Why WeWork's 47 Billion Empire Fell Apart

Transcript

Summer 2018. WeWork’s chief executive, Adam Neumann, flies to Israel on a chartered Gulfstream, smoking marijuana with friends. After landing, the crew finds a cereal box stuffed with weed, and the jet’s owner sends the plane home without him. The Wall Street Journal told that story a year later, as his once 47 billion dollar company was falling apart. How did a company burning through billions of dollars get valued that high? What was in the IPO filing that killed the deal? And why, seven years later, are investors still backing the man who ran it?

The owner’s reason, in the Journal’s account, was fear of a marijuana trafficking incident. Neumann and his entourage had to get home on a separate flight. At the time he was running WeWork, the shared office company he had co-founded. To understand how WeWork’s boss ended up left behind by his own charter flight, go back to the beginning. Neumann grew up in Beersheba, Israel, lived on a kibbutz in southern Israel as a teenager and served as a junior officer in the Israeli Navy.

Neumann came to New York City in the United States in 2001, straight out of the Israeli military. Before WeWork, he started a company called Krawlers, which sold baby clothes with padding sewn into the knees for crawling. He later put that stretch of his life plainly: he was misguided, he said, and putting his energy into all the wrong places. Working in the same building was a lead architect at a small firm, Miguel McKelvey. McKelvey had grown up in what has been described as a five mother collective in Eugene, Oregon, in the United States, and held a degree in architecture. The two became friends.

Then Neumann spotted an empty warehouse on Water Street in Dumbo, Brooklyn, and decided he wanted it. He walked up to the landlord and asked for the building. The landlord’s reply, as Neumann told it: you’re in baby clothes, what do you know about real estate? Neumann fired straight back: your building is empty, what do you know about real estate? In 2008 the two of them talked a landlord into letting them split the floors of an empty building into semi-communal offices and rent them out. They called it Green Desk, and McKelvey built the name, the logo and a working website in one night. Recycled furniture, wind powered electricity, a desk or a private office rented month to month. The business model was one sentence long: charge the members more than your own lease payments cost you. And here is the strange part. The property market was collapsing, and Green Desk thrived. Some people who were laid off in the crash started their next businesses from those desks.

That told the two founders something they would spend the next decade selling: what pulled people in was not the recycled furniture, it was the company of other people. So they sold their stake in Green Desk to their landlord, Joshua Guttman. In 2010 they took that money and started over with a new name, WeWork. The first location opened in SoHo, Manhattan.

That flagship space in SoHo reportedly turned a profit one month after it launched. A profit within a month, in one building, in one neighbourhood. So who was writing the cheques that would carry one SoHo location to a price in the billions?

Start at the bottom of the ladder. The first big cheque came from a New York real estate developer, Joel Schreiber, who paid 15 million dollars for a third of the new company. That puts a price of roughly 45 million dollars on the whole business, right at the start. That price is called a valuation: what one slice sells for, scaled up to the whole company. It is a number on paper, not money in the bank. In July 2012, an undisclosed group of investors priced the company at 97 million dollars. That is the last number in this story small enough to say without blinking.

In February 2014 it became a unicorn, a startup valued at more than a billion dollars. The price was 1.49 billion, with JP Morgan Chase, Harvard Management, Benchmark Capital and Mort Zuckerman in the round. Investors were eager to pump money in. And each round pushed the price higher.

Then the steps started skipping. By late 2014 the price was 5 billion dollars. The following June, a late stage round that included Fidelity put the number at 10.23 billion dollars. Run the arithmetic on those marks: in under three years, a business that rented out desks had multiplied its paper value more than a hundred times.

In June 2016 it laid off 7 percent of its staff and temporarily froze hiring. By that October, Legend Holdings and Hony Capital led a round that lifted the price to 16.9 billion dollars. Shrinking the payroll and growing the valuation, in the same year.

