ColdFusion - WeWork - The $47 Billion Disaster

Starting point is 00:00:00 Does WeWork's implosion pose a systemic risk? The company went from a $47 billion valuation to near bankruptcy in just six weeks. It's been kind of a phenomenal story to watch. WeWork is facing a cash crunch at its current burn rate of $700 million a quarter. It's probably going to run out of money by the first half of next year. How and what is this company going to do if it doesn't hit the public market and raise that money? Hi, welcome to another cold fusion video. The idea of a modern-day tech company is shrouded in glamour, casual dress, cutting-edge tech,

Starting point is 00:00:35 and a collaborative atmosphere which frees workers from mundane pigeon-hold work. This dream is exactly what WeWork sells to people. WeWork rents out co-working offices to freelancers, small business owners, and even some tech giants. The company was an exciting, fast-growing startup on course to issue an IPO in September 2019. Valued at $47 billion, things were going great for Wework, until people started looking into the company, and more importantly, their founder and CEO, Adam Neumann. From a failed IPO to a disgraced CEO, let's take a look at the story of Wework. A premature pseudo-tech giant, which could be falling apart right in front of our eyes. Co-working has been around since the 90s and had been growing in popularity.

Starting point is 00:01:37 since 2005. Writing on this wave, We Work was founded in 2010, though what made the company popular right from the start was their ability to tap into the market and sell an idea. Open spaces, collaborative areas,

Starting point is 00:01:53 it was hip and fresh. It didn't look or feel like a traditional office. They focused on community, drawing from their founders' experiences of growing up in communal living spaces. They frame themselves as a tech company, employing data analytics tools and other smart tech to improve the efficiency of their spaces. This led to an understanding of exactly how people use their spaces, where to build next and how the spaces should look.

Starting point is 00:02:18 WeWork found themselves a target market and grew quickly. The company received some big backing from investors such as Goldman Sachs, J.P. Morgan and SoftBank. Even Amazon invested in WeWork this year. In total, WeWork secured $14.2 billion in funding since 2000. Though low interest rates made it easy for investment firms to pump cash into growing companies. One of these cash pumpers was Masayoshi Sun, the CEO of SoftBank. He manages a $100 billion Vision Fund. We've covered Sun and his SoftBank company in a previous video.

Starting point is 00:02:54 His rags to riches story is really amazing in itself, and I'll leave a link for that below. Sun had made perhaps one of the greatest investments of all time just a few decades earlier when he gave a young Jack Maher $20 million to fund Alibaba. In 2017, Son famously met with Adam for just 12 minutes before deciding to invest $4.4 billion. Son had found a new apprentice in Adam Newman, and in Son, Newman had found a mentor. But Sun's belief in Newman, while it gave way to his rise,

Starting point is 00:03:25 might also have been part of the reason for his eventual downfall. Over the coming decades, WeWork used money from its investors to amass 847 locations, across 123 cities globally. In fact, WeWork was Central London's biggest office occupier and also the biggest private office tenant in Manhattan. But Adam Newman had bigger dreams for the company than just renting office spaces.

Starting point is 00:03:54 Rebranding as the Wee Company, along with WeWork, is also We Live, essentially renting furnished apartments. And more interestingly, We Grow, which in its own words is a, quote, conscientious entrepreneurial school for young children with tuition fees between $22,000 and $42,000. The school is again in its own words, quote, committed to elevating the collaborative consciousness of the world, end quote. We Grow is run by Rebecca Newman, wife of Adam Newman, and cousin of Gwyneth Paltrow. The so-called founding parents testify about the school's intangible strengths.

Starting point is 00:04:32 I see many schools that are very established, but the big issue with those schools is that they're behind. We grow is teaching the children how to adapt to the rapidly changing world around us that we all see. But all of this apparent success had an air of doubt around it. WeWork had secured funding. They grew into a giant, but they hadn't made a profit yet. Nevertheless, after Uber went public in May, WeWork became the most valuable venture-backed company in the United States. Now, it's not uncommon for a tech company to take a while to return a profit.

