ColdFusion - Will Adam Neumann Fail Again? ($1 B Value, No Product!)

Starting point is 00:00:00 This episode is brought to you by CuriosityStream. Hi, welcome to another episode of Cold Fusion. Adam Newman, the infamous founder and former CEO of WeWork, is not a new name to the startup industry. So sensational was the story of his rapid rise to stardom, an equally abrupt fall from grace in 2019, that it attracted a myriad of headlines, inspired books, and even a television drama, aptly named We Crashed, starring Jared Leto and Anne Hathaway. It's as if people couldn't get enough of him. But now, he has attracted another storm of headlines

Starting point is 00:00:37 with the announcement of his new company, backed by a $350 million investment and valued at $1 billion before it's even launched. In today's episode, we'll take a look at what Adam has been up to after the We Work disaster and also his latest business venture. Before talking about Newman's new startup

Starting point is 00:01:00 called Flow. Let's take a brief look at what happened while he was at the helm of WeWork. At its peak, WeWork was valued at a staggering $47 billion. It was touted to revolutionise the commercial real estate market in the co-working office space by, quote, elevating the world's consciousness. End quote. Everyone rode on that hype and all was well. This was until a series of disastrous events led to the eventual downfall just before the launch of its much anticipated IPO. We've already covered the full story in a previous episode, but to put it briefly, Adam Newman's work-hard and play-harder attitude got the better of him. He burned investor money on parties, and the cost of the alcohol supply, quote,

Starting point is 00:01:44 could have covered most of an entry-level we-work salary, writes Reeves Wideman in his book, Billion Dollar Loser. In addition to this, he often rocked up to meetings smelling of weed. Now what you do in your own personal time is fine, but maybe not while you're trying to run a company. He was also known for his outrageous behaviour, from spraying new investors with fire extinguishes, to throwing picnic furniture into a bonfire at a we-work employee's house. And this wasn't to mention he treated his own employees poorly. A lawsuit was filed by a former employee stating that she was sexually assaulted at company events,

Starting point is 00:02:18 and she blamed the companies, quote, entitled Fratboy Culture that permeates from the top down. Newman's business dealings were also shrouded in controversies as well. He made millions of dollars by leasing multi-easing multi-reveillance. properties in which he had an ownership stake back at WeWork. And how could we forget? He infamously trademarked the word, We, and sold it back to his own company for $6 million. So after seeing all of this chaos, investor, SoftBank,

Starting point is 00:02:45 pulled back their $16 billion stake in the company. WeWork's valuation plummeted to $8 billion. Board members grew weary, and the company's IPO was eventually postponed. After this, Adam Newman was kicked out of WeWork. He wasn't to leave empty-handed, though. he was given a golden parachute deal with a lovely payout estimated to be 1.7 billion. According to the Wall Street Journal, Adam still owns $2 billion worth of Weirc stock today. After his exit from Weirwork, Adam Newman and his wife, Rebecca Paltrow Newman,

Starting point is 00:03:19 retreated back to Israel where they're originally from. He did not, however, stay in hiding for too long. According to Forbes, he was back in the Hamptons in the early half of 2020 and soon started offloading some of his real estate assets in multiple locations, worth approximately $69.65 million. After cashing in from selling his real estate properties, he and his family office, 166 Second Financial Services, began quietly acquiring a vast multi-family real estate portfolio.

Starting point is 00:03:48 According to the Wall Street Journal, entities that are tied to Newman purchased majority stakes in more than 4,000 apartments across the country. These holdings are valued at more than $1 billion. So, it looks like Newman is quietly taking stock and building up towards something, But why? Well, this buying spree of real estate assets can be seen as a clever way to offset the taxes of his WeWork exit package worth $1.7 billion, but something bigger may have been at play.

Starting point is 00:04:16 Adam Neumann may be gearing up for another, quote, revolutionary business. Now, fast forward to August of 2022, and Adam Neumann just announced his latest startup, called Flow. While WeWork, his previous foray, was into the commercial business. real estate market. Flow is attempting to transform the residential real estate market. They aim to do this by, quote, giving renters a sense of security, community and genuine ownership, end quote. But if like me, you're wondering exactly how, that information remains sparse. It's a business model that's curiously secretive and somewhat controversial. But we do have some clues. We'll come back to this controversial part later. Their website is just a bare-bones splash page with a tinge of 70s design.

