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©2021 by the Kellogg School of Management at Northwestern University. This case was ready by Professor Sarit Markovich and Evan Meagher ’09. Circumstances are developed solely as the foundation for sophistication dialogue. Circumstances usually are not supposed to function endorsements, sources of main information, or illustrations of efficient or ineffective administration. Some particulars may need been fictionalized for pedagogical functions. To order copies or request permission to breed supplies, name 800-545-7685 (or 617-783-7600 exterior the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No half of this publication could also be reproduced, saved in a retrieval system, utilized in a spreadsheet, or transmitted in any type or by any means—digital, mechanical, photocopying, recording, or in any other case—with out the permission of Kellogg Case Publishing.

S A R I T M A R Okay O V I C H A N D E V A N M E A G H E R

The More durable We Fall: The We Firm’s 2019 IPO Fiasco

“How did you go bankrupt?” Invoice requested. “Two methods,” Mike mentioned. “Regularly after which immediately.”

—Ernest Hemingway, The Solar Additionally Rises

WeWork cofounder Adam Neumann burst onto the stage at Madison Sq. Backyard in January 2019. Earlier than him sat practically 7,000 staff of the quickly rising coworking house landlord, which supplied shared and short-term workplace house and providers principally for startups and freelancers. This quantity was a formidable improve from the firm’s four,000 staff only one yr in the past. Swaggering with the confidence of a rock star and the Zen spirituality of a yoga guru, Neumann quieted the crowd earlier than launching right into a passionate speech extolling the firm’s accomplishments throughout 2018. The vaunted “unicorn” startup* had truly accelerated its progress price in complete membership, workstations, and revenues, which had soared to $1.82 billion. Together with his spouse, Rebekah, serving as WeWork’s chief model officer, Neumann had led the firm’s diversification into adjoining product traces WeGrow (an progressive personal elementary college startup), WeLive (a communal dwelling service), and Powered by We (a design, renovation, and office-management service). 2019 would carry extra of the similar, he promised as staff rose to their ft, cheering.

* A time period coined in 2013 by enterprise capitalist Aileen Lee of Cowboy Ventures. Unicorns are startups with a post- cash valuation above $1 billion.

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This doc is allowed for educator overview use solely by SHAJAN NINAN, Lead Faculty of Management till Could 2022. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860

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“And I’m completely satisfied to announce that our most up-to-date fundraise has been a whole success. . . and values our little firm at $47 billion!” The gang roared, however once more, Neumann quieted them.

“I acquired this name, and it’s factor,” he continued, turning contemplative. “It might be a blessing. We raised a smaller quantity, saved our investor base intact . . . It’s a change in technique, however change . . . teaches you. It teaches you classes. It’s factor.”1

“He actually mentioned, ‘Our valuation relies on power,’ and everyone simply mentioned, ‘OK, no matter,” a senior WeWork worker recalled later. “We went together with it. The way in which every little thing got here collectively, from his power, to his imaginative and prescient, to how people-oriented it was, the camaraderie. We banded collectively, and it was enjoyable. , ‘band of brothers, we’re in the trenches collectively, the adversity and two-minute miles.’ I give lots of credit score to WeWork. It had Uber’s aggressiveness however Lyft’s coronary heart.”

However simply 9 months later, the firm was backing off its IPO, and Neumann had been forcibly ejected from the firm amid scathing public critiques of his greed and egotism.

WeWork In early 2008, Israeli entrepreneur Adam Neumann discovered himself operating a struggling baby-

attire firm out of an workplace at 68 Jay Road in Brooklyn, New York. Referred to as Krawlers, the enterprise targeted on promoting onesies with padded knees to oldsters with crawling infants.2 “We have been working in the similar constructing as my co-founder Miguel McKelvey, a lead architect at a small agency. At the time, I used to be misguided and placing my power into all the flawed locations,” Neuman recalled years later in an interview with a enterprise publication.three Recognizing a chance in the vacant house in the constructing, the two teamed up as co-founders of an incubator they known as GreenDesk, providing environmentally pleasant coworking areas with recycled furnishings and sustainably generated electrical energy.four The enterprise took off as GreenDesk rented house from the constructing’s proprietor Joshua Guttman and subleased it at a premium to startups and freelancers. In 2009, Neumann and McKelvey offered GreenDesk to Guttman, incomes “a number of million” in the course of, and launched a extra formidable model of the similar primary enterprise mannequin—this time, with out having to share any revenue with Guttman—as WeWork in 2010.5 The pair raised $15 million—at a $45 million post- cash valuation—from native actual property developer Joel Schreiber. “I didn’t negotiate; I mentioned sure. I liked Adam’s power,” Schreiber mentioned later.6

