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.