Billion Dollar Loser: The Rise And Fall Of WeWork | Reeves Wiedeman
October 16, 2020
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In this podcast episode with Frank Cottle, author Reeves Wiedeman offers the inside story on his new book, ‘Billion Dollar Loser‘, which focuses on the dramatic rise and spectacular fall of WeWork — the much-hyped startup and its effervescent founder, Adam Neumann.
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Transcript
Frank Cottle [00:00:17] This is Frank Cottle, and I want to welcome you to the Future of Work podcast and our guest Reeves Wiedeman. Reeves is a contributing editor at New York Magazine and he has also previously written for The New Yorker, The New York Times Magazine, Rolling Stone, Harper’s Men’s Journal and many other publications. His recent book, ‘Billion Dollar Loser’ — which might be a 50 Billion Dollar Loser — discusses in depth the rise and fall of WeWork. And it’s his first book. Reeves, welcome.
Reeves Wiedeman [00:00:51] Thanks for having me, Frank.
Frank Cottle [00:00:54] Happy to do so. Really great topic, especially today with so many new companies entering the marketplace and entering the public marketplaces. You know, in your book, you outline a number of topics and issues, but to simplify things, are there a big three, in your view? Reasons why when we look at WeWork, we saw the disruption and the challenges that they faced and candidly, how they failed to deal with the situation?
Frank Cottle [00:01:28] Is there a big three from you?
Reeves Wiedeman [00:01:30] I’ll try to get to three, but I can at least give you my high level thoughts of what happened. I think [WeWork] is a company that had a good idea, you know, made offices, built offices that people liked and expanded. Pretty, remarkably quickly, even in its earliest days. And there are a couple inflection points along the way where I think WeWork went from, you know, a company that provided a pretty great service that obviously, wasn’t the only player in the market, but had a variety of advantages and a variety of reasons that its spaces appealed to consumers. And then I think at a certain point, it started to grow beyond its capabilities. And that was both in the expansion of its office leasing business, its coworking business, all over the world, at a very rapid pace. And then obviously, its expansion into other businesses; into apartments, into schools, into gyms, all kinds of different things that don’t necessarily come from the same expertise. And I think, when you look at what happened here in 2017 when WeWork, when Adam Neumann met Masayoshi Son, the founder of SoftBank, and came out of there with a four billion dollar investment and a mission to really supercharge WeWork’s growth, I think in a lot of ways you can look at that moment as a moment when, if that hadn’t have happened, WeWork may have become a nice, you know, steadily growing business. But from that moment when the company decided to supercharge its growth, I think with some hindsight, it grew just too big, too fast, in too many different directions and eventually lost control.
Frank Cottle [00:03:49] Well, you know, I certainly agree that was a tipping point for the company, but it was on that trajectory already, in many respects. It seemed to me that the company had very much positioned itself and tried to position itself in the market, and I’m sure you’ve spoken with many market analysts from different financial institutions, just like I do regularly, and it had tried to position itself not as a flexible workspace or a coworking company, but really as a technology company. And in doing so, in order to look ‘techie’, it had that growth-at-all-costs attitude. But the reality was, it was asset intensive, capital intensive business to scale, and the hidden issue behind it scaling was the massive, massive amounts of leasehold debt that it had in addition to its capital burn. A software company, or a tech company, only has the capital burn. They don’t have billions and billions or hundreds of billions of dollars of debt piling up underneath that, generally. Right. So to me, that was a factor that a lot of people didn’t really recognize, certainly in the financial, institutional world. They didn’t recognize.
Reeves Wiedeman [00:05:10] Yeah. And I think there were a couple of things there. There’s certainly very early on, as early as 2012, Adam Neumann unveiled this idea that WeWork was building a physical social network, that it wasn’t just a real estate leasing business.
Reeves Wiedeman [00:05:27] And certainly he attempted to sort of tie WeWork to the growth of Silicon Valley in ways that, as I talked to WeWork employees, one of them — this person who was there for a number of years, trying to develop technology within the company — they were searching for the Holy Grail. They were searching for, what was the piece of technology that would actually fulfil the promise that Adam was making to investors and to the public? Of course, they never quite found that. And it’s arguable whether that was a failure of finding that or if it was just sort of an impossibility and that sort of ridiculous idea on its face. And I think certainly, you know, the investors, not just SoftBank, but others who poured money into it, wanted to believe that Adam and the company were going to find some technological way to completely disrupt this business model, because if you could do that, you could make a lot of money. Now, clearly, in hindsight, it seems like clearly WeWork did not do that. And the question again was, whether it was even possible in the first place.