WeWork thrived, arguably by promoting a extra polished, extra aggressively promissory model of the commonplace coworking house mannequin. Whereas most coworking opponents, reminiscent of Regus, Impression Hub, and Industrious, adopted the same technique of leasing giant workplace buildings and subleasing out smaller parts for a premium, WeWork’s advertising supplies offered a imaginative and prescient of collaboration between various, artistic city professionals. WeWork areas featured beer and kombucha on faucet, frequent social gatherings amongst tenants, and foosball and ping pong tables. “We’re altering the means folks work,” Neumann mentioned in 2013. “It simply occurs to be that we’d like house to do it in.”7 WeWork commanded premium costs from sublessors—structured not as a lease cost however as a ‘membership price’—by promising an atmosphere of collaborative innovation whereby D o

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a member firm needing freelance design Help might meet a possible such contractor over commonly scheduled completely satisfied hours, bagel brunches, or yoga lessons. As half of the membership price, WeWork additionally bundled in providers like safety, reception, high-speed web, and printing.

However the actual perk is having different folks round. WeWorkers community at weekly bagel-and- mimosa events, the place they could discover a software program developer to provide an app for them. Members pitch their concepts at casual demo days and get free recommendation throughout workplace hours from keen exterior companions like advert company Wieden+Kennedy. Handshake agreements and job referrals are revamped the wagging tails of members’ canine.

“Different places of work are simply miserable in comparison with right here,” says Nicole Halmi of Neon, an image- choice platform in the WeWork Tenderloin location in San Francisco. “The outdated mannequin of workplace house is lifeless,” provides startup veteran Gary Mendel, who runs Yopine from a WeWork in the renovated Marvel Bread manufacturing facility in Washington, D.C.eight

The corporate supplied a spread of pricing plans to accommodate everybody from solo proprietors needing solely WiFi and occasional to so-called “enterprise” clients (these with greater than 500 staff worldwide) who wanted full-scale-miniature places of work as the first step in nationwide or worldwide growth. As of March 2020, the most elementary membership price solely $45 monthly and included entry to WeWork places of work in 845 open or coming-soon places in 188 cities worldwide. It additionally featured entry to WeWork’s social community, WeWork Commons, which enabled entrepreneurs to work together and change concepts. Precise use of the amenities price a further $50 per day, nonetheless, so it was finest suited to those that have been primarily in networking and who wanted workplace house solely often.9

Moreover, WeWork’s sudden large international attain purported to supply these bigger enterprise clients—which made up roughly 43% of the firm’s membership base—an awesome deal of flexibility in short-to-medium time period leasing choices abroad. Many nations required the formation of an area, tax-paying entity to execute a industrial lease, a course of that usually proved prohibitively costly given the authorized and tax prices of international entity formation. With WeWork leasing out areas round the globe, bigger firms might merely sublease house from WeWork, bypassing or delaying many of the regulatory frictions historically related to international growth.

To help the neighborhood imaginative and prescient, WeWork supplied a networking utility, The WeWork Member Community, which it described as “a personal, skilled, social community for our members to entry the international neighborhood, in addition to the perks and options of their membership. It’s the finest place to resolve enterprise issues, discover purchasers, and join with different members.”10

Coworking Trade Overview In its S-1 type, dated August 14, 2019, WeWork—freshly renamed the We Firm—

estimated a complete coworking industry addressable market measurement of between $945 billion and $three trillion. This market was unfold throughout the 280 international goal cities the firm had recognized (111 of which it already served, as of June 1, 2019, with plans to develop into 169 extra).11 At the D o

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time, the We Firm estimated it had lower than 1 p.c market share in what it described as a extremely fragmented industry, with each particular person and institutional gamers fulfilling the primary worth proposition of leasing out workplace buildings after which subleasing parts thereof at a premium that, to justify its price, typically included value-added providers reminiscent of safety, high-quality web, and recommendation on fundraising proposals.

