People in the real estate world could not understand the valuation whatsoever. One reason for their confusion was that there was a UK listed company called IWG, which used to be known as Regus that was in the exact same business and traded at a fraction of the valuation
WIKIPEDIA: Generation Hustle
The HBO docuseries Generation Hustle produced an episode titled “Cult of WeWork” about the Neumanns’ leadership at WeWork. The characterization of the show as being about scammers caused the Neumanns to pursue legal action against HBO. As a result, HBO changed their characterization and removed its true crime listing. According to Deadline Hollywood, this was the only episode in the ten-part series where “the subject matter hasn’t been charged or accused of breaking an actual law or, in many cases, served time.”
Transcript
0:00 WeWork was founded Adam Neumann – a man who spoke mostly in slogans and his partner Miguel McKelvey who there is not really any good stories about back in 2010. Adam made some big claims like that WeWork, a short-term office leasing company would elevate the world’s consciousness, unleash every person’s superpower and that it operated on a WeOS – an operating system that makes work better and living better. – so yeah
0:28 – slogans… A simpler and possibly more accurate description of WeWork is that it’s shared office spaces with free beer – but it’s hard to raise twenty-two billion dollars with that description – a bit more magical realism is needed.
0:45 That’s why Neumann – a man who was hardly ever seen near a computer pitched it as a tech company and claimed that WeWork was the world’s first “physical social network.”
0:57 Now, obviously the term “physical social network” doesn’t actually mean anything, but Venture Capital people love lines like this, they focus more on the story than the numbers. These are – after all – the same people who were impressed when Sam Bankman Fried claimed while playing video games – that FTX could someday be the world’s leading Banana procurement app.
1:22 They are possibly more gullible than even Michael Lewis – and so I won’t make fun of them – because it wouldn’t be nice, and I pretend to be nice on this channel. Adam Neumann is said to have told anyone who would listen early on that his job was to keep growing the business until it was “too big to fail” and he got pretty close to that goal, in September 2019 Eric Rosengren the president of the Boston Federal Reserve Bank actually warned that the collapse of WeWork could lead to huge losses for banks and commercial property owners.
2:01 WeWork raised twenty-two billion dollars from venture capital firms for a real estate business that never (not even once) turned a profit, it stands out as the worst venture capital deal in history. Earlier this week WeWork announced that it would not be making two sets of interest payments, which total to over $95 million dollars. This kicks off a 30-day grace period that could lead to default. The company say that they have enough liquidity to actually make the payments and that they might elect to do so in the coming weeks.
2:39 They say that they will use the thirty-day grace period to negotiate with creditors. Last month, they announced that they were renegotiating nearly all of their leases, and earlier this year said that there was “substantial doubt” about their ability to continue operations. So, it may all be over soon for WeWork. No one is awfully surprised about this possible default, the bonds WeWork skipped payments on were trading at distressed levels of as low as 9 cents on the dollar before the announcement.
3:16 WeWork went public just under two years ago through a SPAC merger and since then the stock has fallen almost 99 ½ percent, which means that at this point – as a worst-case scenario – it can only fall an additional 100%.
3:32 Let’s look at the rise and fall of WeWork, at why VC’s lost so much money in the deal, and how Adam Neumann got so rich while losing all of his investors money. At the end we’ll discuss his new startup Flow.
5:19 Adam Neumann – the cofounder of WeWork moved to New York City in 2001 after finishing up military service in Israel. He enrolled in college but quickly dropped out to pursue his entrepreneurial dream of making baby clothes with built in knee pads. His company was called Krawlers (spelled with a K) and to date it is still his most successful (or least unsuccessful) business venture.
5:47 The clothes were difficult to sell (because they were horrible) and this forced Adam to rent out half of his Brooklyn office space to another company. This sublease sparked the idea that led to WeWork which he founded a few years later.
