Today, Explained - WeWorked

Episode Date: October 25, 2019

America’s most controversial startup was finally bought out this week, but WeWork is a symptom of a much larger problem. Learn more about your ad choices. Visit podcastchoices.com/adchoices

So here's a business idea for anyone who wants it. Let's get helmets that are easier on the eyes. Helmets are like bulky and they make you sweat even more and they're uncomfortable. Why are helmets still so terrible in 2019? As a daily bike rider, I'd like to know. Anyway, when you get this hustle going, go to MailChimp.com. They've got email marketing solutions. They got a website builder.

They got a social post scheduler. They will help you turn your helmet hustle into a successful helmet hustle. Everyone wants to be the next Steve Jobs, to have that revolutionary idea that changes the world and makes just insane amounts of money. But on that road to riches, there are so many failures. Remember MoviePass? Movie passed the fuck out.

The cash-strapped service known for a failed experiment to sell unlimited movie tickets for just $10 a month shuttered its doors for good over the weekend. Remember Theranos? Theranos dived. The founder, Elizabeth Holmes, and another former executive await a criminal trial. And then there's WeWork, the company that lets you rent office space. Something you can very much do on your own, basically anywhere. I don't want WeWork. I mean, I don't want WeWork at any price. It's too top of the world, Ma. I mean, I just don't want it.

After months of scandals, the company finally sort of face-planted this week. A new dramatic twist in WeWork's story here. CNBC is now reporting that SoftBank is in advanced talks to take control of WeWork. But people have been mocking WeWork from day one. Whoops, sorry! Even though this WeWork thing didn't get settled until this week, Broad City called it this past January. Walk with me.

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. So correct me if I'm wrong. People are paying you to use the free public charging station? So what? All the great male entrepreneurs do it, okay? They take something that already exists,

claim it was their idea, throw in some fancy furniture, and charge double for it. Okay, so SheWork doesn't exist yet, but WeWork does. And I remember going in for the first time. I didn't know what to expect. And I was, I must say, charmed.

Derek Thompson has been to a WeWork. Charmed by the delicious coffee, charmed by the free beer, and charmed by an office whose interior decor I think I would compare to a kind of Epcot San Francisco. He's been covering the WeWork drama for The Atlantic. This is a company that's doing a plain vanilla business. It is leasing buildings. It's gussing them up. It's adding free beer.

Then it's renting them at a higher margin to ordinary workers and businesses, right? It's doing a relatively normal real estate thing. But it just grew like wildfire. I mean, into dozens of cities with hundreds of thousands of members with dozens of enterprise businesses. It became the largest owner of commercial real estate in little old places like Manhattan. But in the background, as it's growing explosively, there's this sort of slow burn controversy. And it's that essentially WeWork is a real estate company that's telling people that it's a tech company. So if you look at its

business, it's buying buildings or leasing them, it's gussing them up, and then it's short-term renting them to customers, but it's receiving the press and the reputation and the funding and the valuation of the next Amazon. So typically a business with WeWork's numbers, you'd think it might be worth, say, $3 billion, $4 billion, but it's being valued at like $20 billion, $40 billion. Maybe this company is worth $100 billion. And that's super weird. So, I mean, I don't know. Do you bake, Sean? I don't bake. I wish I could participate in your analogy. I was hoping for the metaphorical purposes of this narrative. But you know, I've seen it done before. Okay. Let's say that you've watched a baking

show before. And so you decide to bake some cookies or brownies. Sure. And you bake a damn good cookie. So it's like you put it in the oven, you wait a while, it comes out, that kind of thing. Are you a baking expert, Sean? Because I think you might be. I told you I see this. So, look, let's say you bake a great cookie. Yeah.

You're selling thousands of cookies. You're doing a really, really good job. And then the venture capitalist comes along and says, Sean, I think this business might be worth $40 billion. And your friends are like, dude, this is a cookie baking company, right? Like you're not doing anything magical. You're just, you know, putting dough together and putting in an oven. This was the feeling that people were having looking at WeWork. What you're doing isn't magic. Why is your valuation magical? Tell me more about Adam Neumann, the guy behind this magical valuation. Adam Neumann is an Israeli who grew up on a kibbutz.

Who here knows what a kibbutz is? Raise your hand. A communal Israeli settlement. Wow, very educated crowd. And loves to tell people about it. And I've had a few discussions with Google about this. They sometimes call us kibbutz 2.0. And he founded this company and was very successful at convincing investors that it would be worth a lot of money.