The dominant participant previous to WeWork’s meteoric progress was IWG (née Regus), based in 1989 by Mark Dixon, an government who had grown drained of figuring out of resort convention rooms. By WeWork’s reckoning, IWG had lower than three.5% market share, with its 1,284 places producing revenues of $three.2 billion in 2018.12 (The overwhelming majority of these places have been in the United States, its largest and most mature market in 2018, which additionally trailed solely EMEA as its second-fastest-growing market).13 As WeWork flourished, different gamers started to enter the market and maintain themselves out as WeWork options, together with conventional landlords and builders like Boston Properties and Tishman Speyer. “I believe lots of landlords will step in to handle the house if WeWork exits,” mentioned Daniel Lisser, senior director at real-estate brokerage Marcus & Millichap Capital Company, in a 2019 interview with an industry publication. “They’ll attempt to be WeWork with out the drama.”14

The expansion of the gig economic system supplied a tailwind to the industry’s 46% compound annual progress price throughout the decade of WeWork’s ascendance. Freelancers, part-time staff, and entrepreneurs flocked to coworking areas and paid premium costs for low-commitment areas that offloaded the burden of workplace administration and upkeep to the coworking house supplier (see Exhibit 1).

Leasing and Areas WeWork initially acquired the workplace house it leased out to members by signing long-term

leases with phrases so long as ten or fifteen years. Because it grew, the firm shifted from leases to co- administration preparations, by which WeWork’s landlord would make a monetary concession or contribution to the buildout or working prices in change for a share of membership revenues or income. (The corporate discovered the most success with this strategy in softer markets, typically abroad, as the pricing in hypercompetitive markets reminiscent of San Francisco or Tokyo made such preparations tougher to rearrange.) As WeWork grew, it discovered it simpler to get landlords to share some of the buildout prices. As well as, the We Firm arrange an actual property funding fund known as ARK to start buying properties outright, with long-term mortgages financing the acquisition.

The corporate selected new places based mostly on their proximity to amenities and companies like espresso outlets, eating places, and gymnasiums. As soon as it had secured a location, WeWork designed that web site to maximise house utilization, minimizing sq. footage per individual whereas nonetheless offering ample frequent areas and assembly rooms. In response to the firm, its use of information from different places of work allowed it to foretell assembly room utilization higher and thereby to design their new places of work extra successfully.15 In contrast with the 250-square-foot house per individual in industrial places of work industry-wide, WeWork’s buildings supplied a median of 50 sq. ft per individual.D o

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WeWork’s buildouts of new areas on common have been accomplished in 9 months, though some buildings have been prepared in as little as 4 months. In response to information analytics agency CB Insights, WeWork’s effectivity in building and design, along with its shopping for energy, lowered the firm’s price of including a brand new desk to $9,504 in September 2017, from $14,144 the yr earlier than.16

Progress and Enlargement WeWork’s geographic progress additionally scaled the providers it supplied its members by way of acquisitions

and partnerships. For instance, WeWork’s retailer supplied members reductions on software program and workplace providers. The corporate’s acquisition of the Flatiron School, a coding boot camp, allowed WeWork to supply members coding programs and applications, and a partnership with on-line private finance firm SoFi supplied WeWork members in the United States a zero.125% price low cost on pupil loans. All of these incentives have been half of the firm’s imaginative and prescient of constructing a WeWork ecosystem.