6:05 WeWorks core business is pretty easy to understand, they rent large office spaces from commercial landlords, divide them up into smaller offices which they then rent out on a more flexible basis to startups and other small businesses. They earn a small premium for trendy design, flexibility and for organizing regular happy hours. In the wake of the credit crunch when WeWork got going, there were a lot of empty office
6:35 buildings in New York. There was also a newly displaced workforce who were hoping to earn a living through a startup or freelancing. Interest rates were low, and it was a great time to launch a co-working office space. WeWork offered a solution to both struggling landlords, and to entrepreneurs who didn’t know how much office space they would need
6:59 and who were nervous about signing long term office leases. The team launched their first co-working spot in downtown Manhattan, and from there it just boomed. The exposed brick aesthetic appealed to a younger startup community who loved the casual style and the sense of community of being around likeminded entrepreneurs. If you needed a lawyer or a graphic designer to help you with your startup, you would likely
7:27 run into one at the coffee machine. Traditional landlords were resistant to getting involved in this type of business, it was by no means a new idea and it was a business model that always struggled in economic downturns as small businesses folded and quickly cancelled their leases. Many of the landlords that Newmann and McKelvey first approached had no interest in dealing with them, saying “why would I need you, I can do that myself if I want to”.
7:59 Neumann and McKelvey didn’t have a good answer for that question early on, but persisted. There was nothing very special about WeWork back then. In 2008 The New York Times had even written an article about how coworking spaces were opening up all over the country with features like nap rooms, happy hours and good coffee.
8:20 WeWork found its first outside investor in Joel Schreiber – a real estate investor who liked the idea, but didn’t have a suitable building to rent out to them. He wanted to invest with the team and asked what the company – which at this point was just in the – idea stage – was worth. Neumann decided to just
8:44 throw out a big number and said $45 million dollars. Schreiber surprisingly agreed to
8:50 the valuation and put in 15 million dollars to buy one third of the company. Neumann learned a very big lesson that day, if you can boldly claim that your company is really valuable, you just need one person with money to agree to invest at that price, and the valuation takes on real meaning. The team found a run-down building in Soho that they could lease and set about kitting it out with Ikea furniture and renting it
9:21 out office by office while they were still renovating the overall space. They would tell prospective tenants about the gym that they planned on installing and how the vacant lot across the road would be converted into a park and people just signed up. The gym and the park that they had promised never actually materialized. In a year the business doubled in size. And from then on, the growth was exponential.
9:48 The first building was leased for a five-year term and rented out to their customers (that they called members) on a month-by-month basis. After that they began leasing buildings with more typical 15-year leases which of course came with more risk.
10:06 Adam had married Rebekkah Paltrow – a cousin of Gwenyth Paltrow’s who had wealthy friends and he would pitch his scheme to them. By 2012 he had raised an additional seven million dollars from friends and family. But things really got going when he managed to get a $16.5 million dollar investment from a venture capital firm called Benchmark who had funded
10:30 startups like eBay, snapchat, Instagram, Twitter and Uber. This investment valued WeWork at $100 million dollars. Coworking rentals was a business that many real estate investors avoided because it was both risky and a low margin business. When
10:50 it went well you didn’t make very much money, and as soon as a recession occurred you lost all of your tenants which could lead to bankruptcy. Others in the space couldn’t understand
11:01 where Adam was coming from with his promises of massive profits. While the business made very little sense to real estate veterans, Adam’s focus on growth at the expense of profitability fit very well with a Silicon Valley mentality that it was best to acquire customers by any means possible and figure out profitability later.
11:26 Real estate is a very different business to software, where there is next to no cost associated with getting an additional customer to download your app, or to convincing other people to use their personal cars as taxis. On top of that, the office rental business has no moat
11:45 to protect you against competitors, if you are successful, others can easily replicate your business model. It would appear that the people at Benchmark liked the fact that the WeWork made more money per customer than most tech firms do – tech firms can go years
12:03 without getting any revenue from their customers, but mostly it seems they just liked Adam.
12:10 He was a good talker and they felt that if they gave him money he might find a way of building something great with it. So that is what they did.
