Review: Billion Dollar Loser, by Reeves Wiedeman

[Russ Allbery]

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individual payout valued at $1.7 billion), the IPO was withdrawn,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

Reviewed: 2020-12-30

URL: https://www.eyrie.org/~eagle/reviews/books/0-316-46134-2.html

-- 
Russ Allbery (eagle at eyrie.org)             <https://www.eyrie.org/~eagle/>