Frank Cottle [00:06:47] Well, you know, I think that really begs the question. No one ever has found the Holy Grail.
Reeves Wiedeman [00:06:54] It’s never a good thing when that’s what you’re searching for.
Frank Cottle [00:07:01] It really is. It’s funny, I earned the enmity of the head of their marketing department in a meeting in London one time when I referred to WeWork as honestly nothing but Regus with a paint job. And the reality is, if you looked at their centers, if you looked at their business, it always comes down to that.
Frank Cottle [00:07:22] All businesses ultimately are judged and defined by how they make their money. And WeWork never departed from the lease long, rent short model of selling desk space.
Frank Cottle [00:07:41] You might call it coworking. You might call it workstations. You might call it drop in stations. You might add community to it and a variety of other things. But ultimately, they were renting space. And that’s how they made their money. And you can’t escape that. You can’t say, well, we make our money running desks, but it’s really software. You can’t do that. I think that more and more people recognized that as time went on.
Reeves Wiedeman [00:08:12] Yes, certainly, and I think you and others were pointing this out along the way, and I think, you know, there was certainly tension inside.
Reeves Wiedeman [00:08:20] I think a lot of people at WeWork recognized that. But they almost didn’t want to believe it or they wanted to believe that there were these other ways that they were going to make money. Of course, they tried in a variety of ways to charge additional services. They were expanding into offering services to enterprise companies and not just selling individual offices. And those end up kind of being different businesses. And it was, I think, really hard to actually put those all under one umbrella that would make sense and that would make sense in a way that would meet the expectations of WeWork investors; that it couldn’t just be an office leasing company at the amount of money that it was raising. It would never return the amount that the investors were demanding. So in certain ways, the company got itself into a bit of a bind.
Frank Cottle [00:09:16] Well, you know, when your founding CEO announces to the world that he is going to be the world’s first trillionaire and become president of the world, that’s a big vision and a little bit beyond normal comprehension for most people. I think that the company got so inside of itself, in many cases, and that tension that you talked about was really quite evident.
Frank Cottle [00:09:47] And a big part of that came, in my limited opinion, at least, from the fact that most of the people that came to WeWork, came with the expectation — most of the people, being senior level employees — came with the expectation of a tech company expectation. And then ended up having the reality check that, that just wasn’t the case. And they didn’t have the core experience in the basic business that the company was really in.
Frank Cottle [00:10:20] We talked to and I’m sure you have too, I know you have, many, many people that were involved with the company during this time period and afterwards — and it just seems like they were in a totally different realm as opposed to the core basics of the business model that’s proven itself for the last 50 years by many others.
Reeves Wiedeman [00:10:41] Yeah. And I think I’d expand it a little bit beyond just people who were excited about thinking they were working for a tech company. I think for better or worse, the way Adam Naumann talked about the company as a company that was changing the world, ‘making a life, not a living’, building better offices and eventually talking about the ways in which WeWork could make people’s lives better, even outside of their office lives. I think that was really inspiring to a lot of employees. And and I know it was, based on talking to many of them, and I think that’s what brought people into the company. And for better or worse, that was inspiring, and that’s an inspiring mission, whether you’re coming from… these were people from big real estate companies or architecture firms or in a lot of cases, just straight out of college and looking for meaning in their work. And I think this idea that Adam pushed was a very big selling point to those people. And one of the reasons that so many of them stuck around and were willing to believe it, they wanted to believe that the company was doing all these things and in certain ways, it was giving people a nice day at the office, by and large. And then, you know, once the company’s mission statement changed in 2019 to ‘elevating the world’s consciousness’, I think that was a moment where people were like, hold on a second, I understand the idea of a better day at work, I don’t quite understand what this is. And that I think was one transition point for people and how they understood the company and where some of the skepticism, at least internally, emerged.
Frank Cottle [00:12:48] Well you know, it’s funny, when companies — I don’t want to say get in trouble — but when they’re not fulfilling their vision in business, they generally do one of two things. They generally pivot, say, whoops, we made a mistake and so we’re gonna go back this other direction and correct our mistakes. Or they double down. I think that WeWork doubled down and then doubled down again.
Reeves Wiedeman [00:13:16] Yeah, I was going to say quadrupled down.
Frank Cottle [00:13:19] Yeah, exactly. They kept doubling down. And the market, we talked about investors and not meeting their expectations.