12:19 The one difference between WeWork and all of the other coworking spaces that were sprouting
12:25 up all over the world at the time, was Adams access to capital. The competition were trying
12:31 to run profitable businesses, while Adam was just trying to grow revenue as fast as possible,
12:38 because his investors cared more about growth than profits. Now that WeWork had VC funding, something previously unheard of in Real Estate, Adam
12:48 set to work trying to make the business look more like a tech firm than an office rental
12:54 business. This was no easy task for him as Adam barely knew how to use a computer and
13:00 his head of IT at this 100 million dollar startup was a sixteen year old high school
13:06 kid – nicknamed Joey Cables – who installed routers in the buildings for minimum wage,
13:13 and who couldn’t be contacted if there was a problem during school hours. WeWork quickly hired a team to develop all sorts of terrible software so that the firm
13:24 could somehow justify its tech stock valuation. They built an in-house version of LinkedIn
13:30 so that WeWork members could connect to each other. (very few customers used this – because LinkedIn already existed – why would you use a version of it with fewer users)
13:43 They built software that was supposed to be like Google Analytics for offices which tracked
13:49 conference room usage and used sensors to work out where people liked to hang out in
13:54 the building. They experimented with face recognition cameras and microphones in meeting
14:00 rooms that could track facial expressions and tones of voice- the idea was that it could
14:07 tell members how interested their guests were in the meetings they hosted. Sensors near
14:13 the coffee machines revealed that lines get a bit long in the mornings, other business
14:19 insights gleaned through this office-tech were that people liked desks near windows.
14:25 Impressive stuff. A particularly intrusive idea was to analyze the sign in book at the
14:31 front desk to work out which of their tenants were getting visits from high profile people,
14:38 allowing WeWork to judge their tenant’s business potential. While all of this tech development was going on, WeWork was allegedly struggling to process
14:49 rent payments from their customers at many of their buildings, because that tech – the
14:54 tech that possibly mattered the most wasn’t always working.
14:59 In 2014 JP Morgan Asset Management invested $150 million dollars in WeWork, at a new valuation
15:08 of one and a half billion dollars, making WeWork one of fifty Unicorns in the United
15:15 States, a term that that had been invented the prior year to describe a new crop of startups
15:21 with private valuations above a billion dollars. Something that had never really happened before,
15:29 as companies used to IPO long before hitting such valuations.
15:34 By 2015, the five-year-old company had 23,000 customers and 32 locations, renting desks
15:42 for as little as $45 per month. It was added to Fast Companies fifty most innovative companies
15:50 list. In 2016, WeWork raised $430 million in financing
15:58 from a Chinese VC firm which valued the company at $16 billion dollars. Adam’s pitch to
16:05 potential investors at this point was that WeWork could grow at whatever rate investors
16:11 wanted, so long as the investor was willing to fund the growth. They could pick their
16:16 growth rate and he would tell them how much money they needed to invest to make it happen.
16:23 Adam, who kept his office, apartment, Maybach and Private jet stocked with dozens of bottles
16:30 of tequila was known to celebrate every minor event by doing shots with whoever was present.
16:37 A fight broke out in one of the buildings at one point when a tenant became infuriated
16:43 because he couldn’t get any work done due to the constant noise coming from Adams office
16:49 because he was constantly giving speeches, blasting music and doing shots with his employees.
16:55 When the tennant asked Adam to turn the music down, he turned it up. At a deal closing with a VC investor Adam once ripped a fire extinguisher off the wall
17:06 in the meeting room and hosed down the visiting Investment team who were not really expecting
17:12 that to happen. They invested anyway. Things really picked up pace in 2016 when
17:18 Masayoshi Son – the founder of SoftBank came on the scene. Son was a man who had made
17:25 risky bet after risky bet, a number of which had paid off big. For three days at the very
17:32 end of the end of the dot com bubble he had overtaken Bill Gates as the richest man in
17:37 the world. He went on to lose 90% of his wealth that same year.
17:43 Son has made some surprising investments, he put $300 million dollars into a dog walking
17:50 app and $375 million dollars into pizza making robots – these investments didn’t work
17:57 out. He secured the exclusive rights to sell iPhones in Japan and then gave the phones
18:04 away with cheap unlimited data plans to maximize market share – this wasn’t a winner either.
18:11 He had invested in driverless cars, food delivery services and vertical farming too.
18:18 On the other hand, he put $20 million dollars into Alibaba in its early days, and this investment
18:25 went on to be worth more than $100 billion dollars. You get make a few mistakes after
18:32 a win like that. Son tells the story that he knew to invest with Jack Ma when he saw
18:38 a certain sparkle in his eye. Masayoshi had just raised 100 billion dollars
18:45 for his Vision fund, mostly from the Saudi Arabian and Abu Dhabi sovereign wealth funds
18:51 when he met Adam Neumann and saw a similar sparkle in his eye. Adam pitched that WeWork
18:58 was a tech company to Son explaining how his team were developing a standing desk that
19:04 automatically adjusts to a member’s height, keyless entry systems and a phone booth with
19:11 smart lighting. This possibly sounded better than pizza making robots to Son who was enamored
19:18 with Adam but told him he was being too shortsighted. Adam made a crazy pitch, and Masa told him
19:26 that it wasn’t crazy enough. He said “That’s great, but let’s make it ten times bigger.”
