Front Burner - Why did WeWork fail?

Episode Date: November 10, 2023

WeWork was buzzy from the beginning. The coworking company was sold not just as office space, but a lifestyle. Its leader, Adam Neumann, not just as a CEO – but a revolutionary. Now, as the company files for bankruptcy, Eliot Brown, a reporter with the Wall Street Journal and co-author of the book The Cult of We: WeWork, Adam Neumann and the Great Startup Delusion, joins us to chronicle how the tech unicorn fell so far. For transcripts of Front Burner, please visit: https://www.cbc.ca/radio/frontburner/transcripts Transcripts of each episode will be made available by the next workday.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Damon Fairless. I'm Damon Fairless. Just over a decade ago, the sharing economy was taking off in Silicon Valley. Airbnb was founded, a few years later Uber, and then came WeWork.

Whatever your work is, we've got the space for it. With WeWork, you get smart flexibility, which means the workspace you need when and where you need it. If you need a desk, private office, or a full floor, we've got you covered. The co-working company made waves from Silicon Valley to Soho. The co-founder and CEO styled himself not just as a leader, but a revolutionary. When you go into a WeWork, if we did it right, there's an energy that you feel.

That energy is something that's hard to explain. And it's an energy of people doing their own thing while actually still being part of something greater than themselves. We like to call it the WeGeneration. And his company, WeWork, wasn't sold as a business model. It was a lifestyle. Space to start up. Space to converge.

Space to grow. Hire. If you call this place home, prep something to say. Because the world's waiting to hear it. But the success story quickly became a cautionary tale, one you've heard before. A charismatic tech disruptor, big promises, a meteoric rise, and an Icarus-like plunge. In just a few years, the man behind the vision went from being the guest of honor at tech conferences to the subject of exposés, a documentary, and a streaming series starring

Jared Leto and Anne Hathaway. The future of work looks different. We're selling an experience. We. We need a name. We. We live. We dream.

We work. Now, this week, after years of trying to recover from its founder's hubris, the office space co-working company has filed for bankruptcy. Elliot Brown is a reporter with the Wall Street Journal and co-author of the book The Cult of We, WeWork, Adam Neumann, and the Great Startup Delusion. He's here to take us through the company's astronomical rise and fall, the personality at the center of it all, and whether venture capitalists have learned anything in the process. Hey, Elliot.

Thanks so much for coming on FrontBurner. Happy to be here. Great to have you. Okay, so take me back to the salad days of WeWork. The business basically offers co-working space to folks, entrepreneurs, startups, freelancers. It doesn't sound super groundbreaking. What made it so attractive to investors? The short answer is the co-founder and CEO at the time, Adam Neumann. His skill, above all else, has been raising money and at that sort of raising money

from venture capitalists by painting some beautiful picture of something that really wasn't there. And so he convinced some of the world's top investors that WeWork was kind of a disruptive tech company that was going to remake the way we did work and raised over $10 billion from them to make it happen. So it's essentially a business that's signing long-term leases with landlords, renovating the space, renting it as a profit. And as you said, it's basically a real estate company dressed up as a tech company. How do they pull that off? Yeah. In the technical term, lease arbitrage. They're signing a long-term lease with the landlord and then, yeah, filling it with glassy offices and kombucha on tap and renting to tenants short-term, month at a time, for a higher price.

Honestly, you know, we spent a long time, years of my life sort of looking into this, almost with time, it gets harder to understand how he was able to make people see something that was so clearly just a kind of boring real estate company, like make them see a tech company. But part of it was just that that's the environment that we were in. bubble of frenzy, people really just put off critical thinking and sort of are thirsting to believe in something that can make them lots of money. I mean, selling something pretty basic for a lot more money isn't exactly a new approach for Silicon Valley. It's the ridiculousness of it's actually something that's been spoofed before on, say, Broad City. So SheWork uses the urban landscape for a fast-paced workspace with no boundaries. Huh. If Parkour is using the city as your gym,

SheWork is using the city as your office. I mean, it must have been a heck of a pitch, right? So, like, what is Adam Neumann, the co-founder, pitching? What's the sales pitch? Yeah, when I say it, it's not going to sound good because part of it is the way that he did it. But so, it's not going to sound good because part of it is the way that he did it.