The corporate’s formidable model promise was matched solely by Neumann’s capability to fundraise. By 2014, the firm’s roster of traders included J.P. Morgan Chase & Co, T. Rowe Value Associates, Wellington Management, Goldman Sachs Group, the Harvard Company, Benchmark Capital, and Mortimer Zuckerman, former CEO of Boston Properties—all of whom have been drawn to WeWork’s promise of making a community that enabled entrepreneurs inside in addition to throughout places to work together, change concepts, and collaborate.17 WeWork had joined the ranks of the unicorns with its November 2013 Sequence C, however the firm’s future modified eternally when Neumann met Masayoshi Son, the founder and CEO of Japanese monetary providers conglomerate SoftBank.

Masayoshi Son and the Imaginative and prescient Fund Born the son of Korean immigrants on the Japanese island of Kyushu in 1957, Son studied

pc science and economics at the University of California Berkeley. Earlier than turning 21, Son had already skilled entrepreneurial success, promoting a translator to Sharp for about $1 million. A couple of years later, he based SoftBank, initially a pc elements retailer that rapidly diversified into publishing, commerce exhibits, and software program. Son took the firm public in 1994 at a valuation of $three billion and have become a holding firm in 1999, with a deal with enterprise capital investing throughout the go-go late 1990s know-how growth. In 2000, Son led an funding right into a Chinese language startup named Alibaba; by the time Alibaba went public in 2014, SoftBank’s $20 million funding was value over $60 billion, a greater than 300,000% return.18

That extraordinary success prompted Son’s most formidable transfer so far: the Could 2017 launch of the $100 billion Imaginative and prescient Fund. The sheer measurement of the fund appeared, to many enterprise market observers, to show the conventional enterprise capital mannequin on its head, because it takes time to place billions and billions of of capital to work. Son selected a unique strategy: He chosen what he thought-about to be the almost definitely winners in giant and rising markets, and he persuaded their CEOs to maneuver sooner, suppose larger, and deploy extra SoftBank-funded to achieve escape velocity of their vertical. He referred to this technique as gun-senryaku, Japanese for a flock of birds flying in formation.19D o

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The Imaginative and prescient Fund’s impression on the enterprise market was profound and rapid; by October 2019, it had single-handedly deployed greater than 10% of complete international VC that yr (see Exhibit 2). The Fund deployed greater than $7 billion into high-flying ridesharing utility Uber in 2017, about as a lot as the complete goal of competitor Sequoia Capital.20 As a result of it takes roughly the similar quantity of effort and time to carry out due diligence on a $20 million funding because it does on a $200 million or $2 billion funding, Son prioritized large bets on firms that by definition have been already or would develop into unicorns upon closing an funding from the Imaginative and prescient Fund. “It’s actually altering the construction of enterprise fairly basically,” Trinity Ventures normal accomplice Patricia Nakache mentioned in 2018. “I really feel like over the previous three years, the enterprise atmosphere had bifurcated into this world of ‘haves’ and ‘have nots,’ the place there are some firms which have struggled to boost cash and a few firms which have been in a position to increase gobs of cash.”21 These so-called “mega-rounds” typically included secondary parts, whereby founders and staff might promote shares that they had acquired through exercising low-priced worker choices. This allowed founders to get liquidity for his or her possession with out the burden of going public, incentivizing them to stay personal and due to this fact to keep away from the public markets’ extra rigorous reporting necessities. It additionally prompted a rise in M&A exercise, as firms with overflowing warfare chests pursued progress at any worth, typically selecting to develop by way of acquisitions quite than organically. WeWork was no stranger to this technique, buying greater than 20 firms from 2017 to 2019 (see Exhibit three). Solely barely greater than half of these associated to WeWork’s core enterprise proposition, a pattern that grew much more pronounced after SoftBank’s first funding into the firm.

