On the podcast: 'The Cult of We'

Hosts Adam Lewis and Alec Davis discuss how China's tech crackdown could impact SoftBank before Eliot Brown, a reporter for The Wall Street Journal, joins the show to discuss "The Cult of We: WeWork and the Great Start-Up Delusion." That's the book he co-authored with Maureen Farrell detailing the rise and fall of WeWork. Hear stories uncovered during their in-depth reporting as co-host Alec Davis and Brown dig into the lessons that investors can take from this story.

Listen to all of Season 4 and subscribe to get future episodes of "In Visible Capital" on Apple Podcasts, Spotify, Google Podcasts or wherever you listen. For inquiries, please contact us at podcast@pitchbook.com. Transcript Alec: Eliot, welcome to the pod. It's great to be with you again. We're old colleagues, and I was fortunate enough to swap stories in the hallways of The Wall Street Journal about the reporting that you were working on, [and] the reporting that my team and I were working on covering venture capital. We traveled in similar circles while all this WeWork drama was going on, so it's really great to catch up.

Eliot Brown: Super excited to be here.

Alec: I want to start and take you back to, what was it? Around 2014, you were based in New York, you got on the real estate beat. I wonder sometimes when I think about where you started with this and the fact that you were on that beat, when you did that and took that beat on, did you ever in your wildest dreams imagine that you'd come across a saga involving a $40 billion corporate meltdown?

Eliot: Yes, I was covering the office market in New York for the Journal, which was as far as gigs go, I enjoyed it, but it was not the most lively front-page worthy beat of the paper and on very good days hoped that someone beyond a few people in the real estate industry would actually see one of my stories or be interested in something that I had to write.
No, the $40 billion meltdown that captured all of finance and business was not in the agenda. Yes, I started doing that, and then was just looking for interesting trends going on in real estate, and there was this thing called co-working that was taking off. WeWork was not the only one, but they were one of them. I went down to meet Adam Neumann in, it was late 2012 or summer 2013, and met him at his office when they had probably five or six locations or something like that.

Alec: Tell us a little bit more about that first meeting with him. What struck you? If anything, was there any signs that this was an unusual character with an unusual story ahead of him?

Eliot: [chuckles] No, it was all there from the beginning. Go down there and meet him. He's this total full of energy guy. I didn't really know who he was. I'd talked with him really briefly on the phone once. It's like, "Wow, this guy is really lively, really fun to talk to." He was just constantly name-dropping celebrities and Rahm Emanuel. It's like, "What? This is a weird office company." Then he says, "Well, you're a real estate reporter, we're not a real estate company, don't you have someone there who covers community companies or changing entrepreneurship in urban areas?" I was like, "I think it would still probably be me because we don't have community company beat."

That set a question in my head of why were they so intent on saying they weren't a real estate company? I guess what happened in the next ensuing months is I kept asking people about it because everyone seemed to be meeting with WeWork in real estate. Eventually, a light bulb went off when found out their valuation, which was $1.5 billion at the time. I was just like, "I know what a building is worth. They have a lot less space than a $1.5 billion building, and they don't even own it. They lease it. What on earth is this about?" Eventually, I was like, "Ahh, because they need to portray themselves as a tech company to get a big valuation." That essentially became the story for the next six years.

Alec: Yes, very much so. One of the things that comes through over and over again in the book by you and your co-author Maureen Farrell, is this narrative that they were so determined to push. Of course, as you know, this is actually—what a lot of people may not realize listening to this—is that this is actually a pretty common thing now among startup founders and their investors with all manner of companies that just don't really meet the smell test when it comes to where is the tech in this? Where is the innovation? Yes, it is true that WeWork was doing some very innovative things from a finance and office use and on managing the real estate standpoint. Whether that constitutes a tech innovation, of course, is another story.

Eliot: Totally. You hear a ton in the startup land and you actually hear it a ton in corporate America, right? Like GE is a tech company, but the difference is that it doesn't work for these big old corporates. They don't get a much higher valuation because they just start saying tech a lot, by and large, but it really tends to work for the occasional salesman in startup land.

