Instigators of Change

WeBuilt, WeCroaked (Rebroadcast)

August 31, 2022 Season 1 Episode 23
WeBuilt, WeCroaked (Rebroadcast)
Instigators of Change
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Instigators of Change
WeBuilt, WeCroaked (Rebroadcast)
Aug 31, 2022 Season 1 Episode 23

In the early 2000s, a baby clothes salesman was about to strike it big. His name was Adam Neumann, and his rise - and fall - has a lot to teach both founders and funders about why a company can go off the rails. Neumann's new real estate venture, Flow, recently got a $350 million investment from Andreessen Horowitz. We thought it'd be a good time to revisit our conversation with bestselling authors Maureen Farrell and Eliot Brown to talk about how Neumann helped build WeWork, how he attracted tremendous amounts of funding, and ultimately, why the company experienced a fiery fall to earth.

Show Notes Transcript

In the early 2000s, a baby clothes salesman was about to strike it big. His name was Adam Neumann, and his rise - and fall - has a lot to teach both founders and funders about why a company can go off the rails. Neumann's new real estate venture, Flow, recently got a $350 million investment from Andreessen Horowitz. We thought it'd be a good time to revisit our conversation with bestselling authors Maureen Farrell and Eliot Brown to talk about how Neumann helped build WeWork, how he attracted tremendous amounts of funding, and ultimately, why the company experienced a fiery fall to earth.

Kara Miller:

Welcome to Instigators of Change, a Khosla Ventures podcast where we take a look at innovative ideas, the people who come up with them, and those who invest in them. I'm Kara Miller, and this week, we're revisiting a show about the rise and fall all of a company that sometimes felt like a cult and that has a lot to teach founders and investors. A show that was given a whole new level of relevance in the last few weeks which we will get to. But first, let's talk about the companies very compelling founder. 

Maureen Farrell:

They knew how to say whatever, the zeitgeist of the moment, what was raising money, what investors wanted to hear.

Eliot Brown:

In startups, there's these many flare ups of things where you just get one company after another founded an area that turns out it makes no economic sense whatsoever. But everyone saw everybody else investing, so they thought there must be gold in those hills.

Kara Miller:

So, let's start this story in 2006 with a baby clothes salesman. He was in his late 20s about to shake up the world. First though, he had to get the heck out of the baby clothes business, which he had gotten into through an unusual series of events.

Eliot Brown:

He went through the Israeli military and then immediately wanted to go to New York and become an entrepreneur.

Kara Miller:

That's Eliot Brown, a reporter for The Wall Street Journal.

Eliot Brown:

So, he was in undergrad at Baruch College and used that to leverage an attempt to start a business and came up with this idea to add knee pads to baby clothes for when kids are crawling. He called it Krawlers with a K, and the motto was something like, "Just because they can't talk doesn't mean they don't hurt," or, "Just because they can't tell you, it doesn't mean they don't hurt."

Kara Miller:

Brown says the business idea was bad, but the salesman, whose name was Adam Neumann, attracted people to him in a way that was hard to ignore.

Eliot Brown:

We'd talk to these people who would just see him at these trade shows, and he'd have a crowd of people around him at the Javits Center in New York, just because of the energy that he had, this 26-year-old kid who was single and certainly didn't have any children telling people they needed to have this for their child. So, he, I guess, showed early signs of magnetism and salesmanship.

Kara Miller:

Maureen Farrell, a reporter for The New York Times who covered Neumann's rise, says he tended to absorb energy.

Maureen Farrell:

He's about 6'6". You can't miss him if you see him. And eventually, after leaving the military, he had very long hair. He's just a striking person to see. And then beyond that, I mean, just in terms of even his gestures, he's a tall person, but he uses his arms a lot. If he walks in a room, he takes up space, and all eyes in the room go to him. You can't help it.

Kara Miller:

Neumann would use those abilities in spades in the years after the baby clothes idea collapsed, and he would build a new company that would make him famous and then maybe infamous, WeWork. Farrell and Brown chronicle this journey in their book The Cult of We. And the question of whether indeed WeWork, a co-working company where you could run an office or a desk in a building, was cultish and whether Neumann was a conman, well, it's something we'll talk more about.

It's also a question that has captured the imagination of the entertainment industry. Apple TV has a new series WeCrashed, starring Jared Leto and Anne Hathaway and Hulu has offered up a splashy documentary about the saga. Eliot Brown from The Wall Street Journal says from his perspective, what the rise of the company says about the world he reports on is a little scary.