Son and Neumann first met at an occasion known as Startup India in January 2016; Neumann had agreed to talk at the occasion in change for a chance to talk with Prime Minister Narendra Modi to debate WeWork’s growth into the nation. Son and Neumann dined collectively that evening, however Son handed on a $750 million financing spherical two months later, which was as a substitute led by Chinese language enterprise capital agency Hony Capital. By December, nonetheless, Son had reached again out to Neumann to schedule a tour of WeWork’s headquarters in Manhattan. Son arrived hours late and mentioned he had simply 12 minutes to listen to the WeWork story. The 2 continued the frantic dialog in the again seat of Son’s trip to the airport, throughout which Son sketched out the phrases for a $four.four billion Sequence G funding that might worth the firm at over $21 billion. With the extraordinary sums of capital got here extraordinary expectations; Son in contrast assembly Neumann to the feeling he acquired assembly Jack Ma, the founder of Alibaba, with the clear implication that Neumann can be anticipated to ship related returns.22 The stress for progress elevated exponentially, with staff reporting that Son’s insistence on accelerating progress made Neumann extra impetuous. One government recalled the WeWork founder coming back from a gathering with Son, upset as a result of Son had advised him that he wasn’t rising the firm rapidly sufficient.23

“[Son] believed that 9 girls might make a child in a single month,” the senior WeWork worker mentioned later. “‘Amazon took 15 years? Let’s do it in 5.’ However constructing nice companies takes time. It’s a course of. It’s an evolution. And of all the folks in the world, to inform that to [Neumann] was going to provide a supercharged final result. [Neumann] was all the time speaking about ‘progress, progress, progress’—so giving him a billion , and asking him to go even sooner had large downstream results on incentives and habits, all the means all the way down to the most junior worker.”24D o

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“That’s When Issues Obtained Shaky” By the finish of 2018, WeWork was the toast of Silicon Valley. At Son’s urging, Neumann had

repositioned WeWork as a know-how platform, noting the vastly richer income multiples that know-how firms obtain from public markets than do actual property firms. Neumann promised, for instance, to outfit WeWork flooring with sensors that would monetize Assessment of tenant exercise utilizing synthetic intelligence. WeWork then started increasing its choices, buying firms and opening new companies that spanned a spread of industries and markets. It established Rise by We, a luxurious gymnasium providing in a Manhattan-based WeWork house; WeGrow, a personal elementary college led by Rebekah Neumann; and WeLive, a co-living enterprise that tried to duplicate WeWork’s success in industrial actual property with the same turnkey product for communal residences.

In the meantime, Neumann’s free-spending methods turned notorious inside the firm. He overcame delicate pushback from the board to buy a top-of-the-line Gulfstream G650ER personal jet for $63 million and insisted on first-class workplace house in the newly opened Salesforce Tower for WeWork’s San Francisco workplace. Prices for the buildout exceeded $550 a sq. foot, which was about 3 times the quantity WeWork normally spent renovating an workplace.25 (By late 2019, it had surpassed $800.)26 Staff reported that they might obtain Neumann’s mantra from the early days of WeWork—‘Activate the House,’ which as soon as meant throw a celebration so the coworking house would look full of life whereas Neumann pitched early traders—and immediately the workplace can be fully revamped. “The subsequent day, one workplace is painted pink, and it has a $three,000 couch in it, and everybody simply knew, ‘Oh, that’s going to be Rebekah’s workplace.’ And he or she can be there for like two days,” the senior WeWork worker recalled.27

To take care of that tempo of spending, Son and Neumann had agreed to construction a $20 billion buyout of all of WeWork’s early traders, granting SoftBank majority management over the firm and permitting WeWork to develop whereas avoiding the regulatory scrutiny that an IPO would entail. A lot of it could hinge on the blessing of Mohammad bin Salman, the crown prince of Saudi Arabia, who, with $45 billion, was the Imaginative and prescient Fund’s largest backer. The revelation, on October three, 2018, that the Saudi Arabian dissident and Washington Put up reporter Jamal Khashoggi had been murdered in the Saudi consulate in Istanbul put the deal on maintain; the crime was nearly instantly traced again to bin Salman, making a public relations nightmare for the Imaginative and prescient Fund. Quickly afterward, SoftBank’s inventory fell by greater than 20%, or roughly $20 billion in worth. “We need to see these accountable [for Khashoggi’s murder] held accountable,” Son mentioned throughout SoftBank’s quarterly earnings name a month later. “However at the similar time, we have now additionally accepted accountability to the folks of Saudi Arabia, an obligation we take fairly severely, to Help them handle their monetary sources and diversify their economic system.”28

