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Re-examining the rise and fall of WeWork

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PitchBook

The Weekend Pitch

August 8, 2021

Presented by Deloitte

(Kelly Sullivan/Getty Images)

Yes, people are still talking about WeWork. And there are plenty of reasons for re-examining its heady rise and spectacular implosion after the company aborted its IPO nearly two years ago. Like 40 billion reasons.

An authoritative new book about the WeWork saga is making many people's summer reading lists, rekindling conversation about the whole sordid business while adding to our understanding of one of history's biggest corporate meltdowns. I'm Alexander Davis, and this is The Weekend Pitch. You can reach me at alec.davis@pitchbook.com or follow me on Twitter @alecdavis.

WeWork, SoftBank and a real estate startup's delusional tech narrative

Scenes of WeWork's go-go years are familiar. Stylish shared-office designs to attract millennials. Taps serving beer and kombucha. A breakneck pace of opening new locations. And of course, the singular utopian vision and flowing dark hair of its charismatic founder, Adam Neumann.

In their book "The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion," authors Eliot Brown and Maureen Farrell detail Neumann's meticulous behind-the-scenes maneuvers. They show how he started piecing together a high-margin business in 2010 by subleasing a bunch of old New York office buildings that he fixed up to woo startup workers as tenants. The authors retrace the company's origins, its wildly prolific fundraising and its eventual downfall, building on the many WeWork stories they broke in The Wall Street Journal. (Disclosure: Brown and I worked together for a few years at the Journal covering Silicon Valley.)

Buzzing with new details and color about the charismatic Neumann's eccentric behavior, the book chronicles his many episodes of self-enrichment and conflicts of interest, underscoring WeWork's lack of any oversight for reining him in. Those failures alone make this book a must-read for founders, investors and business students for generations to come.

But what really stands out is the book's description of the sustained—and unabashed—scheme of Neumann and his investors that peddled WeWork's office-subleasing business model as a hot technology disruptor that would change the world.

Neumann & Co. were hardly the first VC-backed entrepreneurs to borrow tech marketing tactics to dress up a fairly mundane, legacy industry like office real estate.

Countless startups today—and surely others in the future—still play this disingenuous game in pursuit of tech-sized growth rates and valuations. What works for Silicon Valley must be good for others, right?

But Manhattan-based WeWork took this thinking to extraordinary lengths in a bid to layer a tech-centric vision on top of its office-sharing foundation. Inspired after some up-close observation of the work style of some of his startup tenants, Neumann early on wanted WeWork to emulate their tech culture as a growth driver, according to the authors.

And from there on, Neumann would stick forcefully to depicting WeWork as a tech-community startup. In an appearance on our "In Visible Capital" podcast, Brown shared a telling anecdote about his first interview with the energetic CEO in 2013, when he was on the office real estate beat. Neumann was puzzled why a real estate reporter was on the story, and wondered if the Journal had someone covering "community companies or changing entrepreneurship in urban areas."

(Cindy Ord/Getty Images)

The trouble was there wasn't much tech that actually made money at WeWork. Neumann excitedly told Brown of a company app that tenants could use to order lunch. But people came for the office space and stayed for the office space.

As the company expanded and raised funds at loftier valuations, WeWork and its investors began using tech industry titans as a benchmark for its growth ambitions. When the company was preparing for a 2015 funding round, Goldman Sachs gave Neumann the advice he wanted to hear, using superfast-growth giants like Netflix and Amazon as comparables, Brown and Farrell write.

Neumann got such a high from the validation and prestige of raising mega-rounds, according to their book, that he grew "addicted" to fundraising. That made the company's ongoing tech narrative all the more important as WeWork focused on adding more desk spaces to ramp up revenue while profits were elusive.

In this sense, joining forces with SoftBank's Masayoshi Son proved an especially crucial and decisive turn of events. According to "The Cult of We," Son was so determined to put SoftBank's $100 billion Vision Fund to work that he offered in one fell swoop to invest $4 billion in WeWork, which by then had raised $1.7 billion to date. SoftBank later would go on to fund two more rounds totaling $6.5 billion, including $1.5 billion after the failed IPO.

