Review:
Billion Dollar Loser, by Reeves Wiedeman
| Publisher: |
Little, Brown and Company |
| Copyright: |
October 2020 |
| ISBN: |
0-316-46134-2 |
| Format: |
Kindle |
| Pages: |
315 |
WeWork was founded in 2010 by Adam Neumann and Miguel McKelvey as a
successor company to their similar 2008 GreenDesk business. (Adam's wife
Rebekah is now presented as a co-founder. This seems dubious in
Wiedeman's account, although Rebekah's role in the company is murky,
ever-changing, and hard to pin down.) Its business model in reality was
to provide turn-key, pre-furnished and stocked co-working and small office
space to individuals and businesses on flexible, short-term leases. Its
business model in Neumann's speeches and dreams, and represented by the
later renaming of the company to the We Corporation, was nothing less than
to transform the way people worked, learned, and lived.
Through aggressive, money-losing expansion, WeWork grew rapidly to over
500 locations in 29 countries and became the largest office tenant in New
York City. Based primarily on massive financial support from Masayoshi
Son, CEO of Japanese holding company SoftBank, WeWork's private valuation
rose to $47 billion. In 2019, the company attempted to go public, but its
IPO collapsed, in part due to deeper analysis of the company's books.
Neumann was forced out of the company (with an individual payout valued at
$1.7 billion), the IPO was withdrawn, SoftBank wrote down 90% of their
investment in the company and took control of it, and WeWork laid off more
than 20% of its workforce.
This book is a detailed history of WeWork's rise and fall, joining a genre
that includes
The Smartest Guys in the
Room (Enron),
Bad Blood (Theranos),
and
Super Pumped (Uber). I believe it's
the first full book on WeWork, although it was preceded by several
long-form stories, including
"The
I In We" by Wiedeman for
New York magazine. As the first history,
it's a somewhat incomplete cut: litigation between Neumann and WeWork is
still pending, WeWork staggered into 2020 and a world-wide pandemic that
made cramped open-plan offices an epidemiological disaster, and there will
doubtless be new revelations yet to come. The discovery process of
lawsuits tends to be good for journalists. But despite being the first
out of the gate,
Billion Dollar Loser reaches a satisfying
conclusion with the ouster of Neumann, who had defined WeWork both
internally and externally.
I'm fascinated by stories of failed venture capital start-ups in general,
but the specific question about WeWork that interested me, and to which
Wiedeman provides a partial answer, is why so many people gave Neumann
money in the first place. Explaining that question requires a digression
into why I thought WeWork's valuation was absurd.
The basic problem WeWork had when justifying its sky-high valuation is
competition. WeWork didn't own real estate; it rented properties from
landlords with long-term leases and then re-rented them with short-term
leases. If its business was so successful, why wouldn't the landlords cut
out the middle man, do what WeWork was doing directly, and pocket all the
profit? Or why wouldn't some other company simply copy WeWork and drive
the profit margins down? Normally with startups the answer revolves
around something proprietary: an app, a server technology, patents, a
secret manufacturing technique, etc. But nothing WeWork was doing was
different from what innumerable tech companies and partner landlords had
been doing with their office space for a decade, and none of it was
secret.
There are two decent answers to that question. One is simple outsourcing:
landlords like being passive rent collectors, so an opportunity to pay
someone else to do the market research on office layouts, arrange all the
remodeling, adapt to changing desires for how office space should be
equipped and stocked, advertise for short-term tenants, and deal with the
tenant churn is attractive. The landlord can sit back and pocket the
stable long-term rent.
The second answer is related: WeWork is essentially doing rental arbitrage
between long-term and short-term rents and thus is taking on most of the
risk of a commercial real estate downturn. If no one is renting office
space, WeWork is still on the hook for the long-term rent. The landlord
is outsourcing risk, at least unless WeWork goes bankrupt. (One
infuriating tidbit from this book is that Neumann's explicit and
often-stated goal was to make WeWork so large that its bankruptcy would be
sufficiently devastating to the real estate industry that it would get a
bailout.)
