Thread by @ReformedTrader

1/ Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork (Reeves Wiedeman)

"Neumann resisted the obvious—that WeWork was a real estate leasing company. It was a tech start-up, a social network reshaping society." (p. 5)

amazon.com/Billion-Dollar…

2/ Here's an interview with the author, Reeves Wiedeman:

https://twitter.com/ReformedTrader/status/1421904917564854274

The Foundering podcast tells the WeWork story in a series of seven episodes:

https://twitter.com/ReformedTrader/status/1281980554078900224

3/ "He was still five months from the sudden events that would find him walking the streets of New York barefoot, trying to maintain control of his company in the middle of the most humiliating attempt at a public offering in American business history,

4/ "followed by his ouster with what appeared to be a billion-dollar exit package that fell apart once the world became a place where the last thing anyone wanted was high-density office space.

5/ "WeWork had become the largest office tenant in NYC and second in London only to Her Majesty’s Government. The company had tapped into a desire, strong among young workers, for an in-office experience more fulfilling than the one their parents’ cubicles offered." (p. 5)

6/ "Neumann had been racing against time, riding the longest economic expansion in American history.

"Now he was racing to the finish line. WeWork was running out of money. Neumann had tapped out the world of private capital and racked up hundreds of millions of dollars in debt.

7/ "He was preparing to take WeWork public: the only viable path to continue its growth, as well as an opportunity to cash in on what he and others at WeWork had built." (p. 10)

8/ "The Neumanns spent just a few years at Nir Am, but when Adam began building WeWork, he said he had learned some foundational lessons from his time there. WeWork would be “a capitalist kibbutz. On the one hand, community. On the other hand, you eat what you kill.” " (p. 16)

9/ "Adam & Miguel started thinking about what made Green Desk work. The sustainability pitch—fair-trade coffee, Seventh Generation cleaning supplies—wasn’t going to solve climate change. As a business proposition, environmentalism didn’t offer much more than a marketing gimmick.

10/ "What people seemed most attracted to was the flexibility of a month-to-month lease and the feeling of camaraderie.

"Bringing people together sounded exciting and lucrative. Workers were disillusioned by corporate America and looking for physical connection in a digital era.

11/ "In 2009, Neumann, McKelvey, and Haklay sold their Green Desk stakes. The three cofounders each netted roughly half a million dollars, paid out over the next several years. Haklay decided his share was more than enough and flew home to Israel—

12/ "the dream Adam had laid out for himself when he first came to the United States. But after years of barely getting by, he had turned a small investment into a lucrative payout in just over a year. Adam wasn’t ready to go home. He wanted more." (p. 34)

13/ "Landlords were resistant to the idea. Companies that had tried to serve as office middlemen before had struggled in recessions.

"Landlords fifteen-year leases; an untested company renting space to other untested companies felt like the opposite of that.

14/ "On the other hand, even Lehman Brothers wasn’t a solvent tenant anymore, and landlords needed to fill space somehow. Plus, Adam was relentless. He went back to landlords over and over again.

"How much did Adam and Miguel think their hypothetical company was worth?

15/ "The cofounders weren’t necessarily for a third partner but figured there wasn’t much harm in throwing out an outrageous number. The next day, they told Schreiber that WeWork, which didn’t have a single location, was worth $45 million.

16/ "Without asking questions or pushing back, Schreiber agreed to commit $15 million in exchange for a third of a company that did not yet exist.

"His involvement gave Adam and Miguel credibility. He made introductions to landlords and personally guaranteed leases." (p. 37)

17/ "The exposed brick and creaky hundred-year-old floorboards were appealing to newly displaced workforce craving authenticity.

"Rather than climbing a corporate ladder, the post-recession path to riches involved founding a start-up and disrupting the way things had been done.

18/ " WeWork would serve those making this shift: a start-up begetting start-ups, a place where entrepreneurs could try something, then move on if it failed without a long-term lease. Who knew how much space a company would need in five months, let alone five years?" (p. 41)

19/ "WeWork wasn’t offering big salaries or stock options. The promise that it was helping build a better way of working was the primary recruiting tool.

"Adam was imagining a company with 100 locations and telling friends that he was building a $100 billion business." (p. 44)

20/ "The previous two recessions had wiped out office middlemen as tenants vacated and left them stuck with long-term leases. Hedge funds used a similar carry trade: borrowing money at low rates in order to invest at a higher return—before the bill came due, one hoped." (p. 69)

21/ "Adam’s focus fit with an emerging business theory that it was best to acquire customers by any means & figure out how to make money later.