SoftBank suffered one other setback in December when its Japanese cell phone division held its preliminary public providing throughout a disruptive week in the public markets. It instantly cracked its IPO worth whereas falling 15% on the first day, setting a document as the worst first day of buying and selling in Japanese historical past.29 The one-two punch of the stock-price tumble and the busted IPO supplied simply sufficient of a headwind to the proposed buyout to permit a longstanding difficulty to scuttle the now tenuous deal: voting energy. If WeWork’s IPO went by way of, Neumann would keep D o

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supermajority management over WeWork by making his Class B and Class C shares take pleasure in 20 votes to each one vote for his traders. “That’s when issues acquired shaky.30 There was some dangerous luck—the Nikkei took an enormous hit, and the Saudis refused to re-up,” the senior WeWork worker mentioned. “They have been already $eight billion into the firm, and [Neumann] needed his 20-to-1 voting rights, so between the voting difficulty, the Nikkei tanking, and the loopy valuation, it simply fell aside. It was presupposed to be like $16 billion on $46 [billion]. But it surely turned out to be like $1 billion on $46, and all of it got here from the steadiness sheet of SoftBank, as a result of the Imaginative and prescient Fund had bailed.31

“I don’t know how they acquired to $47 billion,” the senior WeWork worker continued. “They in all probability had some rhyme or cause, however there was lots of hope and religion. Each time you fundraise, you ask your self how a lot runway that purchased you. Once we raised the $four.four billion, that purchased us two years, however to get to the subsequent milestone valuation level, it was going to take us 4 years. However you’ve solely acquired two years of runway! We have been kicking the can down the street. So, let’s load up the tank, increase extra money, however by the means, now you’re burning even sooner so for those who increase $three billion that’s solely eight months of runway you raised, and now to get to the subsequent valuation milestone, you’re seven years out. How are you going to shut that hole?”32

Issues Fall Aside With WeWork’s income progress outpaced solely by its losses—it had misplaced $1.9 billion in 2018

on income of simply $1.eight billion (see Exhibit four)—the firm wanted larger and larger money infusions to maintain afloat. When Son known as Neumann on Christmas Eve 2018 to let him know the $20 billion buyout wouldn’t be going by way of, it solely left one potential supply of these infusions: the public markets. 4 days later, Neumann filed paperwork registering WeWork for an IPO, lastly submitting its S-1, in August 2019.

Even by Wall Road requirements, the market response was savage.

Critics lampooned the doc’s pretentiousness and its idolatry of Neumann, who was talked about 169 occasions. In a scathing retort entitled WeWTF, printed two days after the prospectus’ launch, Professor Scott Galloway of NYU’s Stern School of Enterprise identified that the common unicorn submitting doc referred to founders solely 25 occasions.33 The S-1 featured a “dedication”—uncommon for what is often a dry authorized and monetary doc—that said, “We dedicate this to the energy of We—larger than anybody of us, however inside every of us” and that the firm’s mission was “to raise the world’s consciousness.”34 Additional testing investor endurance, WeWork’s monetary efficiency was reported as utilizing internally created non-GAAP metrics, reminiscent of “community-based EBITDA (earnings earlier than curiosity, taxes, depreciation, and amortization),” “ARPM (annual common membership and repair income per bodily member),” and “adjusted EBITDA earlier than progress investments.”35

Additional criticism was drawn from the governance and associated occasion transactions part of the doc, whereby WeWork revealed that along with Rebekah, a number of of Neumann’s rapid household labored for the firm. The board of administrators had additionally lent Neumann funds with which he bought, in his personal title, stakes in ten buildings, 4 of which he then leased again to WeWork at a revenue.36 In three of these transactions, WeWork had signed a lease with D o

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Neumann on the similar day that he had bought his stake in the buildings, growing the market’s skepticism that these had occurred as arms-length, market-price transactions.