Eliot Brown:

I just think as someone who covers startups, it's incredibly similar to the general MO in startup land where founders are encouraged to have this magnetic vibe, and everyone, including Adam, would talk about it in a way similar to Steve Jobs, where you have this reality distortion field.

And that was honestly one of the first things I noticed about him when I met him in 2013, which is... I sat with him, and he was talking about his vision for the company and how much they were going to expand and how quickly they were going to grow and how every time they an office in Portland, it would be open up when they open it nine months, it would be filled within three weeks.

And when you're sitting there, you believe it. And then I remember thinking, "Wow, that's amazing. And then eventually, when I left, I thought, "Wait a minute. He can't know what's going to happen in Portland in nine months. He's never even been to Portland, hadn't ever had an office there." So, yeah. I think it's sort of a... I'm sure swindlers have it too, but it's a broad thing within sales that I think is really good for fundraising.

Kara Miller:

Maureen, can you just talk about how Adam Neumann first got the idea for a co-working space?

Maureen Farrell:

So, he was in Baruch College, as Eliot mentioned earlier. He went to undergrad there after he immigrated from Israel, and it's a New York institution. He was older than the average student. He had served in the military for about five years.

And from what we understand is that he met a woman. I think she was maybe in her 50s, and they became fast friends. They worked on group projects together, and he was talking about entrepreneurship, wanting to do... He was in an entrepreneurship program that pushed people to come up with ideas and try out business plans. Her son had opened something. It was called Sunshine Suites. It was a co-working space in Manhattan. So, she invited Adam to just come take a tour to meet her son.

So, from our understanding, that was the first time he actually saw co-working. I mean, this was sort of like a nascent... Not completely. I mean, it had been around for a while. There's Regus. We have a chapter in the book on that, but he did walk around toward the space, meet his colleague's son. And what we understand and what we reported in the book was that he took a lot of the elements from Sunshine Suites, including even the legal documents. He copied those and used those as a boiler plate for WeWork.

Kara Miller:

So, did they feel ripped off by that?

Maureen Farrell:

I think to a certain degree, if I'm remembering correctly, there's some frustration. But I think a lot of people in the co-working industry at that point in New York... I mean, there were also, as Adam and WeWork grew up over the next few years after he started WeWork, it was a very collaborative industry, both in New York and around the United States. A lot of people would have just one or two offices, work together.

And I think a lot of people in the industry just met Adam, were intrigued by him. But also he went about this business, he was going to make it huge. He was going to be global and probably not collaborate. I mean, he made it clear he would meet with people, but he was going to be the winner. And I think he really threw a lot of people off throughout the industry, including the CEO.

Kara Miller:

Eliot, obviously 2008, 2009, you've got a major stock market crash. We're entering the Great Recession. And yet Neumann's idea of having a co-working space, or at least the idea that he glommed onto of having a co-working space, that survives. How was it able to not completely fall apart during that moment in New York?

Eliot Brown:

Yeah. I mean, so their predecessor company Green Desk was really founded at that time that everything was imploding, and so I think what they saw is at the time it was really just a couple floors in a building in Dumbo in Brooklyn. That was the perfect type of alluring space for the companies that were getting created or the people that were getting jobs, which is, graphic designers, individuals who were getting fired from their jobs or laid off from their jobs and striking out on their own. So, that's one element.

And then the other thing that was happening is just in the couple years, I guess, one of the big wins at the back of WeWork early on was that they really tapped into this casualization and hipsterization of Millennial culture. So, there was clearly this untapped demand for a workplace that was less sterile than what we were used to in corporate America. So, they were opening these places with exposed brick, which was very cool in Brooklyn coffee shops, but had not really hit much of the office market in Manhattan. So, that found this geyser demand.

Kara Miller:

Maureen, one of the things that is really striking about the rise of WeWork and the money that started to flow in is that Neumann, though he was obviously not deeply connected in New York, pretty quickly seemed to get in with a famous or peripherally famous crowd. Who was around him, and how did that happen?

Maureen Farrell:

I mean, so he was a master at building connections, but a very key part of that was when he met his wife. He met his wife, who was Rebekah Paltrow. She was a cousin of Gwyneth Paltrow, and she'd grown up in New York, in the area. She was very wealthy, had a lot of connections of her own. But then she had also gone out to L.A. to try to be an actress for a while, and she had built this whole other range of connections there, including... I mean, one of her good friends at the time was Ashton Kutcher.

Shortly after Adam and Rebekah met... I mean, they met and by all accounts were smitten with each other. They were very quickly engaged, but she also very quickly pulled Adam into her world. They met through a mutual friend of hers from college, but she really helped connect him to a lot of different people, including him. And they were hanging out with Ashton right away who much later became involved with WeWork.

