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Re-examining the rise and fall of WeWork

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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.

Recommended reads

Why Silicon Valley's many Asian Americans still feel like a minority. [Bloomberg]

While the pandemic has decimated an unprecedented number of businesses in the US, it's also enabled a boom in new ones. Just ask the roughly 500,000 entrepreneurs who've launched a new company since mid-2020. [The Atlantic]

As bigger funds increasingly target private tech companies, the old VC taboo of not taking stakes in competing startups is beginning to fade. [The Information]

Anthony Di Iorio, co-founder of Ethereum, first became interested in blockchain a decade ago. Now, the Canadian entrepreneur is walking away from the crypto space altogether. [Fast Company]

Many investment executives who back SPACs are scoring big paydays upon those deals' completion. The same can't be said for many of their clients. [The Wall Street Journal]

The high country of southern Australia is described by some as a remote place of beauty. In the case of a series of vanishing hikers and campers, it's also a place of mystery and unpredictability. [The New York Times]

This edition of The Weekend Pitch was written by Alexander Davis, Adam Lewis and James Thorne. It was edited by Alexander Davis, Angela Sams and Sam Steele.

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Your Weekend Briefing

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August 8, 2021

By Remy Tumin

Welcome to the Weekend Briefing. We're covering a summer surge in virus cases, the state of the infrastructure bill and the closing of the Summer Games.

A Covid-19 surge is stretching the capacity of medical facilities in Jacksonville, Fla.Bob Self/The Florida Times-Union, via Associated Press

1. For the first time since February, the U.S. is averaging more than 100,000 new cases a day.

Infections and hospitalizations are increasing rapidly as the highly contagious Delta variant spreads. The outlook is especially dire in the South. Louisiana is leading the nation in an explosion of new cases, and hospitals are overflowing and admitting more young people than before. But the crisis is also driving some to get vaccinated.

Right behind Louisiana is Florida, which is averaging more than 19,000 new cases a day. Gov. Ron DeSantis has been unyielding in his resistance to mask mandates. Now record Covid hospitalizations are raising the stakes — and could affect his political perch as a Republican Party front-runner.

And in Texas, cases driven by Delta swamped hospitals while officials were prevented from issuing mask mandates by order of Gov. Greg Abbott.

Vaccination rates have been slowly rising since the middle of July, and 58 percent of eligible Americans have received at least one dose of a Covid-19 vaccine. Here's how Delta is changing advice for the vaccinated.

Victoria Dickens wore a mask and face shield to school in Summit, Miss., last week.Matt Williamson/The Enterprise-Journal, via Associated Press

2. The Delta variant is looming over the economy and the new school year.

A booming July jobs report offered good news for the country's recovery: 943,000 jobs were added last month, the best showing in nearly a year. Yet sectors where the most growth occurred — leisure and hospitality — are especially vulnerable to Delta. Diners are flocking back to New York City restaurants, but the biggest concern for restaurateurs is that Delta's advance in coming months could imperil the rebound in revenue they had hoped for.

Tens of thousands of 5-year-olds from the country's poorest neighborhoods didn't enroll in kindergarten last year, new data shows, hardening inequities in education. The challenge now is to re-establish relations between the schools and families who left them. That task is made harder by continued anxiety about infection in classrooms.

Japanese baseball players celebrated their gold medal victory against the U.S. at the Olympics last week.James Hill for The New York Times

3. After two weeks of elite competition, the Olympic cauldron will be extinguished this morning, ending a Summer Games like no other.

The closing ceremony begins at 7 a.m. Eastern. There will be music and speeches, and a handoff to Paris for the 2024 Games. For all of the worry over hosting the event amid a pandemic, the Games have been a showcase for the beauty of resilience, our sports columnist writes.

Here's a recap of the final weekend:

Allyson Felix is the most decorated American Olympian in track and field after the U.S. took gold in 4x400 women's relay. Eliud Kipchoge of Kenya, the world's most decorated marathoner, won gold in the men's marathon to defend his title as Olympic champion.
The U.S. also captured gold in men's and women's basketball and women's water polo.
Japan beat the U.S. to win its first gold medal in baseball. Brazil beat Spain in extra time to repeat as the Olympic men's soccer champion.
Catch up on all of the action with seven Olympic moments worth revisiting, our best Olympic photos and spectacular moments, frame by frame.

Gov. Andrew Cuomo in June.Carlo Allegri/Reuters

4. As the #MeToo movement swept the world, Gov. Andrew Cuomo cast himself as an ally. But in private, he was committing new offenses, according to a report.

Even as the New York governor signed protections and surrounded himself with feminists, he resumed his unwelcome pursuit of a female state trooper and asked a young aide to play strip poker, according to the report by the state's attorney general last week, which detailed accusations of sexual harassment by 11 women.

