April 7, 2020
Is WeWork dead? | Startup Forensics: the downfall of Adam Neumann

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. Deskmag.com, 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.

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

  1. Bro. Your head is too big for you. Let me know if you need a headrest. I'll send one out. Lots of love.

  2. They should investigate Adam N.
    I used to work there as a temp employee I don't like the culture especially the young employees they talk down on you
    This is what you call Karma

  3. sub letting office space is not a new concept or expensive to get into. there was a never a chance that it was worth 45 billion. a lot of investors are suckers!

  4. The argument on being the leader on the segment does not make any sense for me. It can easily be copied and voila. It is not like they offer anything special. Rather than a real estate company, it should be valued like a gym company. Gym might trade on higher multiple than real estate but not as high than tech. Might be what the guy sold.
    The only way being a leader make sense in this market is if your customer is moving from one city to the other and you are able to deliver a good deal because you are the biggest like an hotel chain but in wework case the customer is pretty static. Makes no sense to me.

  5. Softbank has refinanced them with strict terms and conditions.
    They are just another firm who might become a victim of the global recession.
    Maybe they can get rid of the space which is not profitable and retain market position via consolidation

  6. Instead of saying tech companies typically have high margins it might be more accurate to say that tech companies have high fixed costs and low variable costs. You can spend a lot of money producing a software disaster. You can spend a moderate amount of money producing a software hit.

  7. They were trying to become the Uber of commercial real estate. Investing $10 billion to try to control a trillion dollar market isn;t so crazy.

  8. Adam’s extravaganzas are not pivotal to the viability of the business model. It might appeal to the casual onlooker of this story, but it’s a non-issue. SoftBank funded Adam as they saw fit. SoftBank crossed someone important and this media storm is the comeuppance. SoftBank wouldn’t have carried this project this long if they thought the path to profitability/healthy ROI was not there. Firing Adam is simply a means of controlling the narrative and distancing themselves from bad PR. WeWork will continue to be funded. Period. And the IPO will eventually go through. The hysterics around this story needs its own forensics.

  9. Tech companies are valued higher than traditional companies because of their potential to scale easily and/or efficiently. Not just because of their potential.

  10. You really can't blame Adam. If people are nieve (dumb) enough to believe everything they hear without doing their due diligence before giving up a wad of cash, then they are to blame in this whole fiasco~

  11. every time masayoshi looks in the mirror, he doesnt see a short liver spotted baldie but adam… that chiselled face, that flowing hair 😂

  12. He bought the name "We" (from himself) for 6 million ?!? I'll sell you "They" for just 3 million. I'm planning a sale on the other pronouns next week too.

  13. Wework is a fraud from the beginning, it was designed by Adam to scam investors' money, the business model will never make money. Regus, on the other hand, is a profitable entity, and with a smaller market cap, why?. Adam is the male equivalent of Elizabeth Holmes, knowing the business model will never make money but keep lying to investors so he can keep raising money. Unfortunately, Softbank did not provide and governance and continue to provide Adam his capital, hopefully, to fix it at IPO and let the public takes over this scam. I have not seen any co-working space company make any profit yet (Regus is not co-working, they are service office, space planning is more efficient), similar to car-hailing companies, none are making any profit and no light at the end of the tunnel. If Wework has to make money, it has to learn from Regus, and spend a lot of money to redesign their floor plan, then it might have a chance to do an IPO. However, I doubt it will ever return the money that Softbank has invested. Softbank should have let it failed instead of putting good money after bad money. This is a real estate company, hiring a telecom guy to run a real estate company is not a good idea, another mistake that will eventually need to be corrected.

  14. Well.. WeWork have nothing to backup its' claim net worth of X billions of dollars when u have no properties, no technologies, easily copy by another company. They are kinda like a renovation expert with some network of the funds and some overdressed, overly paid management dudes at best!