But, yeah. So, she was just a really key part, and she was involved in Kabbalah as well in L.A., which is just sort of not a religion, but a spiritual outpost that attracts a lot of celebrities. So, she was taking him also to The Kabbalah Centre to meet a whole lot of people, and including he met some big real estate investors, including one person who became a member of his board throughout the time at WeWork.

Kara Miller:

That was so striking, reading your book and going to The Kabbalah Centre, as you say, meeting these big real estate people. So and so is Madonna's ex-boyfriend. The locus of connections at The Kabbalah Centre is just like, "Wow. If you're starting a business, that's where you might want to be."

Eliot Brown:

Yeah. Our sense was that Adam was dragged into it by Rebekah. But as soon as he got there to The Kabbalah Center, the thing that he loves is proximity to rich people and celebrities. So, he was suddenly starstruck and said, "Ah, this is great."

Kara Miller:

Eliot, I know one of the bones of contention in every or many, many interviews that Adam Neumann did as this business is growing, one of the things is like, "Is this a real estate company, or what is this, a tech company? What kind of company is this?" And that was a very important question. It was an important question to him. It was an important question to people in the media. Why was it such a seminal question how that question was answered?

Eliot Brown:

Yeah, totally. I mean, I think that Adam was set from early days on characterizing WeWork as a non-real estate company. So, early on, it was a physical social network, and then by the time Uber and Airbnb were getting hot, he called it part of the sharing economy. Later on, he's talking about how they use AI. And SoftBank later on even called WeWork an AI company, which probably rather insulting to people who work in AI.

And, I mean, at its heart, this was the foundation of the whole WeWork house of cards in that, in order to be valued high and raise all the money they raised, I mean, they ended up raising over $10 billion, you could never be valued like a real estate company. So, he had to pick something much more valuable, which was tech, in some degree, and get people to see that and view it as a tech company. And that will sort of unlock the dollars. So, that's exactly what happened.

Kara Miller:

We were talking about his charm before. I mean, he got all these amazing investors, and we'll get to some more of them, but Jack Ma, Harvard, Fidelity, T. Rowe Price. These are not fly-by-night folks. Is that because of this story about tech? Is this because of his charm? What's bringing these blue chip people into his camp?

Maureen Farrell:

It seems like a lot of it was really his charm. He knew how to speak the language that Eliot said. He knew how to say whatever, the zeitgeist of the moment, what was raising money, what investors wanted to hear.

But one of the things that really struck us as we were reporting the book is that in a lot of cases, Adam would meet with the principal at a certain firm and really wow this person. They would get so excited about the concept of WeWork and the future and about investing.

Then that person would have their deputies, underlings essentially, do research on the company, do due diligence. And oftentimes, their underlings would come back and say, "Hey, we found these red flags. The business doesn't seem to add up." And then the principal, the decision maker, was still so smitten with Adam Neumann that he, and it was usually a he, would just say, "Oh, whatever. Let's just take a bet on this guy. He's going to figure it out." And it was so striking. It happened time and time again.

Kara Miller:

So, isn't it the job of these people who run whatever it is, like real estate firms or big companies, or VCs or whatever, don't they see charming people all the time? Isn't their job to see beyond that?

Maureen Farrell:

You would think.

Eliot Brown:

Yeah. I mean, you could say maybe their job is to find the most charming people who are good at convincing others.

Maureen Farrell:

Which I was saying.

Eliot Brown:

I think that's part of it. But I think the venture world, partly because it's all about seeing the future and not today, just goes in these herds and really looks to one another to believe in something. So, you can see that in startups. There's these mini flare ups of things where you just get one company after another founded an area that turns out it makes no economic sense whatsoever. But everyone saw everybody else investing, so they thought there must be gold in those hills.

So, it is a real gold rush mentality. So, I think that happened with WeWork was you had some early investors who were really charmed by Adam, Benchmark, and they thought, "Well, this business doesn't look great, but we'll figure it out or Adam will figure it out." And then later investors came in, and they were like, "Well, Benchmark's there. They must have seen something about the business."

So, it turns out that Benchmark was probably looking more at the guy. But so JP Morgan comes in, and then Harvard comes in. Then T. Rowe comes in, and then Fidelity. So, they're all looking to each other and those that came before them and using that as a way of validating how impressive the business is.

Kara Miller:

So, I actually wonder this from both of you. People always talk about the smart money. Does that make you feel like, "Yeah, it's not that smart."