19:32 Son decided to invest 4 billion dollars into WeWork – this was Vision Funds biggest investment
19:39 to date and is one of the largest venture capital investments of all time. He pulled
19:45 out an iPad and both men signed a letter of intent. The time taken from meeting Adam to
19:52 signing the contract (which included a twelve-minute tour of a WeWork building) came to under thirty
20:00 minutes. SoftBanks investment gave WeWork a private valuation of $20 billion dollars making WeWork the fourth most valuable startup in the United
20:11 States just behind Uber, Airbnb and SpaceX – the leading money losing startups in the
20:18 world at the time. In 2017, WeWork doubled in size opening an
20:24 additional 100 coworking spaces around the world. Neumann described the decision to open
20:31 locations in Africa not as a growth opportunity but as a duty to community and growth, because
20:38 of how WeWork affects GDP and employment. In many ways I think he is more spiritual
20:46 than Jack Dorsey. The core business while growing rapidly was
20:51 unprofitable, but Neumann diversified into other unprofitable business lines. WeLive
20:59 rented out tiny apartments with communal spaces which were supposed to mitigate loneliness
21:04 and suicide. The units had two murphy beds crammed into a studio apartment with mattresses
21:11 separated by a curtain. They suited New Yorkers who were concerned that their apartments were
21:18 already too spacious. There was WeBike, WeSail, WeEat, WeMove, a
21:25 gym called Rise by We and of course the WeWorld concept. WeGrow was the elementary school
21:33 run by Neumann’s wife Rebekkah (who had no background in education but claimed to
21:39 have studied under The Dali Lama and Mother Nature Herself…) The New York Post described
21:46 WeGrow as New Yorks Most Obnoxious elementary school. The school committed to unleashing
21:53 every child’s superpowers – well every child whose parents could pay the $42 thousand
21:59 dollars a year in tuition anyhow. I dunno… you can’t really expect unleashing superpowers
22:06 to come cheap – even with VC funding… Adam told people that We Neighborhoods and
22:13 We Cities were a when, not an if… He even met up with Elon Musk at one point – who
22:20 was claiming that he would have colonies on Mars by 2024. Adam offered to help out by
22:26 building a WeWork co-working space on Mars. I’m not sure if that is still planned…
22:32 There’s still a year to go. Now, I’m a bit worried worry that I haven’t been clear enough about this – there was nothing remotely innovative about WeWork.
22:43 People in the real estate world could not understand the valuation whatsoever. One reason
22:49 for their confusion was that there was a UK listed company called IWG, which used to be
22:56 known as Regus that was in the exact same business and traded at a fraction of the valuation
23:02 of WeWork. People were looking at IWG which was profitable, and WeWork which was not,
23:10 and wondering what was going on, what did SoftBank see that they didn’t.
23:15 On almost every metric like global square footage, number of members, locations, countries,
23:22 revenue, and profit IWG was either similar or much better than WeWork, except, of course,
23:30 for valuation. While there is no moat to protect you from competition in the office rental space, having access to a huge amount of capital and investors
23:41 who didn’t worry about profits meant that WeWork could destroy the profitability of
23:47 their competitors. And maybe that was a moat of sorts. They would send teams to hand out
23:54 leaflets at competing office spaces offering one, two or even three years of free rent
24:00 to entice small businesses to move to WeWork. With Softbank money WeWork was now paying
24:09 real estate agents much higher fees than the competition in order to quickly secure the
24:15 best locations. They would pay one years rent as a fee to the agent and often offer their
24:22 new tenant’s a years or more of free membership to convince them to sign up. This meant that
24:28 a new building could go two or three years without generating any revenues at all.
