Acquired - The WeWork “Acquisition” (with Dan Primack)

Episode Date: October 25, 2019

It’s an IPO, it’s a bailout, it’s an... acquisition? We’re joined by the one and only Dan Primack from Axios to recount the epic saga of the We Company in all its tragic glory. How did this business somehow go from chopping up commercial real estate to elevating global consciousness to rewarding its ousted CEO with a $1.7B “platinum parachute”, all while the company can’t afford severance for thousands of soon-to-be laid-off employees? Where did it all go wrong? And most importantly, who gets the Gulfstream G650??Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!

No, yeah, we'll cut this part out. We have a woodpecker happening. Woodpecker situation. This is a first on Acquired. Dan's going to take care of it. I love it. Welcome to Season 5, Episode 6 of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert, and I'm the co-founder of Pioneer Square Labs,

a startup studio and early-stage venture fund in Seattle. I'm David Rosenthal, and I'm a general partner at Wave Capital, an early-stage venture firm focused on marketplaces based in San Francisco. And we are your hosts. Today, we tell an episode that in our initial season five planning calendar, we had as an IPO episode. And then that was pitifully canceled. And we were just going to tell the crazy story of the antics that got it here. But now it's shaping up to be a tried and true acquisition episode for us. So here on this episode, we will dive into the existential question of if WeWork, a once $47 billion company, can be saved by SoftBank's effective acquisition of the company. And we are going to try to accomplish two goals. First, to dive into the

history of this company from the very beginning. And second, to try and see the core economic forest through the under-governed trees and understand precisely the position that the business is in today. Listeners, Dan's face during all of this is priceless. If only we were a video podcast. Which brings me to the only appropriate way that we know how to tell this story is with the expert help of Axios' Dan Primack, who has been meticulously and astutely covering this company for several years. Welcome to Acquired, Dan.

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notes or going to servicenow.com slash AI dash agents. And now on to WeWork. All right, on to WeWork. Man, we were thinking about how to frame this and talking with dan a little bit before and um you know i think what we decided to go with which is true is like this is a tragedy this is like a greek tragedy particularly for thousands of people who you know by the time people listen this might have lost their job i mean within hours of when we're taping this or a day within when we're taping this yeah it's like uh you know i don't know the peloponnesian war or something like the outcome is predetermined and the actors are just caught up in forces beyond themselves. Minus one actor who gets a lot of money.

And I guess gets an island in the Peloponnesian side. Yeah, right. Those grandchildren, I'm sure. Which Greek mythological character is Adam Neumann? Was there a Greek mythological character who just got to walk away with all the riches and leave all the responsibility behind? I don't remember that. There was usually a moral in the stories, wasn't there? Listeners, we sit here on Thursday, October 24th in the morning, 10 a.m. Eastern time, so you get a sense of where we are in this currently developing tragedy.

Yeah, indeed. Well, all right, let's dive into Act One, The Rise of WeWork. And to talk about WeWork, you obviously have to talk about the um protagonist question mark of this adam newman who is adam newman self-styled hero self-styled hero uh so adam as many folks probably know he was born in israel he's israeli his parents were both doctors his parents divorced when he was seven and he ended up living in 13 places over the next 15 years, which is actually like pretty crazy. And probably a lot of that goes into the ethos behind WeWork, including in the US. He spent a few years living in the US, then came back to Israel, and he spent a number of years living on a kibbutz in Israel, which is like a rural sort of communistic farm. He was dyslexic, I presume is dyslexic, but nonetheless quite smart. He tested

into the Israeli Navy Academy, Naval Academy growing up, became an officer and he served in a kind of elite unit in the Israeli Navy for five years. After that, he moves back to the US to New York to live with his little sister, Adi, who was actually Miss Teen Israel. No way. Yeah, totally. And she was a model in New York. And Adam, I guess, had always wanted to come back to the US and to New York. They lived together in the city and he went to business school at Baruch College. And his goal was getting out of the army, just like many folks in Israel wanted to become an entrepreneur, wanted to start a company. And so I think this was probably while he was in business school or

shortly afterwards. He has his first great startup idea, perhaps inspired by his fashion model sister, Collapsible Women's Heels. I forgot about that. Yeah. Pretty amazing. I actually couldn't find the name of the company, Dan. Did you remember?'t remember it. No, and it's killing me now. No, but that's exactly what it was. Yeah, it was. I mean, like, amazing. That, unfortunately, didn't work for reasons that are lost to history. But undaunted, Adam goes on and he starts his next company. The next company is called Crawlers with a K. And Crawlers, this is true.

Now, remember, Adam, I mean, folks, listeners probably have some image of Adam right now. He actually does have five children now. At the time, he had no children. And Crawlers was a baby clothing company. And the unique insight innovation that they had, this is maybe going to presage WeWork here, is they had the technological advance of built-in knee pads in pants so that as your children were crawling around on the floor, they weren't falling on the floor. Danny, you can probably speak to this. This is a real problem. This sounds like a Kramer thing.

But it's also, it's a little bit New York. You think of the era, both of those, like collapsible heels, baby clothes. You think of New York in that time from an entrepreneurial sense. There was all this complaint, there's not much tech,unquote yeah coming out of new york but a lot whether whether you want to call it fashion apparel consumer consumer products i mean that's also the warby parker era etc that's totally what was yeah we should we should set the time frame here this is mid-2000s when all this is going on so just pre-financial crash and yeah tech in new york was like there was union square ventures there but there was media media media and ad tech media had done well or was was rising was i mean i guess was four square around yet probably yeah but it

got so much publicity i don't even think one of those earlier maybe it wasn't around yeah it wasn't early new york companies new york tech company maybe etsy was but like these were not people weren't building like real tech companies in new y. Well, we will continue on that theme. Whether WeWork is or not, yeah. Yeah. So it's right around this time while Adam is trying to make crawlers work that he goes to a party. And he went to lots of parties. In fact, he goes to a party at his own apartment.

And as we're doing the research here, Dan, I don't know if you saw this or remember this. I guess Adam had a habit. This must have been summertime, of in the parties that he would throw in his apartment, he would just walk around without his shirt on. That I don't know, although there's a photo of him from like two weeks ago walking down New York Street without his shoes on, which is insane in Manhattan, but was, yes.

No shirt, no shoes. It was like within two hours of the board asking him as CEO. It's possible they took his shoes, we don't know. So Adam is shirtless at this party and a guest, a friend of a friend, shows up and meets Adam in the elevator going up to the apartment.

And that man's name is Miguel McKelvey. Now, Adam, I don't think we've mentioned yet, is six foot five. Miguel is six foot eight. So maybe they were like the only people who could see each other in the elevator. And Miguel had a similarly interesting background. So he grew up not in Israel, not on a kibbutz, but in Oregon on a hippie commune.

Wait, both WeWork founders have their origin stories from communes? And it absolutely, when we get further along, absolutely makes sense when you think about what we were tried to become. Yeah. Wow. Yeah. So Miguel was born to a single mother, lived in this collective of five single mothers and their children. He had four sisters, were not biological sisters, but this commune was 10 people, five mothers,

five children. Later, there was a little brother uh that came into the picture about 10 years later but that was that was how he grew up in this collectivist rural commune outside of eugene oregon he ends up he was very smart though is very smart goes to colorado college for university spends a couple years there then ends up transferring back home to the university of oregon which is in eugene uh he does two things there one he plays basketball uh six eight you can't waste it and oregon has like a pretty good basketball oh yeah he was like legit and um two he studies architecture and he gets his architecture degree so this is all starting to come together

here and it's going to come together even more he graduates and in um true you know sort of free spirit fashion he moves to tokyo after graduation and because he has a friend over there and he's like hey you should just come like hang out in tokyo so he goes remember softbank is gonna enter the picture uh here you know in a little bit uh and in tokyo he starts his first company a company called english baby which amazingly still exists today we'll link to this in the show notes yeah did it merge with crawlers no no no no uh so uh miguel was a co-founder he was not the ceo the company ended up moving spent a couple years in tokyo ended up moving back to portland oregon so it's still based in portland an english baby is best described as like myspace plus duolingo uh so this is again like early to

mid 2000s good idea yeah it's probably not a bad idea i think they were inspired by like do you guys remember growing up like this concept of you would be like uh your schools would help you become pen pals with like students in foreign countries i think that's what kind of inspired that they wanted to do that on the internet so like learn help foreign students learn english know, with friends in other countries. Yeah. So the tagline, which is still there on the website today, the motto of the company is learn English, find friends. It's cool. Kind of amazing. So after that, Miguel works on that for a couple of years and then he's like, you know, I have this architecture degree. I should use it. I also, he's also kind of always had this dream. He talks about this. He was on how I built this podcast. He always had this dream to kind of move to New York. So he just

picks up, moves to New York and he joins a small architecture firm in Dumbo in Brooklyn. And this is a, there were two architects there and he was working as a draftsman for these two architects and they had one major contract, which was the buildout of the american apparel retail stores all across the country so miguel gets drafted in as a draft from the basically this was when the you know era of american apparel they're just rolling out in a huge way kind of like we work would all across the country open up all these stores all with the same aesthetic that would come to sort of inspire we work here to bring it full circle uh just before flying out to do this episode i walked past the empty space in seattle where the american apparel

store used to be and was more recently filled by glossier's pop-up which is just like to bring it the most full circle oh my god yeah are you are you implying there might be some empty we work spaces soon no i don't know um so it is this man that walks into the elevator and meets adam at this party in this probably would have been like 2007 maybe too early 2008 in new york and they get to talking at the party and adam it turns out is looking for office space for his burgeoning hyper growth company crawlers and is talking to Miguel and Miguel's like oh yeah like I'm an architect like I like you know I'm into I'm doing all this commercial space and Adam wants to wait eight years my company the company I'm working for is going to collapse there'll be

