes later, Masa Son, among the wealthiest people in Japan, scribbled $4 billion on his iPad. That made Adam's company, WeWork, valued at $47 billion!
Masa and Adam would project WeWork to be valued at $10 trillion by 2028! Yet the wind was going to change very quickly. And just two years later, the whole thing was to implode.
From the height of a $47 billion valuation, the company risked losing it all!
This isn’t a movie by Oliver Stone, who wrote the legendary Wall Street, interpreted by Michael Douglas, in 1987, and which would paradoxically inspire generations of financiers. We’re, at this time, into WeWork’s offices, a real estate company claiming to be among the largest tech players, running what the company called a Space-As-A-Service Business Model. This story is so exciting that Apple TV+ is making a series about it, interpreted by Jared Leto.
https://www.youtube.com/watch?v=VAuhT5241h8
When I interviewed Eliot Brown, a reporter at Wall Street journal since 2010, he had been following WeWork’s founder rise for a few years. Eventually, the story got so compelling that when WeWork crashed, Eliot wrote a book about it called “The Cult of We.” Founded in 2010, in SoHo, NYC, by Adam Neumann and Miguel McKelvey, WeWork quickly expanded. By 2012, WeWork was a successful and profitable company that was now worth over a hundred million in a very short time.
2016 would be a turning year for WeWork as it managed to get a $4 billion offer after a 12 minutes tour of the offices, Masa Son, founder of SoftBank. Masa Son would later promise to take over the company for $20 billion and make it into a $10 trillion behemoth by 2028!
Things didn't turn out as expected. Masa Son pulls back from its promised investment as liquidity drains out. WeWork, therefore, tries to IPO to getting the funding it needs to survive. Yet, as it submits its S-1 form to the SEC, the whole scandal comes out, as a conflict of interests, bad management, and extreme losses become public! WeWork would have to withdraw its IPO.
As the company restructured, it went public via a SPAC company BowX, valuing it at $9 billion (instead of the $47 billion of value at its peak). By March 2022, WeWork is valued at less than $4 billion.
What happened there? Let’s look at one of the craziest stories of the tech industry, which might well resemble the epitome of what can go wrong when markets are supplied with massive liquidity and private investors are looking for the next big thing!
As Eliot Brown explained to me, Adam Neumann's entrepreneurial story started when he moved back to Israel with his mother, where he lived most of his life, before adulthood. In Israel, he lived in a Kibbutz, a communal socialist experiment. There, he learned the value of community. He also learned how the place was a mess as it was hard to make the community keep going without the financial resources. After a short stint in the Navy in Israel, he moved to New York.
In the city, he found the perfect place for him to bloom. He just wanted to become rich, and with his sister already in New York, working as a supermodel, he was right on introduced to interesting people. Adam was quite energetic, a natural extrovert; he found it very easy to make friends and build communities just for having fun.
His first venture as an entrepreneur was a baby clothes company (mainly financed with his sister’s money), which tried to make clothing that had knee pads for babies when they were crawling. It was called “Krawlers.”
The idea was that babies’ knees must hurt, so here’s a way to make it, so they don’t and didn’t go very well. Yet Adam was a great salesman. However, his inability to understand the product and his lack of passion about it (he was a man in his 20s) made the business continuously struggle.
The real turn of events came when he met someone who ran an office space subleasing company, a little incubator-type environment called Sunshine Suites. It was the son of a classmate of his at college. Adam felt impressed by how much money Sunshine Suites was making. In the meantime, Adam had met an architect, which turned into a good friend named Miguel McKelvey. Adam Neumann pitched the idea to do something similar to Miguel McKelvey, who became the co-founder of something very similar to what would later become WeWork.
Back in Brooklyn, they convinced their landlord to give them a floor and put up the money to organize a first co-working space. The landlord put in the money, and real estate and Adam and McKelvey put in sweat equity. The deal worked pretty well! Soon enough, the company, which they called Green Desk, was a success. We’re in the 2010s.
When Adam Neumann saw the idea was working well, he figured to turn it into something way bigger. Yet the landlord didn’t seem to agree. Thus, he liquidated the two co-founders and gave them about $500K each.
Adam Neumann recommended McKelvey to keep his money as he would have spent it, so that they could use it for their next venture.
Finally, as the vision was shaping into Neumann’s mind, he wanted to build something big, a multi-billion dollar business.
He also understood that to do so; he had to play the venture capital game. And as it would later turn out, he was very good at it.
But before we get to that, Adam Neumann, in the meantime, had also met what would become later on his wife: Rebekah Paltrow, causing with the actress Gwyneth Paltrow.
At the first encounter, Rebekah Paltrow tried to inspire Neumann to think big, but also to do so with vision, and not to only think about money. While this might seem inspiring, as we would see throughout the story, it also turned into one of the paradoxes of the whole WeWork story, in what we can call “fake leadership.”
Fast forward, WeWork is indeed a good idea. That’s a sort of real estate arbitrage, where you leverage on a longer-term lease to rent the real estate locations at a much higher price to co-working companies by offering them ancillary services.
This model is well known today, yet pretty new in the 2010s. However, while this business model turned out to be profitable at the time (we’re right after one of the greatest real estate bubbles of our times), when commercial real estate was under pressure, it was still a business that was very hard to scale.
The primary reason was that WeWork had to anticipate the costs related to long-term leases and pay them out slowly as more members came in. While over time this model would make sense, in the short-term this form of arbitrage also carried negative cash flows.