Starting point is 00:05:05 Interestingly, the lack of information didn't stop them from securing $350 million in funding. The funding came from the investment firm A16Z, also known as Anderson-Horowitz. This gave flow a valuation of $1 billion even before it officially launched. It's an astounding amount of faith to put that amount of money behind something that doesn't even exist, let's alone a company being run by Adam Newman. A16Z led the way and invested in companies like Facebook, Pinterest, Groupon, Slack, Lyft, and many others. It's safe to say that they've cemented their place in the ruthless VC world of Silicon Valley. And yet, shockingly enough, this $350 million investment was their largest check ever.

Starting point is 00:05:51 ...flowing into Adam Newman's new company flow. The former WeWork CEO and co-founder receiving a a $350 million check from venture capital firm and Dresen Horowitz. It's the largest check the firm has ever written in a funding round, according to the New York Times. That brings flow to a billion dollar valuation pre-launch. The business aiming to disrupt the residential real estate market by creating a product consistent with service and community features. So there's a major question here. Why take such a big risk?

Starting point is 00:06:23 Well, Mark Anderson, the co-founder billionaire of A16Z, wrote, in his recent blog post titled, Investing in Flow. Quote, We love seeing repeat founders build on past successes by growing from the lessons learned. For Adam, the successes and lessons are plenty,

Starting point is 00:06:39 and we are excited to go on this journey with him and his colleagues, building the future of living. Adam returns to the theme of connecting people through transforming physical spaces and building communities where people spend most of their time, their homes. Residential real estate, the world's largest asset class,

Starting point is 00:06:56 is ready for exactly this change, end quote. And to clarify by change, he meant, quote, to rethink the housing rental market by creating a branded product with consistent service and community features, end quote. Now keen viewers would remember that Adam Newman has tried to do something like this. He called it, we live.

Starting point is 00:07:16 He came up with the idea at the same time as we work. And by the way, we live only opened two locations and failed to get off the ground. So right now, the United States is going through a housing crisis. Renters and would-be homeowners across the country are facing spiking rental prices and increasingly steeper barriers to entry, respectively. A rising interest rate environment is also complicating things. Mark Anderson, the co-founder of A16Z, is very much aware of the problem himself. In 2020, he wrote an essay called It's Time to Build. But when it came to

Starting point is 00:07:52 the issue of combating the housing crisis in his own neighbourhood, he stood in opposition. As the Atlantic reported, he and his wife had submitted a public comment arguing against a proposed multifamily housing plan in their town of Arthetton, California, which is also the most expensive zip code in the US. So, on the one hand, Mark Anderson gives a passionate 2020 essay about solving the housing crisis and then backs Adam Newman's real estate venture. But he himself doesn't want to solve the problem in his own backyard. That sure is interesting. It could just be that maybe this implies that he doesn't have people's best interests at heart. Okay, so remember when we said there might be a controversial part to Flo's secret of business model? Well, let's take a deeper look into that now. So Adam Newman did not only amass a huge portfolio of real estate assets,

Starting point is 00:08:43 but also invested $20 million into a New York-based company called Alfred. This made Newman the lead investor. According to Forbes, Alfred's business model is extremely similar to what Flo is proposing. So what is Alfred and its business model? Alfred was co-founded by two Harvard Business School classmates, Marcella Sopone, and Jessica Beck. It started as an app-based concierge-type service provider, which targeted busy millennials in the urban area. It provided services like pet care, grocery pickup, dry cleaning, laundry and so on. Later on, Alfred decided to move to upscale areas and partnered with landlords to provide the same services but with higher profits.

Starting point is 00:09:28 But this wasn't the end of the evolution. Soon, Alfred's management realized that using software to manage properties makes more sense. Additionally, if they could add property management expertise to the equation, it would be vastly more profitable and provide an all-encompassing package. This realization came after they participated in an experiment in Connecticut, where Adam Newman owned several of the buildings. According to their website, Alfred now provides a residential management software that, quote, gives owners and operators a unified platform to support all aspects of residential living. The company began to grow, and they acquired a property management firm, RKW, residential, which is already managing 30,000 homes.