storefronts everywhere everywhere everywhere and so Miguel's like dude don't go don't go looking for office space in Manhattan like that's stupid come Come to Dumbo. Rents are cheap here. It's super awesome. It's really hip. You're going to like it a lot more. So he convinces Adam to move into the same building that his architecture firm is in Dumbo. And this is 2008. The financial crisis is happening. Rents are super cheap. There's proverbial blood on the streets in New York. I was there. We all remember remember this real estate is plummeting and these two entrepreneurial guys they kind of cook up this idea they're like there's some empty floors in this building that we're in here in dumbo what if we convince the landlord to let us take over one of these floors and then we can stuff some more people into it and like make the arbitrage on the rent and they decide this is a

good idea these two new fast friends. And so they do it. They convince the landlord. It's like, well, I can't move this floor anyway. They give it to them. And the idea is this is going to become like Airbnb for office space. And maybe the better analogy, though,

is there's a Forbes article a couple years later in the early days of WeWork. And they say, sort of like Airbnb, but maybe a better analogy is like an airline operator because really what they're trying to do is take a physical asset and squeeze as many people into it just like coach on an airplane and to turn out i think the financial dynamics of this business look a lot more like an airplane operator than they do like airbnb but anyway it's actually a great idea like very quickly the space gets filled up. They

list it on Craigslist. They're like, hey, we've got desks here. They decide to call it Green Desk. They think this is going to be eco-friendly. That's what's going to appeal to these types of folks that are new age entrepreneurs. They care about the environment. They start marketing. Didn't they only stock environmental products products so it's like all seventh generation sort of like cpg stuff throughout the i think they might have they they used only recycled desks and then the kicker is i i'm sure this was probably fake but they were like we are powered only by wind power in dumbo in a building in dumbo they've changed their own grid? All right. Hey, they're entrepreneurs. They're entrepreneurs.

Throw a windmill on top of the building. Yeah. I'm sorry. I'm just trying to think of Brooklyn. I'm trying to identify in my mind the first windmill I've seen there, and I'm still trying. It was the Dutch. They put the windmills in New York when they settled it. So like I said, though, it works great.

There are all these people that are getting displaced from their traditional New York when they settled it. So like I said, though, it works great. There are all these people that are getting displaced from their traditional New York finance, media, what have you jobs. And they're either starting businesses or they're freelancing and they're looking for stuff like this. And so the Craigslist postings that they're making are just getting all this demand. And within, I believe within a month, they have the space pretty much booked up then they start taking some more floors in the building the landlord owns a few other buildings nearby they start doing this in the other buildings and it really works wait so this is green desk now this is not we work this is bad happen at green desk or they just morph no something great happens to green desk which is

two years later the landlord says man this is like becoming a big part of my business. And he, unclear to me if he offered to buy or they offered to sell to him, but they buy, the landlord buys Green Desk from Adam and Miguel for $3 million, which is pretty great. So this is 2010. They raised no investment? They, I believe, raised no investment. Now they had a third partner who was guy, I believe, named Gil, who Miguel had worked with at the architecture firm. And I believe Gil at this point just takes the money and moves back to Israel. He was Israeli. But Adam and Miguel, they make like a pretty bold decision.

And this is 2010. Remember this. Like, they just made probably at least a million dollars each. They could be living large in New York at this point in time. In Dumbo, at least. In Dumbo, at least. And man, to invest in Dumbo Real Estate in 2010, you would have made a killing. But they say, no, we're going to double down. We've learned a couple of things from GreenDesk. We think that this product has some form of product market fit. Let's take this across

the water into Manhattan. And so they go, they decide to restart the company and they want to go do this same concept in Manhattan. But they've learned, one of the key things they learned is that actually this eco-friendliness thing, like it sounds good, but that's not why people showed up. People showed up because what they were really doing was they were selling a culture they were selling a workspace feel design culture and i think this is totally true like dan i don't know if you'd agree you know i mean i think they were selling you know if you think about freelancers back then are people trying to start coming they were selling the coffee shop is what they were selling

without having to go and buy coffee and there was actually a desk that's what they were selling because that's where you would go and probably with worse wifi at the time. Yeah. Well, I think Regis and IWG is going to come up in a minute, but again, this is not a super new idea. The idea. No, it's not. I look in 19, I'm going to really date myself now in 19, like 94 in Cambridge, Massachusetts and Kendall square where MIT is. I was working on a startup newspaper at the time and we rented an office space. And the big thing that that had was it had a common receptionist and a mailbox. That was huge, right? We could get mail to us, and somebody would pick up the phone and would direct it to us. So I mean, that was very much the early version. But

that general idea, and there was a bunch of different basically conference rooms, and every company had one. Yeah. But I bet though, it probably didn't feel, it felt probably kind of pretty crappy. Yeah, it did. No, it felt like basically we were in a very large cubicle with a better, with a window. Yeah. So this is an age old business, this subdividing real estate, basically leasing, taking on a long-term liability where you rent out space for some low price because you're taking it in bulk, you subdivide it up and then you rent it for a higher price in a shorter term. And for what we work would become and have some common shared services which is you know that you know particularly if you're a two-person company you don't want to have

to deal with somebody answering the phone or how do we get you know broadband visitors do we have to hire somebody to take the trash and all and and and get make sure the coffee machine is filled every morning yep yep and i think just to hit on this one more time because i think this actually is a big difference from we work and and everything else what they did is they did that and they made it feel like you were like at a real place not like you're at some budget low rent it's like english baby right it's cool yeah that's what it was yeah it was cool it was cool and there's multiple interviews with early we work members that said yeah i was working on a startup it wasn't going well but like my parents could still come to the office and they felt like I was doing

something real, like I was a success. I was in a place. Oh my gosh, look at all these great desks and computers and a receptionist. There's this energy here. Yeah. Ostensibly, something was working. Ostensibly, yes. Ostensibly. And I think at this point in time, something really was working. People wanted this. So they had to come up with a new name. So Dan dan i think you know the story of i've heard rumors of the story adam's never said it directly to me uh the the rumors are that adam was partaking in some stuff he would later partake in on planes and and that is when the name came up this time on a couch as opposed to an airplane seat well maybe he was on a couch on his private jet that's possible of course that's fair that's totally fair we're referring to um you know the the reporting uh that came out in

the last couple months that adam apparently smoked marijuana which shocked shareholders shocked shocked shareholders because apparently his major investors had never met him uh anyway um so they they needed they obviously needed a name to replace green desk and they come up with we work so this is like kind of an amazing entrepreneurial story what happens next so they start shopping for real estate in manhattan a lease that they can take out on they're looking for a whole building that they want to do this they want to go big but even with the two-ish million that they have between them that's not really enough to get even in 2010 a lease on a whole building.

And they want to be in like real hip part of town. They want to be in Soho. They want to be downtown. So they're going around. They're like going to all of these. I don't even know how it works when a building's up for lease. It's like sort of an auction or like whatever it is. I have no idea.

It's market by market. I know in New York, it's like one of the craziest ways. In New York, when you're looking for an apartment, you hire a real estate agent. Like that's how nutso the real estate market there. So I'm sure there's extra complications when you're looking to lease a whole building. A whole building. Yeah. So while they're at a few of these, whatever they were, they were like moments where lots

of people who are interested in buildings would all be in the room at the same time. So they're at one of these and they meet a Brooklyn-based real estate developer named Joel Schreiber. And he takes a shine to these guys. He's like an established, pretty big-time real estate developer. And they know they need some more capital. And so they kind of throw out something to him and say, hey, we need some funding for what we're doing. You think this is a good idea. How about you invest at a $45 million valuation?

And he says, sure, I'll buy a third of the company. Which by the way, just, I mean, again, go back nine years. I mean, when we, you know, nothing that's under a billion dollars anyone pays attention to. That was for a startup that didn't exist. That was an enormous amount. That's an enormous amount today.

It's a huge valuation at the time. It is it is but even then i mean just so absurd this is audacious yeah audacious fair but this is the very first example of adam looking around like if this were a tech company then what they would have gone and done is raised five hundred thousand dollars on a four million dollar premium evaluation what adam did was say oh no, this is not that. And also, we're not going to approach a traditional tech VC type person. So you pitch something unfamiliar that's completely different to someone that's not playing the same game as everyone else. And you get a non-tech investor in a non-tech business at a non-tech valuation and boom, very first time this playbook has been run. $15 million in the bank. And so they take out a lease for a whole building in Soho.

They start doing the renovation. So there's the lease, but then they have to renovate this and turn it into a WeWork. Clear why it kind of makes sense that you should feel like your $15 million is safe here. Normally, when you're investing in a tech company, you're buying like laptops and then you're paying salaries. And in this scenario, you're getting something of value, this longish term lease, so that at least if the business goes kaput, then this major investor owns a third of a valuable lease. Yep. And presumably, you could repurpose that building and rent it out for other things. Which of course, by the way, as we go on is in theory the the the concept in part behind we works kind of

massive valuation which which makes what's just happened that much more that much more nutty so they start renovating this building floor by floor doing that and and i believe this we'll see if we can find some pictures we work as we know it today like this was it like they the all the aesthetic the glass walls the communal spaces like they had this nailed kind of from their green desk days from the beginning. So they start doing. Plus beer taps. That was very important. Like in the early days when you hear about a WeWork, that was the first thing you hear.

They have beer taps in the office. Yeah. IWG does not have beer taps. It's like the lowest COGS. It's the highest delta between value and perceived value that you could imagine. Or I guess between cost and perceived value. So as they're finishing each floor in this building, within one quarter of each floor coming online, they're at 100% occupancy. So they're like, oh, man, this is working.

They start running the same playbook on other buildings in New York. And Adam has a great quote on this he says during economic crises there were these empty buildings and these people freelancing or starting companies i knew there was a way to match the two if he had stopped there that is like a brilliant entrepreneurial insight he has one more sentence though what separates us though is community so even back then even in you know 2010 uh i'm gonna defend him on that for a quick second which is and we talked about this like go back to the green desk days and to your friend who said oh you know my parents came in and it looked like

something was happening like these freelancers they weren't necessarily working with each other per se on the same project but again working next someone it's the difference between working alone in like you know you could rent out a one office office, I guess, somewhere, right? And you're alone completely with the door shut. There's people around. There's an energy that makes you work more. It's the same reason why there's like even today questions about is it better for people to be in an office compared to, you know, all working remotely all the time. Yep.