Eliot Brown:

Yes. I mean, that was one of the biggest lessons here is, initially I didn't really know what was going on. Were these people dumb? But then we looked in, and it's like, "No." I mean, a lot of these investors who were in there were approaching it in a relatively smart way or generally were smart people who make other good investments.

But, yeah. It shook my notion of what reality is and how easy it is for your mind to bend and see something that wasn't, because these otherwise smart people were looking at something that was so incredibly, obviously to me a real estate company and being like, "Yep, that's a tech company." Yeah. I mean, it's just the power of herd mentality and confirmation bias.

Kara Miller:

Yeah. Yeah. Maureen, how did it change how you think about the smart money or wealthy people and the brilliant decisions they make?

Maureen Farrell:

Yeah. I mean, completely the same thing. It was shocking every step of the way, and as Eliot said, the confirmation bias and just the idea that you just hand over your thinking to a Fidelity or whoever. Investors one by one, I mean, as much as they were looking into it, it was like, "Oh, well it got the Harvard stamp of approval or the Fidelity, it must be fine. We should be not worried about it." And I think it just makes you just so much more skeptical as you realize you need to be more skeptical of everything. You can't just rely on those gatekeepers, so to speak.

Kara Miller:

So, you point out WeWork was not making money for quite a while during its rise. But then again, neither was Airbnb. Airbnb worked out, and it's very profitable now. So, how were people supposed to distinguish between the unprofitable but going to be profitable, and the unprofitable and maybe more of a house of cards type of situation?

Eliot Brown:

I mean, to me, when I look at these businesses, I think the VCs often do the same thing, where you just look at the underlying business. And with WeWork, it was just... This comes up a lot. Is this company a tech company? Is it something else? With WeWork, all of the revenue was coming from people renting offices. They just called them "memberships."

Something like Airbnb, at least, that is almost a great example of the opposite where they didn't own any hotels. They didn't rent any hotels or barely any, or homes. What they were just doing is creating a website and then taking 15% every time somebody rents a room in somebody else's home. So, that's pure software, and WeWork is almost purely the opposite. Until, I think, last year, you could not rent an office on the internet there. You had to go in person or maybe call someone, which was shocking given that you can rent a hotel room on the internet.

Kara Miller:

Right, right. Not super techy, is what you're saying. Yeah.

Eliot Brown:

Yes. So, yeah. I think it was just so fundamentally a real estate company, and so one of the reasons it was such an amazing story to us is it really took a lot of glossing over things and rose-colored glasses to see it as something else.

Kara Miller:

Did either of you ever think, "This is a really smart idea. A lot of people do kind of hang out their own shingle and start their own business. Or maybe they're in a small business of a couple people, and yeah, they're not going to sign a three-year lease in a building in Manhattan. That would be crazy. They don't have that money, and people like to meet other people. So, you're starting one thing, but you meet the graphic designer down the hall. And lo and behold, oh my gosh, they can do your graphics"? Did you ever think, "Oh, this is pretty smart"?

Maureen Farrell:
 
I mean, I still, going into WeWorks, the business itself, take the economics out of it, is a cool concept. I mean, it wasn't that novel at all, but what we say often is one of the biggest innovation was actually just the architecture. And I mean, you do walk around, not all of them, but a lot of the WeWorks, I think they're just really beautiful. They do have a nice vibe, and I always love going in and taking meetings there. So, the spaces are really cool and great. I was always impressed by that for the most part. It's just the question of who's paying for it. The business isn't paying for it. Then it's figuring out a way to make money to pay for it.

Kara Miller:

So, it sounds like it's maybe not the problem isn't the business, but rather that this is maybe a small-time business that people were trying to say, "This is the next Google," and not really.

Eliot Brown:

Yeah. And I think that's a pretty common thing, particularly when you get in the middle of these manias where ever everything needs to be bigger and you just need to keep reaching for the sky. It's not enough that Uber is just the biggest taxi replacement company. It needs to be the Amazon of transportation and get into flying cars and robot cars.

So, yeah. I think the problem is the valuation, and that's what led out to everything else. You could have done this on a much slower scale and then gradually built it up just using profits or debt financing or a normal, non-venture capital  way of financing things, except it just would've been slower.

And we've seen that with other companies. We've seen that with competitors that have done this slower. It's more of a mom-and-pop type business that gets bigger. It just doesn't really justify $10 billion all at once.

Kara Miller:

Right. Maureen, I'm going to play you a clip from the 2021 documentary about WeWork. This is a former lawyer, and he's talking about what we talked about before, this idea that there was this kind of spiritual dimension to what Adam Neumann was trying to do. There's Kabbalah, a little bit of Kabbalah threaded in, a little bit of Rebekah Neumann threaded in. And here's the former lawyer.