But so it's basically like this isn't about office space. People are here because they're looking for companionship in a lonely world. The Apple generation, the iPhone's about I, but here at WeWork, we're about we. And, you know, a lot of buzzwords like that. From the first day that we started WeWork, it was about bringing people together. The point was to actually do something new, to humanize work. And, you know, if you think about it, 10 years ago, as social networks and these huge media companies were getting bigger and bigger, we were promised a world where technology was going to bring us together, was going to connect us.

Technology, for a lot of people, actually disconnected them. And WeWork was always about bringing people together. And now as we're seeing where the world is going, we feel that our message is stronger than it's ever been before. But basically just saying we're the only ones that could ever make such an energetic workplace and companies will just lust to be here. And our fastest growing category in WeWork is enterprise. And actually very large organizations are coming to us today, not just to redo their space, but actually to help them amplify

and then just make their culture a little better. And even if that were true, the reality is companies weren't paying extra to do that. They would just do it at anyone else, you know, offering a similar product. So yeah, it was sort of saying

some things that did help attract demand, but didn't actually lead to better economics to make it sort of worth all the money that they were worth. I was just looking back at some of the WeWork spaces, right? And so, you know, there's all these perks that tech companies at the time were kind of, you know, imbuing their offices with. So, you know, whatever, snack rooms, ping pong tables, that sort of thing. But it sounds like from what you're saying, aside from the physical business spaces, really it comes down to the pitch and really the pitches come down to Adam Newman, the co-founder and CEO of WeWork at the time. You've met him, you've talked to him. Just briefly, can you tell me about the guy? Who is he? What's he like in person?'t figure out how to use his MacBook and just hit play on a video. Then he quizzes me about why a real estate reporter should be interested in a company that had nothing to do with real estate. I sort of he name drops a few people and then then celebrities and then he says he likes me.

And he's like, you should write this piece on us. And we are a community company. And then, you know, opens the door and tells the whole office, everyone, this is Elliot. He's our friend. Give him whatever he wants. And, you know, I'm sure he does that to everyone who walks in the office. And you sit there and you just sort of he talks about the future and the way that in nine months they're going to open up in Portland full in within three weeks. And you sit there, you're like, wow, that's amazing. And then I left.

I was like, how would he know that? He can't know that. That's literally unknowable. It's in nine months. He's probably never been to Portland. And so this kind of oversized charm offensive personality really worked for him. Why? Yeah, this is, they were a hundred percent a product of, in creation of, of, of sort of Silicon Valley founder worship. And it's almost as though Adam

kind of studied the thing that was most likely to get venture capitalists to throw money at you. There's basically been in the past 10 or 15 years in Silicon Valley, this kind of meme that founders are these omnipotent beings. And it's really modeled after Steve Jobs and the mystique around him with Apple, where he sort of ran Apple, then got tossed out, then came back and saved the day. And, you know, the idea is only a founder can have real drive, not some buttoned up for hire CEO. So what that has done is it sort of led to a situation where the people with money are looking for kind of crazy, often explicitly crazy, hyper ambitious salespeople, because really they want somebody who can also sell a vision to

somebody else. And so that's effectively what Adam is. I mean, he is a salesperson above all else. Okay. So Adam Newman's making a lot of Kool-Aid and a lot of investors are drinking it up. So just for a bit of background, the first WeWork location opens in New York in 2010. By 2017, there's 200 locations around the world. And it's this Silicon Valley unicorn. And then by 2019, it's actually valued at $47 billion. So that's more than Airbnb, more than SpaceX at the time. What were Adam Neumann's plans for the company with all that success? They got so grand at that point. You know, they changed the mission statement to elevating the world's consciousness.

You know, he had wanted to sort of expand into owning real estate, which they did some of it into, you know, property management, where they would go into other people's buildings and sort of run what they did. Then they had all of these kind of distractions, effectively. They started a preschool, a holistic preschool with an entrepreneurial bench for three-year-olds and four-year-olds. And they wanted to spread that across the world. It's like as if somebody designed a school based on our wish list, a school that values vegetarianism, yoga, meditation, technology, entrepreneurship, farming. What else?