Yet, we’re in a period when private markets were heating up, and venture capital was massively betting on tech companies. Adam Neumann, therefore, realized the importance of reframing WeWork as a tech company rather than a real estate player.
Indeed, over the years, WeWork called itself a Space-as-a-Service business model. This was done to mimic the successful and rising industry of software companies offering their technology for a monthly fee (the Software-as-a-Service).
The move was successful, as WeWork quickly convinced venture capitalists to invest. Among the first, there was Benchmark, a well-known name in Silicon Valley. They were the first big check into Uber.
This created an aura of success, it validated WeWork as a tech company, and it made it into a multi-million dollar success. And the road to billions wasn’t that far!
https://www.youtube.com/watch?v=BzAdXyPYKQo
One of the most hilarious scenes of the series Silicon Valley (above) well explains in a hot market what makes a company successful. It’s not the revenues. It’s the hype you can create, but also how much you can shift your narrative around growth rather than profitability. That is what WeWork did. Adam Neumann, at that point (we’re around 2014-2015) had mastered the venture capital game. And he started to secure other financing deals.
The real breakthrough came when they managed to pull in a mutual fund, Fidelity. A growth fund part of the Fidelity family gave WeWork an over $200 million cheque, making the company valued over $10 billion for the first time.
Fidelity at the time was pulled into WeWork as it was trying to show it could invest in innovative companies, and for the mutual fund, a cheque of over $200 million was a small thing compared to the hundreds of billions it had under management.
While WeWork grew to become what is called a Decacorn, yet, as WeWork was growing by surfing venture capital investments, Adam Neumann was taking money off the table by selling some of his shares to finance his lifestyle.
At the same time, he was also opening personal loaning lines to keep the extravagant lifestyle the family was living. On the one hand, he preached to his team to work hard and do it for the mission; on the other hand, he was taking money off the table where he could to finance his lifestyle. To be sure, there is nothing bad about taking money off the table, especially if you’re letting some of your early employees, and the people that made the company successful do the same.
Instead, he was taking favorable deals for himself, and that’s it. And there is more to it.
As WeWork was growing, a plethora of conflicts of interest started to build up. In fact, Adam Neumann, on a growing number of deals, would, on the one side, invest in the property behind the commercial building. And on the other hand, manage the company as WeWork’s CEO. For a company that was now worth more than $10 billion this was a matter of concern. And yet, as the company scaled, things only got worse.
The money that Neumann would take from the various financing rounds, were also used to do acquisitions that didn’t make any sense. The epitome of it was the acquisition of a company called Wavegarden, which actually made artificial waves for surfing!
The real turning point for Neumann (or, if you wish, the beginning of the end) and WeWork came when he encountered Masa Son, the patron of SoftBank, a Japanese conglomerate, who had billions of dollars at its disposal. Masa Son’s career is quite interesting. In fact, he managed to become among the wealthiest person in the world, during the dot-com bubble, only to see his wealth to evaporate.
Even though he failed with the dot-com bubble he still managed to build an aura of success thanks to a huge winner. Indeed, Masa Son had invested $20 million in the early days of Alibaba, turning it into a multi-billion win!
The approach he used was gut instinct in spotting a visionary founder. Thus, it was this ability (as he later recalled) to spot a visionary like Jack Ma (founder of Alibaba) that made the investment so successful (according to Masa Son).
As Masa Son recounted, referring to Jack Ma (I edited the text for readability):
He had no business plan, and zero revenues, but his eyes were strong, strong eyes, shiny eyes, I could tell from the way he talked, he had charisma, leadership. So his business model was wrong, but the way he talked, and he could bring young Chinese people following him.
Masa Son, after the dot-com crash, had started to rebuild his business by investing in the communication industry, until he tried to merge Sprint and T-Mobile, and failed. Yet, when Masa Son's real mission was to find the next visionary. When he met Neumann he had successfully built one of the largest funds ever created, for tech companies. The Vision fund, in fact, had secured over $45 billion from Prince Salman (King of Saudi Arabia). With that money, Masa Son was ready to invest in the next tech messiah, able to change the world.
Here we go back to the day Masa Son had scribbled the $4 billion investment on his iPad. That made Adam's company, WeWork, valued at $47 billion!
Yet the story wasn’t over yet.
Masa Son became the main mentor of Adam Neumann, at the point that the two met to discuss the final vision for WeWork, making it into a multi-trillion-dollar success! Indeed, as Son and Neumann met, in 2018 Son had promised Neumann to buy out WeWork, make it a private company, and bring it to become a $10 trillion company by 2028.
That was the grandiose/mad vision!
Yet, as the deal was about to close, things changed pretty rapidly. As market liquidity started to drain up, pressure mounted on the Vision Fund, and Masa Son called the deal was off the table. This made Neumann go in the path of one of the most unsuccessful IPO attempts. As the window of opportunity to IPO was closing, WeWork tried to go public in 2019. Yet, as the WeWork S-1 was released the public was shocked to see a company bearing massive losses, and with no plan whatsoever to turn a profit any time soon. And to make things worse, all of Neumann’s conflicts of interests started to be made public, until the situation became unsustainable, and after various theatrical moves, Adam Neumann was ousted, yet he left the company with one of the most generous, severance packages of all time.
At the time of this writing, WeWork, which would later IPO through a SPAC, is now worth less than $4 billion. The once envisioned multi-trillion success turned into a nightmare.
The overall company survived all that, showing that overall, WeWork wasn’t a bad idea. But of course, neither is a tech company that could be worth more than Apple, Amazon, and Google combined.