Speaker:

At one of these events, I was sitting towards the back, and there was an older usher there. It was an African-American guy, and he just started asking me some questions. He was like, "What's the company about? What do you do there?"

I'm answering his questions. We're going on and on. And he just kind of changed his tone of voice. He kind of looked down on me a little bit, and he was like, "Brother, can I ask you a serious question?" And I was like, "Yeah, sure. Ask me the question." He says, "Is this some kind of cult?"

Kara Miller:

Maureen, talk about that and about these get-togethers that they would have periodically for WeWork.

Maureen Farrell:

Sure. So, the cult question, I mean, obviously, it's the title of our book, came up a lot. Adam was all about bonding, but he took it to another level. It seemed like it kept, over the course of the company's trajectory, these meetings that they would have all-company meetings. They were, he liked to call them, summer camp. He said he never went to American summer camp.

From the early days, first they would go to Upstate New York and go to this camp that his wife's family owned. They would bring in all these bands. There would be tons of alcohol provided by the company, tons of-

Kara Miller:

That was not like any summer camp I ever went to.

Maureen Farrell:

Me neither. So, yeah. So, especially at the beginning, it was over the top, but not in the way it became. A lot of thought. A lot of partying. In general, there were a lot of younger people. But as time went on, it just got bigger and bigger and bigger. It was this global company with thousands of people. They eventually took over a whole huge space outside of London.

And it became much, I mean, we've seen clips. We've heard stories, really kind of like indoctrinating people into this, people called it "cult-like," but just the ideas around WeWork. I mean, in some of the final summer camp, Adam Neumann and Rebekah Neumann were talking about that WeWork was going to save all the world's orphans. I mean, it just became more and more grandiose, his visions of who he was and what WeWork was going to do.

And I don't know. People still, I think, enjoyed it, but I think some people were just kind of like freaked out by some of these aspects of things and also really pushing them on the spirituality side of it too, of buying into that.

Kara Miller:

Eliot, there's another quote from the documentary. Scott Galloway says... This is a great one. "You tell us 30-something male he's Jesus Christ, and he's inclined to believe you." Do you feel like that's over the top, or was he getting just a ton of adulation?

Eliot Brown: So, in reporting for the book, we would often ask people who were quite close to him, "Do you think he thought he was the Messiah?" And the answer was always the same. It was usually, it was a pause. "Man, probably not."

So, yeah. I mean, to Maureen's point, he literally was talking about saving the world's orphans, solving world hunger. He told people repeatedly enough that people are pretty sure he believed it, that he wanted to be president of the world. This is the type of thing that, I guess... These visions of grandeur grew with the valuation. The more money would come in, and the more he'd, I guess, convince himself that WeWork was indeed going on the rocket ship that he was selling.

So, then I think he kept aiming higher and saw himself as a head-of-state type figure and actually ended up snubbing one head of state and almost snubbing another. I mean, he saw himself on that level, and this is a guy who was running an office space subleasing company that was losing $2 billion a year.

Kara Miller:

Maureen, can you talk about some of the biggest injections of money? And some of them came in some ways nearer to the end of this falling apart of the... But what were some of those later injections of money, and what did they do to Neumann and the company?

Maureen Farrell:

Sure. So, he was, as we said, he was a master fundraiser. He continually, I mean, this company, as we also said, needed money. I mean it was burning through more capital each step of the way than it was taking in, so he constantly had to fundraise. He was eventually just going around the globe.

It kept on seeming throughout the company's history that there's no more money to be raised in the private markets. He was raising money, larger amounts of money at ever larger valuations. So, at one point, I think it was 2015, 2016, it seemed like, "Okay, we're going to probably have to go public because we need more money." And then he went to China, and he was able to secure a big investment there.

Kara Miller:

Okay.

Maureen Farrell:

But then eventually, the next year, Masayoshi Son, he's the CEO of SoftBank, a huge global investor to begin with, but then he was in the process of raising the largest fund ever to invest in tech companies.

Kara Miller:

Okay.

Maureen Farrell:

It was $100 billion fund, nothing like that had ever been seen before. Half of it was coming from Saudi Arabia. He had gotten a large commitment to it, and Adam Neumann met him. He came in to meet Adam in WeWork's office. He gave him a very short tour in late 2016, took a 45-minute taxi ride. Masa, he happened to be going up to Trump Tower to meet the then president-elect.

Kara Miller:

Okay.