$63 million jet everywhere. They owned a stake in a weave pool company. So they wanted to have surfing, wanted to get into events. They wanted to have e-sports. So yeah, very grand ambitions at the time. And you mentioned the 60-something million dollar jet. So he and his wife, Rebecca Paltrow Newman, whose first cousin is with Gwyneth Paltrow,

they also hire a battalion of nannies for their kids, right? Tell me a bit more about their lifestyle in those days. I mean, it was insane. So, so yeah, they, they would have this, this trail of like an entourage that would just trail around them. So they had, uh, you know, I think it was like there's three nannies might've been more, uh, they had a hairdresser that they had multiple surf coaches, uh, who would go surfing with them at that point, the Newmans owned seven homes, one giant one in San Francisco that had a room shaped like a guitar in the middle of it.

They had two in the Hamptons. They were living extremely large. One of my favorites is they had a chase car that would drive around after Adam because he'd always just sort of end meetings in the middle of a car and tell the person to leave. And so one person he was meeting with on a Long Island expressway, they were stuck in traffic. He says like, okay, go get in the chase car. The person goes out and then finds the wrong car and gets in. And the car's like, what are you doing?

Wow. The other story that I'm trying to recall is that that private plane was basically just a big smoking tube of weed. There were an enormous number of private jet party stories that we came across. On one flight, they got so much filled with so much smoke that the pilots had to put on the oxygen masks. There was another that was dramatic where they flew to Israel with marijuana, put it in a cereal box. The owners of the plane, Gulfstream, found this, realized it's a problem, recalled the plane, and then Adam had to take a different private jet home. Okay, so we've got this company that's expanding like crazy. It's going off in these fairly quixotic directions, but also this kind of like, you know, old school rock and roll CEO partying lifestyle. So at this point, what does the board of directors do?

For the vast majority of the history, nothing at all, except sort of, you know, pass things unanimously. So you'd frequently hear about, you know, people on the board pushing back a little here and there, sometimes more than a little. But the reality is that at the end of the day, they would vote for everything. And this wasn't really unique to WeWork, except WeWork was just doing sort of dumber things with the money. But for instance, if you'd ask each of the board members individually, then I'd imagine they'd have said they were against the private jet. Well, if you have a majority of them vote against it, then you don't get a private jet, but it was voted for unanimously. So part of that is because, and this is again true of Silicon Valley culture,

the founder effectively controls the board. Half of them or more sit at his pleasure and they're scared of him. As an investor, what you have is a relationship with a founder. And if you get a reputation for being at a founder's throat, you're going to have trouble finding another good founder to back in the future and convince to take your money. So they want to maintain good relations. They don't want to vote against him. And Adam really does kind of control the show. Even if they ask questions about why WeWork is losing a dollar for every dollar it takes in and saying maybe we shouldn't keep spending like we're spending, it's Adam's choice at the end of the day.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people, and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo.

50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. So in 2019, the wheels start to come off a bit. How does that start? Where does it go from there? effectively double as much money to keep it going because all it does is lose money. So by 2019, he'd picked all the fruit off the tree of the private markets and needed to find a new place to go. And that was the only place in town was the stock exchange, the public markets where you can raise debt and equity easier. So they filed to go public. That means they kind

of have to bear all with their numbers and tell everyone about them. And the markets just balk. I mean, essentially reality set in. And people realize not only does this company lose just gobs of money, it's not clear when it will make money. It can't really explain what it does clearly. also has these just like large number of conflicts of interest with the CEO and the investors where he owns some properties and leases them to the company. He took out hundreds of millions of dollars with loans and stock sales. And so basically the market says no way. So the IPO, the offering also exposes some questionable business practices beyond what you've talked about. The one that really struck me was that Newman had trademarked the word we. Can you tell me about that? Yeah, he had a trademark for use of the word we in some ways. And he had taken it out years earlier with his own company.

And essentially, some lawyers at the company were like, oh, we need to transfer this to WeWork. Essentially, some some lawyers at the company were like, oh, we need to transfer this to WeWork. And it was so sort of let's get out of more money in the culture that they thought it would be fine for WeWork to pay Adam to, you know, six million in stock or something for this word. And obviously that should have been free. You know, you should have just transferred it without any cost. should have just transferred it without any cost. But because he was sort of so had set this culture where he should be paid for things, that's what resulted. Okay. So it's fair to say that the attempt to go public is a disaster. So what does WeWork do from there? So they're at that point, nearly insolvent. Adam gets, you know, pushed out as CEO. It came, I played a role in this, was writing a story, including with the pot in a cereal box anecdote among a huge number of other anecdotes about how he wanted to be the

world's first trillionaire and a bunch of other fun stuff, and send them the fact-checking questions. And that actually did play a role in essentially the board pulling the IPO and then moving to oust him. Because if the one thing he could do was raise money and convince people always to value them higher, and he couldn't do that anymore, he didn't have quite the same appeal. So he gets pushed out, he gets an enormous exit package, and the biggest backer, SoftBank, essentially doubles down on the company with a $5 billion loan package and pledging even more money after that. So SoftBank steps in, bails out WeWork, but then part of that is that Newman has to go. And did you say, how much would it take to get him to walk?

