Is WeWork dead? | Startup Forensics: the downfall of Adam Neumann

If you are in the startup world, you must
know about WeWork. Chances are you are actually sitting in one, right now. Officially the ‘We Company’ was founded in
2010 and VERY QUICKLY expanded to 836 locations (as of this recording), 15,000 employees, and
over half a million members. It’s the bright and classic startup Unicorn
story. Except it isn’t. In mid- 2019, the company filed the documentation
to prepare for an IPO (Initial Public Offering), or to begin trading in the stock market.
This required them to publish their so-far secret financials. Once the world had a look at their numbers,
everyone quickly realized that the company founder and CEO, Adam Newman, had been selling
smoke and mirrors. The company was not only far, far from being profitable, but Adam had
been living an eccentric executive life that was costing the company millions. The CEO was ousted. The valuation of the company
went from a shocking $47B to an estimated $8B or less, and SoftBank, their lead investor,
is preparing to rescue/acquire/take control of the company to save it from oblivion. In this video, we are going to dig into the
We Company story, their rise, and downfall, and of course, what lessons we can learn from
them. This is a new series we call- Startup Forensics. Push it aside. Notice anything strange? Stomach, liver, lungs… This gory story started in 2008 when Adam
Newmann and Miguel McKelvey established a coworking space in DUMBO called GreenDesk.
They laid out ~100 spaces and rented them from $350 to $2,400/mo: the business boomed. They quickly sold GreenDesk to the landlord
of the building and used the 7-figure acquisition money to start a new space in Soho in 2010,
under the name ‘WeWork.’ This is when Adam’s fundraising abilities
started shining. That year, Manhattan property owner Joel Schreiber invested $15MM in the
company for a reported 33% stake. That means the post-money valuation of WeWork at this
point was already $45MM. It’s unclear how much traction they had at
this point, but needless to say, this is already a pretty high valuation for such an early
company. Mr. Schreiber’s quote on that was “I didn’t
negotiate — I said yes,” “I loved Adam’s energy.” Fast forward to 2014, WeWork was already ‘the
fastest-growing lease company space in New York, ‘ according to Forbes. The company
expected to make $150MM that year and $400MM the year after. New locations were launching
with 80% occupancy. They bragged to the press about their operating margin, 30%. This will
be important later. JP Morgan, the Harvard Corp, and Billionaire
Mort Zuckerman joined as investors on a massive $150MM round of funding, which closed in February
2014. It effectively valued the company at $1.5B. Let’s stop for a second to talk about. WeWork was charging $350/mo or so for a shared
desk, and around $650/mo per person for a dedicated desk. This is crazy-expensive if
you think of it on a per squared foot basis. However, when you factor in the cost of actually
renting an office in New York, a 2-3-4-5 or ten-person team can still SAVE money by going
with a WeWork space. We have one, and we do see the savings. Think about it:
3-year lease and deposit. Office furniture and decor.
Internet and other utilities. Phone systems.
Compliance and other paperwork required to open an office.
Office manager, mail handling. If you’re focused on building a business,
trust me, you do not want the distraction of having to run an office. Or figuring out
how to make it look good. Plus, there’s the intangible value of people:
a community. I truly believe that surrounding yourself with other entrepreneurs, creators,
and brilliant minds have echoes in your own performance. WeWork was all about happy hours
and community events to bring like-minded people together., a site dedicated to tracking
co-working trends, estimated that around 5,900 shared office spaces had launched by 2014:
astronomical increase over the 300 that were tracked by 2009.
Fewer than 10,000 people working in co-working locations back then, the number in 2014 was
already at 260,000. It’s the perfect mix: fast growth, a fast-growing
market, a good chance of becoming a market leader, and a founder that can fundraise. Let’s get back to that $1.5B valuation. The valuations of tech companies and tech
startups are very different from ‘traditional businesses,’ mostly because of POTENTIAL. Traditional businesses can be valued based
on the assets they own, based on their revenue and profits (aka EBITDA). You can look into
the valuations of some traditional companies that trade publicly and see how these numbers
are more or less correlated. But take a look at Amazon. Amazon reported
$232B of revenue in 2018, with a net income of $10B. Just $10B of net income. Profits. Its market cap when these results
were published: $820B. WHY?
Because Amazon is a tech company, it’s not making any profit now, because it’s focused
on owning the world. Literally. eCommerce, groceries, streaming, and web services. Over
50% of the internet runs on Amazon, and it is continuing to grow. Investors are betting on Amazon because of