Yep. Yeah. Again, he's not wrong, but it is a. But it does lead to. He's not 100 percent right either. So 2011, this is actually really interesting. I was surprised by this. The next year in 2011, PepsiCo takes out a bunch of desks in that first Soho WeWork and starts putting some of their remote New York City-based employees in the WeWork.

I thought that was a much newer phenomenon, WeWork's business model. I thought so too, but it was actually from the very beginning um that big corporate clients were also saw the appeal of this the next year in july 2012 this catches the attention of a number of venture capital firms including uh storied venture capital firm benchmark benchmark capital and in the summer of 2012 they lead a $17 million Series A in WeWork at a $97 million post money valuation. So a nice step up from like the original seed round, which was crazy to begin with. And again, back in 2012, you know, a Series A at $100 million post, like that's a significantly higher valuation than Benchmark gave to Uber in Uber Series A. Kind of crazy. And in Forbes, Bruce Dunleavy gives a nice

quote where he flew out to New York to see what was going on. He said, it reminded me a lot of eBay when I first met them in 1997. There was something going on at both that you couldn't quite put your finger on. And I think this is an early precursor to a lot of WeWork, which is there's something valuable here. You can't quite put your finger on it and thus it's hard to value. And that sort of gets taken advantage of over time. Now, all that said, everything up until this point, Dan can feel free to disagree, it all makes pretty much sense. No, I don't disagree. I think it did. Yeah, I think it does. Yeah, absolutely. Even this seemingly crazy investment by Benchmark, as we stand today, that's a great investment.

And there was like, yes, there was like, is this a tech company? Is this just a real estate company? It is. But we will come back to this benchmark investment and then the subsequent investments that in the background, as that was going on, you talk about the valuation, the part that didn't get reported at the time, none of us ever see, is the actual governance terms that are sitting behind that valuation. Do you know if that was happening at the Series A already? Well, I don't know for sure, but I believe Newman, I mean, Adam Newman, even at the time of IPO, owned a remarkable amount of this company. For example, compare Travis Kalanick was, I think, owned like 6% of Uber when he got

booted, around 6%. Adam owned a third of the company. So, I mean, he still, I mean, after all the soft bank money, et cetera. So he controlled this thing even in those early those early days well and it's interesting you know adam of course had miguel as his co-founder i believe well now it's now obfuscated because they have their shares in an llc but i believe adam always had a greater economic percentage of the company than miguel um if you remember back to Uber and Travis, Travis was not the founder of Uber. No. It was Garrett Camp. But Adam had a bigger piece than Garrett had of Uber. I mean, going forward. Interesting. Yeah. Well, because Garrett and then Travis ended up splitting.

But there was some delusion. Travis didn't start in the same way as like, I am solo founder of this company. No. Again, I mean, and we'll get into this, but I mean, control was important to Adam. Very every way control really mattered yeah yeah so after that investment things continued to work while they're opening lots of locations in new york i think it was right around then that i remember the seattle we work opening uh where we were ben and i were there at the time they were opening there was definitely in San Francisco, a number of cities around the country. Expansion keeps continuing. They start to attract the interest

of the financial community. So they raise, I believe, three more rounds over the coming years led by investment banks, by Jeffries and JP Morgan, chief among them, but also from Goldman Sachs. And they start

pumping quite a lot of money into the company on short order. And so by 2014, the company now is valued at $1.5 billion and is kind of quite large at this point. Yeah. And how much do you think had to do with the fact that they were New York based and not San Francisco based? I think I would think, oh, you mean in terms of the leads? I think two things, New York based, but also think about that. They are still basically a real estate company. Or if you are, if you are Goldman Sachs, if you're Jeffries, if you're JP Morgan, you have giant real estate investments. You have whole teams that are dedicated.

They know that, you know, some sort of app or some sort of machine learning something, something. They've got to put a lot of faith that the founder knows what they're doing. With this, they felt they knew what they were doing. This is them. This is real estate and it's on their block. Yeah. Well, that's actually true. And I believe by 2014, WeWork had become the single largest lesser of new available commercial square footage in New York City. Think about all of the real estate investment and property developers in New York. WeWork was the largest. So of course they were attracting attention to these folks. And it goes back to what you said earlier. Remember also what they are investing in.

An app company can disappear just like that, right? There's a scandal or it doesn't work. There's no product market fit. Worst thing that happens here is you end up with a shell company that's got, as you said, all the commercial real estate in New York City. That's the worst case scenario. That's pretty safe as venture capital investments. Right. Goldman, JP Morgan, they're going to be super happy to take over those leases if something goes sideways here. And let's think about how you might make that

investment and arrive at a $1.5 billion valuation at this point. Is someone doing a discounted cash flow? Is someone actually saying, well, if they continue growing at this rate for X years, and we're looking at our net operating margin, and we think that there's some chance to generate a billion and a half in cash flows? I don't want to say I guess. I would hope so. I have so little faith that people do that or really do that and don't just come up. There is a big part of me that believes, and you guys can feel free to disagree, that people come up with a valuation and then they back their math into that valuation.

If the first one doesn't work, they'll come up with another way to make the calculation. But look, there was some reasonableness to it, right? Because you think about WeWork, the issue was always they had to spend a lot of money up front. Their up front capital costs, A, to lease the buildings, but also to do the renovation, right? It costs money to, because they were doing full almost demo inside of these things, almost down to the equivalent of studs, and then rebuilding them inside.

That costs a lot of money. And if you've got a 20-year lease, you are theoretically, you're going to, depending on the building, you'll get to break even at year three or year four at 70, 80% occupancy. And that's when you're really in the money. So that's how you're planning it. Yeah. You know, and it's interesting. I hadn't quite thought about this till now as we've been going through it.

I think you could argue, Dan, that like the valuations for the tech venture capital community look a lot like what you said. But I kind of imagine, you know, Goldman, JP Morgan, they don't do this. They were looking at the value of this real estate. And I strongly suspect having friends that were at some of these places on real estate investing teams at the time, they probably had big theses about like, those years, call it 2010 to 2014, were years to go big on investing in commercial real estate in major metropolitan areas the counter argument would have been even at the time would have been okay we're in an economic recovery at the time arguably boom by 2014-15 okay so you're right so the floor you

know floor 30 on 6th avenue that's there's got a it's got an intrinsic value to it but we work has decided that they are going to rent it out to short-termers for the most part. Yeah, maybe some Pepsis, but short-termers. And they're going to spend a fortune renovating it when it was already an office building, right? Generally, most of them, maybe not the one in Soho, but most of them were probably already office buildings. Could we have done better just calling Pepsi, calling somebody else, splitting the floor in half and basically keeping the infrastructure exactly the same, maybe with a new coat of paint? Yeah, maybe they could have. So the net of all this is in june 2015 we work makes a really key hire they hire a man named arty minson who was the cfo of time warner cable uh now if you

think about the cable business uh this is the not the content business this is the literally the pipes the distribution of cable which is why he was perfect for this. Exactly. It's a cash flow business. Cash flow business, but the same thing, right? A huge upfront infrastructure spend, and you will get your money, basically recurring revenue year after. It'll take a while to get your nut back, but then eventually it's a lot of money down the road and it's recurring. I mean, I remember. And limited supply also. I mean, you think about cable.

In New York, everyone knows when Time Warner decides to stop carrying a channel, you're out of luck. Same thing. There's a limited amount of commercial real estate in New York. Yeah. I remember back in the mid-2000s, Is when they were incurring huge losses doing all this build out of laying the cable, laying the pipes into consumers' homes. But then the switch flipped exactly like you said, Dan, and then they became cash flow monsters and people loved them. And so I think a lot of this bet here was the same thing was going to happen with WeWork. And Artie said that explicitly over and over again. He felt they

were analogous. And that's Ben Thompson's AWS analogy too, that says, look, there's huge build-out costs. It would be strange if this business weren't incurring huge losses right now in this era of rapid expansion of infrastructure. At some point, it should flip. Yeah, indeed.

This though... It did, by the way. It did eventually flip. AWS definitely. No, we were just in the opposite direction yeah well exactly i was gonna say this is no no no you're not this is a switch does flip at this moment unfortunately the switch that flips i think was more in adam than in the business yeah so this this is the moment where until this point the name we work is in no way

salid or in no way a head scratcher. It's a really interesting company that seems to have product market fit. That's, of course, growing very fast, but no one's looking at the growth and saying like, there's something massively wrong here. Mostly. The only concern, at least I remember hearing at the time, was this argument. And the Pepsi thing is interesting because the enterprise piece of them in terms of renting to big enterprise companies wasn't well known and wasn't even that big within WeWork in terms of its revenue at the time. There was a concern that, wait a minute, they're filling these with all of these startups, these tech startups. If the tech startup bubble bursts and that's on top of a commercial real estate bubble, you've got a bubble on top of a bubble and then the whole thing goes to hell very, very quickly.

That's a great point yeah that was i distinctly remember having this conversation like late 2014 of uh i would be short this company purely because there's going to be a tech bubble that bursts soon which here we are five years later and we're all still waiting for it to happen or maybe it's happening right now um but but yeah dan this great point yeah you're right but the growth makes sense it's the reason they kept raising money at higher valuations. And they kept filling the buildings. I mean, that's important. The buildings kept being full.

Yeah, they kept being full. So Adam, at this point, he's very wealthy on paper. But as they keep raising money, he starts doing... It's unclear exactly the method by which he did this, but he starts taking quite a bit of money off the table. Some definitely from selling his own shares. We won't know. And they were all, they were employee tenders.