Part of the thing that made me so interested and to become the reporter that covers this stuff was I was just so flummoxed by how all these silly startups—silly-seeming to me startups—in Silicon Valley were pushing this line that they were tech companies that should be worth gazillions of dollars, and they just seemed to have business models that all they do is lose money. One of my favorites that I always bring up and my co-author Maureen rips me for talking about it too much is Casper, which they're cool. They—

Alec: The mattress company?

Eliot: Yes, the mattress company. They figured out a good way to brand themselves, and they had really good viral marketing early on, and pioneered this idea of direct-to-consumer or were a pioneer with that. In reality, they aren't a tech company. They just contract with phone companies to make mattresses for them just like all the other mattress companies. Yet, they raised money not at mattress valuations but at tech valuations. [chuckles] Bloomberg long ago did a great story on Melt, the grilled cheese company, and they had tech valuations. Then eventually, they never could make the revenue or profit, I guess, that they promised, and they went down to having grilled cheese valuations.

Alec: That's quite a comedown. What kinds of things stood out for you in the years you covered WeWork? What kinds of things were they doing early on, if anything, to back up that notion of themselves as a technology company?

Eliot: I first met Adam in 2013, and then we meet him again when they ... Besides raising money, they were changing their product. We go in to meet him for a story about their fundraising, and he just starts showing off the app and half of the—Well, not half, but a large chunk of our day is spent talking about this app and how you can order a salad through it. It's like, "What? You're an office space company. Why are we talking about your app?" They tried to make this app part of a social network, but then no one was using it.

They actually did some funny things, like where they had a feature where you could send a fist bump to somebody else, and the employee from WeWork would go and give a fist bump to someone. Probably a rather expensive labor cost. It didn't work. The reason people were going to WeWork was because they wanted office space, not because they liked the tech, because they didn't. They didn't even have good tech generally. You couldn't even purchase a WeWork space online. [chuckles] You had to call someone.

It was largely just a marketing sheen, and Adam would talk endlessly about how they were a tech company and had all this amazing tech for, I don't know, eventually, it became things like where they would use AI to track where people are walking within WeWork. They learned all these amazing insights. Then you'd ask, "What insights did you learn?" They were like, "Well," and this is a real one, it's like, "We learned that people really like to sit near windows." It's like, "Wow." [laughs]

Alec: Breakthrough finding there.

Eliot: Yes. The same thing would be true. We eventually got to see a bunch of their investor presentations, and they would do the same thing in the investor presentations. They were littered with these images of MacBooks and iPhones as though those were necessary for using their office space.

Alec: What of the venture capitalists who bought into this? We can talk endlessly about their role and their interactions, but what can you tell us about to what degree they were skeptical of things like that? These are very savvy Silicon Valley investors. Legendary firm Benchmark is there very early on. I'm pretty sure well before it became a billion-dollar valuation.

Eliot: Yes, they were the first, the Series A. $100 million.

Alec: What do you think their role was in facilitating and to whatever extent substantiating his own vision for this as a tech innovator?

Eliot: Benchmark was an interesting one because they did really validate the whole thing. Before Benchmark came in, it would be very hard to argue that this was a company really worth getting venture capital behind to me. It clearly wasn't much of a tech business even at the time. They didn't push that line very hard until they realized that it would be effective.

Benchmark, I think, was really attracted to the guy, Adam. He just checked all these boxes that has become the meme on Sand Hill Road of what you look for in a founder. It's like, he's really excitable, he has this contagious energy, he has enormous vision and enormous drive, he doesn't sleep, he has a little bit of crazy. Yes, one of the things, and this was first pointed out to me by Charles Duhigg at The New Yorker, in his story "Founders Fund" on their website, lists that they look for founders with near messianic qualities. This is like the Silicon Valley ecosystem was pushing founders that think of themselves like the Messiah, and they found that in Adam Neumann.

They liked that. They were a little put off by the real estate aspect because real estate is not a very ... it just has a cap on how much profit you can get, and every time you need to add a member or a paying customer, you have to build a new office, as opposed to software where you just send them some files and take all profit. They didn't like that, but they did like WeWork at the time, actually, the only time in its history was profitable. They're like, "Wow, we don't even see profitable businesses, and you guys have done it even without our cash, so this must be really something special."