the tech nature of its business: tech products have high margins. Amazon’s business and market
share will allow it to generate massive margins when it chooses to do so- but for now, the
focus is on expansion, and investors want to buy in that future bet. The point is, tech companies with the promise
of large profits have easier access to capital, certainly compared to boring non-tech companies
whose margins are unlikely to grow. This is why WeWork did everything it could
to position itself as a tech company. Because tech companies are cool, and more importantly,
have access to cheap capital. Buzzwords like “physical social network”,
or artificial intelligence to glean insights about buildings have been thrown around. We’ll get back to this. This is where SoftBank comes in.
SoftBank is a Japanese multinational conglomerate that owns a massive stake in companies like
Alibaba, Yahoo Japan, Uber, Slack, Compass, among many, many others. In 2017, SoftBank announced the Vision Fund:
the world’s largest private equity fund with a capital of $93 billion. SoftBank first committed
$3.1 billion in new funding to WeWork in 2017. Their intent was to ‘invest in all companies
developing technologies in line with the global artificial intelligence trends, including
sectors as finance or transportation.’ Money for the fund came from sources such
as the Public Investment Fund of Saudi Arabia (the kingdom’s main sovereign wealth fund)
and companies such as Apple, Qualcomm, Foxconn, and Sharp. SoftBank became WeWork’s most crucial investor
and doubled down round after round, leading new rounds of funding, leveraging and convincing
other investors to join and pushing WeWork’s valuation up to $47B for their last 2019 round. This easy capital allowed WeWork to run initiatives
like Rise by We, a Wellness, luxury gym concept. That’s run by Adam Neuman’s wife. WeGrow, a private school for kids 3 to 10
years old and WeLive, a co-living concept in high rent areas. Leaked internal documents from 2014 stated
that WeLive was projected to make up 21% of WeWork’s revenue by 2018. But of course,
it didn’t, and all three initiatives mostly failed and have been mostly phased out. Prior to an IPO, companies release public
filings with the purpose of getting investors excited and interested in joining, and purchasing
company stock as part of this transaction. An IPO, in the end, is a round of funding. The company seeks to raise additional funding from new investors and the shares are offered publicly. WeWork released its S-1 Filings on August
14th, 2019. The moment the world had a chance to look at these numbers, everyone started realizing
how much of a bubble this was. WeWork was NOT a tech company. It was a Real
Estate company with some tech, and for a Real Estate company, these numbers don’t make any
sense: In 2018, it generated $1.8B in revenue but
spent a total of $3.7B, which resulted in net losses of $1.9B. It had losses of $900MM+
for the first half of 2019, so there was no path to profitability.
Moreover, it needed the money from this IPO to continue operating or it would be bankrupt
in a matter of months. There was NO investor interest. A couple of weeks after their financials were
made public, pressure started building on top of Adam’s role. Some disturbing news came to the light, like
the fact that Adam borrowed money against his stock, and used it to purchase properties
that he would then lease to the company. WTF. Or that he registered the name ‘We’ under
his name, to then sell it to the company for $6MM. Also in 2014 when investor demand was high
he managed to negotiate shares with 10 times the votes of others. With a disclosed personal goal of ‘becoming
the world’s first trillionaire’, Adam convinced the board to buy a private jet he would use
to travel. In total, he borrowed over $740MM against his stock and has sold a tremendous
amount of his shares in the company. A very rare and suspicious activity, of course. With new revelations coming to the light,
Newmann was forced to step down, and he did on September 25th. The IPO intention was withdrawn
by the company and major layoffs were announced by October 3rd.
4,000 employees were expected to be cut, which represent over a quarter of the company staff. Having lost investor trust, interest and with
fast shrinking cash reserves, the company had no choice but to seek profitability, as
the real estate company that they always were. Two new co-CEOs were brought in, the company
jet was sold, and the company is seeking to get rid of some of their ‘unrelated’ acquisitions,
such as Meetup. The future for WeWork is certainly uncertain.
While we can’t call it dead yet, the clock is ticking for them to get back on track.

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15 thoughts on “Is WeWork dead? | Startup Forensics: the downfall of Adam Neumann

  1. Great videos for startups and until now my business is ultimately changing because of your videos.

    I'm gonna start a big leap at a start of 2020 for my business by providing an App as well, I will update in a later comment the status of my business if you would like to know.


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