I mean, I'm told at least that every time, there's some debt stuff too with JP Morgan, but in general, every time he sold shares, it was part of an employee tender. And he was selling at the same price they were, but he obviously had a lot more stock well i was gonna say yeah then the what we do know is that by the time we get to now he has i believe it's a 500 million dollar loan facility personally from jp morgan backed by his we work shares so which is effectively a way to be selling without actually selling your shares along 500 million dollars that's a lot of money man's got a lot of houses that's exactly like 10 homes or something like that so he starts doing two things you know what that's two for each of his children that's not bad well he does have five children uh well look i agree if i had five children i too would have 10 houses so i don't begrudge that at all but but yeah he starts buying residential property uh he owns four multi-million we're talking like 10 plus million

dollar properties in the new york area alone dan i think you're right 10 residential properties around the world i believe so yeah 10 are in that ballpark well he also sees gosh there's these companies like we work that will pay a bunch of money to me if i own a building to lease it for me so i gotta figure out a way to get into this building ownership business. The other thing and the other more problematic thing that he starts doing is he starts using this money to invest in commercial real estate. And this is a huge conflict of interest because... I mean, it is. It's an obvious conflict of interest. His argument was always... I remember hearing about this and actually asking about this. This is before I

joined Axios when we brought him and his wife, Rebecca, to a Fortune conference in Aspen. I remember asking about this. His basic argument was we were having a hard time. I almost think he did some of the commercial real estate earlier, because at least his argument was we were having a hard time at points convincing landlords to let us in, because they viewed us as this venture-backed startup. Oh, we're going to sign a 20-year lease, but where are you really going to be in five years?

Or you're going to be gone. But if I buy the building or I have a piece of the building, well, we'll lease to WeWork because I have faith in it. So I'm solving for that problem. But you're right. Obvious conflict of interest. Right. Well, I mean, that logic may make sense.

Which in theory, if you had an independent board of directors, which had oversight, would be able to manage and silo. Yeah. And that logic might in theory if you had an independent board of directors which had oversight would be able to manage and and silence yeah and that logic might make sense but then the obvious answer is start investing have we work start buying the buildings not adam which is what they ultimately get to but not yeah right yeah not adam personally and then leasing the buildings back to we work but that he's profiting on the other thing i mean this is just standard like ridiculous startup stuff. Uh, they,

uh, uh, which is sad to say at this point, but they ran out all of universal studios one day and they get the chain smokers to perform and they start doing this thing called we work summer camp. Yeah. It actually started at Rebecca's family's property.

I think in upstate New York, somewhere like, I don't think it's the cast skill, cat skills, but somewhere sort of like that looks a lot like that. There's property, I think in upstate New York, somewhere like, I don't think it's the Catskills, but somewhere sort of like that looks a lot like that. There's a few really great pieces reporting on this, but it's like 150 acres of land. Her family, I think, is independently wealthy. Actually, her cousin is Gwyneth Paltrow. Yes. Yeah. Yeah. You know, again, this is one of those things that sounds so stupid. And it is. I remember the first time I called, I think it was, I had talked to like who was running pr uh for we work at the time and i called and i get a text back saying

sorry i'm at camp right now it's which i say to a colleague of mine i say he because it was like june maybe i said to a colleague i think he's bringing his kid to camp and she responds he doesn't have a kid said but he says he's at camp he said oh he's at we work camp and that began a whole conversation what the hell are you talking about but i will say like look at google google still does this like so if things are going well no one cares and when things go badly this looks just awful so when you have a monopoly in an 85 gross margin business you can do shit like this you can't by the way as i said i came from fortune magazine the old stories for fortune from before my time were when they had a blowout the fortune 500 issue was you know the kind of the vogue issue, right?

It was massive. And I guess maybe like 10 years before I'd gotten there, they had a blowout issue and they brought the entire staff from the most junior to the most senior, everybody to Hawaii for a week. So, I mean, that in retrospect was really dumb. But at the time, you do it. You know, great. Like, you know, exactly. But here we are in a, I don't know, 10% to 20% gross margin business that's purely right now. All the cash in the bank is investor dollars.

None of it is profit dollars. Correct. Yeah. So the peak of this period of the company is 2016. They raised just under half a billion dollars from two Chinese entities entities uh that value the company at 16 billion dollars uh and that was i i think that was the first time they crossed the 10 billion dollar valuation threshold and now they're among the top like three most valuable startups in the world to quote unquote startups and but we work we work uber airbnb airbnb and then you can take some of

the chinese ones but at least for the u.s yeah yeah for the at least for the u.s and i think that was 2016 that was before i think people really maybe dropbox at that point was already there but close yeah not quite it was like in the five ish because yeah ipo around 10 yeah yeah but uber airbnb and them that those were the three well and and i think actually a lot of the chinese companies hadn't even been started in 2016 yet i mean that's fair Yeah, like Pinduoduo, I think, was started in like 2017. Like, it's crazy. So, yeah.

So, benchmarks two for three in these three big $10 billion companies. Well, plus Snapchat was kind of up on its, you know, rise at that point. So, yeah, everybody's sitting pretty. Enter SoftBank. And it's a one-of-a a kind founder, Masayoshi-san. Listeners, if you don't hear the Imperial March playing, know that it's because I checked with Disney and we did not get the copyright authorization to put that behind this section. So we've talked a lot about SoftBank on this show, including doing a whole episode on the

Vision Fund. We're now in early 2017. SoftBank has just raised the Vision Fund. And we're going to talk a lot about their motivations and everything that happened here along the way. But one thing I think to really keep in mind, they have $100 billion to put to work. Theoretically. that they're clear about is they want to deploy this capital in less than five years. How do you deploy $100 billion, which as we've talked about, is the largest fund of any type in any asset class ever raised in history? How do you do that, let alone in tech companies? You need to find some companies that can absorb massive chunks of capital. So they start looking around and they say where can we put this money uh uber is obviously one example that they put quite a lot of uh number of those billions into but here's this interesting company called we work it's already one of the highest valued startups in the world and they have this interesting capital dynamic they're very

capital intensive they scale with capital they take take on these long term leases. And they want to move into Asia. And they want to move into Asia. Exactly. This feels like the perfect fit. We could really put a lot of billions to work in this company and then, you know, get through our deployment phase and fund one and just like, you know, any good fund manager, you then go raise our next fund. Yeah. Now, David, is SoftBank Vision Fund's mission to invest in technology companies? How does that start to factor into the picture? By this point, WeWork believes it's a technology company. I mean, the one thing you didn't say when I thought you were going when you talked about that inflection point was, to be honest, the AWS example is pretty good, right? It is

starting to add lots or believes it's starting to add lots of services on top of the real estate right so beyond the beer taps and the and the decor it's trying to add all these services and some of those are network for members all that stuff uh eventually elementary school but nonetheless that that's the idea and i think that's part of it but it's also if you're, SoftBank looks at what they believe are transformational shifts in how people either live or work, right? So they invest in Slack, for example, right? They think that's a fundamental change in how people work from collaboration. In this case, they think this is a fundamental change in how people work from a physical location standpoint. So this works for that from a thematic standpoint. point. Thematically, but economically, this doesn't have the high fixed cost, low variable

cost component that a true sort of pure technology business would have. No, not at all. But I think to underscore again, as we said, it has this other extremely attractive element to SoftBank. SoftBank invested in Slack, right? How much money could they put into Slack? They couldn't put that much money in. And Uber, they could only plug a ton in because it was in crisis. It was a management crisis. They took advantage of the situation. Even if you look at Vision Fund, a ton of that was money that they had already invested in ARM that they basically just transferred over to take a big chunk. If you're doing privately held companies, as you say, it is hard. It was the big question when they were raised. How are you going to deploy this in any reasonable way? Yeah. And so here's this like perfect vehicle.

So this is amazing. Dan, you may know more details on this, on how this happens, but the SoftBank team is scouring the world looking for companies like this. WeWork is top of the list. So they set up a, you know, sort of like final diligence meeting

where Masa is going to come over to New York to WeWork headquarters. They have two hours booked with adam gonna see the whole space gonna spend a lot of time with adam and as the story goes uh the time when masa is supposed to show up arrives adam's all like you know ready he's activated the space as he uh says that he does uh and um masa is nowhere to be found time goes by waiting like an hour goes by finally masa shows up and he says i'm really sorry i only have 12 minutes and so they do a quick walk through in the space and then he says to adam i gotta get in a car to the airport you can get in the car with me if you want. We can talk about this. Adam gets in the car with him. Masa pulls out his iPad, as the story goes,

draws up with his finger on the iPad a sketch of the terms of a deal, the terms being that SoftBank would invest an initial $4 billion in total out of the company. Out of the Vision Fund. And that's $1 billion for international expansion into entities outside the U.S. In Asia, yep. company out of the vision fund and that's 1 billion for international expansion into

subsidiaries in asia yep 1.3 billion of primary capital into the company and 1.7 billion in secondary to basically buy shares from existing shareholders no new cash including adam including adam they sketch this on the ipad in the car masa signs the car. Masa signs his name to it. Adam signs his name to it. And then, of course, the team is all hammered out. And it's important, just for those who don't understand Vision Fund, to get an investment from Vision Fund, at least one, I think it's like over $100 million,

you do need Masa's approval. And that can't be via phone. It's got to be an in-person meeting. This isn't a normal venture fund where one partner meets with this or maybe two partners meet with the CEO and then they bring it back to the partners and they discuss it and they have an investment committee to vote. No. If you want this, Adam had to meet with Masa.

This has been true for anyone who's raised money from them. Yeah. Wow. Lots of friends. It's what, 100 companies now? 100 investments? I'm not sure what the number is. Although Vision Fund 1 is basically full in terms of new companies.

Yeah. It's basically full. I have friends who've gone through this like where the soft bank investment team will you know work on a deal together and then it's like okay well we're gonna fly you over to tokyo or wherever in the world came to new york was a big deal was gonna be in new york was a big deal usually you have to get on usually you go to tokyo yeah so uh it's done so now all of a sudden uh they valued the company at $20 billion, which was already valued at $16. But this was $4 billion of capital.