They liked that, and WeWork did have really good margins at that time because it was just this serendipitous time in the world where real estate prices were still low. There was this untapped demand for millennial-friendly space that WeWork really did help figure out, and so there was a big gap between what they were paying a landlord for their office space and what millennials would pay them for their monthly fee for an office space. Briefly it was a pretty good business, but then it became a very poorly run business.

Alec: Yes, at the time, it penciled out and then some and showed a lot of promise. Talking about the messianic founder, which you guys portray very effectively in the book and the culture around him, it makes me think a little bit about the title of the book, "The Cult of We." Why did you call it "The Cult of We" and what kinds of cultish things come to mind?

Eliot: It's partially tongue-in-cheek, but based in some reality. WeWork under Adam really did become a very founder-led, founder-driven, almost religion to some of the people there. He really imposed this idea of how, and this is common in Silicon Valley with a little different wording, but like just how WeWork was making the world a better place and how—

Alec: Changing the world.

Eliot: Changing the world. It wasn't just doing that on its own, it would do that by people coming into the fold, being part of the We ecosystem and the We family, and everyone would be—Adam wanted everyone to have the values as him. As his ego grew over time, as the valuation grew over time, he really thought that WeWork was not going to be an office space company. He talked about solving world hunger with WeWork, about providing a home for all the world's orphans. He, by 2018, started which is really sort of the peak of Rome before the fall, he saw it as this post-state corporate entity that would link the world together, and people would live there, people would go to school there.

He saw himself on sort of on par or above heads of state, and so he would tell his staff like, "We're going to have a seat at the table on the Middle East peace, and a treaty between Israel and the Arab states will be signed, and the Palestinians will be signed into WeWork." He once told a founder, "I need to have the biggest valuation in the world because when countries start shooting at each other, I want to be the one who they call." It's like, "What do you even mean by that?" This is the sort of thinking that he wanted to inspire among all the WeWorkers there. If you ask the staff, not all of them, but a lot of them thought that they were working for something a lot more than an office space company. They thought it was this really mission-driven, community-making, utopian company that just happens to be going up and up and up in value.

Alec: There too is another sign, of course, in the extreme of how WeWork was, I think, quite the emblematic company of our times. In some ways, you could say a peer of many other founders who talked this way that this is the game. For them, it's not a game, maybe some it is and they're just acting the part. I'm sure there are some of those too.

Eliot: Yes, one of WeWork's investors, sort of nonchalantly told me, "Oh yes, these companies all have to say that because you can't recruit talent otherwise, so they have to say it." Because the idea is that if you're a software engineer, you only care so much about money, and you want to be motivated beyond just that. You convince yourself to do that by saying, "Oh, with this thing, I'm helping the world through my product." It's harder to do that if you say, "We're an office space subleasing company." It's a lot easier to do that if you say, "We're a community-enhancing, consciousness-elevating company."

Alec: Speaking of consciousness, that reminds me of the hard-partying culture at the company. This is a founder who had a real taste for tequila. I must have seen a couple of different mentions of that in just the promotional material alone, and I remember from your reporting at the time this was all playing out. In fact, I had a PDF copy of the book, so I did a search for how many times the word tequila was going to show up in the text. I only found 16 mentions. I was disappointed. I was hoping for like triple digits.

Eliot: [laughs] We could have written the whole book about tequila. There were enough anecdotes on the cutting room floor.

Alec: There were tequila sunrises and tequila sunsets all the time at the company, right? Or at least in Adam's meetings.

Eliot: Yes, no, no. I'll try to tell this one quickly. One of the anecdotes that I love is Adam arrives for a tour of an office building in Los Angeles and it's like 10 a.m. He gets off a plane, and gets in an SUV, and drives to the Arts District, and there's a broker there waiting for him. The car door opens, and it reeks of marijuana and he seems incredibly drunk. Then, he just tells the broker again, 10 a.m., "Hey, we're not getting out of this car and going into that building until you do a shot." He pours him some tequila, he does a shot, makes him do it again, does another, and then Adam runs through the building and is just wild and racing around. He's like, "This is amazing."