It sort of changed over the years and there was a lawsuit, but at the end of the day, he and entities he controls got about 700 plus million through stock sales and direct payments and another $430 million loan that may or may not sort of just end up in his pocket at this point. So the company has him out of the picture, but they put in a new CEO, Sandeep Mathrani in 2020. He's super different than Newman, right? How did that go for WeWork? Yeah. So instead of this sort of exuberant visionary Silicon Valley CEO, they essentially turned to the stereotype of a kind of bland real estate CEO. I mean, Sandeep is considered a smart guy, a good real estate operator, well-respected in the industry. And so he comes in, he starts February 2020. So it's sort of this plan to cut costs further and turn WeWork around with all the money SoftBank's

given so it can actually make money. And then the first thing that happens, the first thing we sort of realize about how COVID is affecting us when it sweeps the world is that we aren't going into work anymore. And so if WeWork's Achilles heel of its business model is that it is very susceptible to rapid changes in the office market downward. And meaning, to rapid changes in the office market downward. And meaning, if suddenly there's no desire for people to go into the office and you're renting an office from WeWork a month at a time, you're going to cancel that lease, that agreement, and WeWork is still going to be stuck

paying rent every month to a landlord. So it's probably not super surprising that the company filed for bankruptcy this week. What does it mean for the company? Is it the end of WeWork? Yeah. I mean, essentially, they almost made it. If COVID had not changed as much about the way WeWork as it did. They might have sort of muddled through, but especially in the US and Canada, which is where they filed, the office demand just didn't come back. So what they want to do now is restructure, not just turn off the lights.

They want to cancel dozens of leases. They filed for 69 already and a number in Canada, a ton in New York, I think 40 of the 69 and, you know, cancel uneconomic leases and, and, and shrink and, and then also cancel all their debts because they took a lot of debt. Um, and then hope that they can actually, you know, at different rates turn, you know, profitable in some locations. So we started the week on Monday talking about Sam Bankman Freed, founder of FTX. We're ending the week talking about Adam Neumann and WeWork. Investors are still getting just wrecked by these kind of characters. I guess I'm wondering, where does the next one of these guys come from, do you think? The market is changing.

I think both of them were products of a frenzy, and there's no longer a frenzy outside of kind of the AI world. So maybe that's one answer if I were guessing. But, you know, they'll come from somewhere again. I mean, this is, again, bubbles make people do really silly things. And in a hysteria, when everyone seems to be getting rich, you really just start to believe in people, in things that, you know, in Morse's day, times seem ludicrous. So just before we wrap up, I guess I'm curious. Adam Neumann walked away with a good payout, a sizable payout.

A billionaire. A billionaire. So how has he fared in all this sense? Yeah, I mean, his reputation has taken a hit. And certainly in popular culture, I mean, I think it's kind of well-known if you look at the comments on anyone's stories, whenever they write about him, it's well-known that he got rich while investors lost everything. And I don't think that's a, I guess it depends who you ask if that's a good thing or a bad thing. However, he has been able to raise new money and enormous amounts of it. He has raised $350 million from venture capital firm Andreessen Horowitz for a real estate company that seems to have a tech valuation and appears to

have some cryptocurrency aims too. It's in residential real estate and focusing on community. It sounds like wildly different from WeWork. We still don't know much about it. I guess we'll see. Fair enough. Hey, Elliot, thanks so much. It's really interesting. I appreciate you coming on. Thank you so much for having me. It's been a pleasure. That's all for today. This week, Front Burner was produced by Rafferty Baker, Shannon Higgins, Joyta Shingupta, Lauren Donnelly, and Derek Vanderwyk. Sound design was by Mackenzie Cameron

and Sam McNulty. Music is by Joseph Shabison. The senior producer is Elaine Chow. Our executive producer is Nick McCabe-Locos. And I'm Damon Fairless. Thanks for listening. FrontBurner will be back on Monday. We'll be back on Monday.