That was a step order of new capital coming in and 1.7 of that going to existing shareholders, which, again, we don't know the details. But I imagine a lot of that was to Adam. Yeah. And also notable time, they get two board members, too. It's important. They put two people on the board of directors at this moment. Yeah. Which that had to be stomach churning for Adam who's obsessed with control. Well, as we will learn later, he had two people on the board of directors, but they have as much control over financial decisions there as my kid

does in my house, right? She can ask for things and complain about things, but in the end, I get to decide what we buy and what we don't buy. Dan, do you know, so famously now, Adam has a 20 votes for every one share in the company that he has. Do you know if he got this as part of the deal? I do not know. I do not know. At some point along the way, I mean, I have to, again, we can't go back. We don't have the documents to sort of forensically examine what the control and government. But luckily, there will probably be class action lawsuits somewhere, so we will get these documents. It's just a question of time. But what the governance was at various points along the way, I can say with 100% confidence, there's no way that, going back to the original benchmark investment, that the voting structure

was like this. I don't know that that's true necessarily. I mean, think of Benchmark. It's not just Benchmark, but all of them were so bent over backwards for any – I mean, go back to the Zuckerberg thing, right? Think of Zuckerberg. He turns down a billion dollars from Yahoo when the entire board, including his investors, wanted him to take the deal. He was able to do that. And as you know, I mean, after that, so many other founders of, quote, hot startups were able to get similar terms, whether it was 20 to one or not. I have no doubt that after the benchmark deal and the B and the C rounds, Adam could ultimately whatever he had, it was more than the rest of the board combined. Yeah. the soft bank dynamic that comes into play with boards because they're basically the only entity

that is going to do the things that they're going to do because they so aggressively want to put this capital to work. So they basically arm Adam to go back to the board holding a piece of paper that says, I'm going to get literally billions in investment dollars. And the terms can kind of be as Adam friendly as they want. You can look at the rest of the board. The board's not going to say, no, we don't want $2 billion here to what? $2.3 billion of new capital coming into the company. Like almost any terms, they're going to be happy with that, especially because what SoftBank does is they say, also, if you don't take it, we're going to find someone who competes against you who will. And also with SoftBank, they and Adam are peas in a pod in this, right? Adam is a grow, grow, grow, grow person. And that is what SoftBank's model has

been really with most of its companies that Vision Funds invested in, right? Think of DoorDash, think of Uber. It has been this idea that if you buy, no matter what the industry is, if you buy market share, you can suffer the losses. We will make money eventually. And so in the case of WeWork, that is new markets, new cities, new buildings, buy, buy, buy, and here's your checkbook. We're going to do this. And that's exactly what Adam wants to do. Yeah.

I mean, there's a famous story also of they have a closing dinner for the investment in Tokyo after it happens. And supposedly Masa asks Adam and Miguel, who would win? A sort of rhetorical question. Who would win in a fight? Who wins in a fight? The crazy guy or the smart guy? And Adam answers right off the bat, the crazy guy.

And Masa says, yes, the problem is you're not crazy enough. So he's, you know, Dan, we talked about this in the prep for this. Masa, in a lot of ways, is feeding Adam's instincts here. Absolutely. I mean, he's an enabler. But beyond that, more than that, he's an enabler who's also like pushing him from behind. I mean, as I said, they were perfect for each other in the sense of they both wanted the same thing. And, you know, leaving the money out of it.

Masa, you know, when you hear a founder saying, I want this investor because they see the same vision I see, Masa was that guy. Yeah. Yeah. So this is the pivotal moment where if you accept this term sheet as the board, this is the last opportunity that you have to exert any measure of control. This is basically you're faced with this. It's almost a Kobayashi Maru. On one side here, you cannot take $2.7 billion of fresh capital in a company that needs a crap ton of capital. On the other side, you can accept your fate that what all then happens in the next two and a half years, something along those lines, you're letting happen. It's not going to necessarily play out

exactly like it did, but you're basically saying, this is the SoftBank and Adam show. We're about to do a bunch of crazy stuff. But you're also maybe getting paid off. Another thing we do not know is, you know, you talk about that tender. Did Benchmark take money off the table in that deal? They might have. They did an Uber from SoftBank.

So like you might also be saying, well, okay, we're getting our principal back plus, you know, 3X our principal. So we're already in the money. Worst thing that happens is we're 3X in the money or 5X or whatever the hell the number is. So go for it. Make us the next Google.

Make us the next Facebook. Yeah, yeah. Exactly. You're at the casino at this point. You've gotten 3X your money back. Let it all ride. So those are the incentives. We've talked about the board and the investors.

We've talked about Adam is looking for this partner in crime and SoftBank is looking to go put billions and billions of dollars into something because, boy, are those management fees sweet when they have these huge funds and they can actually put it to work. 2017 that was two years ago like this was very recent it feels five years ago it feels 10 years ago uh so much has changed so they take this money uh they turn around right away and they buy the lord and taylor building uh on fifth avenue in new york for 850 million dollars which you know i don't know i'm not a real estate investor i don't know how to judge like whether that was a good investment or not but now all of a sudden you're now in a new league of capital deployment here and this is for their head i mean it's partially they'll use some floor sure we were this is because they feel they need new headquarters because they have physically grown out of theirs and they're out of space and

i will say from being in their headquarters even a few months before all hell broke loose this year it was crowded like it was legitimately crowded they hired a lot of people yeah i mean they had uh 15 000 employees yeah uh until this week now that lord and taylor store is going to look like an american apparel store the one you pass by it's going to look very similar oh man how history repeats itself they also at this point uh purchased the infamous gulfstream g650 private jet purchased by the company for adam's use uh for 60 million dollars right around the same time adam and his wife rebecca who at this point has been rewritten into history as a co-founder of the company as best as we could tell in our research she and adam were together when they started the company but was not actually like it's a fascinating thing too because usually co-founders

get written out of stories not written in like that you know silicon valley is littered with people who legitimately co-founded companies who don't get to be part of those narratives in this case. In the sort of like sci-fi world, this is referred to as a retcon, a two of them decide right around the same time that going back to the Green Desk environmental roots of the company, they really should ban meat. It would have such an environmental impact if they banned meat from WeWorks. And I have heard a back story of this. And again, I'm not going to claim that this is completely true. But a story I heard when this decision came up or when adam proposed this decision was that internally they said no uh like his people internally said for example we have sales people who go and try to sell things to potential

customers or maybe meet with landlords are they not and they're going to pick up the tab right you know i'm a salesperson if the person i'm with gets a burger can they not buy it and because adam had actually basically said no no company money will be spent on meat well that is a problem and so people raised all these legitimate concerns but this goes to the government later to the governance this wasn't a board issue but raised all these legitimate concerns and he sat there he took them all in and just got up and said yeah we're gonna ban meat and walked out and then announced it before they like and just announced it and that was that and that's how these things worked yeah at the same time that he's flying around on a private jet which has terrible

environmental impact cover your ears and ignore the cognitive dissonance nothing wrong with banning meat but like uh in theory but but it's part but it's part of this idea that we work you know what was that line you said the community line right i mean adam and i i believe this was sincere uh he believed we work was more than a co-working space. You know, anytime, if you've ever been in a WeWork and you get in the elevator to go up to whatever the floor is, there's a schedule of events. These events have nothing to do with, quote, business as it is. It is farmers markets. It is, you know, yoga.

It's stuff like that. He legitimately believed that. And he also believed that that was a way to keep customers that when you, you okay maybe now my three-person company now is a 20-person company we should maybe have our own space but man we like it here yeah yeah totally again not wrong it just got so perverted over time um the uh so fast forward to this year and um you know, the probably I think in many ways, once this came out in the IPO filing, this was the straw that sort of broke the camel's back. We've talked about everything that's happened up until now. In January of 2019, WeWork changes its name to the We Company. And in doing so, WeWork did not have the trademark for the name, the We Company.

Who had that trademark? Adam had that trademark via an entity he controlled called We Holdings, I believe. And so WeWork, at Adam's direction, licensed that name from his own company for 5.9 million dollars and um again i'm just sort of speechless here and the and the defense of adam newman in this and which i'm not going to make by the way because i said this was horrible uh but the defense the argument was that was that this was a tax issue was that that that it had a value that adam had created it it had a value and if he simply gave it, it's kind of like you can't just give your friend a brand new car. You just can't do it. There's a

tax liability with that, that if he had simply given it to the company. Now, this is also a person who did have a $500 million loan from JP Morgan. This is someone who had taken hundreds of millions of dollars. He could have sucked up the taxes. And again, even if it's one of those things that the board at the time was willing to do how nobody was able to flag it and convince everybody internally before it became publicly disclosed is a just endless yeah like how this would look yeah um even if there is one of those things that even if you could make a valid on paper argument for it the optics are so so God awful. You don't do it. Yeah. David, I have a name thing I got to talk to you about after this.

We're changing the name. We're going to be the acquired company. No. Acquired Media LLC is a great name. Right around the same time, news comes out. Remember SoftBank and their motivations. They want to dump a lot of money in here. So now we're in the beginning of 2019. We're two years into the Vision Fund. God, I can't believe that was this year. That's when the news comes out. The discussion between SoftBank and Adam, or WeWorkers, are going on in late 2018. And Adam does think he has a deal.

Yeah. Well, and again, so one of the things we wanted to do on this episode is talk about why is SoftBank doing what they're doing throughout all this? Okay, so we're now two years into the Vision Fund. They've deployed a lot of it, but they're thinking about and talking publicly about Vision Fund 2 and trying to start fundraising for that.

People are still shaking off the shock that Vision Fund 1 happened. This notion that, oh, we're about to go do it again, $100 billion again. Yeah, yeah. So now, speaking as a fund manager, like any fund manager, you can't, it is in your fund documents that you cannot go raise a successor fund until typically you are at least two thirds, if not more deployed and reserved of your initial fund. So they're now sitting here and I don't, I don't know exactly how much capital they had deployed out of vision fund one at this point but they're like we want to raise fund two we got

to deploy fund one so news comes out that they're talking about and like you said dan adam thinks there's a deal for softbank and the vision fund to invest 16 billion more and we work and by the way this is the first time the issue of control comes up because the the story the news stories that come up were that that softbank would basically buy a majority stake in the company which even though i don't think it was ever explicitly said the assumption is if you own most of the company you get to make most of the rules which we thought until yesterday which we thought until yesterday uh but adam apparently at least from what i'm told was never going to give up control and that this becomes this issue of you might own 52 but i still have control and that i don't think that

was the breaking point of that deal but that was always something I always heard from Adam's people internally at WeWork was that he always felt the reporting on that was wrong because quote, he was never, ever going to give up control in a SoftBank deal. Interesting. Interesting. Yeah. Cause it was not Adam that blew up that deal. No. No, it was SoftBank's LPs. So at least according to the reporting. David, walk us through this.