Every WeWork that you open will immediately create 700 jobs in your city just to build it, and then 1,000 jobs a year. Inside that WeWork for the next 20 years, so 20,000 jobs for 20 years, just one location. In particular, he was very successful at convincing Masa Son, the head of the Vision Fund at SoftBank, a Japanese conglomerate, to give him billions and billions and billions of dollars with which he could buy buildings, gussy them up, and then rent them out for profit. When I'm going to make a decision based on three months forward, I'm not going to make the right decision.

Masa is very famous for making a 300-year plan. If you want to start thinking forward, you really have to think really far away. At the same time, Adam Neumann, it turns out, even though he's talking about sort of this communal dream of the future of work, he's very quietly sort of engaging in double-dealing. He's using every opportunity to squeeze little dollars from WeWork. So, for example, earlier this year, it came out that WeWork was changing its name to The We Company. Adam Neumann actually had bought the trademark to the name The We Company. And so he could force WeWork, the company that he owns, to pay him $6 million to change its name to The We Company, a name that he owned.

Neumann was doing things like this day in and day out. And on top of the fundamentals that investors were looking at and beginning to doubt, there were also these concerns that this guy at the head of the company was just bilking the company for as much money as he could possibly grab for himself. I've also heard stories that Newman was like a quirky founder, business leader, boss, all together. Yeah, he loved to party. There were two cardinal rules to observe. The first was to be sure to have shot glasses and cases of Don Julio 1942. He loved private jets. He loved smoking pot in his private jets.

He loved throwing parties with tequila shots and Run DMC playing music there. And then there was the music. Our paying customers would be complaining about how loud the music was. But if we turned it down, we'd get screamed and yelled at by Adam and his team, an employee said. I don't entirely begrudge founders who want to drink tequila and smoke pot in their sort of private planes. That's kind of fine. I think what is weirder is the degree to which he was, on the one hand, telling people that WeWork is going to sort of elevate the world's consciousness. As CEOs, it is our responsibility to set the trend of the future. And the trend is

we versus me. While using the company to make so much money that he essentially spent like 80 million dollars on real estate in five years. It's that sort of double dealing that concerns me more than the fact that he had a pension for Don Julio. It sounds kind of Fyre Festival-y, the whole thing. Yeah, I think for some people, WeWork is the Fyre Festival of startups. And for other people, Fyre Festival is the WeWork of concerts. These are both enormous debacles with charismatic people at the center of them

who were humiliated by the course of events that became inevitable as the company reached its sort of sad conclusion. So with Fyre Festival, it happens once people touch down and see that the emperor has no clothes. What is it for Adam Neumann and WeWork? What is the moment? The moment of terrible revelation for WeWork

was the filing of the S-1. The filings reveal some lofty goals. It says its mission is to elevate the world's consciousness. What the filing does tell us could be concerning to prospective investors. They say it themselves in their IPO filing. They say that we have a history of losses, and especially if we continue to grow at an accelerated rate,

we may be unable to achieve profitability, they say, for the foreseeable future. And when investors and critics of WeWork could see exactly what the company was, it became very clear that this was an organization, a firm, that had to spend $2 to make $1 every time. And that's why the valuation fell from $47 billion when the IPO was first sort of announced in the middle of the summer to now just $7 billion now that SoftBank has taken control of the company. And that's the big news this week, that WeWork is being bought out by something called SoftBank.

Where does this all leave Adam Neumann? Adam Neumann has been evicted from WeWork. And the eviction parachute has earned him more than $1 billion. So SoftBank has essentially said, we are going to pay you to leave by A, buying up to a billion dollars worth of WeWork stock, B, giving you a $500 million loan to pay back some credit that you owe, and C, paying you $185 million over the next four years in exchange for consulting with the new chief executive of WeWork. $185 million over four years as a consulting fee is about $46 million a year. That is more than all but nine chief executives of public companies in America make.

And that's not to lead a public company. It is to advise the leader of a public company that he ran into the ground. That parachute is not golden. That's platinum. That's some other shit. That is emerald parachute. If emerald can fly, it is an emerald lace parachute. Wow.