Then calls up the landlord. Then, he sees a sign that says, the Shorenstein properties, and he's like, "Oh, I know that guy," and so he calls up the landlord and calls him like 12 times and eventually he answers. He's like, "I'm in your building. I'm going to take the whole thing." Then, rushes back, takes the sign that says, here's what the building is, and tries to break it over his head. He's like, "You guys won't be needing this anymore." It actually takes a while to flex and it doesn't break very easily.

Anyway, he didn't even end up taking the building, that they barely even heard back from WeWork, but this was common. He would do this in meetings, both for fun, to endear himself to the landlord, but also because he happened to love tequila. This is another thing he'd impose on others. If he liked tequila, that means the whole staff must like tequila, so they would pass around tequila shots all the time. They would do it at staff meetings, they would do it after he talked about how they had just fired 7% of the staff. This was a trays of tequila shots were a very common thing at WeWork for a long time.

Alec: There was a point in the book where it seemed like you guys were trying to say that having a startup companies as tenants, this is in the earliest years, that it was at that moment when Adam and his coterie looked closely at startup culture and wanted to emulate it, and began to pattern their company after what they were seeing. Would you say that that was a major influence on him and a factor in the founder he became?

Eliot: Yes, totally. I don't think it was—I initially thought it was more craven than it was, where it was just looking around what is the absolute best way to make money, and then sketching out a strategy to do that, and that would be by positioning ourselves as a startup. I think Adam, it was a little more intuitive or slightly organic, where he would see that there were spaces that were filled with startups. Everyone was talking about startups. He saw the movie "The Social Network" and loved it, and took this weird lesson from the movie, which is supposed to be about how Mark Zuckerberg is this craven, awful person and he's like, "I love how he built a company," and sees Mark Zuckerberg crushing others and liked that.

He was absorbed in this and saw that that's where all the money is, and then I think he convinced himself, he's like, "Well, we're a social network, too." Then, as like all the money started to be about sharing economy, suddenly, it switched to like, "No, no, we're the sharing economy, too." It's like, "You have a completely different business model than Airbnb and Uber," but still, he would put himself in the same bucket. That's a long way of saying, yes, this was a part of the zeitgeist of New York at the time and San Francisco, was these really ... This was the startup boom before even unicorns were really a big thing. You see all of these things everywhere, you see them raising money, which is always the biggest thing in Adam's eye. That's suddenly, we were camouflaged of like it maybe a little bit without knowing, and then a little bit intentionally.

Alec: Let's get into some of the big money issues and again, getting to the back to the rise and fall of the company. You guys talk in the book about this idea that Adam Neumann was actually so empowered and thrilled by the fundraising process and bringing in big funding rounds, and ever higher valuations, that some people felt that he was kind of addicted to that process. I think you actually say this idea of being addicted to fundraising, and so I'm just thinking, like, you take a person like that, if that's the case, and then you bring him together with Masayoshi Son, the CEO of SoftBank Group, who was hell-bent on writing really big checks and thinking bigger than an anybody out there, that you have a perfect storm that was bound to go wrong in that kind of mix.

Eliot: 100%. It was this confluence of two really combustible figures that should not have met. Both of them were obsessed with wealth, obsessed with valuation and obsessed with irrational hyper-growth without thinking hard about it, and neither of them seemed to really understand or care about, I guess, losses. I think they both academically understood losses, but then would just only look at revenue growth, in terms of where they would focus.

Actually, they were once talking about this gigantic deal that SoftBank eventually backed out of. Adam was going to be incentivized to grow the company based on revenue growth goals, which is in the world of like CEO compensation, is just a totally insane thing to do, because growing revenue is only half—the point of a company isn't to grow revenue. The point of the company is to make money and profit, but if you just focus on growing revenue, you tend to do pretty disastrous things to do that. That's exactly what happened with WeWork.

Yes, these both revenue-growth addicted guys meet each other, they both convince each other and feed off each other, thinking bigger and bigger. Then, you have by 2018, after SoftBank had invested a lot of money in WeWork, they're talking about this absolutely monstrous deal that Adam first asks Masa for $70 billion, which like the most company has ever raised in history is like $12 billion, that's Uber, maybe it's a little more. He's like, "Yes, we'll just need $70 billion to do this." It's like, literally, where on earth is that money going to come from? There's not that many wealth funds in monarchies that even have that.