I thought venture capital was a blind pool. Not envisioned. Saudi Arabia has it. It's actually funny. Saudi Arabia doesn't have a veto. They can't kill a deal. But Saudi Arabia, which you probably know this better than me, I think they're like 30% or 40% of the fund. They can say you can't use our money for this.

And for anything over a certain amount, they have a right to basically say you go go do the deal but we're carved out of this one and yeah interesting which is not typical in a venture fund agreement but a 40 billion dollar commitment isn't typical so you should get a little bit of extra say shouldn't you there's a lot of things that are not typical about the vision fund um but regardless of whatever control they had, they had the ultimate hammer, which LPs always have, which is like, we're evaluating you about whether we're going to do fun two or not. And I have to believe that that was ultimately the leverage they had and why SoftBank backed out of the deal was they're like, oh, shoot. Actually, if we do this, it's going to jeopardize. There's also tense relationships at this point. Remember when you're thinking now this is a little bit after but in october of 2018

we're talking december january in october of 2013 is when uh the jamal khashoggi gets killed 2018 2018 sorry i apologize uh masa decides he's not going to go to their big conference he's actually going to show up in saudi arabia and meet behind the closed doors but he's not going to sit on stage so things are tense this is davos in the desert davos in the desert which is happening very shortly happening this coming tuesday masa is speaking this year oh wow someone needs to raise a fund and that just shows it's it's all written out right there i mean it's not to no i'll make a value judgment on the show like that's that's a horrible thing to go after the events that transpired and represent your organization there and participate clearly, clearly, desperately needs to raise a fund. corporate, I believe, not the Vision Fund, $2 billion in WeWork at this point in time. Because WeWork needs the cash. They've been grow, grow, grow. They bought the Lord & Taylor

building for $850 million. And they've been making decisions. Because remember, the bigger deal fell apart really at the last minute as far as WeWork was concerned. They were making, and think about the time again, end of year, Q4. That's when you're making all your plans for the next year. They expected to have the money. I don't know whether they were officially signing lease or not but they certainly had the engine running yeah totally and and to explain the softbank corp thing this is softbank the gigantic telecom that's been around for 30 40 years that precipitate came before the vision fund this is off their balance sheet rather than a balance sheet that softbank corp expects to grow in 2019 because they've agreed to sell Sprint.

A deal that's still not closed. Interesting. Yes, yes. Wow. We did the T-Mobile Sprint episode so long ago. I forgot that it hasn't closed yet. Has not closed. Still in court.

Yeah. Still antitrust regulation. But I believe they just got approval. They got through antitrust. But about a dozen state attorney generals are still going to block it. So we will see. We'll see. Wow.

So, okay. now now we work needs plan b they need capital to fund this plan and probably a lot of these lease commitments are in place already so what's what's the alternative at this point i'm going to raise a point here that we want to talk more about there is essentially only one buyer of weWork shares at this point, and that's SoftBank. Or the public market. Well, the belief is or the public market. It turns out the public market was not a buyer. But so they're looking around for alternatives.

There's no other private investment firm or entity that WeWork could go to for financing at this point in time. Some might call this a price discovery problem. Yeah, indeed. So the only alternative is, well, public markets, let's tap the public markets. So in April of 2019, just like three months after this deal falls apart, they file confidentially with the SEC to go public. It gets reported that this is happening. They filed technically in December, technically filed confidentially. They thought they did it. What was the, they gave an explanation, which I didn't think made a lot of sense, but they did.

Cause why else would they have done it? Something about the timing and the year, but yeah, they filed officially confidentially in December. It got reported several months later. Wow. Is that like, help us understand that timeline versus a normal IPO timeline. Was this rushed? No, that makes sense. If you were to file confidentially in December, they knew, kind of similar to how Uber knew

or Lyft knew, that this company was relatively unusual and that the SEC was going to have more questions than it would have for a run-of-the-mill company. So you file in December with the idea, first idea, maybe we'll go public in late spring, but we'll probably go public in September. We are working on this big softbank deal, so we don't have to, but we'll have this in our back pocket. You do it in December. No one's paying attention until January anyway.

Go through a bunch of revisions. You don't want to go public in the middle of the summer. You'll come out right when Q3 happens. You'll be out the door. And indeed, that was what they tried to do. Yes. So August comes around of this year, just two short months ago, and they filed the public version of the s1 which means like the train has left the station like once the public version of the s1 comes out the process is going yeah should be

six weeks and then you're up you're probably six weeks in your public and all hell breaks loose i mean dad you were more than anyone on top of this it's one of the most remarkable s1s that's ever been written and not just because look let, let's start with the obvious, right? There was huge revenue growth. You know, if you only read like to the whatever it is, like the eighth page where you see kind of the top line financials, even though the losses were massive, which wasn't a secret. Because remember, WeWork had been kind of like Uber had done, even though they were private, had been disclosing financials for a while for two reasons. One, because they wanted people probably not to be shocked by the S1 eventually. And two, they had done a bond offering, a public bond offering about a year and a half earlier so they had public disclosure requirements anyway so the top line look revenue growth was huge and it

was billions of dollars of revenue this wasn't a small thing losses were huge billion dollars losses uh but then you had to keep reading and to be honest these things are like 100 pages long and this this i think is the longest i've ever read it was like multiple hundreds of pages it was very long and lots of reporters kept going to different sections and finding things that were shocking and surprising. And you kept looking at and going, no, that can't be right. And you would ask, we had conversations like, it says this, but it doesn't really, right? Like, what am I, because these are written by lawyers and bankers. What does it really mean? And good Lord. And also partially because, you know, you talked at one point about, you know, Adam has some real estate.

WeWork has, is this series of LLCs. Every building is its own LLC. So it's incredibly, even if everything's on the up and up and there's, it's an extraordinarily complex organization structurally and all that comes out in the S1. Yeah. Even without, I mean, there's, I think it's page, I'm going to lose it, but the first 20 pages here, there's their org structure. Here it is, page 16 of the We Company that owns the We Company MC LLC that has the We Company partnership and then the We Work Companies LLC and then all the countries.

And like, this is before you get to buildings. Yeah. And remember, they'd also, they'd raised or still are, maybe not now, they'd been raising a massive fund. You know, you talk about, oh, WeWork should have bought the buildings well they were doing that they were they were raising a massive fund which adam was going to have a stake in but just like everybody else that we work would and that was going to go buy buildings that was again that's another separate entity which is then leasing out and all that but yeah look we learn a lot of stuff this is where we learn about the trademark thing yeah this is where we learn about the extraordinary

amount of control he had even to the point where if something were to happen to Adam, like he were to die, the board doesn't get to replace him. His wife, Rebecca, gets to decide the succession plan. And if she dies, too, then their children. Absolutely. We learned that they are also going to give away an enormous amount of money in charity after this IPO. I think he's committing to a bill. And Adam has. I will say Adam has given a lot of money in charity over the years out of some of that money.

He hasn't put it all into houses and Gulfstreams. But I think they commit that they're going to give a billion dollars over 10 years after the IPO away from proceeds. It's fascinating. There's actually in this document, a section that says charitable commitments of our co-founders and other senior leaders. That is very atypical. It's very typical. And by the way, if this had become official, if this IPO had gone forward, he would have, I think, been legally obligated to do so. I he was he was all this wasn't a giving pledge which is signing something that warren buffett gave you and you know if you don't do it what's going to happen to you this had the force of law behind it in theory yeah or at least the force of the sec okay so much much weaker law

it's sort of law it's not the doj but it's something. Exactly. All right, listeners. Our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to mid-sized businesses and provides enterprise grade security with the technology, services, and expertise needed to protect you. They offer a revolutionary approach to manage cybersecurity that isn't only about tech, it's about real people providing real defense around the clock. So how does it work? Well, you probably already know this, but it has become pretty trivial for an entry-level hacker to buy access and data about compromised businesses.

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that make sense for them. In fact, it's pretty wild. There are over 125,000 businesses now using Huntress, and they rave about it from the hilltops. They were voted by customers in the G2 rankings as the industry leader in endpoint detection and response for the eighth consecutive season and the industry leader in managed detection and response again this summer. Yep. So if you want cutting-edge cybersecurity solutions backed by a 24-7 team of experts who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired, or click the link in the show notes. Our huge thanks to Huntress. So let's talk about what we don't learn in this document. So what I was really trying,

when we were talking about doing this episode, in my head, I'm like, okay, I want to tell people what the macro story is here. And then the question in my mind was, is this actually a good business at steady state if we work stops expanding? So I'm scrolling and scrolling and scrolling and hundreds of pages. You can't actually ascertain, hey, of the cohort of your buildings that are at scale, what are the gross margins? What are the unit economics? They keep saying we have really strong unit economics. And then the only financials they give

are this massively blended one that is a very, very basic P&L that shows the business, including all of the expansion. So really difficult to tease out what losses are actually incurred at maturity. They have this silly graph that has no y-axis with this curve that basically shows, hey, the buildings are breakeven after six months, but not much more detailed than that. No, and you would have thought they maybe would have, by the time they filed the S-1, learned the lesson from Uber, which had a similar problem, which is, look, every single company I think I've ever talked to tells me that even though they're losing a lot of money, their unit economics are fantastic.

I'm waiting for someone to say, well, you know, economics are kind of mediocre. No, you know, economics are always great. But you're right. And that was an issue with Uber, right? Guess what? They don't tell investors that either. But when you looked inside Uber's documents, you could not figure out how much what were the unit economics per ride, particularly for Uber Eats per delivery. You couldn't figure out any of that. I think that has been an ongoing problem for them. And WeWork was the same way, right? And you should have been able to because WeWork had been saying things over the years like, again, like Uber in mature – for them, mature markets where they had been X number of years or had X number of buildings.