The report was meant to be an investigation into Cuomo's actions, but it also exposed the limits of what has been achieved since 2017, when the revelations about sexual misconduct by the producer Harvey Weinstein broke, our reporters write in a news analysis.

Cuomo and his lawyers have until Friday to submit any evidence in the governor's defense to the New York State Assembly, which seems headed for a vote on impeachment.

Continue reading the main story

Vice President Kamala Harris and Senator Tom Carper stayed close to the Senate chamber.Cheriss May for The New York Times

5. The Senate is one step closer to passing the $1 trillion infrastructure bill.

The bipartisan bill cleared a key procedural vote on Saturday, breaking a filibuster to end debate on the deal before turning to an agreement on amendments. The vote was 67 to 27. The legislation, which would make far-reaching investments in the nation's public works system, appears ready to pass with a small but significant share of Republican support — possibly even including Senator Mitch McConnell, the minority leader.

The bill has largely survived because most of the key Republican senators involved are not operating under Donald Trump's influence, our congressional reporters write in an analysis. Can that last?

Times subscribers make our coverage of the Olympics possible, allowing us to bring you behind-the-scenes stories and expert coverage from on the ground in Tokyo. Become a subscriber today with a special offer.

A light pole melted from the heat of the Dixie Fire in downtown Greenville, Calif.Jungho Kim for The New York Times

6. The Dixie Fire is now the largest blaze in the U.S., and the third-largest wildfire on record in California.

The town of Greenville has been reduced to scattered bricks. By Saturday afternoon, the fire was just 21 percent contained and 448,000 acres had burned, according to a Times wildfire tracker. Five people are missing, but some residents in a nearby town have refused to heed evacuation orders.

As southern Europe faces one of its worst heat waves in decades, firefighters battle blazes across Greece, prompting thousands more people to flee their homes and hundreds to be evacuated by sea.

The Marshal Dostum School in Sheberghan, Afghanistan, in May.Kiana Hayeri for The New York Times

7. The Taliban captured two Afghan provincial capitals in two days last week as international forces begin their withdrawal, and overran a third on Sunday.

Sheberghan, the capital of Jowzjan Province, collapsed less than 24 hours after Zaranj, a city of 160,000 people on the Afghanistan-Iran border, was also taken over. The Taliban victories come despite continued American air support and are the result of a strategy that has exhausted Afghan government forces.

The Taliban also seized Kunduz, a major city in northern Afghanistan that would be a significant military and political prize for the insurgents.

The Biden administration had pinned its hopes on a peace deal that would halt the violence with a power-sharing agreement. But the prospects of a negotiated outcome, which could partly salvage the 20-year American project in Afghanistan, appear to be fading fast.

Ernesto Collado encourages his tour group to stop and smell the seaweed.Samuel Aranda for The New York Times

8. "We have no idea what life really smells like."

After experiencing phantosmia, a condition also known as olfactory hallucination, Ernesto Collado lost his ability to smell except for a single, unpleasant scent. He was told he would have to relearn how to smell through practice, and started with a sprig of rosemary. Now, the actor turned fragrance maker is an evangelist of the nose and life's authentic smells. He aims to recover what he calls "smelling culture."

Our reporter recently accompanied Collado on one of his smelling tours through a landscape in Catalonia painted by Dalí.

Tiny cakes for tiny hands.Linda Xiao for The New York Times. Food stylist: Sue Li. Prop stylist: Nicole Louie.

9. How do you celebrate a first birthday? With strawberry baby cakes, of course.

Our dessert columnist Dorie Greenspan was entrusted with making her granddaughter's first birthday cake, but in the end, she went simple — and small. Her strawberry cupcakes are made in mini-muffin tins and finished with a white-chocolate glaze. "The tins make cakes that are small enough for chubby baby hands to grab and just big enough to hold one candle," Dorie writes.

For something savory, consider the versatile plantain. Maximizing plantains' qualities requires treating them slightly differently when they're green and firm, and when they're spotted yellow and black. Here's what makes this starch so exceptional.

And to wash it all down, look past the pale rosé for one of these darker-hued pinks, our wine critic suggests.

The Salk Institute for Biological Studies made T Magazine's list of most influential buildings.Lenny Ignelzi/Associated Press

10. And finally, weekend reading to get engrossed in.

The 25 most significant works of postwar architecture. The chiropractor to Olympic track stars. The Australian mountain range that can swallow up visitors without a sound. Catch up on the latest edition of The Weekender.

Our editors also suggest these 11 new books, "U.F.O." on Showtime, The Weeknd's disco fever and more new songs.

Did you follow the news this week? Test your knowledge. And here's the front page of our Sunday paper, the Sunday Review from Opinion and today's Mini Crossword and Spelling Bee. If you're in the mood to play more, find all of our games here.

Have a restorative week.

David Poller compiled photos for this briefing.

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