Then came a cheque bigger than anything before it. In August 2017 came SoftBank, the Japanese investment group run by Masayoshi Son. Through its Vision Fund, it led a round that priced WeWork at 21.2 billion dollars. The Vision Fund’s own cheque was 4.4 billion dollars. With that one cheque, SoftBank could have bought the whole company, at its early 2014 price, almost three times over.

Money that size changes what a company buys. In 2018 WeWork bought its own Gulfstream G650, the same model Neumann had chartered, for more than 60 million dollars. It had already signed a contract to buy the Lord and Taylor building on Fifth Avenue in Manhattan for 850 million dollars. There was a coding school called Flatiron School, the events site Meetup, and a stake in Wavegarden, a maker of artificial wave machines. A coworking company, investing in wave machines.

In January 2019 SoftBank went again, and the new price was 47 billion dollars, more than double the last mark. It set that price for a company still burning through billions, before the public had seen its full accounts. SoftBank had weighed a far bigger cheque, then cut the plan back because of turbulence in financial markets and opposition from investors.

Since 2010, WeWork had raised 12.8 billion dollars, most of it from SoftBank’s Vision Fund. That is how a company losing so much was priced so high: the price was set by whoever wrote the next cheque, not by profits. The Wall Street Journal later reported on Adam Neumann’s ambitions. To live forever, become the world’s first trillionaire, and be president of the world.

In August 2019, the company filed to sell its shares on the stock market for the first time: an initial public offering, or IPO. That filing, a Form S-1, gave outsiders their first in-depth look at the numbers. The name on the cover was not WeWork, because the legal name had been changed to the We Company. Much of what came next started with that document.

Start with the leases, because that is where the filing bled. It disclosed 47 billion dollars of future lease obligations: rent the company had committed to pay landlords for years to come. Same figure as the valuation, but this one was rent. Against it stood only 4 billion dollars of future lease commitments. Close to twelve dollars of obligations for every dollar of commitments. It had signed long leases with landlords, then rented the space out on much shorter terms. That was the arithmetic no banker could talk around.

The profit pages were just as blunt. The filing showed a loss of 1.6 billion dollars in 2018, on revenue of 1.8 billion dollars. For every ten dollars that came in, it lost almost nine. The same filing recorded that Neumann had volunteered to take no salary for that year. His salary was never the problem. Business Insider said it in one line: WeWork was not even close to profitable, and it lost 219,000 dollars every hour of every day.

Then came the questions about the founder. The filing showed that the company had paid 5.9 million dollars to an entity owned by Neumann and other founders, just to license the name We. As chief executive he had also bought buildings and leased space in them to his own company, what observers called a potential conflict of interest, one that would not be allowed at a public company. And by that July he had already sold off 700 million dollars of his own WeWork stock.

Investors read all of it. The company was then, as one account put it, besieged with criticism over its governance, its business model and its ability to turn a profit. WeWork amended the filing twice to answer those worries, from its governance to who would succeed Neumann. It was not enough.

The repairs came fast, and they came late. In early September, Harvard Business School professor Frances Frei became the first woman on the board of directors. Days later the board won the power to choose a new chief executive, Neumann’s family would no longer sit on it, and he agreed to hand over any profits from his real estate deals with the company. He also returned that trademark payment and signed the We trademarks over to the company.

On the seventeenth of September, the company postponed the share sale. Barely five weeks from filing to collapse. The price now being discussed in public was around 10 billion dollars: less than a quarter of SoftBank’s January price, and less than everything investors had put in since 2010. Nine years of other people’s money, and the business was now priced below the pile. Neumann still had his job, but only until his own directors moved to push him out.

That September, the fight over Adam Neumann stopped happening behind closed doors. On the twenty-second, the Wall Street Journal reported that several WeWork directors were preparing to ask him to step down as chief executive. The paper described the days before it as a tumultuous week in which his eccentric behaviour and drug use had come to light. The same reporting said he had undermined his own position at the company. Among the stories now in print: the flight to Israel, and the cereal box.