24:34 Another problem they were running into was that there were just not enough startups out there to rent all of the office space they were occupying. They began pitching to big
24:45 firms like JP Morgan, IBM and the Guardian newspaper that they should unload their real
24:52 estate and move into more flexible leases in buildings operated by WeWork. They did
24:58 end up renting space to a number of big firms. Masayoshi Son had pushed Neumann to take his
25:06 goals and multiply them by ten, but it seemed that there wasn’t actually enough real estate
25:12 available for WeWork to hit these new goals. New construction was popping up all over Seattle,
25:19 for example, but the WeWork team found that if they occupied every new building going
25:26 up in the city, they still would not hit their target. Landlords were also aware of how much SoftBank money WeWork had to spend and how fast they
25:36 wanted to move, and so pushed up their rents and refused to budge on pricing. WeWork would
25:43 just pay the premium to keep growing. In the 2010’s, massive amounts of money
25:49 was flowing from VC’s like Softbank into everything from scooter rentals to food delivery
25:55 to all you can watch movie deals burning cash to acquire customers. Facebook, Uber and Airbnb
26:04 all identified as platform businesses as did Beyond Meat, Peloton and Casper Mattresses.
26:13 When the Popular YouTuber – and NYU Professor – Aswath Damodaran argued that Uber’s Total
26:20 Addressable Market was the $100 billion dollar taxi and limousine market, Silicon Valley
26:26 VC’s shot back arguing that it was instead every car on the road. This kind of belief
26:33 was necessary to justify some of the crazy valuations that were happening in the private
26:39 markets at the time. The tech unicorns themselves were of course reluctant to go public, as
26:46 it might be more of a struggle to convince people outside of the Silicon Valley bubble
26:51 that any of this made sense. Jeff Bezos had raised just one round of VC
26:57 funding before taking Amazon public, Mark Zuckerberg had gone through five rounds of
27:04 fundraising. WeWork had stayed private long enough for SoftBank to invest in a seventh
27:10 round of financing. WeWork lost over $2 billion dollars in 2018
27:16 – a loss well beyond anything Amazon – the ultimate growth before profits company had
27:22 ever managed in its fastest growth phase. In January 2019 WeWork raised an additional
27:30 $2 billion dollars from SoftBank at a $47 billion dollar valuation. SoftBank considered
27:37 investing as much as $16 billion at the time but downsized their plans due to turbulence
27:44 in financial markets and opposition from their investors. In May 2019, Uber – another Softbank company went public at a valuation of 82 billion dollars.
27:58 It had been valued at 120 billion dollars just months earlier in the private market.
28:05 Its IPO made history with the biggest first-day dollar loss that has ever been seen. It fell
28:12 7.6% on the first day of trading. Softbank’s Uber investment was underwater at this price
28:20 making it difficult for Son to deploy any more money into WeWork, a business that seemed
28:26 similar but worse. With WeWork’s high cash burn rate, and with
28:31 VC money drying up, the company was going to have to go public soon. Adam believed that
28:37 Uber’s mistake had been to show fiscal restraint in the lead up to the IPO, as the conservatism
28:45 had slowed growth, which had spooked investors. His plan was to double down on spending and
28:52 wow investors with the shocking growth rate he could achieve. WeWork – which was now the most valuable private startup in America was in a mad rush
29:02 to go public, as they were rapidly running out of money. They rushed to get their accounts
29:08 in order and file an S1 document with the SEC. Rebekah – Adams wife – was now listed as a cofounder of the firm and she didn’t
29:19 like that the documents were weighted down with numbers. She spent hundreds of thousands
29:25 of dollars on hiring fashion photographers for a thirty-seven-page photo spread that
29:31 was included in the securities filing. (This is very unusual.) She also insisted on personally
29:39 selecting the paper the form would be printed on. Adam struggled to articulate in writing what made WeWork different to other real estate
29:50 firms like IWG. He was better able to convince investors with a bottle of tequila and a fire
29:56 extinguisher than with the company’s accounts. The S1 filing started out with the line “we
30:03 are a community company committed to maximum global impact – our mission is to elevate
30:10 the worlds consciousness.” – That is not typical language in a securities filing.