Lastly, the firm’s title itself turned an indication of the self-dealing rampant in the firm’s tradition. To rebrand itself as the We Firm, in early 2019, WeWork needed to purchase the trademark to “We,” which was owned by We Holdings LLC and which “handle[d] some of the founders’ inventory and different property.” In impact, Neumann had trademarked the phrase “We,” transferred it to an LLC below his management, after which offered it to the We Firm for $5.9 million value of shares in the We Firm.37 The corporate later reversed the transaction amid investor outcry.38

A media feeding frenzy ensued, as nervous bankers—who had pitched WeWork on a valuation between $63 billion and 96 billion in the IPO simply months earlier—started to stroll again the proposed pricing in the face of public market uninterest in paying 24 occasions income for a cash- burning startup. Governance performed an enormous half, as Amy Borrus, deputy director of the Council of Institutional Buyers, identified. “If you’re visiting with potential traders, and so they increase all these questions, that’s the place the rubber hits the street. It seems lots of traders had pointed questions as to how the firm was structured, how [Neumann] ran the firm, in addition to the financial outlook for the firm,” Borrus mentioned in an interview in late 2019.39 Along with Neumann’s 20x voting rights if the IPO went by way of, traders questioned the CEO succession plan in the occasion of Neumann’s passing or incapacity to carry out his duties. WeWork’s bylaws supplied for the creation of a three-member succession committee consisting of Rebekah Neumann and present board members Bruce Dunlevie and Steven Langman. If neither Dunlevie nor Langman have been serving as administrators at the time, Rebekah would select one or two board members who have been serving at the time to sit down on the choice committee along with her.40

With public investor urge for food for the IPO in freefall, bankers saved revising the pricing vary downward, till asserting they might delay the roadshow on September 16. Firm spokespeople referred to the declare made in the S-1 that though WeWork had prioritized topline income progress above profitability, it might merely dial again on progress if it felt an impetus to achieve profitability sooner quite than later.* Market observers questioned this stage of management however famous that delaying the IPO would give WeWork administration a chance to show it. “One good factor about suspending the IPO is that you simply get to seek out out,” Matt Levine wrote in his Cash Stuff column on Bloomberg. “Lacking out on the $10 billion of public cash would decelerate WeWork’s progress plans, but when WeWork is true, then there may be only a dial that it could flip between “Progress” and “Revenue,” and dialing down the progress mechanically dials up the income. If you’re assured that you simply possess this dial and that it really works this manner, then delaying the IPO is a no- brainer: Positive, you delay your positive-expected-value progress, however you get to maintain possession of profitable enterprise quite than promoting it too low cost. On the different hand, if the dial seems to not work, then you definitely’ll find yourself wishing you’d offered it low cost.”41

* The S-1 said: “If we stopped investing in our progress and as a substitute allowed our present pipeline of places to mature, we’d now not incur capital investments to construct out new areas or the preliminary bills related to driving member acquisition at new places. Fairly, we anticipate that every mature location would generate a recurring stream of revenues, contribution margin and money flows. We imagine that the flexibility to handle our progress by specializing in our present pipeline of places and permitting them to mature presents us with a chance to handle our profitability profile.”D o

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Two days later, on September 18, the Wall Road Journal printed an article about Neumann’s administration fashion that detailed his smoking of marijuana on the firm jet, his heavy tequila consumption at work, and his egomaniacal aspirations to develop into the world’s first trillionaire, “president of the world,” and immortal being.42 This scandalous account put WeWork’s board of administrators in a difficult place. Neumann nonetheless managed a supermajority of WeWork; whilst CFO Artie Minson and investor Michael Eisenberg held a convention name with the board on Sunday, September 22, arguing that Neumann must step down, Neumann declared “I’m by no means not going to be CEO.”43 Critics identified the irony that if the board terminated him, Neumann would have enough voting rights, if the IPO was profitable, merely to terminate the board and re-hire himself.44

Complicating issues nonetheless additional, the board’s monetary indulgence of Neumann over the years—by way of the loans that allowed him to train inventory choices and people who allowed him to buy buildings and lease them again to the firm, in addition to allowing his participation in secondary parts of financing rounds—meant that the group had even much less leverage than a typical board may in such a state of affairs. Such secondary items, as soon as uncommon in enterprise capital circles, had grown more and more frequent all through the decade, as firms remained personal longer, and massive funds of indulgent personal traders (SoftBank foremost amongst them) had demonstrated their willingness to supply early staff and founders liquidity previous to exit by way of acquisition or IPO. The Wall Road Journal had revealed in July that Neumann had already monetized his curiosity in additional than $700 million in WeWork inventory by way of such transactions over the previous couple of years. Already fabulously rich, with six properties situated in Manhattan, Westchester County, the Hamptons, and San Francisco, Neumann confronted little incentive to cooperate with the board.