By then the talk was no longer only about desks and leases. Attention had shifted to how he ran the place. There were reports that he had served employees tequila shots after discussing layoffs with them. Investors were pressing hard, and the pressure came straight out of the disclosures in that filing.

By the twenty-third, SoftBank wanted him removed as chief executive. The next day Neumann resigned as chief executive and gave up majority voting control of the company he had built. Two of the company’s own executives, Artie Minson, a former finance chief of Time Warner Cable, and Sebastian Gunningham, became co-chief executives. Neumann stayed on as chairman, for now. That same day, WeWork put the Gulfstream up for sale. Critics said the jet had become a red flag in the run up to the share sale, and had caused problems with staff who did not receive promised bonuses and raises.

Meanwhile, it was becoming clear that WeWork was in financial trouble. It had begun selling off the businesses it had bought, and its bonds had fallen to record lows. By early October the company was hunting multi billion dollar lifelines from JPMorgan and SoftBank.

Losing the company did not mean losing the money. That October, SoftBank agreed a package worth close to 1.7 billion dollars for Neumann to leave the board of directors and sever most of his ties to WeWork. The package counted 970 million dollars for his remaining shares, plus 185 million dollars to stay on as a consultant, about 46 million dollars a year. Then the line that still stops people: 500 million dollars of credit to help him repay his loans to JPMorgan Chase. WeWork’s largest investor was now helping settle his bank debt.

The founder was being paid to leave while the company went looking for a rescue. Weeks after that exit deal, minority shareholders sued Neumann and other WeWork officials, accusing them of breaching their duties to shareholders.

And SoftBank had to show the damage in its own accounts. In early November it cut the value of its WeWork investment by 9.2 billion dollars, about 90 percent of the 10.3 billion dollars it had put in. Later that month, WeWork cut 2,400 jobs, almost 20 percent of its workforce worldwide.

Neumann’s own deal did not survive as written either. SoftBank stopped paying the rest of his consulting fees and, in 2020, called off an offer to buy shares from some of WeWork’s big stockholders. WeWork and Neumann both sued. Under new terms reported in 2021, a company he controls was allowed to sell 578 million dollars of WeWork stock. He still collected 106 million dollars in cash, about half for legal fees.

The share sale was dead. The company was not. In October 2021, WeWork finally went public another way. It merged with BowX Acquisition Corp, a shell company already listed on the stock market, in a deal valued at 9 billion dollars, and its shares began trading on the New York Stock Exchange. Sandeep Mathrani, brought in as chief executive in early 2020 from GGP and Brookfield Property Partners, stayed in charge. That same month, WeWork announced a partnership with Cushman and Wakefield that included a 150 million dollar investment in the company. Fresh money, a ticker, a clean slate. The leases were still there.

By the end of June 2023, WeWork was running more than 700 locations in 39 countries. And it was handing more than 80 percent of its revenue straight to landlords and lenders, as rent and interest. In cash, that was over 2.7 billion dollars a year. Do the division: more than 7 million dollars a day, every day, before a single desk was cleaned or a single coffee poured. That is not a bad quarter. That is arithmetic that never closes.

It had already tried to buy itself time. That spring, in financial trouble, the company swapped its debts for new ones that fell due later, at interest rates as high as 15 percent. By August, with bankruptcy looking unavoidable, it hired the restructuring advisers Alvarez and Marsal. Cash came in from BlackRock, King Street Capital Management and Brigade Capital, as part of a possible bankruptcy plan. This was not money for growth. It was money for getting through bankruptcy.

In November 2023, WeWork filed for Chapter 11 in federal court in New Jersey, in the United States. That is the kind of bankruptcy that lets a company keep operating while a judge oversees cuts to its debts. It listed liabilities of between 10 billion and 50 billion dollars. Days before that filing, SoftBank paid 1.5 billion dollars to Goldman Sachs and other creditors, because it had guaranteed WeWork’s loans. Masayoshi Son’s group had already seen most of its investment’s value wiped out. Now it was paying the bills as WeWork went into bankruptcy.