There's a legitimate business here. But that business looks like a
quietly profitable real estate company that builds very efficient systems
for managing short-term leases, remodeling buildings, and handling the
supply chain of stocking an office. That looks nothing like WeWork's
business, has nothing to do with transforming the world of work, and
certainly doesn't warrant sky-high valuations. WeWork didn't build an
efficient anything. It relied on weekend labor from underpaid employees
and an IT person who was still in high school. And WeWork actively
resisted being called a real estate company and claimed it was a tech
company or a lifestyle company on the basis of essentially nothing.
Wiedeman seems almost as baffled by this as I am, but it's clear from the
history he tells that part of the funding answer is the Ponzi scheme of
start-up investing. People gave Neumann money because other people had
previously given Neumann money, and the earlier investors cashed out at
the expense of the later ones. Like any Ponzi scheme, it looks like a
great investment until it doesn't, and then the last sucker is left
holding the bag. That sucker was Masayoshi Son, who in Wiedeman's telling
is an astonishingly casual and undisciplined investor who trusted
knee-jerk personal reactions to founders over business model analysis and
historically (mostly) got away with it by getting extremely lucky.
(I now want to read one of these books about SoftBank, since both this
book and
Super Pumped make it look like a company that makes
numerous wild gambles for the flimsiest of reasons, pushes for completely
unsustainable growth, and relies on the sheer volume of investments
catching some lucky jackpots and cashing out in IPOs. Unfortunately, the
only book currently available seems to be a fawning hagiography of Son.)
On one hand, the IPO process worked properly this time. The sheer madness
of WeWork's valuation scared off enough institutional investors that it
collapsed. On the other hand, it's startling how close it came to
success. If WeWork had kept the Ponzi scheme going a bit longer, the last
sucker could have been the general investing public.
Another interesting question that
Billion Dollar Loser answers is
how Neumann got enough money to start his rapid growth strategy. The
answer appears to be the oldest and most obvious explanation: He made
friends with rich people. The initial connections appear to have been
through his sister, Adi Neumann, who is a model and hosted parties in her
New York apartment (and also started dating a Rothschild heir). Adam met
his wealthy wife Rebekah, cousin to actress and "wellness" scam marketer
Gwyneth Paltrow, via a connection at a party. He built social connections
with other parts of the New York real estate scene and tapped them for
investment money.
The strong impression one gets from the book is that all of these people
have way more money than sense and we should raise their taxes. It won't
come as a surprise that Adam and Rebekah Neumann are good friends of Jared
Kushner and Ivanka Trump.
Those are the questions I was the most curious about, but there's much
more here. Wiedeman's style is nearly straight chronological reporting
with little analysis, but the story is so wild and absurd that it doesn't
need much embellishment. Neumann is obviously a megalomaniac whose
delusions of grandeur got worse and worse as WeWork was apparently
succeeding. Rebekah Neumann is if anything even less in touch with
reality than he is, although in her case that appears to stem from having
so much money that reality is an inconvenient speed bump. Miguel
McKelvey, Neumann's co-founder, is an odd and interesting side note to the
story; he appears to have balanced Adam out a bit in the early going but
then wisely started to cash out and pocket his winnings while letting Adam
dominate the stage.
There are some places where I don't think Wiedeman pushed hard enough, and
which cut against the view of Neumann as a true believer in his impossible
growth vision. Neumann took several investment opportunities to cash out
large amounts of his stock even while WeWork employees were being
underpaid and told their stock options would make up for it. He clearly
used WeWork as a personal piggy bank on multiple occasions. And Wiedeman
documents but doesn't, at least in my opinion, make nearly enough of
Neumann's self-dealing: buying real estate that WeWork then rented as a
tenant, or paying himself for a license for the name We Holdings (although
there at least he later returned the money). I think a good argument
could be made that Neumann was embezzling from WeWork, at least morally if
not legally, and I wish Wiedeman would have pressed harder on that point.
But that aside, this is a great first history of the company, told in a
clean, readable, and engaging style, and with a lot more detail here than
I've touched on (such as Rebekah Neumann's WeGrow school). It's not as
good as
Bad Blood (what is), but it's a respectable entry in the
corporate collapse genre. If you like this sort of thing, recommended.
Rating: 7 out of 10