Starting point is 00:05:09 But WeWork, although it likes to think of itself as a tech company, really isn't. WeWork is effectively a landlord. They don't sell technology hardware or software. They simply rent office space. They use technology to make more effective business decisions, but these days, most companies do. And therein lies the main problem with WeWork.

Starting point is 00:05:29 How is a landlord company supposed to make explosive returns and growth like that of a tech company. Beneath the facade of a successful tech company lay the true story. A story of a company who hadn't yet turned a profit but was being hailed as a titan of industry and a founder who got drunk on the allure of being a pioneer. If you have a business that's mission driven, you will attract the best people. If you attract the best people, remember this. You have to treat them the way you want to be treated. You have to take care of them. I know today and I did not understand this in the past that the most important thing in our business and in every business are the employees and the people making it work every

Starting point is 00:06:10 single day. One reason that investors began to look critically at WeWork was that there was an obvious and inherent risk with the company's business model. WeWork engages in an average lease of 15 years with a landowner. This means that WeWork pays a fixed amount each year for the land lease. The company then charges people to use the space. If occupancy is high or property prices increase, then WeWork makes money off the space. However, if occupancy dips too low or property prices fall, WeWork can't charge as much,

Starting point is 00:06:46 yet they still have to pay the agreed lease. Hence the company would be bleeding money. To counter this, WeWork has a company structure of subsidiaries, which holds specific leases in different areas. That way, if one subsidiary has to fail, It doesn't propagate to the rest of the business. But many people still believe that WeWork wouldn't be able to sustain themselves in the midst of another financial crisis or similar crisis where fewer people are willing to rent co-working spaces. And besides all of this, massive cracks have appeared in the company.

Starting point is 00:07:24 The cracks became apparent to investors as WeWork was prepping for an IPO for September 2019. The problems all started in January with SoftBank, a major investor in WeWork. They backpedaled on a proposed $16 billion stake in the company, reducing that figure to just $2 billion. This was blamed on a dip in SoftBank's share price, but some people were concerned that SoftBank was rethinking WeWork altogether. So as WeWork began as IPO filings, investors were keen to see what all the fuss was about. During the process for filing for an IPO, a company is required to disclose a lot of information to potential investors. This means financials, business models, disclosures, among other things.

Starting point is 00:08:08 The company goes quite literally from private to public. And this was where the suspicion of the $47 billion valuation arose. Internal documents from Weirworks IPO filings revealed that it was losing more than $5,000 per new customer. This was a terrible look for a company. As more details came out, the company's value had dropped by nearly 80% just this year alone. Many blame the financial situation, but also there's many doubts about the company's founder and CEO, Adam Newman. To give you an idea of Adam's character, he trademarked the word we, then had the company pay him $5.9 million in licensing fees.

Starting point is 00:08:50 The Sydney Morning Herald has also called him the newest, most hated man in America. You're in a business where you're going out and you're securing long-term leases where you have a long-term expenditure. and you have very short-term revenue obligations, $650 a month. And the criticism goes something like, wait till Adam sees a downturn. How do you respond to that? What value do you drive by actually going and telling the world what works and what doesn't work about another company

Starting point is 00:09:21 that you have no access to their numbers? You probably don't understand a business model. But if you're just going to express an opinion about something you might not know a lot about, especially if that person is buying something from you, don't do it. Adam Newman moved to the United States in 2001 and after a time in the Israeli Navy

Starting point is 00:09:41 he studied business in New York. His business venture before founding WeWork was a failed baby clothes company called crawlers that made pants with knee pads for crawling babies. Adam Newman is an interesting character. He has the typical confidence to dare to do anything the attitude of any Silicon Valley founder despite being from New York.