Maureen Farrell:

He rode with him in his car, and over that car ride secured, I think it was what? $4 billion in funding. It was for his like global expansion. It was just so much more money that he had ever raised before. I mean, we kind of look at that as the beginning of the really challenging part of the company's history.

But when it became very unwieldy, it had already been so, but it was a moment where Adam really got licensed to spend and grow this company to a huge level. But also, it became more and more impetuous with his spending in all the different areas he thought the company would grow into. He had always talked about it being so much more than a real estate company. But this was the time when he and, with Masa's money and with his backing of this, decided to launch into so many new areas and made everything more difficult from there on out.

Kara Miller:

Eliot, do you feel like there were people inside of WeWork as a ton of money's been raised... Obviously, now, Masa's giving him this $4 billion. Were there people inside who are like, "This isn't a good business. We're burning through money. We're not profitable."

Eliot Brown:

The answer is yes, but the answer's yes and no.

Kara Miller:

Okay.

Eliot Brown:

I think that basically what happened with internally is people thought that things were getting crazy when Masa came in, and they were concerned with where WeWork was going. But if the question is, did they think that they were working for a real estate company that should be valued at a 10th of what it was, the answer is no. They still believed in some sort of the super-inflated valuation and dream.

But, yeah. Even a lot of the people right around Adam who had been with him by his side start to look at what happens after Masa comes in, and they're like, "Why are we buying a wave pool company? Why are we buying a coding academy? Why are we starting an elementary school? Why are you buying a corporate jet that cost $63 million?"

So, people were concerned with where it was headed and knew they were going to run out of money and run out of financing sources if things kept up. But on the other hand, Adam had always pulled rabbits out of the hat before with financing and was the world's best salesman by their standpoint. So, I don't think there was a ton of dissent around him.

Kara Miller:

I would love to hear from each of you on this, but there's so many crazy examples of Adam Neumann's own extravagance. Do you want to just mention one or each mention one or two? I'll just leave it to you. You write about this. I can't even choose.

Maureen Farrell:

Sure. I'm happy to start there. I mean, we could just start with his houses. He had them. What was the total count, Eliot, maybe seven or eight?

Eliot Brown:

Yeah, it was eight.

Maureen Farrell:

Okay. Eight, and all over the world, multiple ones in the New York area. And just the renovations alone, just getting details on these of... One example is they bought a big part of a townhouse in Manhattan and were renovating it for years, and Adam's wife was very paranoid about 5G. There was a 5G tower going up near the house and a whole separate story. They actually got this CFO of the company. They asked if he would help try to get the 5G tower relocated.

But they spent so long renovating it, and I don't think they ever actually fully moved into it, because by then she was freaked out about 5G. But the spending on these houses alone was insane.

Eliot Brown:

One of my favorites was his entourage. So, when he'd fly to California, he'd bring trail of people that would come with him. So, there would be his hairdresser would come with him. His surf coach that was on staff, his surf coach's wife and kids, the nanny for the surf coach's kids.

Kara Miller:

Oh, my gosh. I'd just say a couple of ones that struck me is his office stuff. He had a special HVAC thing for marijuana smoke to pull the smoke out of his office. And then another thing I think you talk about is that they had this edict that everything be vegetarian at WeWork, except people would look into his office and be like, "Isn't he eating lamb chops?" So, the inconsistency of others and himself seemed notable.

Eliot Brown:

Yeah. The lamb chop incident happen very shortly after he announced the edict that WeWork was going vegetarian. Another similar one of hypocrisy was he would have these meetings and drag staff in for hours at a time, and they would go through lunchtime. So, people are sitting there with their stomach growling. And frequently his assistant would come in and put some silverware and a place setting at his place at the table, bring in his meal, and then he would eat it while everyone else is watching.

Kara Miller:

Oh, my gosh.

Eliot Brown:

And then sometimes he'll lick the plate clean.

Kara Miller:

Wow. Okay. So, moving from this, Maureen, what were the first signs that the wheels were starting to come off, that the good times, such as they were, were not going to last?

Maureen Farrell:

I mean the first really key moment came by the end of 2018. There's this huge deals. So, Masa had already invested billions of dollars in the company through SoftBank, and then they had been talking for months about doing this giant deal. It was almost $20 billion of investment, both letting people sell shares and putting new money into the company that was essentially going to keep WeWork private forever.

A large number of the staff worked on this. Adam was running the company in 2018, the second half of it, with an eye towards this deal closing, growing the company in a huge way. And everyone at the top of the company seemed to have, anyone who knew this deal, have almost near 100% certainty that it was going to close and this money was going to come in.