How did he work that deal out for himself? Well, genius comes in many forms, Sean. And one kind of genius is understanding how to bilk billionaires out of a billion dollars. And if that is the genius of our age of scams, then Adam Neumann is the Da Vinci of the 21st century, because that is precisely what he's done. He went to Massa Sohn, the head of the Vision Fund at SoftBank. He said, give me billions of dollars in order to buy real estate all over the world to lose money over and over and over again. And then in order to kick me out, pay me another billion dollars, including a $185 million consulting fee in order to leave. I mean, it is a brilliant move if the end goal is to make as much money as possible for you and the generations of people to follow you. It's a

rather despicable move if you care about people and communities in the kibbutznik way that Adam Neumann liked to talk about his company. Let's talk about those people for a second here. What happens to surely the hundreds if not thousands of WeWork employees? Drive 4,000. Yeah.

So this is a company that employs 15,000 people. And the latest news that I've seen says that up to 4,000 of them are going to lose their jobs. This is a company that I've seen says that up to 4,000 of them are going to lose their jobs. This is a company that actually can't lay them off immediately because they don't have the cash on hand to do so. But SoftBank, which has just taken over the company, does have the cash on hand to pay Adam Neumann, the disgraced founder, over a billion dollars. I mean, it's a little bit of a rich situation. And if I was working at WeWork now, I would be utterly furious about the fact that I've been led by a founder who has made a billion dollars while watching my stock that I was hoping to use to buy something in my life plummet to zero.

And that's if you get to keep your job. And that's if you get to keep your job and you're probably losing it. You might get severance that only lasts you a few months. I mean, I would be furious at the leader of my company if I realized that that was the case. Will this company continue to exist? I think it could. Fundamentally, WeWork might be a legitimate business if it set its sights lower. Essentially, the business of leasing real estate and fancying it up and renting it out to freelancers and enterprises who want to be there for a while, that's a real business. And other businesses do it. But the kind of wrenching changes needed to take a company with $50 billion ambitions and transform it into a $5 billion company, those are wrenching changes.

And one of the wrenching changes is exactly what you talked about, firing about a third of your workforce. I guess the thing I don't get is like how anyone thought this was a hundred billion dollar idea. I mean, when two comedians saw it for exactly what it was on Broad City. What an hysterical business model to brand this as like a shared co-working space when really you're storing people in what are essentially closets after luring them in with these like seemingly high-end perks but it's also like a bag of beer in a trash can at our counter you work is a multi-billion dollar corporation that is fucking genius how does a billionaire like masa son Son, father of SoftBank, look at this glorified real estate company and convince himself that he's got tech's next big thing? I think there are a lot of really, really rich people that want to do something more than just make money. Once you become a billionaire, I feel like you can have everything in the world.

If you want a private jet, it's yours. If you want seven homes on every continent, it's yours. What's one thing that's really difficult to buy? It's a feeling of status that can only come from that sense that you've changed the world. There's a certain class of billionaire that wants to be behind projects that have world-changing potential. And Massa Son, I think, was one of those people. He raised this $100 billion fund not to make another $100 billion exclusively, I think, but also to be able to tell himself and his local network and the conferences that he went to, I'm behind the next Amazon. And when you're a startup guy who spins a beautiful story

about building an international capitalist kibbutz that's going to unite the world around a new vision of work, then, yeah, maybe you can find a billionaire dumb smart enough to say, go even bigger, and here's $10 billion to do it. WeWork is a symptom of a much larger problem. And that problem might make your life much more expensive really soon. That's in a minute. You know, something I think should exist but doesn't is Newman's Own for everything else. You can go to the grocery store and get your Newman's Own vodka sauce and a part of the proceeds go to charity,

but why doesn't a part of the vodka that you get in the liquor store go to charity? And why doesn't a part of the chewing gum you buy go to charity. I'd be way more inclined to buy those things when some of the money was going to charity over like the regular things that I buy where none of the money goes to charity. I think there's like a bunch of startups that are trying to take that approach to like shoes and maybe glasses. But how about we take that approach to everything, y'all?

Anyway, when you make the vodka that has a charitable component, go to MailChimp.com and use their all-in-one marketing platform. It's going to give you the tools you need to give your whole charitable vodka situation an online presence, to keep your followers engaged, and to give you more time to focus on making really great charitable vodka. Charitable vodka! Derek, I think I have a pretty good grasp on who Adam Neumann is at this point and what he's about, but tell me more about his sugar daddy billionaire,

the guy who's now in charge of WeWork. Right, yeah. So the daddy billionaire is a guy named Masa Son, and he is the head of SoftBank, which is this huge Japanese conglomerate. And several years ago, he raised this $100 billion fund called the Vision Fund, with which he wanted to not only make a lot of money,

but also, as he once put it, go Big Bang. If the Big Bang sort of launched a new universe, he wanted to launch the new 21st century with this investment. And so he backed companies like WeWork and Uber and DoorDash that he thought might represent a new kind of urban experience in which our day-to-day lives were mediated by this tech layer, that we worked at a company that was kind of a tech company. We work.

