WeWork’s model flawed from start and almost no one called it out

Published in the San Diego Union-Tribune, November 4, 2019

WeWork (until WeDon’t). The story of this business and its founder, Adam Neumann, is a classic tale of the “emperor has no clothes” on steroids.

I am fascinated by its rise and fall because fundamentally the basic business model was flawed from Day One. Any student of finance knows the mantra — you don’t offset or balance fixed long-term liabilities against variable short-term assets. And along the way, almost no one called it out.

Entrepreneurs are taught to find a competitive advantage — intellectual property, a network effect, scale, price or customer service. What’s key is that at the end of the day, you need something to differentiate yourself from the competition.

Renting a vacant office building and then hoping to make it sexy with cubicles, contemporary open space (some exposed ductwork is always nice), coffee machines and couches, and then trying to find startups that would like to be there — recognizing that most of them are not cash-flow positive and have only enough money in the bank for a short period of time (shorter than the lease they signed) — is a suspect business model.

The startups themselves will need to go out and raise more money, and if they don’t get the new dough in time, then they will default on the lease. The remedy for WeWork might be to sue them, but they have no assets. So instead WeWork will need to put another hot startup into the space. But that company is also running on hope and hype and fumes. And so the process repeats itself — until it doesn’t repeat itself. You all know about musical chairs.

WeWork itself is really just a hype and hope machine that needs to raise billions of dollars every year to pay the rent to the owner of the building while they try to collect the rent from the five guys and a dog with an idea to change the world. That is not a business with a sustainable competitive advantage. I mean, come on, are they the only company who can sign stupid expensive, long-term leases from landlords with empty buildings?

Two weeks ago, WeWork was valued at $47 billion (based on nothing more than a roll of the I-Ching and the blessing of SoftBank), and today it is valued at $8 billion. Among my pals, there is a school of thought that says it is actually worth zero or even negative, given its liabilities. Neumann said he was going “to fuse profit and purpose to create a modern capitalist kibbutz.” Hearing this, any investor should have run for the hills.

But, the power of American Greed still looms large. The founder, Neumann, walks out of this mess with $1.7 billion. Sadly, many of the 4,000 employees who believed in the fantasy machine will lose their jobs — and the ones who get to stay will find that most of those stock options that they accepted in lieu of being paid a full salary, those options that were golden (at the $47 billion valuation) are suddenly “underwater” — worthless, unless you can breathe through your gills. The planned initial public offering disappears, but the new car you bought in anticipation — that payment is still due on the first of the month.

Journalist Derek Thompson, in a brilliant article for The Atlantic, writes about one of the myths that Neumann spun — that given his time growing up on the Israeli Kibbutz Nir Am, he claimed that he would take that sense of community and empathy from the kibbutz life and migrate it to WeWork. He would imbue the idea of “We” into “Work.” It is interesting to look at some of the big tech companies that failed and realize that many of them have a touch of “cult.” You needed to be a true believer (Theranos comes to mind).

Neumann spun the tale of a “values-driven movement” that he wanted to encompass our entire lives. But his personal values centered more around the private jet and his five homes. At times, he would riff on becoming the first “trillionaire.” That should have been a signal to lock the doors and call the looney bin.

Thompson reminds us of Scientology’s founder, L. Ron Hubbard, who famously said “the best way to make real money in America is not to start a business, but rather to have a religion.”