Frank Cottle [00:13:27] I don’t think it was just SoftBank that pushed the model, I think the model was really pushed by the founding investors who kept manipulating all you’ve been saying on the valuation model upward and upward to where a lot of institutional investment analysts that I speak with, they became afraid if they didn’t invest that they would lose out. It is a fear and greed principle. You know, bouncing those things back and forth and usually greed overcomes fear all the time. So, even while a lot of them knew it was speculative and they were even skeptical about it, they were afraid to be left out of the party, which is what happens quite often in Wall Street.
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Reeves Wiedeman [00:14:24] Yes. And it’s impossible to sort of separate WeWork from, you know… You can’t lump it in with the Silicon Valley companies that emerged over the past decade in certain respects because it was ultimately not a technology company. But I think when you think about startup valuations and the fundraising environment of the 2010s, that is a huge part of the phenomenon of WeWork, where for a variety of reasons, institutional investors were looking for big bets, the market was booming. And, you had to sort of prove yourself. And one way to prove yourself was to find these unicorns and these companies that were, you know, some of them might flame out, but some of them are going to become the next Google or Facebook or Uber or whatever they might be. And that’s the environment that WeWork was raising money in. And it was the company saying, what Uber was saying about transportation, WeWork was saying basically we can do that in real estate. And I think a lot of investors and to your point, ones well before SoftBank took a look at the numbers, took a look at the models, in a lot of ways they were not real estate experts, and so, they may not have known exactly what they were looking at, but they knew enough to know that the models didn’t necessarily support it. But there was a hope. There was a hope that WeWork might be the one to be able to break the rules of the real estate business. And that, I think as much as anything, is what funnelled so much money into the company.
Frank Cottle [00:16:09] Well, a lot of these companies looked at WeWork as part of the sharing economy, and one failure in that regard is — let’s use your Uber example — with Uber, the driver shows up with their own car. Yes. With WeWork, you had to build the car, design the cars, sell the cars, drive the cars, etc. So the analogy of the two models really fails on just about every test. And yet WeWork perpetuated it. And the investment community allowed them to. And, you know, it was pretty abysmal. And it is funny, the divide that I saw in the investment community. There were half the people that said, ‘we got to do this, we’ve got to do this’. The other half of the people said, ‘you’ve got to be kidding, you’ve got to be kidding’. There was a really big divide in the investment community. And now the largest percentage of people that we work with are people that got sucked in and are trying to figure out where the industry is going to go and if they’ll ever get their money back out, etcetera, etcetera. Yeah.
Frank Cottle [00:17:34] One of the wonderful things that they [WeWork] actually did is they brought so much attention to the whole concept of flexible work, which had been around for years, decades, in fact, but had never been looked at as inspirationally as WeWork was able to do, or gain the traction within the investment community that WeWork was able to. Yeah. So over the long haul, we look back on this 10 years from now, we’re going to see an industry pivot point, if you will, a tipping point where all of a sudden because of WeWork — and IWG Regus that group as well, but a lot WeWork in this case — the investment community is now really looking at that flexible workspace sector and every aspect of it. And that in itself will drive an amazing amount of change, particularly as the large corporations start migrating to that model as a result of the pandemic, and in many cases, they were doing so already. So in that regard, as we look at WeWork it’s a huge contributor, in my view, to the industry at large. And that has to be considered when you look at the history of the company.
Reeves Wiedeman [00:19:01] Yeah. And as I talked to other coworking flex space operators, when I first started talking to people, I was curious if there was a certain amount of jealousy of Adam. And this was particularly, you know, my reporting began before that the company’s IPO fell apart when things were still kind of riding high. And I think there are probably a few people who wished they could have been the Adam Neumann of this business. But by and large, people were grateful. And people, you know, a lot of the people running these companies didn’t want to run a globe-spanning, world changing operation.
Reeves Wiedeman [00:19:39] They wanted to run their one or two spaces or maybe half a dozen or maybe a few dozen spaces if they got really big and they were grateful to WeWork for kind of laying the groundwork for this. And I’m obviously very curious, that’s the moment we’re in now, is frankly where WeWork started. You know, WeWork launched out of the 2008 financial crisis, when rent was cheap. And Adam, you know, again, they were not the only flex space operator at the time, far from it, they were not the first, but they had the ambition to push and to grow and to make this, what was at the time, a somewhat new model or at least parts of it, into something of a standard. And I am curious, you know, that the current moment has obviously involved all kinds of disruption. And I’m certainly curious what kind of new models are emerging. WeWork is, of course, attempting to position itself as, the organization that’s going to do that. I imagine there will be others who may be cooking up something now or are in the months and years ahead.