What Adam and Masa both would see is like, in a way that others don't, they had trillions in their eyes. Whereas other CEOs are looking to make billions, these guys literally wanted to make multitrillion-dollar companies. We saw their projections that they were thinking they'd make tens or hundreds of billions of dollars and profit on their investments. [chuckles]

If there were some reality to it, if they had the capability of doing that, that'd be a great investment, but it was just so far from any company that could ever deliver that. It's just astounding that you had two people on earth with controlling billions of dollars that came together like that.

Alec: Those are sky-high numbers and then some. There was a point in 2016, this is a different level, of course from what you're talking about, but this to me speaks to and puts in perspective just how big of a difference it was once SoftBank got involved. I think in 2016, you talk about the—I believe that's when the first SoftBank investment happened. At this point, the total that WeWork had raised to date was about $1.7 billion, and now here Masayoshi Son was offering $4 billion in one fell swoop. Now, if that doesn't put in perspective how much of a order of magnitude working with SoftBank would be, what did—it turned out to be ultimately less than that, I think. 

Eliot: Yes, it was a little complicated. SoftBank ended up putting 4.4 [billion dollars] in, but not all of it was growth capital for WeWork. They gave them like 3.1 in new money, and then bought out other investors. One of the things we learned in the book was—well, two points here. Part of this was all geopolitics. At the very time that this was happening, Saudi Arabia had a new ascendant prince, Mohammed bin Salman, who really wanted to diversify, take a bunch of the country's oil wealth and put it into Silicon Valley startups. Masa comes around as like, "I'm raising a fund, that's funding Silicon Valley startups, and I want to raise it 30 times bigger than the next venture capital fund." Mohammed bin Salman is like, "Okay, well, here's $45 billion." That was the caricature of what we thought happened.

Then, we looked more into it, and that's basically what happened. There was some due diligence, but not—Masa has said on the record that he raised $45 billion in 45 minutes, billion dollars a minute. Then, very shortly thereafter, he turns to within a month, is looking for places to put that money that he can get into and Uber's hard, Airbnb was hard, they didn't really want him, and he finds WeWork, and that's how he writes a check. Literally, after a 12-minute tour, and then a car ride on the way to see the president-elect at Trump Tower, he agrees to what was, I believe, the second biggest startup investment ever in the country?

One of the points here is, it was all as quick, and erratic, and surface-level as it seems, like there was a little more looking into these things. A consistent theme through all the investments with WeWork are most of them was it was Adam convincing a principal at the top of a company to have a vision with his personal pitch. Then, the work under that, behind that by the company, with numbers and spreadsheets validates that initial handshake.

Alec: To me, this money coming in, ultimately, it's coming from Arab states, through SoftBank, into a startup, quasi-tech startup at that, perfectly—Don't you think it perfectly sums up the bigger picture phenomenon we have at work right now, where there's just so many entities out there sitting on literally trillions of dollars in the aggregate that are determined to become tech investors or transform their company or their country, as is the case for Saudis, into technology players, and that the competition to find a place to put it will ultimately get you into a an investment that isn't really a tech company, but it is overfunded. We all know where that ended.

Eliot: 100%. Yes, one of the things we tried to do with the book, because we're Journal reporters, we follow the money, is show how at every step of the way, basically every step of the way, what was happening was too much money was trying to pile into startups. Far more money than good ideas. Good ideas don't rise exponentially, generally, and money was just flooding into Silicon Valley, and so you have what, quote-unquote, "dumb money," which is sovereign money, state money from Middle East and other countries coming in, that usually is not a great sign of they're following other investors.

Then, we have this amazing anecdote where the mutual funds started coming in to Silicon Valley in like 2014, 2015, in a huge way because just like the Saudis, just like everyone else, they were tired of seeing all this rapid growth in startups and trying to find ways to beat the market, so they start pumping money into private companies in a way that they hadn't done before.

The reality of Silicon Valley is, it's actually, in the startup ecosystem, it's not that big of a receptacle. There's only so much money it can absorb. There's not that many startups and a lot of them are software companies, so you don't need that much money. When you pour too much money in, valuations go up really fast. Briefly, like T. Rowe Price, the mutual fund that valued WeWork at $5 billion really not that long after they were valued at $1.5 billion. I was like, "Wow." Then they started talking about how they're part of the sharing economy and I was like, "Really?"