Then the founder came back. In February 2024, Adam Neumann bid 500 million dollars to buy WeWork out of bankruptcy, the same sum as the credit SoftBank once gave him to help repay his JPMorgan Chase loans. The company’s own managers and lenders rejected his alternative plan. Instead Yardi Systems, a real estate technology provider and one of WeWork’s creditors, invested 337 million dollars for a 60 percent stake, and Anant Yardi joined the board of directors. Hedge funds added 113 million dollars for a fifth of the company. A real estate technology provider now controlled the business that had once been the largest private sector tenant in both London, in the United Kingdom, and New York.

On the thirtieth of May 2024, bankruptcy judge John Sherwood said he would approve the restructuring plan. The company’s attorney, Steven Serajeddini, put the case in one line: a little more than six months, he said, but it had felt like a lifetime. The plan eliminated 4 billion dollars of debt and cancelled leases at about 160 locations. WeWork said the plan would cut its future rent obligations roughly in half. And on the way out of Chapter 11, WeWork valued itself at between 665 million and 865 million dollars, a sliver of the peak price SoftBank had once blessed. Creditors with no collateral were expected to get back one cent on the dollar.

The money had found him again more than a year before WeWork’s bankruptcy. In August 2022, the venture capital firm Andreessen Horowitz put 350 million dollars into a company called Flow. Flow was a residential real estate business, founded that year by Adam Neumann and run out of Miami, Florida. The cheque valued it at more than 1 billion dollars. Flow had not yet operated a single building. A unicorn before it opened a door.

There was one more detail in the deal. According to the Wall Street Journal, Andreessen Horowitz also took a stake in Flow’s own property holdings. The pitch had a familiar ring. Flow said it aimed to address parts of the United States housing shortage through technology, social interaction and promoting equity for renters. One business write up says Flow was pitched on a promise of ending loneliness. Its model was built around furnished apartments, wellness amenities, communal space and resident programming. The company combines ownership, development, property operations and software in one business. It began by managing more than 3,000 apartment units in Nashville, Tennessee, in Atlanta, Georgia, and in Miami and Fort Lauderdale. Community as the product, all over again.

Then the map got bigger. In 2024 Flow entered Saudi Arabia, partnering with local investors to build and run apartment blocks in Riyadh. It got in by buying residential blocks and raising a fund of 293 million dollars. The same write up says much of the money Flow raised has gone into real estate it holds.

Now count what Flow says it has. Flow now says about 8,500 residences sit under its management or in development, in the United States and Saudi Arabia. It values that portfolio at 2.5 billion dollars. Trade coverage adds commercial space, and a site near Miami that Flow is pursuing, with room for more than 2,300 apartments. The plan is to run Neumann’s own buildings and other landlords’ buildings too.

And the man himself? In 2023, after he called an article in The Spectator defamatory, the magazine amended it to say he did not deliberately mislead investors or break any law. He has also been telling his story again, on The Diary of a CEO podcast, going back over WeWork and Flow.

So here is the scoreboard. Forbes estimated his net worth at 2.2 billion dollars in early 2024. And in 2026 an apartment industry awards list named him its investor and owner of the year. In July 2023, Fortune reported how Neumann saw Flow’s options with the company he had lost. Flow, he said, had only two choices: compete with WeWork, or partner with it.

WeWork fell apart when a price set by the next cheque met rent locked in for years. The losses landed on SoftBank, on creditors and on the staff who were cut, while the founder kept a fortune.

WeWork, meanwhile, first broke even in late 2024, on a measure that leaves out interest and other big costs, and was still not profitable. Neumann is somewhere else entirely: his next communities, in Dubai and Abu Dhabi in the United Arab Emirates, are planned for early 2027. As for why the money keeps finding him: his first backer, Andreessen Horowitz, later invested more, citing Flow’s new way of running rented homes. Same promise about community, new buildings, and this time ownership is part of the model.