For a bunch of different reasons, as the year ended the market was in trouble. The Saudis were very wary of putting money in, questioning whether this was actually a company versus a real estate company. And they already had a lot of money in real estate. So, this entire deal fell apart right before the end of the year in 2018, and I think that was really clearly the beginning of the end, because at that moment it became clear to everyone in WeWork, even Adam, that they were going to have to go public. And there were a lot of issues at this company. No one quite knew how bad it would be, but that it would be a tough company to take public.

Kara Miller:

Eliot, at what point did people start getting laid off in large numbers? Did people who were believers start to question what they had believed in? When did that turn start to happen? How quickly did it happen?

Eliot Brown:

I think the big shattering of the facade was right after the S-1 came out, so after they publicly filed the public. They just immediately became the laughingstock of the internet. I think people there had assumed they were working on something special and then quickly realized like, "Oh, maybe it is a real estate company."

And then one of the reasons that WeWork story's so fascinating and eye catching is its implosion was very quick and fiery. It was all within a couple month period of 2019 that their valuation simply went from $47 billion to $8 billion. They nearly went insolvent, and they laid off thousands of workers.

Kara Miller: Maureen, sometimes people talk about Adam Neumann in the same breath as Elizabeth Holmes of Theranos. I'm going to play you a little clip of Neumann. This is him answering a question from Andrew Ross Sorkin of The New York Times, November of 2021. And essentially, Neumann was asked what he thinks of that comparison between himself and Holmes who ran this infamous blood testing company that, of course, didn't actually do what it promised to do. Here he is.

Adam Neumann:

When you refer to WeWork as a fraudulent company or compare it to companies that don't exist today and are actually being dealt with in a very specific way, forget me, you're offending the employees that built this company. You're offending the management team today that's running it. WeWork is a public company. It's in the billions, and it's positioned to be a real winner. And if you're going to say that it's a house of cards or it's fraud, it's just false.

Kara Miller:

Maureen, what's your take on that assessment?

Maureen Farrell:

I mean, I think it's mostly fair his commentary on that. I mean, a lot of people constantly bring up... I mean, one thing he doesn't get to with Elizabeth Holmes, people always mention her and say, "Oh, is it unfair that she could go to jail and Adam was paid like more than a billion dollars to leave?" Which, fine. I mean, his payout is a separate story.

But Elizabeth Holmes, it seems like, knew her product didn't work and that product could have actually, the thing that she was putting forth could have killed people. So, I think that's just such a different world.

I think Adam definitely misled people. But as we talked about earlier, I mean, he had some of the world's most sophisticated investors looking at their numbers. They saw the numbers that they put at forth. They saw the projections that they had put forth that they never, ever hit. I mean, he was constantly saying they were going to be profitable. They weren't.

So, I think he may have misled people, but I don't think there was outright fraud. And I think in a lot of cases, investors let themselves be misled. They had access to documents that told them what was happening there and chose what to see and what not to.

Kara Miller:

Eliot, let me pick up on one thing Maureen said, which is the payout that Adam Neumann got, which we haven't talked about. But he did get, I mean, there's some dispute, but somewhere in the neighborhood of a billion dollars. We won't quibble over the exact amount. But he did well, let's put it that way. Was that fair? Did he deserve that?

Eliot Brown:

I mean, that is one of the most, if not the largest payout ever to a CEO or chairman to go away from the company, so it's pretty hard to justify in any sense, even at a much lower figure. One of the lower lowest ones you can use is 185 million. I mean, it just shows that he's an amazing negotiator when it comes to himself, and that SoftBank also is not all that parsimonious when it comes to money, because he negotiated directly with them. Everyone involved other than Adam was just totally aghast when that came out.

Kara Miller:

One thing, Eliot, that I noticed is that people were willing to speak to you for the book in pretty large numbers, which doesn't always happen. Why do you think that was?

Eliot Brown:

Generally, I think people were really, really angry after. People involved with WeWork were really angry about it and angry at Adam, and so that helped us. I think another part of it was when you go to people telling them you're writing the definitive book on this pretty important saga and business, that opens up things that a newspaper article doesn't. So, I think there was a lot of that just for history's sake.

But, yeah. I think a big reason was that people felt wounded by him because he had brought them in and told them to see something that wasn't there.

Kara Miller:

Maureen, I wonder, given everything we've just said is, if you're a founder of a company, what do you take from this story? What should you take from this story?

Maureen Farrell:

I mean, it's a great question because I would say in the immediate aftermath, there was this whole wake up saying that companies should be profitable. There should be an eye towards profits. The crazy thing about that is by early 2020, at some point the pendulum from back towards rationality had swung back the other way. So, theoretically, there should be all these warnings that this book gave both founders and investors.

