Review: WeWork's debacle had many enablers - Reuters

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WeWork CEO Adam Neumann speaks during a TechCrunch Disrupt event in New York City, U.S., May 15, 2017. REUTERS/Eduardo Munoz

LONDON, Aug 6 (Reuters Breakingviews) - When WeWork’s much-hyped office-sharing edifice started crumbling in 2019, founder Adam Neumann was the obvious person to blame. In “The Cult of We: WeWork and the Great Startup Delusion”, Eliot Brown and Maureen Farrell portray the ambition and recklessness of the Israeli entrepreneur with great detail and colour. But the authors’ main achievement is to subject Neumann’s many enablers – investment bankers, fund managers, venture capitalists and the media among them – to proper scrutiny.

An office-leasing startup touted as a technology company, WeWork, also known as The We Company, had raised more than $10 billion at private-market valuations peaking at $47 billion by the time it tried to go public in 2019. A charismatic founder, Neumann, aimed to “elevate the world’s consciousness”. He regularly served tequila shots to employees and investors, according to Brown and Farrell. Neumann smoked pot so avidly on a private jet that flight attendants would reach for their oxygen masks.

In the end, WeWork’s planned initial public offering failed to find public-market buyers at any price. Its valuation plunged to $9 billion almost overnight. Masayoshi Son’s SoftBank Group (9984.T), already an investor, came to the rescue with WeWork weeks away from running out of cash. Neumann was paid to go away with over $1.5 billion in cash and credit.

With the benefit of hindsight, WeWork’s governance lapses were shocking. In some cases, board directors could have reined in Neumann, for example over using private jets and acquiring a surf-pool company. They didn’t. Neumann was also allowed to own stakes in buildings WeWork leased. With minimal oversight, management was characterised by chaos, with executives switching roles constantly.

The most striking aspect of the story, however, is the investment culture that allowed it all to happen. The authors, both Wall Street Journal reporters, document the fear of missing out that led so many players to dance around the red flags. Venture capitalists from firms like Benchmark Capital turned a blind eye to everything from conflicts of interests to alcohol consumption at WeWork with the hope of selling out at a massive profit in the public listing. Other fund managers were keen to make outsized returns in a low interest rate environment. Some of the biggest names in the finance world were involved in one capacity or another: they included JPMorgan (JPM.N), Goldman Sachs (GS.N), T. Rowe Price (TROW.O) and Fidelity.

Fuelling Neumann’s rising and erratic ambition was his backing from SoftBank’s Son. According to Brown and Farrell, the duo once viewed WeWork as a business that could be worth $10 trillion by 2028. SoftBank and its roughly $100 billion Vision Fund, mostly backed by Saudi Arabia, gave Son huge financial firepower to bet on companies he thought would be winners. Neumann at WeWork and Son across the tech world were both trying to ratchet the valuations of businesses ever higher. Both men relied on instinct to make decisions.

Investment bankers, afraid to lose out to rivals in the battle to win lead roles and league-table credit for the biggest tech IPOs, also enabled Neumann, “The Cult of We” explains. Goldman, for example, pitched a lofty range of expected public-market valuations to get in the good graces of the WeWork team: $61 billion to $96 billion. JPMorgan readied a plan to help WeWork borrow $6 billion in hopes of winning the WeWork IPO mandate.

Journalists also played a role. The startup-focused press in particular acted more as cheerleader than watchdog. Few people wanted to argue the reality that WeWork was much more like a traditional real estate business than the tech disruptor it claimed to be.

The collapse of WeWork’s IPO chastened Son and punctured broader tech industry hype, but only temporarily. There are still plenty of mundane businesses masquerading as tech pioneers, and there is still lots of investment cash chasing the next big thing, driven to downplay the risks by fear of missing out. Tech industry stock-market valuations, as measured for example by the Nasdaq 100 Index, have soared to all-time highs, inflating the worth of many of Son’s other bets. The delusion of the book’s title is going strong.

Follow @karenkkwok on Twitter

CONTEXT NEWS

- “The Cult of We: WeWork and the Great Startup Delusion” by Eliot Brown and Maureen Farrell was published in the UK on July 22 by Mudlark.

Editing by Richard Beales and Oliver Taslic

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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