Starting point is 00:10:10 Alfred was no longer just a small startup providing concierge-type services with its app. It was now a property manager as well. Alfred now manages 20,000 units and has over 300,000 US residents using its technology and services. And guess who was the lead investor and had two board positions? Adam Newman. At this time, he began to distance himself from his own portfolio company. If only there was an easier way to make money in the real estate market, perhaps by providing services and property management software, just like Alfred.

Starting point is 00:10:42 It would be too messy to buy up the company outright, so in 2021, Newman secretly acquired another startup called Carson Living, one of Alfred's direct competitors, they were both doing the same thing. The acquisition has mostly been kept under the radar, but one of Carson's former investors suggested that the founder of the company is now working for Adam Newman on one of Flowe's products. It seemed like, as a major investor, Newman quickly realized the potential of what Alfred was doing, and he wanted some of that money for himself. Besides, he's no stranger to the real estate market, nor did he lack any experience.

Starting point is 00:11:15 in building a multi-billion dollar company. Then it probably comes to you as no surprise that the New York Times has speculated that Flow is presumably going to offer concierge-type services and facilities and management services to Adam Newman's vast property portfolio and third-party landlords, the same business model as Alfred. It also raises a few questions on the moral standing. That being said, it is still early days, though. Flow is yet to be launched.

Starting point is 00:11:42 Many are speculating that it's just going to be an Alfred copycat. The media in general were an uproar when the news of Adam's return broke. From journalists to tech experts, almost everyone unanimously condemned A16Z for backing Adam Newman in his quest to redeem himself, and rightly so. As reported by the BBC, Alison Byers, founder and chief executive of Scroobius said, quote,

Starting point is 00:12:09 There is a reason why this is making such waves, because of the size of the check, because of the unprecedented funding of somebody who has been popularized as an immoral, business person, it creates a more emotional reaction. The size of the deal is undeniably colossal. $350 million at the pre-seed rounding and the valuation of the company worth north of $1 billion does turn a few heads. It also brings back the decades-old controversy of biases surrounding venture capital firms.

Starting point is 00:12:39 NPR showcased their concern on a recently published article titled, quote, $350 million for The WeWork co-founder shows how broken and biased venture capital is. It's not all doom and gloom for Newman though. There are some tech experts and VCs who have taken kindly to the news. According to Rare Breed Venture's founder, McKeever Conwell, it's not shocking that Newman is back and his new big idea got the funding as well. It's more of a norm than an exception in the startup world. He notes that successful founders tend to find their feet in their second, third or fourth

Starting point is 00:13:13 trying. And as a side, we work eventually did manage to go public after Newman's exit. It's somehow still operating under new management, albeit poorly. Early investors still got paid a good amount of money. And that's probably what A16 Z is banking on happening too. They think this guy can generate cash. Conwell went on to say, quote, at the end of the day, we as VCs are essentially money managers, were glorified financial advisors, we take money from rich people or groups that have large pockets of capital. Our job is to make them more money. He continued, our job is not necessarily to care about ethics, morality, systemic racism or financial inequalities. There are many VCs who care about that, but that's not the job. So, for better or for worse, Adam Newman sure does know

Starting point is 00:14:03 how to attract people's attention. In terms of business, he has very little ethics, but does manage to track investment. We'll see how this goes, but he's off to a rocky start to say the least. Flow is going to launch in 2023, though before it opens its doors to business, it's literally just all smoke and mirrors. Only time will tell if Adam Newman is able to change the narrative in the future by disrupting, quote, the future of living. So there you have it. Whether you like it or not, Adam Newman is back. So what do you guys think? Do you think his new company, Flo, will be successful? Do you think the investment firm A16Z was right in throwing $350 million at a project that doesn't exist? Let me know your thoughts in the comment section below. So I've got some very

Starting point is 00:14:47 interesting topics planned next for Cold Fusion, one of which is a lesser-known story about an electric car made by General Motors back in the 1990s. The car was futuristic, quick and quiet. Consumers loved it and it was decades ahead of its time. But in a bizarre twist, General Motors killed the project. They shipped all the cars out into the desert and crushed them. So why on earth did this happen to such a seminal piece of technology? Well, you can watch the episode and find out. If you want to see it right now, it's on the streaming platform, Nebula. Nebula is a streaming platform made by creators for creators.

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ColdFusion - Will Adam Neumann Fail Again? ($1 B Value, No Product!)

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