"Elam couldn’t figure out how to bridge the gap between Adam’s promise of massive profits and the realities of the coworking business.

22/ "The expansion he was talking about didn’t make sense to her. No one had successfully found a way to “scale” a feeling of community, which required time, effort, and a personalized touch that defied the optimization necessary to grow rapidly." (p. 71)

23/ "A successful real estate mogul might convince investors that his company was worth 5x revenue, while tech founders who promised exponential growth from the networks they were building could suddenly command valuations that were 10x or even 20x instead." (p. 75)

24/ "Gurley published a post, “All Revenue Is Not Created Equal,” expressing concerns that LinkedIn was trading at 15x revenue. This was the kind of valuation that had emerged before the last dot-com bust. He worried fast-growing companies couldn’t meet such lofty expectations.

25/ " “Growth all by itself can be misleading.” Businesses with such valuations needed network effects that allowed them to easily acquire customers. They also needed a “moat,” as Warren Buffett put it, to prevent competitors from pillaging their castle.

26/ "The last Internet bubble had given rise to“profitless prosperity” as companies sold goods & services for less than they were worth to build market share. Some, like Amazon, had pulled off the trick; many more had burned millions of dollars, only to be long forgotten." (p.78)

27/ "Since 2012, Adam had raised far more money than any of his competitors, and his capital-boosted ambitions had left his rivals behind. “Everyone else had to make a profit,” Dyett said. “Adam didn’t.” " (p. 85)

28/ "A software company might operate for years on Benchmark’s investment, paying its employees, buying server space, and renting an office. But WeWork was not a software company. The costs of its leases, renovations, and day-to-day operations were much larger

29/ "and required additional funding to keep up with the growth Adam was promising—he intended to open more locations in 2014 than he had in the company’s first four years combined—as well as the increased expectations that bigger investors brought to WeWork’s business." (p. 87)

30/ "The company was forming itself in Adam’s image. He could be inspiring, pushing employees beyond their limits for the good of the cause and the promise of riches. They compared his aura to the “reality distortion field” once described as emanating from Steve Jobs." (p. 97)

31/ "Adam engineered a change to WeWork’s charter that gave him ten votes for each share he owned. This would give him 65% of the votes.

"Supervoting shares had become popular in Silicon Valley. Mark Zuckerberg had negotiated a similar deal, as had Travis Kalanick at Uber.

32/ "Many investors, eager to get in on the small group of start-ups that could make plausible arguments for world domination, believed they had no choice but to accept the terms. But giving so much control to an entrepreneur who had never run a large business was a risk." (p.98)

33/ "WeWork's rise gave many in real estate a sense of déjà vu. In 2000, Regus was preparing to go public. The company had become a crucial cog in the booming start-up economy of the ’90s, and its shares quickly shot up 40%, reaching a total market capitalization >$3 billion.

34/ "But when the dot-com bubble burst, Regus collapsed with it. Tenants bailed on their flexible contracts, leaving Regus with a devastating decrease in revenue to cover the costs of the long-term leases it still had to pay for. In 2003, the US arm of Regus filed for bankruptcy.

35/ "By the time WeWork secured a valuation of $5 billion, Regus had recovered and would rebrand as IWG—a profitable, if boring, company. But IWG had not returned to its peak stock value, a number WeWork had blown past, despite IWG having 2000 locations & $2 billion in revenue.

36/ "WeWork, by comparison, had just two dozen spaces producing close to $150 million.

"WeWork's spaces were vibrant and millennial-friendly, while most of IWG’s were practical and bland. But it wasn’t obvious that an aesthetic edge justified WeWork's valuation.

37/ "When critics asked Adam how his business would fare in a recession like the one that felled Regus, he responded that big companies would downsize into WeWork, while laid-off freelancers would look for something beyond a home office.

38/ "“What’s shocking is that you could look at our P&L and then pull up Regus’s, and it’s the exact same business,” said a member of WeWork’s finance team. “People got caught up in the hype and Adam’s charisma, but when you looked at the numbers, it was always kind of clear.”

39/ "While there were plenty of occasions when WeWork locations were naturally lively, community managers became experts at impromptu parties that could be “activated” in the 90-second window Jamie Dimon or Bruce Dunlevie walked through a WeWork common area with Adam." (p. 101)