I think the scary and depressing thing about it is they were briefly heeded and then not, within a few months, were disregarded in it. Maybe not on the same scale as Adam Neumann, but we're hearing so many stories about founders taking out money from the company, investors letting them sell shares early, just a lot of extreme behaviors. I hate to say it, but it's kind of sad that these lessons have not been learned in a bigger way yet.

Kara Miller:

Eliot, from the VC side, from the funder side, what should people learn from this? And also, do you think they've learned anything?

Eliot Brown:

So, to the second first, no. I don't think there have been lessons learned. I mean, like to Maureen's point, briefly, there seemed like there were. But then that disappeared. We're sort of in a chilling-off period now, so we'll see what happens in the market.

But to me, one of the things that I just found rather puzzling about the market is this notion of founder control and how freely it's hand out. It's one thing to believe in the power of a founder as being these special beings, and it's another to then give them full control. You look at the deity figure founders of history of Steve Jobs and Jeff Bezos, and they didn't have founder control. They just owned the same type of stock as everyone else. And why you would give a 25 year old or 35 year old with no real business history the keys to a car and then $10 billion when the company hasn't even proven itself just defies conservative investing principles.

So, that's what the market's chosen to do, and that's how the market competes. And venture firms will compete on what they give founders in terms of control, as opposed to just giving them money. So, should that change? That's up to the market. But it certainly seems like that is the conditions that will lead to another WeWork at some point.

Kara Miller:

Eliot, I wonder how you think about this story. So much of your reporting and understanding of WeWork came before the pandemic, and one of the interesting things as the pandemic winds down or something as we hit this two-year mark is that people talk now all the time about like, "Oh, well maybe people don't want to do the full commute into Manhattan or Boston or San Francisco, but maybe they do want a place near them somewhere where they can see other people, because it's kind of lonely to sit at your kitchen table all the time." Do you look at WeWork at all in a different light since the pandemic?

Eliot Brown:

Yeah. I mean, I think it's still emerging. I'm not as close to the office market stuff today as I used to be. But I think it's still a total jump ball as to what happens, and no one really has a sense of how many people, what percent of companies, what employees are going to come back to the office. Other than that, it's not going to be 100% the same.

Kara Miller:

Right.

Eliot Brown:

So, I think that uncertainty probably can benefit WeWork. Some companies may not know what they're doing, so maybe they're just going to go with WeWork when their 10-year lease comes up and just stick with them for a few years. And then yeah, you could also see some sort of growth of a suburban hub and spoke thing. That can get expensive depending how big you go in on it.

So, yeah. I would think that they benefit potentially, or there's a lot of things that could go in their favor, assuming people come back to the office in some form. That said, I still think the basic question is, is this a tech company or a real estate company? And the market has now come to the conclusion it's a real estate company. I don't really see what would change that.

Kara Miller:

Do you know what Adam Neumann is doing now?

Eliot Brown:

He is spending money. He's investing some of it. He's buying a lot of apartments. He wants to do something related-

Kara Miller:

He's in real estate, is what you're saying.

Eliot Brown:

He's in real estate and trying to create a big business that he expects will be very valuable. Whether he wants it to be valued like a tech company or thinks it will be, I don't know. But he's doing something that he thinks will be the future of living. As best we can tell, it's all his money so far, almost all his money.

Founders like that usually can raise lots of money from outsiders. That's a weird facet of Silicon Valley. So, we'll see what happens. But his image is pretty tarnished, so I can't imagine that he'll be viewed with the same Messiah-type vibe that he had in 2018.

Kara Miller:

Eliot Brown and Maureen Farrell are co-authors of The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion. Thank you so much for being here.

Maureen Farrell:

Thank you so much for having us.

Eliot Brown:

Thanks for having us.

Kara Miller:

And thank you for joining us. If you want more on the WeWork story, it's been bubbling up on lots of screens recently as I noted earlier, there's that documentary on Hulu, and WeCrashed is on Apple TV. As for Neumann's future and his new rental real estate company Flow, Marc Andreessen, the co-founder of Andreessen Horowitz, wrote in a recent blog post "It's often under appreciated that only one person has fundamentally redesigned the office experience and led a paradigm-changing global company in the process: Adam Neumann. We understand how difficult it is to build something like this and we love seeing repeat-founders build on past successes by growing from lessons learned." We will see if the big bet pays off. Follow Instigators of Change on apple podcast or wherever you get your podcast and leave us a review. I'm Kara Miller, our show is produced by Matt Purdy, talk to you next week.