And we ordered food through something that was kind of a tech company, like DoorDash. And we moved around with companies that were connected to the internet, whether it's Lime or Uber. And so we have to put a lot of money behind these companies that have a tech layer in them and can potentially sort of change the way that we live in ordinary cities. How are these other companies doing? DoorDash, Uber? So imagine you wake up on a Casper mattress and you work out in a Peloton before breakfast

and you Uber to your desk at WeWork and order DoorDash for lunch and take a Lyft home and get dinner through Postmates. You have now interacted with seven companies that will collectively lose somewhere around $13 to $14 billion this year. Let's say you come home after this experience and you pull out your phone and you play with Facebook and you scroll through Twitter and you scroll through Instagram. You have now interacted there with two, three companies that are fantastically profitable, but charge you $0 in exchange for their services.

Right. So in the first half of the day that I described, you're paying companies. Right, Uber, DoorDash. But they're not making any profit. And in the second half of the day I described, you're paying these companies you're interacting with nothing, but they're fantastically profitable. And the weird big takeaway for me is that in a very strange, ahistorical way, the best business model of the 21st century is not to charge people for stuff and make a margin.

It's to build a product and charge people $0 and run a fantastically successful advertising business. How is a company that's as ubiquitous as Uber charging people money for rides all around the world losing money? Every time you pay Uber $10 for a trip, where is that money going? Well, some of it has to go to pay Uber employees. A lot of it has to go to pay the driver. And a lot of it, it turns out, has to go to pay for promotions and other forms of marketing to get more people to use Uber. Because if Uber raises its prices just a bit to like $11 for that trip, and you load up Lyft and see that Lyft is a $9 ride at the exact same destination, there's no switching costs. You're just going to use Lyft. So both these companies have for years been using their investments in order to give people promotions and discounts. So what they're essentially doing is subsidizing their users, right? They're essentially paying us a little bit of money in exchange for using their services. And I've called this the great millennial urban consumer subsidy, that as you

go about your day, all of these companies that we interact with to move about the city and live our lives are, with every single interaction, every single exchange, paying us just a little bit of money in order to do so. And the concern, I think, for consumers and also to a certain extent for these companies is what happens when the game is up. And when the jig is up, will people just go back to the yellow cab and the grocery store and the restaurant down the street? Yeah, it's interesting to think like, is the last decade just going to be some fever dream of venture capitalist expenditure? Yeah. Maybe. I think it's more likely that the cost of every single little thing just goes up a little. The reason that people use Uber and Lyft rather than a cab service isn't just that

it's cheaper or at least is anticipated to be cheaper. It's also that it's arguably more convenient because you can hail it from your phone and you can schedule it rather than having to walk into the street and raise your hand. These companies are a revolution in convenience, and that isn't something to be overlooked. But they're also a revolution in convenience that aren't viable at the prices that we're currently paying. And so I think consumers should be ready to pay a little bit more for everything.

There is a theme about the failed investments of the last few years. And it's that these companies that exist in the physical world, that drive cars and move food and are real estate, that when you try to put a tech layer within them, you don't necessarily wave a magic wand and turn them into a tech company that should be valued like a Google or a Facebook. It doesn't work like that. Their feet are still stuck in the mud of the physical world. Derek Thompson is a staff writer at The Atlantic, and he hosts a podcast there called Crazy Genius.

It's all about technology, science, and culture. I'm Sean Ramos for him. This is a Crazy Genius podcast It's all about technology, science, and culture. I'm Sean Ramos from this is a Crazy Genius podcast called Today Explained. Before we go, how have we not figured out diapers yet? Like, you got the cloth diapers that are a mess, or someone needs to come pick them up, or you need to go drop them off, or you just gotta like put tons and tons and tons and tons of diapers in the trash.

They say they're biodegradable, but how long does that take? Once someone cracks the diaper problem, hit up MailChimp.com. They got that all-in-one marketing platform to make your diaper business a great success. Good luck! Hello! Whoops!

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