Then, six months later, five months later, Fidelity comes along and again, same thing, where it's like, the principal of a fund, smart guy, good investor, generally, but he just gets won over by Adam, and is convinced, as were some other people at Fidelity, that this is a disruptive sharing economy tech company, and they double WeWork's valuation to $10 billion.

Even though they had some analysts that were like, "This is a real estate company. Look at its numbers. What are you thinking?" They were like, "No, we think it's worth the risk. Let's do it." Now, I'd say what was happening with SoftBank had a lot more zeros, and was probably that much more erratic than stuff that happened elsewhere in the WeWork story, but it's basically the same thing in China with an investment and then some of the earlier investors too.

Alec: There were times when people inside WeWork pushed back on Adam, tried to rein him in. There were times when some of the venture capitalists thought that he was too distracted, empire building. How did Adam Neumann deal with those kinds of people? What kinds of changes in the company, like the corporate governance, changed along the way to help him cement his power?

Eliot: Yes, I took a class in college where I remember they talked about different types of leaderships with presidents, and some of them like to be challenged and have a circle of advisers that challenge them, and others, just like a very hierarchical thing where what they say goes. Adam didn't do well with people challenging him. Occasionally, he would like someone who fought back against him, but generally, he would push them out, he just pushed them aside. If you agreed with him and thought big, then he would be telling everyone how you're awesome. He told like six different people that they were going to be the next CEO of WeWork whenever he decides to step back as chairman. Of course, none of them knew that the others were being told this, too.

Those were the people that validated him and his ideas. The people who were really pushing back against the vision, they didn't get it. They didn't have the strength or the vision, and they weren't part of the We team in the same way. Internally, that's what happened. Then, externally, you had the same thing going on with the bankers, where this was a real structural flaw in the system.

Investment bankers, in theory, you would think their job is to give you advice, and sober advice and honest advice on how much your company's worth, what your company is doing right and wrong, and how to best position it to investors, but because of the way Adam would pit these banks against each other, and because of the way that banks are all super competitive with each other, an ego is really at stake with them, you had them almost getting in an arms race to tell Adam that his company was worth even more than he thought it was. Adam tended to favor the advisers or did favor the advisers who told him that it was worth the most.

Initially, Goldman Sachs tells him that they think WeWork could be worth up to $96 billion in an IPO, double what they were valued at the time, and he just is over the moon. He loves it, and he's like, "You guys are going to lead the IPO." There are other reasons that didn't end up happening, but that was the key to Adam's heart, and so therefore, people gave him unrealistically good news.

Alec: He shopped and cherry-picked for the news that he wanted to hear and the people who would support his vision and his valuation.

Eliot: Totally, yes. Like the JP Morgan banker tell him like, "It's only worth $63 billion," which is far more than they were worth at the time, and he just loses it and berates them. Then, once the bankers reads his anecdote as the WeWork is approaching its IPO, and it's starting to teeter, and the market was completely pulling back, and Lyft and Uber had done poorly, the bankers had this presentation, they have a $30 billion next to WeWork's valuation. Adam looks at it, he's like, "What's that? We're going to be worth more than $47 billion."

They don't have the courage. They say like, "No, no, no, that's just an illustrative valuation. It has nothing to do with anything." At least the WeWork people present assumed that the bankers intentionally did that to test the waters, but they certainly didn't stand up to him then and say, "Your company is not going to be worth $47 billion."

Alec: There were a lot of unorthodox things about the way that WeWork did things, the way that they communicated and reported their financials, in particular. One of them really sticks with me, and I think back to when we first started talking about it, we were covering WeWork and that is, this financial metric that they liked to put in their reports called Community Adjusted EBITDA. That's right.

[laughter]

We've heard of all kinds of ways to report cash flow that are favorable to the kind of narrative that a company or an investor wants to talk about, but what is Community Adjusted EBITDA? Why did they do that?

