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For those outside the world of startups, Silicon Valley can sometimes appear to be a massive, high-tech Ponzi scheme. The reasoning isn't entirely unfounded: investors pour millions of dollars into businesses that don't make money, luring more investors through various funding rounds—Series A, Series B, and beyond –. If things go as planned, the company goes public, allowing anyone to invest. Those who cash out at the right moment reap significant rewards, which bears some resemblance to a Ponzi scheme.
This comparison is a bit exaggerated to make a point, but there's a grain of truth in the narrative. Adam Neumann, co-founder of WeWork, exemplifies why these stories arise. Let's take a closer look at the WeWork journey to understand the context of its meteoric rise and fall.
In 2010, Adam Neumann and Miguel McKelvey launched WeWork, starting with a single location in New York City. Their vision was simple yet ambitious: transform the traditional workspace into a dynamic, community-driven environment that catered to freelancers, startups, and entrepreneurs. The idea was to provide flexible office spaces with a touch of modernity and a sense of belonging.
They created a buzz, establishing WeWork as the place to be. The open-floor designs, vibrant aesthetics, and networking opportunities attracted a diverse range of clients. By 2012, WeWork wasn't just growing; it was evolving. With $17 million in Series A funding from Benchmark Capital, they expanded to San Francisco and Los Angeles. Entrepreneurs and freelancers flocked to WeWork locations, driven by a sense of community and excitement.
In 2014, WeWork's valuation skyrocketed to $1.5 billion after a Series D funding round of $355 million led by T. Rowe Price, Goldman Sachs, and others - if you want to know more about valuation, check this out -. The buzz was palpable as WeWork expanded to Seattle, Washington D.C., and Boston, establishing itself as a key player in the coworking space industry.
By 2016, WeWork's global footprint was unmistakable. They launched in London, Berlin, Shanghai, and beyond, securing a Series F funding of $690 million, valuing the company at $10 billion. In 2017, SoftBank's investment pushed the valuation to $20 billion.
The venture-backed startup game is about world domination: becoming the market leader can lead to billions in profit. This requires burning through capital rapidly, but it's not unprecedented. Consider Amazon's achievements or Meta, which, despite initial losses, created billions in value.
Tech startups often defy traditional business logic, especially with seemingly unlimited funding. Adam Neumann excelled in this arena, leveraging the right connections and adopting a "fake it till you make it" approach. He portrayed WeWork as a tech company, despite its core business being real estate, a sector known for its physical assets and tangible value.
Investors sometimes use Myers-Briggs tests on founders, seeking specific personality types. Modern startup founders often fit predefined personas—like Elizabeth Holmes or the nerdy, introverted genius. These charismatic personalities captivate even the smartest, wealthiest investors.
Adam Neumann's biggest act was positioning WeWork as a tech company. With an R&D team, a cool app, and iPads, WeWork attracted tech startup valuations. Entrepreneurs, too, were drawn to the allure of working in spaces built by peers rather than dull corporate offices.
Understanding valuations is crucial. Traditional business valuations assess assets against liabilities, industry conditions, and intellectual property to set a price. However, 409A valuations often hold little weight for startups.
Consider WeWork's Series A round, valuing the company at $97 million. New investors received about 17.5% of the business. The transaction involves issuing new shares, with pre-money valuation plus capital equating to post-money valuation. Despite having only one leased location, WeWork's valuation was based on potential rather than existing assets.
Startup valuations often reflect what could happen if the company becomes a market leader. Facebook's Series A investors, for example, paid $6 per share, reaping substantial gains when the company went public. Venture capital aims to multiply investments quickly, making the WeWork narrative compelling.
WeWork was thriving in the venture capital world, with private investors entranced by Adam's charm. However, the release of their S1 filing in preparation for an IPO revealed the company's inefficiencies. WeWork transformed from the most exciting IPO of the year to the laughingstock of the tech world.
The S1 filing exposed a non-tech real estate company burning through capital. The reaction forced WeWork to cancel the IPO and led to Adam Neumann's departure. Investors and employees with stock options faced uncertainty.
Adam's fortunes diverged. Despite shady dealings, such as trademarking "We" and selling it to WeWork, he managed to secure loans using WeWork shares as leverage. This conflict of interest added to investor concerns.
To recover credibility, investors needed Adam out, but his exit was costly. He received $185 million for a non-compete agreement, a $106 million settlement payment, and an extended $432 million loan. When WeWork went public in 2021, SoftBank bought $480 million of his shares, fulfilling a contractual obligation.
Despite the controversies, Adam Neumann emerged with significant wealth, committing $350 million to a new venture, Flow, with an additional $350 million from Andreessen Horowitz. This investment values his company at over $1 billion.
There was no shortage of controversy and skepticism regarding Adam’s new real estate venture, which still leaves more questions than answers.
But why does he get away with it? Repeat founders like Adam often secure capital faster and at better valuations, regardless of past failures. Adam Neumann created billions in value at WeWork, which holds weight, even if much of that value was fleeting.
The game of raising capital involves projecting confidence and embodying a founder persona - also, managing communication with your investors like a pro. It's not about dishonesty but about method acting—a belief in your company's success, even when doubts linger. Founders bear the responsibility of fulfilling promises made to investors and employees.
Adam Neumann's charisma enabled him to create a cult around his persona, leading to unchecked power as CEO. Capitalism rewarded him, not punished him. While aspiring founders shouldn't emulate Adam entirely, there's value in understanding the character traits that thrive in the venture capital world.
The WeWork saga offers valuable lessons about the complexities of the startup ecosystem. It's a reminder that charisma and vision can take a company far, but they are not substitutes for a solid business model and financial discipline. WeWork's story underscores the importance of transparency, accountability, and sustainable growth in the high-stakes world of venture capital.
Despite its tumultuous journey, WeWork has become a cautionary tale and a case study in modern entrepreneurship. As the company continues to navigate its post-Neumann era - although he is not so sure about that- , it remains to be seen whether WeWork can redefine itself and regain its former glory. Until then, the story of Adam Neumann and WeWork serves as a fascinating chapter in the annals of Silicon Valley's ever-evolving narrative.
In March 2024, Adam Neumann surprised everyone by submitting a bid exceeding $500 million to reacquire WeWork, which had filed for bankruptcy in November 2023. However, after a couple of months, he withdrew his bid. Neumann's offer, made through his new real estate company, Flow, and backed by Andreessen Horowitz, was ultimately abandoned. Meanwhile, WeWork's restructuring deal, approved by a U.S. bankruptcy judge, reduced its debt by $4 billion and secured $450 million in new funding from SoftBank, enabling the company to exit Chapter 11 bankruptcy and renegotiate lease agreements amid the shift to hybrid work.