We were building profitable. Understood. There's overhead. There is marketing but you couldn't even figure out that in that building in soho that they'd been in for four years take out all the overhead is the building profitable no freaking idea no idea which is a problem because if the argument was arty minson's argument like with a cable company eventually you could figure that out what was the you know was deciding to lay pipe in seattle did

that make money in the end after a certain amount of time you should be able to say yes or no yeah in this case they didn't they it wasn't even that they couldn't they didn't and the backstory that you keep hearing and part of this is probably self-serving about bankers and board is that these things were indeed raised not by the sec but these things were raised by bankers and boards and just like with adam and the meat thing he basically waved his hand and said don't worry about it this is how we're doing it wow so needless to say potential public market investors react terribly to this as does the media

and everybody um first problem is the governance as you keep saying damn so september 13th we work announces is changing the corporate governance and adam is still going to have the super voting shares right but they're going to be weaker i think it was supposed to go down to three to one if i'm correct it was 20 and then 10 20 and then 10 and then three right so it was going to load the succession thing was going to change the board was going to be able to determine who was his replacement was their one and they were allowed to fire him which was important and by the way that's unusual because again think of facebook board can't fire zuckerberg uh i don't think alphabet they can fire larry page yeah that was interesting

that the board now even though they didn't have the votes the one thing they could vote on would be to fire adam newman now this was dan correct me if i'm wrong this was an announcement this was not an actual change these were things that were going to happen upon the ipo uh yes and no and that's where things get very tricky because as we know they do fire adam newman so they clearly got the ability to do so or maybe they just persuaded him he had to step away uh either way we we being you me the media ever everyone is under the impression at that moment that these changes have been made. It is codified. It's talked about in an SEC document.

And again, it comes this question of, okay, is this something you've done or is this something that is effective as of the issuance, the actual shares being issued? That remains unclear. Because I believe when we get to the end of this in just a sec, Adam still has the 20 to 1 voting space. If not 20, he has at least 10. I believe he still has 10. It's not three. He still controls the votes as of, well, as of two days ago. Yeah.

So then September 24th, Adam is out as CEO. The board is replaced. He remains chairman. He becomes chairman. Yeah. Executive chairman. Even that wasn't enough to get the IPO back on track. They announced after that they're pulling the IPO.

Well, let's just go back quickly because this is important. This is where SoftBank plays. Even before Adam gets fired, there start to be reports over a weekend that SoftBank is pushing to have the IPO postponed. Now, remember, Adam wants this thing to go forward. To be honest, the board wants this to go forward as well. And obviously, the bankers want this to go forward. It's an interesting leak. It's an interesting leak.

And SoftBank will not cop to it. But if you go to who had incentive to leak this, because this is a really damaging thing to leak. This isn't just like, oh, you know, maybe earnings projections. This is really damaging. This is saying to prospective investors, this thing shouldn't happen. That's a real freaking problem. And by the way, the biggest investor who's got two people on the board, they should know this company well, doesn't want it to happen. So SoftBank is clearly, somebody at SoftBank is investor who's got two people on the board, they should know this company well, doesn't want it to happen. So SoftBank is clearly, somebody at SoftBank is leaking this. And then there's the question of why. Why would SoftBank be torpedoing its own portfolio company?

And the best explanation I've come up with, or at least the one that everybody affiliated with WeWork, those who support Adam, those who don't, everybody seems to believe is that SoftBank, this goes back to Vision Fund, which is, if this goes public, and it goes public, say, at a valuation, I'm going to make this number up now, of 15 billion. Because now they were getting investor feedback. This thing's not going at 49. It's probably not going at 20. Down to 20, down to 15. If it goes public at 15, SoftBank then is obligated to revalue its existing shares in WeWork. And what does that do? It means when you're going to the Saudis or to Apple or whoever else, our IRR on our existing fund has gotten a lot lower

because you said earlier, this is one of the biggest investments there. It has a significant, any valuation change has a significant change to SoftBank. And remember, SoftBank had previously marked it up to 49 billion.

It had done an insider deal. It marked up on its own. So the reduction would have been massive. Yeah. It would have cratered. They've got $7, $8 billion in because they continue to put in more convertible notes too. There's a lot of money in. And again, just, yeah. And the value of it just would have been, they had marked it up themselves. If they had just kept it at cost, things would have maybe been a little bit better. But yeah, it leaks out and it becomes a cavalcade and eventually Adam leaves. Because then there was, again, there was first talk it becomes a cavalcade and eventually Adam leaves. Because

then there was, again, there was first talk SoftBank wants the IPO not to happen. Then SoftBank thinks Adam Newman should leave. Well, Adam's not leaking that. There's no reason for anybody else to be. SoftBank's leaking that. Yeah. Wow. So the net of all of this is that- I should say for the record, SoftBank says they didn't leak it. There we have it. We don't know who did. Somebody did. The net of all of this is that the company is now running really on fumes.

Shockingly low on cash because remember how much money they were planning to get. They're looking to bring in $3 billion via the IPO. Then they'd also agree, J.P. Morgan had arranged a massive $6 billion debt package, which was concurrent to the IPO. So we work in whatever it is in August, looks at its balance sheet and says, we're running really low on cash. But come end of September, we're going to have $9 billion. And they had banked that in their brains and in their models. And at that point, we got $9 billion coming in September. spend and by the way really spend because wouldn't it be great if we go public right after labor day then five weeks later we can come out with q3 financials which show massive growth and so let's goose the growth now yeah yeah so i think dan you had reported something's got to happen by

thanksgiving because they're gonna hit i overstated it i i i heard by thanksgiving uh but apparently they would have been out of cash by the end of next week although it is unclear how much of that's related to severance etc they were gonna have to pay to these thousands of people they're laying off but yeah they they were they were almost out of money they need money so yesterday as we sit here the outcome of this is announced softbank is acquiring the company without acquiring without actually no one can explain to me still including softbank so no one can explain so let's walk through what that package looks like so softbank is going to well first of all uh to get adam to step aside uh from the board position they are uh paying him 175 185 million 185 million dollar consulting fee a quote consulting fee which gives them three things

adam gives up his his super voting shares. Adam steps down as executive chairman. And those are the two official things. The unofficial thing is he votes for the deal. There's an alternative package and there's questions about how real it was, but there's an alternative package led by J.P. Morgan. It includes things like Starwood, Barry Sternlich, who's a serious real estate investor. There's an alternative package. There are people on the board who prefer that package because they think it leads to IPO quicker. But Adam, again, didn't give up the voting control. So Adam gets to decide and he takes $185 million bribe, which his people say is in the best interest of the employees because there's a tender offer as a piece of this, which we'll discuss. But yeah, they pay him off. And by the way, what a remarkable thing to learn. If you are an activist investor like Elliot, who spends

all this time, for example, with AT&T, like working with small shareholders and stuff to convince the board to maybe vote. I wonder if Paul Singer has ever thought, what if I just gave the independent directors $10 million each? Wouldn't that be faster, easier and buy their votes? It's unclear at this moment if that's illegal, because to be honest, from what I can tell him, so long as you can have a defensible fiduciary argument in this. he's gonna be a consultant to the company they're gonna ask his advice then we work is this legal and they said we can't tell and then said because no one really considered this right like i don't know like in the way he said to me what i said we also don't have anything in there what happens if we learn that like we work can actually work well on mars it's not in

the documents we didn't think about it i think the only guaranteed outcome here is that the SEC is going to have lots of job openings and guaranteed employment for a number of years, at least the New York office of the SEC. There's going to be a lot of unemployed WeWork people to go there. Let's go through the rest of the package because in addition to that $185 million consulting agreement, they are doing a tender offer of $3 billion. So to Adam and anybody else at the company. And investors at $19.19 a share, which goes back from a valuation perspective years, four years, three years. Right. So it's looking like about a billion of that will buy Adam's shares. Up to a billion. He doesn't necessarily have to sell it all. It's hard to imagine he won't, but in theory, he doesn't have to. So interestingly, you pointed on that

1919 number. That strike price, if you go back to the last time that the stock was valued around there, you brought this up earlier, was around 2014, which was around the time when WeWork had about 1,000 employees. So 14,000 of the 15,000 employees have been issued stock options that are underwater. It's what we think. I mean, as we discussed before the show, there's a, I mean, valuation stuff. There's a 409A valuation, which is what shares are really valued at. And that's different than the official price. So it's possible there's another 1,000 that, but even if you're slightly in the money, there are taxes on top of this, you weren't expecting this. So a lot of people might not have exercised options. And if you deal with this stuff, you realize that if you haven't exercised your options, you're actually paying a higher tax rate than people who did a year ago. And and I

have been told there's certain people who got actual stock grants, which is different than options just were handed stock, basically free in lieu of cash. I doubt that was very much, if that existed, those people are in the money. But look, no, most people who've joined WeWork in the last couple of years, who a couple months ago, honestly might've been taking out mortgages, might've been taking out loans.

Why wouldn't you, right? You've got a $49 billion company. Any bank would loan against that, or at least loan something against that. And they are two things. They get nothing out of that financially and thousands of them are literally going to be out of work jobs yeah yeah so they they don't get nothing for their stock and they don't even have paychecks they'll get some severance but not much really sad the last component of this deal is a 500 million dollar

loan um to adam i'm sorry this there's a couple more parts of this deal the 500 million dollar loan to adam personally from soft bankank Corp off of their freaking balance sheet. Which he will use to basically repay his loans to JP Morgan. And then a $1.5 billion investment at a share price of around $11. So somehow there are two different- And that values the company at $8 billion, I believe. I think in the end, Post Money is a little bit over 10, I believe. But think in the end, post-money is a little bit over $10, I believe.