"It was this confluence of two really combustible figures that should not have met," Brown told me. "Both of them were obsessed with wealth, obsessed with valuation and obsessed with irrational hyper-growth without thinking hard about it."

Hard thinking and actual scrutiny didn't hit home until September 2019. That's when WeWork finally moved forward on its long-standing plan to go public. But its prospectus portrayed a free-spending company that was far from profitable. It also sparked widespread criticism of the company's poor corporate governance and lack of discipline. Neumann lost the support of his board and was forced out. Some $40 billion in value had vanished by the time the company received bailout funding.

After the IPO was called off, a humbled Neumann addressed WeWork staff via a webcast to discuss next steps and take measure of the company's journey to that point. WeWork, he said, had "played the private market game to perfection."

But his company also had become a poster child for the reality check that many venture-backed founders ultimately face when they make the journey to Wall Street.

Readers and reviewers often label deeply reported narratives like "The Cult of We" as a "cautionary tale," and that's fair for this book. But leaving it at that would be an understatement. Brown and Farrell have issued a damning indictment of a venture capital ecosystem hell-bent on fueling a founder's grandiose business dreams. And they make the case that those dreams amounted to little more than a mirage.

A message from Deloitte

What the SPAC revolution means for private equity firms

The fast-paced SPAC revolution is upon us, and PE managers need to be ready to handle this era with their portfolio companies. It is more important than ever to understand the necessary steps to complete this process. From the completion of SEC- and PCAOB-audited financial statements to understanding the de-SPAC process and all the steps in between, PE managers need to be prepared.

Review our checklist that helps PE firms ask the right questions as they prepare portfolio companies to go public through a SPAC merger.

Did you know ...

A La Liga Santander match between Sevilla FC and Deportivo Alavés on May 23, 2021. (Fran Santiago/Getty Images)

… That CVC Capital Partners has agreed to acquire a minority stake in Spain's La Liga for €2.7 billion (about $3.2 billion)? The deal will give the investor a 10% stake in a newly created company that controls the league's commercial activities.

But La Liga heavyweight Real Madrid, which has been feuding with the division since the latter's ill-fated attempt to join the European Super League, has already voiced opposition to the deal, according to reports. And FC Barcelona followed suit, releasing a statement Thursday saying the deal "condemn(s) FC Barcelona's future with regard to broadcasting rights."

It's unclear if other clubs within La Liga could follow suit. If the deal goes through, it would be the latest in a long line of sports-related deals for CVC.

Quote/Unquote

"Africa is almost like a blank canvas that VCs and startups can build on. We're going to see a quantum leap in the development of [its] ecosystem and there's a great amount of opportunity for really strong returns."

— Pierre Suhrcke, a partner at European growth investor TempoCap, speaking about the burgeoning fintech sector in Africa

Datapoints

Mind the gap, SPACs: Since January 2020, the number of blank-check IPO registrations in the US has grown 2.75 times faster than reverse mergers with SPACs (also called de-SPACs). Many dealmakers have committed to closing a merger within two years. But if a deal fails to materialize, those SPAC sponsors could be in a bind. Read about SPACs and much more in our recent Quantitative Perspectives report.

Deal Flow

For venture capital firms, providing equity for startups isn't always the answer. In fact, VCs have increasingly used a route made popular by their private equity brethren: debt.

Since 2011, US venture capital debt financings have steadily increased in deal count and deal value nearly every year, according to PitchBook's H1 Global Private Debt Report. Here's the breakdown:

In each of the past three years, investors have loaned more than $20 billion to VC-backed companies in the US, with the number of debt financings outpacing the broader VC market.

Through the first six months of 2021, investors have completed more than 1,500 venture debt financings for VC-backed companies in the US.

PitchBook data has shown that a good chunk of US venture debt deals have gone toward the tech and life sciences industries. And 2021 in particular has been especially tech heavy so far, with 79% of venture debt deals directed to that wide-ranging sector in H1.

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