Frank Cottle [00:21:00] Well, we’re in a whole different economic cycle right now and have a lot of outside pressures due to the Covid pandemic. But if we remove Covid from the equation for a moment, just say we’re going to slide into a recessive cycle, then what historically has happened is, as the market goes down, rents get cheaper and at a point in time, the market flattens out and then it starts to rise again. Well, during that flat period, historically is when the flexible workspace industry has actually gained the most square footage. So if we say using a simple example that in November of 2019, a square foot of space in the market cost a dollar. And then we look at companies and in 2018 we say it cost ninety five cents. In 2017, we say it cost 90 cents. So during that three year period, the market was fairly high. But as we look forward, we can say, you know, in 2021, 2022, I think the market is going to be 70 cents, 80 cents. So as others who are well capitalized, come in and take space at that 70 to 80 cents, they can actually make a profit below the base operating cost of a company like WeWork, which grew massively in 2017, 2018, 2019. And at the very top of the market, another company, even a local company, can have a much lower base as an operating cost and can really just move market share because they can make a profit, and WeWork can’t at their higher bases. So in order for WeWork to do what they’re talking about doing, they’re going to have to completely rationalize their portfolio from a cost standpoint — and just as IWG is doing right now, same thing, they just have a broader base and a broader base in time — that is going to have to happen. Or little local companies will be undercutting WeWork with an equally nice product. Also, you see a lot of property companies themselves saying, you know what, we want a service. Sam Zell said decades ago when he got into the industry that we want to service the entire lifecycle of our customer base. So we want them from start up through 10 floors through the new global corporate headquarters. And as property companies begin adding that, it will restrict the amount of available office inventory for independent operators such as WeWork or IWG or other smaller ones. So that’s going to be an interesting dynamic to watch.
Reeves Wiedeman [00:24:03] Yeah, and I was having a conversation with a group of smaller operators about the book recently. And, you know, I told all of them I’d rather be you than WeWork. And I think it’s going to be, they were all talking about the various ways in which they were trying to adapt to this moment. And none of it’s easy. And the path forward isn’t clear. But I think it’s a lot easier to be flexible and to adapt when you’ve got a handful of spaces that you’re responsible for, that you’re paying for the lease on, as opposed to WeWork, which still even as it’s curtailed its growth, has more than eight hundred now around the world.
Reeves Wiedeman [00:24:47] And to your point, something in the neighborhood, certainly over half of those were leases signed at the peak of the market and probably much more than that. So they’re going to, I think, they are trying to turn the ship. But, you know, it’s more like turning the Titanic than it is a little speedboat. So I’d rather be in that position.
Frank Cottle [00:25:13] Well, you know, I’ve been a sailor all my life, and it’s a lot more difficult to turn a ship, sailboat, anything on the ocean in rough water. And right now, you’ve got the combination of, they need to turn the ship but you also have very, very rough water. And that is going to make it even more challenging, not just for them, but for everybody that might need to do that. So it’ll be very interesting to see how this all plays out.
Frank Cottle [00:25:46] Reeves you’ve done a great job in painting a complete picture of WeWork, not just the challenges, but so many of the very good things.
Frank Cottle [00:26:00] If we wanted to get a copy of your book, when does it come out to the public? And how would one get a copy of it?
Reeves Wiedeman [00:26:08] Yes. The book is being published on October 20th. And it should be available pretty much wherever, it’s obviously on Amazon and available through Barnes and Noble. But also any local bookstore should have the book available. And yeah, I think to your point, the book is about the rise and the fall. And I think it would be simplistic to just say that, Adam Neumann was crazy and this company was doomed to fail. I think it’s more complicated than that. And I think hopefully we’ve done a decent job in the book of explaining both the good parts of the company and the way things went south.
Frank Cottle [00:26:57] Well, I think you’ve done a fabulous job of it. I would encourage everybody within our industry to take a look at this and read this book. There are very few things that allow an objective, insightful opportunity to look at something within our industry, and Reeves, I think you’ve done a fabulous job of it. And I want to thank you for being with us today.
Reeves Wiedeman [00:27:21] Yeah. Thanks for having me.
Frank Cottle [00:27:22] Take care.