  15. You said something like "this will be important later" (2:46) and "we will get back to this" (6:10), but these topics have never been addressed ever again until the end of the video.

  16. I think the problem ultimately was the hype, they were as you say selling office space in real terms. But they made out that their product was really this indefinable energy that is produced from hipsterish design open plan spaces. The problem is that energy is definable and quantifiable, it's also not unique and easily imitated. And I think what is going to happen is that brand 'shine' will no longer be unique or as important going forward. On top of which startups are rapidly realising that actually open office spaces are in and of themselves although visually beautiful, also largely a hype. Cal Newport exposes this in his deep work book. That these spaces are just constant distraction zones, so in terms of output they can actually inhibit success, and at the startup phase it can completely derail a potentially viable company. He found that deep focus, and quiet individual work spaces where you can mono task and get work done actually produced better results in aggregate for companies but also for the career of the individual too. And so I think there is a brewing storm of a backlash against open plan. The problem is individual private offices look bleh. So I think thats is a potential challenge, how to create beautiful and inspiring spaces yet protect attention/focus/output.

  17. Bloomberg did one on this, there is another similar sized company called IWG IIRC. Their valuation is only a fraction of weworks. It's like the answer was there all the time if anyone bother to do due diligence.

  18. A wonderful idea and service to society that got addicted to growth and overspent. Still lots of brand equity and potential for the future.

  19. Bro, you did a very good job because you’re looking at WeWork for what it is…as a commercial rental/subleasing property management company. WeWork is amazing at branding itself, designing spaces, and marketing to get people subleasing. Then used the “tech startup world” to get high valuation and liquid investment. Very impressed by your analysis. Better than anything on TV. Subscribed to show support!

  20. The actual business concept is a good one. Just its execution looks fraudulent. That said, that market deserved it. The market is crazy. For all the big investment numbers, so little actual pre investment forensics.

  21. Sooo no due diligence by any of the investors. No checking on real valuations by anyone. Just going to hand over millions/billions without checking, Hope that’s ok.

  22. 4:30. EBITDA is not profits. EBITDA stands for earnings before taxes, depreciation, and amortization. Profits is what is left over after those costs, before you account for changes in prices of assets and foreign currency rates, its called Net Income. After you account for changes in market prices of assets and foreign currency adjustments, its called comprehensive income. Also, you only value a company based on its assets if its a bank or an insurance company. Most corporate owned assets are worthless in liquidation. So sales and income are the only things that matter for most companies. Also, there are industries that have higher margins than tech, like accounting: https://www.forbes.com/sites/sageworks/2017/08/06/these-are-the-10-most-profitable-industries/#7ef06d6915f0. But with accounting you can't really expand because there are no real increasing returns to scale. So the number of accountants available at any one time is a constraint on the size that you can reach. The point is that profit margins are not a good indicator of expansion potential. But anyways, Wework has no barriers to entry. It could have been profitable, if they had bothered to buy the actual real-estate instead of just sub-letting. But it was never going to be a good investment for outsiders.

  23. How did they arrive at the $47 billion valuation? It was the total liability owing on the term of the office leases. Go figure.

  24. This is mind blowing. 4K employees who enabled Adam to present a seemingly solid case, go home and Adam is scooping almost 2B$. This is corruption.

  25. no real tech, no real hard work, only some story tellers and the so called 'positive vibes' .. lol , i knew it form the time i see their ads everywhere even on youtube

  26. You guys gotta learn the correct pronunciation of these peoples names (McKelvey, Shreiber etc) – otherwise, solid video! Love the concept / theme 🙂

  27. that's friggin hilarious "physical social network". That's like saying the barista gave me a physical smiley face this morning when I ordered my coffee.

  28. I don't know why people thought WEWORK was the best thing since the invention of the automobile because in my eyes they were nothing more than a large international "office incubator". The idea of the business incubator goes back to the 1980s so I wouldn't give WEWORK credit for the idea.

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