Eliot: Yes, that was a fun one. In the old days, we used to just care about profits and net income, and then companies started to be like, "Well, let's show people that we're still good, even if we don't have profit." Then EBITDA became a big thing, which is boring, but is subtracting things like depreciation and taxes. Then, you can adjust that further by making other little adjustments. WeWork adjusted it twice after. Essentially what they did was said—it was an attempt at saying, "Here's what our offices make, if you just look at the office and you don't look at all these headquarters' costs."

That's a useful thing for an investor in theory, but they did it in a really creative way where, this is complicated, but if you sign a 10-year lease, it's like an apartment where the landlord gives you the first month free. The landlord often gives you the first year free on a 10-year lease. WeWork had all these 10-year leases, but they aren't paying rent for a full year.

In that full year, it really looks like you're super profitable, because you aren't paying any rent, which is your biggest expense in theory. Then, GAAP accounting, standard accounting says you can't do that, because of this exact reason. You have to put a placeholder number there that shows up as a law or a large expense. WeWork didn't do that for Community Adjusted EBITDA. Basically, they are saying, "We're taking in all this revenue for these locations, and our expenses are really low, so therefore, we have 25% profit margins." This is really beneficial, because instead of having a -100% profit margin, which is the actual thing, they were losing 100% of revenue or more, they had a way of telling investors, "No, our business is great. The core business makes 25% profit margins." Of course, it was done with this accounting trick.

Alec: They were essentially able to talk about how everything is fine, and we don't really need any more money, if they wanted to put it that way. Or, we can consider ourselves a growing company in traditional terms, i.e., profit, as opposed to actually losing a ton of money.

Eliot: Precisely, even though it was illusory. It was fictitious, essentially. There was a way of showing it and it has to do with cash flow, but not really. The company was a bonfire of cash, and they had made a metric that was like, "No, it's great. We're profitable."

Alec: Well, that's innovative. [laughs] Maybe just to conclude here, when things really failed, the IPO failed, ultimately. Take us inside what Maureen was hearing from the would-be investors and just the kind of reception that the company's S-1 had, and some of the behind-the-scenes conversations, I think with some debt investors that really exposed the problems that led to the IPO having to be pulled and Adam getting fired.

Eliot: They come in August 2019, WeWork puts out its prospectus, its S-1 that lists all the company's financials and has the summary, and they just get totally battered in the press, because of all these things that we'd been writing about for a long time about how it had all these conflicts of interest with Adam, about how their losses were doubling every year, and that's not really what a company is. That's just a way to burn money, and—

Alec: Was this before or after Community Adjusted EBITDA

Eliot: That was after, actually. They had done that before.

Alec: Yes, okay.

Eliot: Yes. That happened, and then Adam goes to try to meet investors in a pre-roadshow, they call it, just to test the waters and see what people are thinking, and try to get them excited about the company. Normally, he just always had people on the edge of their seats and just essentially dying to write him a check, but just people in the room were like, "It just felt completely different. He was just constantly sort of knocked back on his heels and feeling defensive. He didn't have the same je ne sais quoi, where he's really connecting with anyone and selling them.

Apparently, he was just flailing, and hard to watch for the people who had seen him be such a good salesman. Also, the questions are suddenly a lot more skeptical and critical because the whole zeitgeist has changed, and everyone can read in the press of what a dumpster fire this was. They started to teeter, and the expected valuation kept falling and falling. Then, yes, toward the very end, we get ready to run a story that push some- was the straw on the back, and that caused them to pause the IPO, which just getting our fact-checking questions and knowing what was in the story was a big factor in why they paused the IPO.

Alec: If I could just jump in, they're coming to a realization at this point that not only was the company doing things that were unorthodox and they had concerns about Adam, how he ran the company, but I think there's also realizing at this point that the company is going broke, just flat out. I think maybe up to that point, a lot of people didn't really realize that. 

Eliot: Yes, it's funny. It's literally going broke in weeks, only came right after that, where I think they finally started—the bean counters were like, "Actually, we don't have a lot of money in this thing." I think people didn't really absorb just—WeWork's business model, if you look at it, was effectively not in marketing, but in reality, was to essentially double the amount of money they raise each year and then double the amount of money they lose each year. The losses just kept growing and growing.