30:17 The document revealed that Adam had cashed out more than $700 million dollars’ worth
30:22 of WeWork stock- far more than any other startup CEO had ever done in history. As VC’s had
30:30 been putting money in, he had been taking money out. It revealed that he had trademarked
30:36 the word We and sold it to the company for $5.9 million dollars. There were errors exaggerating
30:43 the number of desks being rented out which had to be restated. It came out in the filing
30:50 that Adam personally owned a number of buildings that had been rented to WeWork, which looked
30:56 like a serious conflict of interest. Those leases called for $235 million dollars in
31:03 future payments to Adam. It didn’t help the IPO’s prospects when
31:09 news outlets reported that Adam smoked so much weed on a private jet flight to Israel
31:16 that the crew had to wear oxygen masks to fly safely and that they had refused to fly
31:21 him back to the United States. The SEC sent a nine-page list of objections
31:28 to the S1 filing. They asked if WeWork could clarify why they felt their assumed desk occupancy
31:35 rate of 100% was reasonable. They said that non-GAAP accounting metrics like Community
31:43 Adjusted EBITDA which appeared in the document more than 100 times could mislead investors.
31:51 They asked for clarity on the meaning of the thirty seven page photographic spread in the
31:56 document which “did not appear to have a clear disclosure or investor protection purpose.”
32:04 We work was receiving so much bad press and investor mockery at this point that they approached
32:11 Google, who will help companies buy their way out of a bad news cycle by burying bad
32:17 press in search with paid ads. There was so much bad press at this point in time that
32:24 even with Softbanks money, it was too expensive to pay for this service.
32:31 Softbank and JP Morgan – WeWorks biggest financial backers had had enough at this point
32:37 and asked Adam to postpone the IPO and to step down as CEO. SoftBank at this point still
32:44 believed in the co-working business model and thought that if they could replace Newman
32:50 with a competent CEO they could possibly turn things around. The company appointed Sandeep Mathrani, a real estate pro to be its new CEO just one
33:02 month before the global pandemic completely disrupted the entire commercial real estate
33:09 industry. WeWork was especially hard hit at this time due to the short-term nature of their contracts. The new management implemented severe cost
33:20 cuts, staff were laid off and underperforming building leases were cancelled or renegotiated.
33:27 In October 2021 the company finally went public by merging with a SPAC at a 9 billion valuation.
33:36 Down quite a bit from the 47-billion-dollar valuation that had been claimed less than
33:42 two years earlier. The new management claimed that after all of the Cost Cutting the firm just needed to achieve a 70 percent occupancy rate to break
33:52 even, and this rate had been achieved pre pandemic. The Spac Merger injected 1.3 billion
34:00 dollars into the firm which would help with the cash burn until occupancy recovered.
34:07 Jim Cramer the Mad Money host announced that he was bullish on the IPO.
34:26 Occupancy did grow in the wake of the pandemic but not fast enough. While they did eventually
34:32 reach 70% occupancy, they didn’t achieve breakeven, and the firm continued to lose
34:38 money. WeWork raised a cumulative $22 billion dollars of equity capital over its life and
34:45 burned through almost every penny of it never reaching profitability even after severe cost
34:52 cutting. I can tell that a few of you have gotten to really like Adam over the course of this story and possibly worry about him, having fallen
35:01 on hard times… Well don’t worry about Adam, everything worked out just fine for
35:07 him. As I mentioned earlier, he managed to take a lot of money out of the company during
35:13 the bubble period, he also received a substantial layoff package and has an estimated net worth
35:21 of 2.2 billion dollars today. Last year, he received a 350 million dollar
35:27 investment from the prominent Silicon Valley venture capital firm Andreessen Horowitz for
35:34 his new company Flow which plans to transform the residential rental real estate market.
35:41 The investment which is the largest individual check Andreessen Horowitz has ever written
35:46 in a round of funding to a company, valued Flow at more than $1 billion dollars before
35:53 it even opened its doors. Marc Andreessen wrote in a post on his website
35:59 when announcing the deal that “It’s often underappreciated that only one person has
36:05 fundamentally redesigned the office experience and led a paradigm-changing global company
36:11 in the process: Adam Neumann.” The company says that they hope to address
36:17 some aspects of the United States housing shortage through technology, providing equity
36:24 for renters, and a new type of social interaction. So, that sounds great. Let’s hope that this
36:32 new business goes on to be as successful as his first business Krawlers.
36:38 If you enjoyed this video you should watch my video on the FTX bankruptcy next. Don’t
36:44 forget to check out our sponsor Blinkist using the link in the description below. Have a great day and talk to you again soon. Bye.