Starting point is 00:10:03 But Newman, wasn't your typical startup founder in many other ways. As interest in the IPO grew, so did the list of reports of not just about WeWork, but about Newman himself, from his use of drugs and alcohol to his tirades in the workplace. It was as if Newman lived in an alternate reality, a reality, perhaps, fed by those around him. Ashton Coucher and Newman were close, even pitching a Shark Tank-style idea to a TV network, but it was never picked up. But perhaps it was Masayoshi's son,

Starting point is 00:10:37 who gave Newman an untouchable status in the tech world. Sun would proclaim that, quote, we work is next to Alibaba, end quote, and also telling Newman, you need to think bigger. With the confidence of having such a figure believe in you, who else could tell you otherwise? Newman wanted his staff to work hard and play hard. Adam said that he likes how alcohol brings people together.

Starting point is 00:11:06 During executive retreats, extravagant cases of a hundred and ten dollar a bottle tequila, were reportedly always within reach. It was said that the drinking at these retreats started in the morning. In 2016, several weeks after Newman fired 7% of his staff, he held a company-wide meeting, but not just any meeting. After telling the staff that the cuts were necessary, he brought out trays of tequila shots

Starting point is 00:11:29 and then brought in a famous rapper from the group Run DMC to perform. Newman and some of his staff danced, while others stood around bemused. According to friends and former executives, there was a case of Adam Newman trying to smuggle cannabis into Israel, a country where it's very much illegal. On one trip on his private jet to Israel with some friends, upon landing, the flight crew found a stash inside a cereal box. Realising that they'd been tricked into international drug trafficking, the pilot and crew immediately flew back, leaving Newman stranded in Israel. Adam Newman also liked to smoke before meetings and on private plane trips. Like many other founders, he's also not a fan of a suit and tie.

Starting point is 00:12:12 He preferred to walk around the office barefoot. Newman would call a personal trainer to visit him in the office for a midday boxing session, then would continue about his day, walking around the office covered in sweat. Speaking of his office, he had a private office with his own meditation room, complete with beads, a whiteboard for his free-flowing ideas, and a large, apparently photoshopped image of him surfing. But if all of that wasn't enough, Newman was also very impulsive. On a video call with his executive team, he ordered a company-wide ban on meat,

Starting point is 00:12:42 leaving the team to scramble together to figure out how to enforce the ban, yet former employees say that they've since seen Newman eat meat himself. Other times, he proved to be a tyrant, raging through the office. A former employee testified, quote, No one wanted to get in his way. He either got berated or humiliated or asked to do some impossible task, end quote. One time, he called a meeting to demand the manager responsible, for buying a new coffee machine without his approval to step forward.

Starting point is 00:13:13 A number of his close friends and family hold executive positions within the company. Sometimes, according to an employee, they'll sit in on random meetings and leave without saying a word. There are currently three lawsuits against the company, one for age discrimination and two for sexual harassment. But aside from the parties and non-traditional approaches, it was Newman's financial dealings that had the investors skeptical. He collected rent on properties that he owned himself from WeWork, somewhat of a conflict of interest. He also borrowed hundreds of millions of dollars from WeWork at interest rates below 1%. He purchased a $60 million company jet, despite the company losing $1.6 billion that year. He also sold hundreds of millions of dollars of company shares over the years.

Starting point is 00:14:00 It seemed like he didn't have any confidence or care about the company's future. As report after report came out, Newman must have known. that he was in damage control. Investors were unanimously slamming WeWork as a bad investment, and reports about Newman's character began filling the headlines. The IPO was put on indefinite pause, and Newman was forced out of the company and had to resign as CEO. That $60 million jet that Newman bought also has to go. Shocking to many, Newman will still walk away from the company he founded with $1.7 billion, while many thousands of the company may lose their jobs. Also, in the end, SoftBank reportedly would have invested $15.4 billion in the WeWork disaster,

Starting point is 00:14:45 more than the gross domestic product of Jamaica. I still want to invest more and I want to increase. Some of my investors say, Masa, you get too excited. And too much concentration into one company, don't go too far too much. WeWork is in a tough situation. The business model is risky. It hasn't turned a profit. And investors just forced out the company's charismatic yet reckless founder and CEO.

