WeWork and WeBurn Cash

Neglecting to Measure Twice. Why are so many smart people not smart enough to realize what they don’t know? Probably because they want to be admired as the “smartest” or the “fastest” to make a judgement.

Many times they are correct, but situations in which there is no second measurement are problematic since these constructs entail Iceberg Risk. As we know, 90% of an iceberg is underwater and not visible. Learn to identify situations that look great on the surface but do not hold up to that second measurement since this is where your dreams will likely hit that iceberg.

Here is the story of how SoftBank inexplicably continued to fund Adam Neumann and WeWork despite every red flag in the book being waived in its face.

Neglecting to Measure Twice is one of the Seven Deadly Stupidities.

Imagine a company that operated in 120 countries, 900 cities, and had 3,000 separate locations. Each location is a co-working or shared office space where you have your own cubicle or office but share common spaces and conference rooms with others. If there are ten co-workers on a floor, they may work at ten different companies. It would be interesting to meet and network with such a diverse group, especially if you are a solo entrepreneur or a startup with a handful of employees. 

The information above describes a company called Regus. It was in business for more than twenty years before WeWork entered the market for shared office space in 2010. Regus is still in business and was several times the size of WeWork when WeWork imploded in 2019.

WeWork started modestly with Adam Neumann as its co-founder and CEO. The “modestly” part did not last long. Neumann was a world champion spender of investors’ money, promoter of what he saw as a new world order of people living together in harmony, and an expert at insider dealing for his own benefit.

What a guy!

To start, the WeWork business model was built on a faulty assumption. For example, WeWork would sign a ten- to twenty-year lease for three floors in an office building, creating a substantial liability for WeWork. It would increase that liability by making the capital investments required for the space to be useful for the one and two-person businesses that would sublease from WeWork. The problem was those subleases were for small pieces of the space and for short sublease terms (starting at one month).

If we build it, they will come.

We won’t go into the Neumann eccentricities and profligate spending – traveling with his surfing coach, chartering Gulfstream jets like the rest of us ride the subway, and many other documented excesses -- but rather focus on how SoftBank and other investors continued to pour money into WeWork at an astonishing rate even though the ability to measure twice was readily available to them. Prior to its failed IPO in 2019, it has been estimated that WeWork was burning an eye-watering $150 to $200 million in cash per month.

Before the failed IPO, investors, including SoftBank, had access to all this information. They could see that WeWork’s locations doubled in the past year to more than 500. Losses more than doubled. There was no sighting of a sustainable business model.

Many times, with multi-location businesses like retail stores or WeWork, management rolls out a “same store” analysis, which is a legitimate financial exercise. What you would expect to see from WeWork in such an analysis would be something like, “For our locations open for at least thirty-six months, here are the profits we are making, so hang in there. Let us keep getting bigger since once locations are running for thirty-six months, we kick ass.”

No such data were available from WeWork, yet SoftBank stepped up to invest. And not just any investment: SoftBank invested a total of $17 billion of debt and equity in WeWork. Did SoftBank ignore the warning signs as WeWork was pitching it for investment dollars? Maybe, but this looks like a situation where SoftBank wanted to use WeWork to make a statement about how big and bad SoftBank was. The problem was that most of SoftBank’s other investments were software and technology-focused. The beauty of a software company is operating leverage.

Not so with an asset-intensive real estate business, that did not even own the real estate, but leased it. Most of SoftBank’s previous success was built around the operating leverage it witnessed at many of its portfolio companies. There was no leverage at WeWork. Each location needed desks, managers, water coolers, etc., so, it was no different than going back into the studio to try to make that second hit song.

Or was SoftBank stuck, and this just another classic case of collective denial? It was already deep into WeWork and may have been at the point where if it pulled its ongoing support, so would other investors and WeWork would collapse. SoftBank never did that second measurement early in the life of its investment and continued to compound the error, rather than taking its medicine by eating the WeWork loss early and moving on. 

Afterword

In August 2022, Neumann secured $350 million of funding from renowned venture capitalists Andreessen Horowitz, the largest check ever written by the investment firm. The funding was for Flow, Neumann’s new venture that has been vaguely described as a WeWork for residential space. The venture firm says Flow will be, "community-driven, experience-centric service with the latest technology." Um, okay. More than a year after the announcement, Flow has yet to announce any deals or products.

In July 2023, Adam Neumann’s family office, aptly named after the famous Portugal surf break Nazare Management, defaulted on a $31 million office building loan in San Jose, CA. 

Seems like a paltry sum for such an alleged high-flyer, don’t you think?

In August 2023, WeWork said the following in a filing with the SEC, “Substantial doubt exists about the company’s ability to continue as a going concern.” WeWork filed for Chapter 11 bankruptcy protection on November 6, 2023.

As for SoftBank, in August 2023, it sued a company called IRL for $150 million. IRL’s primary service was a messaging application like WhatsApp. IRL was a SoftBank portfolio company and 95 percent of its users were fake. SoftBank, an allegedly sophisticated investor said it “relied on representations of management” in making its investment.

Sounds like a formula for stupid.

After the IRL fiasco was made public, other venture investors spoke out about the need to do more “uncomfortable” diligence on target companies, which to me means measuring twice and in some cases, measuring three or four times.

The $150 million lost investment in IRL is one thing, but SoftBank has another trophy on the wall from its $1 billion failed investment in Wirecard, the German payment processor. Before its ultimate collapse, which included a middle-of-the-night private-jet escape to whereabouts unknown by COO Jan Marsalek, it came to light that Wirecard falsified records and forged transactions to induce the SoftBank investment. Marsalek remains a fugitive and is speculated to be in Russia.