If you keep doubling and you're doing that with $2 billion, then it becomes $4 billion, and it becomes $8 billion. [laughs] Rapidly become enormous numbers that are not going to be readily supplied. That was, yes, totally another thing that people realized, like, "What's the future here? Why are we going to give these guys billions of dollars?"

Alec: Sometime in the next, I don't know, a few weeks, maybe a month or so, WeWork, the new WeWork, the [crosstalk] leaner and meaner, which is just down to its core business after having shed all these non-core businesses, it is going to finally go public as a result of the reverse merger. Compare and contrast for me a little bit this company and the lessons learned to the old company.

Eliot: Yes. There's a time parallels to Regus which did this in 2000, but WeWork in 2019 was not an office space company, it was a consciousness elevating company. Their mission was to elevate the world's consciousness officially. Now, it is a real estate company. They have largely embraced the reality that their business is about subleasing office space. They have a CEO who comes from real estate, they include more figures that are helpful to people who understand real estate. Yes, their business is in renting desks. The things that people are looking for in the business, is what's going to happen with the future of office space, and what is the demand for office space going to be like, as opposed to a demand for community? Which is what Adam Neumann would have had people believe.

Now the biggest change in that, is that the valuation is much lower. They actually have a lot more space than when WeWork was going public back in 2019 because they had started basically a year's worth of growth at the time that took a really long time to finish up. They have something like 50% more desks than they did at the time. Now, they have a lot less occupancy because of COVID, so there are only a little over half-filled, which is a really good way to lose money, but depending what happens with the future of the office, this is It's essentially the bet now, is like, if it comes back fast and people prefer flexible space instead of 10-year leases, then WeWork will probably do pretty well.

I think, in general, the feeling is that it's not going—real estate has a cap on it. There's only so much somebody is going to pay for office space, there's only so many add-ons you can get them to pay. I don't think anyone's expecting it's going to soar to be $100 billion company quickly if it does well. I think it's more grow organically and a lot slower, and ideally have some kind of profit, which would be a nice thing for a functional business.

Alec: Then, on the SoftBank side, of course, SoftBank went through a pretty big reckoning of its own after all this. I think it's the controlling investor, at least leading up to this reverse merger with the SPAC, but talk a little bit about what kind of comeuppance this has been for SoftBank and the way that they're doing business going forward.

Eliot: At first, it was this totally disastrous thing for them. Basically, the failure of WeWork killed the Vision Fund 2, the sequel Vision Fund. The implosion happened at the exact time that SoftBank was trying to raise the world's largest investment fund, which was a sequel to its first world's largest investment fund. The investors who were looking at it, the sovereign wealth funds, flipped out and said, "No, we aren't going to put money in this thing, especially when one of your biggest investments seems like one of the dumber investments ever." [laughs]

It was a huge black eye. Then suddenly, they told essentially a huge chunk of their portfolio companies to do the opposite of what they'd told them to do months earlier, which was—The prior advice had been grow, grow, grow, we don't care about losses, and something like that. Like, "No, no, no, we care about profits. You need responsible growth and please cut costs."

Now, the thing that's changed since then in the past year and a half since, is COVID happened and tech really did incredibly well, and so the Vision Fund, SoftBank's big investment fund, has at least recovered some. It was this total garbage dump, but has now a positive return. Not a very positive return. If you look at it, it's worth 60%, more than the money that was put in and the Nasdaq has over doubled in the same time, if not a lot more. It's not a very good way to invest money, but they've had some pretty big wins, DoorDash, Coupang. I think reputationally, people are forgetting certainly in the way they did, how careless and reckless SoftBank was with WeWork.

Alec: We'll see if that persists once they start reading your book and that gets out there.

Eliot: [laughs]

Alec: All right, Eliot, thanks so much. It's been great talking with you. The book is a great read. It is full of, I think, really important lessons about everything from running a startup, to fundraising, to geopolitics, and how all of them combined in one really happy story. Great work. Congratulations on the book, and I appreciate you coming on. 
  In this episode

Eliot Brown
Reporter at The Wall Street Journal

Eliot Brown writes about startups and venture capital out of The Wall Street Journal's San Francisco office. He previously covered commercial real estate and economic development from New York City. He joined the Journal in 2010 from The New York Observer.