But again, it is so convoluted, no one really quite knows. And I think at this point, you could say that the old valuation models that we use for most of these companies, right? It's the value of this, the Series A value. This, I think, is all just out the freaking window at this point. So this gets to the market discovery or the price discovery problem that I alluded to earlier. When you have only one party who can buy and the leverage keeps swinging all

over the place, they just keep valuing it up, down, up, down all these different places, depending on this specific moment in time. Yeah. There's,

there's no way to ascertain what the price should be because there's only one party that can and is willing to and keep buying. Yeah. It's wild. And, and then the final piece, because we kept saying that they've bought the company, except they say they didn't. They have a majority stake in the company, but they claim they will not control the votes on the board. And the way they say they get to that is they are going to significantly expand the board. But when you ask them, OK, what's the size of the board? And then most importantly, who's going to appoint those new board members? There are no answers. When you ask WeWork internal official spokesperson for WeWork internal, you ask her that.

She said she said to me yesterday, said, call SoftBank. I said, why would I call SoftBank if SoftBank is not the one who's controlling this? Call SoftBank. When you call SoftBank, we haven't either. I don't know if it was we haven't determined or no comment. But I mean, look, they're for whatever reason, they're claiming they're not controlling this, they're in charge. They should be. They own most of the company. They own most of the shares. And whether or not most of those board members are salaried SoftBank employees or not, they're going to be beholden to SoftBank or in some way related. Okay. So this is the last piece, which conveniently is acquisition category on this show.

Why is SoftBank doing this? Here's my thoughts there i think there are two reasons one i can't remember where i read but i didn't come up with this idea is uh syphius uh the committee on foreign investment in the u.s softbank is of course foreign entity they're a japanese company now they would be buying uh control of a u.s company they've had issues with syphius in the past so this just like short circuits that. That could be a risk to the deal. Say, oh, we don't actually own it, so we don't have to go through CFIUS. I don't think that covers, because even a minority state, for example, they had to go through CFIUS for their Uber deal. Yeah, yeah. So yeah, I don't think that's the real reason. I think the real reason

is I don't think they want to, pure speculation, I don't think SoftBank wants to consolidate WeWork's financials on their balance sheet. No way. Because, now remember, the balance sheet of this company is enormous liabilities of all these leases. SoftBank has a lot of debt that they have taken out at the corporate entity. Remember, they're a telecom provider. They have debt. That debt is basically junk bond rated status. They're one of the most highly leveraged companies that exist.

Look at it. They would make a private equity person blush. Exactly. And so now if they all of a sudden consolidate this balance sheet, jack up the liabilities on the balance sheet, that's going to torpedo their debt ratings at the corporate level. That's going to increase their cost of capital hugely. That's terrible for the company. So I think they're doing all these gymnastics to A, to avoid that happening. But then B, why do all these gymnastics then you get back to the vision fund and at this point i don't even think it's about raising vision fund too i think

it's about just trying to salvage vision fund one they can't let we work go to zero because the alternative here is we would die yeah we work is gonna die as you said in like maybe the jp morgan would have i mean look the thing that's interesting there's a bunch of i mean this is still a real business right this isn't you know i've seen oh this is the next theranos no theranos had a product didn't work this has a product that works it's still you know like go to any city there are people who walk went to work this morning to we work and not who work for we work lots of them they have real buildings those buildings still exist all that stuff there will still be thousands of employees left even after the massive layoffs obviously certain

facilities will close that are underperforming uh Obviously, expansion slows down. But it is a real business. I will say that the word soft bank isn't arbitrary, right? Soft is the software piece, right? I believe I'm a tech visionary. But the bank part is important, too. He is a financier. So the stuff you said about the balance sheet, that's all real. i will say that i will bet that softbank still believes long term there can be a business here the one thing about masayoshi son is that i've always found fascinating is he made an enormous amount of money uh in the dot-com boom huge money i saw him sitting next to bill gates at one point and he said to bill gates he said at one point he said in the late 90s i was richer than you he. He said, two weeks later, I was broke.

And that's true. And what happens to most people who went through that, the dot-com boom, Marc Andreessen always talks about how people who went through that are too risk-averse. That's true usually, you are, because you were so scarred by it. Masa went the other way. Masa decided to take all that risk again. And he caught the Alibaba train and he did great with it.

But like, and then he decided to go over the top. That's why he's so unusual. And I would say with this, he might look at it and say, things are really bad right now, but there is a business. I still believe in the thesis of the business. Maybe the management got away from us. If I can get in what I believe is relatively cheap and control this thing, maybe we can make a go with this.

So here's my attempt to put a bow on the whole thing, which is, you know, we talked about this in the Vision Fund episode. This is the largest fund of any type, any asset class raised ever, masquerading as a venture capital fund. Well, wait, that doesn't make sense. Venture capital funds shouldn't be bigger than private equity funds. Is this an unmasking of the Vision Fund for what it is, is a private equity fund. And when you look at this, gosh, they just made a $1.5 billion equity purchase that now has them owning a majority of the company. Oh, and they levered $5 billion of debt on top of it. Wait a minute. I've seen this playbook before. And they paid a CEO to go away, which is a very private equity leverage buyout thing to do. Totally. So now all of a sudden, yes, you've now taken out

the timeframe of which they're going to realize returns on this asset. But if they can turn this around, turn it into what it does still have the potential to be, not the same kind of business everyone thought it was, but a good business and a big one with real estate assets all around the world. Well, now maybe they just saved the Vision Fund. I mean, I will say, though though there is an ongoing question of why they didn't let jp morgan do the bailout like i almost get the sense that jp morgan looked at this and said with softbank's deal all right if you want this problem your problem take it like i i it was almost like a hot potato i don't quite understand why softbank was willing to catch that well because again jp morgan was gonna now you could argue it would have been too much debt and

the company would have sunk under the debt. You could make that argument. But it was money. It was money. It was lifeline. It was runway. This brings us to what we normally call what would have happened otherwise. This episode, I'm going to call the bizarro world we work. We've got this comp.

It's IWG. Last year, they did $3.3 billion in revenue. This business ends up looking a lot like we work at maturity. That was profitable, $200 million in operating profit. Their market cap is about $4.6 billion. So we're getting close to the neighborhood of where you're basically buying a business that looks like IWG. You run that for a while, it's going to be profitable for you. So look... Hey, great private equity pickup. Exactly. Exactly. Exactly. All right. Well, let's bring this home.

So WeWork is in a place now where they have $6.5 billion in the company, some debt, some equity. We sit here today. We will see if that is enough to have them figure it out over the next year, maybe IPO at some point. We don't know what the future will hold. What we're going to grade here today is SoftBank's pseudo acquisition here of WeWork. Woo! what we're going to grade here today is SoftBank's pseudo acquisition here of WeWork. Woo.

I'm going to give them a, a, a B minus. The, the, the low part is for why exactly, again, I think they should let JP Morgan probably take it,

but man, they were creative. Like you, you deserve something for like, you might've gotten to the wrong answer, but you got there in a fascinating way. You really can't knock the hustle here. No. And by the way, remember they but you got there in a fascinating way. You really can't knock the hustle here. No.

And by the way, remember, they wanted control of this company a year ago. They got it, even though they didn't officially get it. They got it for a lot less money, too. So SoftBank Corp has put in the $2 billion from earlier this year, and now another $1.5 billion in equity capital. So the corporation themselves outside of the- Well, plus the $3 billion tender. that's equity. They're buying from shareholders, but that's new equity they're buying. Good point. So they've spent, what's that? Six and a half billion dollars

to own a majority of this company. Now, the Vision Fund poured $8 billion in and the business isn't even worth the combined amount of that. But if you look at what SoftBank did, they made a bunch of management fees off the Vision Fund and paid $6.5 billion to own an asset that's probably worth about $6.5 billion. I'll give one counter, so maybe I would give a lower grade would be, it's unclear who runs this.

They've spent a lot of money without having a CEO. There's these co-CEOs who are there, Sebastian Gunningham and Artie Minson, who we talked about earlier it remains unclear if they are staying or not uh maybe they're getting a good deal of cash to stick around that's unclear they've put marcello clara the ceo of sprint in his executive chairman which is mind-numbingly strange mainly because masa said well we're gonna originally we're gonna bring marcello in so we can figure out what's really happening inside the company again you had you had two directors. What were they doing?

And why do they still have jobs if they couldn't figure those basics out? But Marcelo is a telecom guy. Do they believe these two are the right horses or not? That's unclear. It's a lot of money to spend without knowing who's really going to be running it in six months. I'm in for your B minus. David, where are you? It's so hard to conflate, I think, just like this story has illustrated, all of these series of decisions along the way by everybody involved, many of which decisions were terrible decisions. I think it's why in the beginning we framed this as like, this is a tragedy like this is the sum of the system that has created this so now if we're to grade specifically this decision by softbank um i think there's if you're on the fence take employee sentiment into it they have to own this thing and they have some very angry people working yeah yeah so i yeah i think i'm in for the b minus for slightly different reasons

which is the reason it's that high is this is a save like because this was going to go to zero if maybe the jp morgan thing would happen maybe it wouldn't so it's saved but on the other hand there's a very strong case to be made that this is throwing good money after bad uh so um you know and that's that's never a good position to be in so yeah b minus there we are we'll check in in a year or so i'm sure we will well if the cash lasts that long listeners thank you for going on this journey with us um dan where can listeners find you? Oh, at axios.com. You can get my daily Prorata newsletter at signup.axios.com

or just type Axios Prorata into your podcast thing because we've got a daily podcast as well. And I will say Prorata is excellent. Like much of the details that we've gotten over the last few years about this company

have been that Prorata is the first thing that I read when I wake up in the morning. So thank you for doing that. Appreciate it. It's the first thing I write when I wake up in the morning. Awesome. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring, Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple.

Yeah, Vanta is the perfect example of the quote that we talk about all the time here on Acquired, Jeff Bezos, his idea that a company should only focus on what actually makes your beer taste better, i.e. spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. It plays a major role in enabling revenue because customers and partners demand it. But yet it adds zero flavor to your actual product. Vanta takes care of all of it for you. No more spreadsheets, no fragmented tools, no manual reviews to cobble together your security and compliance requirements. It is one single software pane of glass that connects to all of your services via APIs and

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