Starting point is 00:15:20 The company is fast running out of cash and in dire need of investors. This resulted in a $5 billion investment from SoftBank in October 2019. And now SoftBank has control of the company. For WeWork to restart their efforts towards an IPO may prove to be just as difficult as fixing the damage Newman has caused. It's a very real possibility that WeWork could be heading to bankruptcy court. That would be a catastrophe of epic proportions. In pure dollar terms, the fall of WeWorks valuation is right up there with all-time value destruction champions like Enron, WorldCom, and Lehman Brothers.

Starting point is 00:15:59 Not only this, but Eke could shake the very foundations of the concept of investing in a unicorn company. These investment banks should have known better. We've seen people fall victims to these charismatic types before. This house of cards was coming down. This is a failure in misunderstanding what the marketplace is. Find me another example of creating a company that loses 50 cents out of every dollar of revenue. And explain to me how that works. He needs to think about what's best for the company at this point.

Starting point is 00:16:31 And I don't think it includes him. It hasn't been a good time. Uber, Lyft, Slack, Dropbox and Beyond Meat are all trading below their IPO. prices. Fitbit traded $50 a share after its IPO in 2015, but when it was recently bought by Google, it was only just $7 a share. But what makes the WeWork disaster so interesting is that it never made it to the public markets. It seems that people are no longer willing to buy the hype of IPOs. Of course, the number one casualty of the WeWork disaster has been Masayoshi's son, the chairman of SoftBank. He's lost billions.

Starting point is 00:17:10 but not only that, his reputation as an expert investor may be damaged. And finally, in all of this, there's one major cloud hanging over Wiiwork and it's something outside of their control. The health of the financial markets themselves. To explain it briefly, there's a problem in the repo market. The repo market is basically the mechanism that keeps the whole financial system running on a daily basis. On Tuesday, September 17, 2019, there was a catastrophic failure of some kind, and till this day, no one in the public can really be sure what it was. But as a result, up to $100 billion a day has been pumped into the system to keep it going.

Starting point is 00:17:54 If you look at the balance statements of the New York Fed, mortgage-backed securities made up a significant portion of these funds. It would seem like there's a problem in the real estate sector once again. If this is indeed the case, another real estate downturn would obliterate wework in the blink of an eye. That model has gone bankrupt multiple times before. What happens is you arbitrage the risk of short-term leases with long-term debt. So you go buy a building and put debt on it. When rates go up and there's an economic slowdown is in a recession, you go bankrupt. So no, I won't be investing in that.

Starting point is 00:18:28 If you invest in that, you should realize that's another money loser right now. No matter the outcome, it doesn't look good for WeWork as it stands. Time will tell with the WeWork story. So there you have it. That's the story of how a company went from being valued $47 billion and hailed as a startup poster boy to having to cancel an IPO and forcing their erratic CEO out. And it's a story that could cause a shift in how we view IPOs. That's the story of WeWork so far.

Starting point is 00:18:59 Next week in the next episode of Cold Fusion, we'll be taking a look at the popular app TikTok. You might not know, but it's now the number one social media app in the world, and the company behind it is the most valuable private company on the planet. If you want to see all of that and more in the next episode, definitely subscribe so you don't miss it. So thanks for watching, I really appreciate it. Don't forget to check out the Cold Fusion podcast, and also follow me on Instagram and Twitter. Anyway, this has been to Go-Go, and you've been watching Cold Fusion, and I'll catch you again soon for the next video.

Starting point is 00:19:32 Cheers, guys. Have a good one. Cold fusion. It's new thinking.

ColdFusion - WeWork - The $47 Billion Disaster

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