“It was a recreation of rooster,” the senior WeWork worker later recounted, noting that SoftBank had been the solely investor in the firm since 2016. “He had already taken $700 million off the desk. ‘Hey, Masa . . . what if I don’t [step down]?’ WeWork was once four% of [Son]’s portfolio, but it surely turned 100% of [Son]’s fame.”45

Finally, SoftBank blinked, though not with out forcing Neumann out of the firm. The negotiation performed out over three weeks in late September and early October. Neumann resigned on September 24, pressured largely by a $500 million mortgage prolonged to him by JP Morgan, which had each invested in the firm and served as lead banker on its failed IPO. The non-public mortgage had been collateralized by his shares in WeWork, and since he had borrowed in opposition to them at a a lot increased valuation, Neumann discovered himself at threat of being in technical default. (His resignation as CEO additionally positioned Neumann in technical default, triggering rapid reimbursement; JP Morgan agreed to provide him 45 days to resolve the state of affairs.) In mid-October, SoftBank gained a bidding warfare with JP Morgan Chase & Co. for a rescue provide that valued WeWork at roughly $eight billion, some 20% decrease than its 2015 Sequence E spherical (see Exhibit 5). The transaction granted Neumann the proper to promote $970 million in shares (roughly one-third of his remaining stake at that time), prolonged him a $500 million mortgage from SoftBank to repay the JP Morgan mortgage, and paid him a $185 million consulting price. SoftBank’s Marcelo Claure changed Neumann as chairman of the board, successfully severing all ties between the founder and the firm.46 The corporate laid off greater than 2,400 staff—over one-quarter of the workforce—and commenced D o

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divesting the investments Neumann had made in firms he discovered personally fascinating, reminiscent of $13.eight million in a Spanish artificial-wave pool firm and participation in a $32 million financing spherical for surfer star Laird Hamilton’s “superfood” espresso creamer firm.47

In the meantime, market observers (and 1000’s of laid-off WeWork staff) made Neumann a poster-child for twenty-first century greed,48 whilst he reportedly started to seek advice from himself to buddies as a “martyr” and to counsel that his lavish exit bundle served as proof of the good job he had carried out as WeWork’s CEO.49 Matt Levine of Bloomberg was much less complimentary: “It’s one factor to construct a profitable firm that creates lots of worth and take some of that worth for your self; Neumann created an organization that destroyed worth at a blistering tempo and nonetheless extracted a billion for himself. He lit $10 billion of SoftBank’s cash on hearth after which went again to them and demanded a 10% fee. What an absolute legend.”50

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Exhibit 1: Progress in World Coworking Areas, 2005–2020

three 30 75 160 310 600 1,130

2,070 three,400

5,780

eight,900

12,100

15,500

18,700

22,400

26,300

–

5,000

10,000

15,000

20,000

25,000

30,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Supply: “Coworking Areas,” Statista, accessed December 10, 2019, https://www.statista.com/examine/35480/coworking-spaces-statista- file.

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Exhibit 2: SoftBank’s Rising Share of the World VC Market

Supply: Jason D. Rowley, “SoftBank Dealt in Tenth of Worldwide VC Greenback Quantity So Far in 2019,” Crunchbase, October 1, 2019, https://information.crunchbase.com/information/softbank-dealt-in-tenth-of-worldwide-vc-dollar-volume-so-far-in-2019.

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Exhibit three: WeWork Acquisitions and Investments

Supply: Andy White and Priyamvada Mathur, “WeWork Has Acquired Extra Than 20 Corporations in the Run-As much as its IPO,” PitchBook, September 5, 2019, https://pitchbook.com/information/articles/wework-has-acquired-more-than-20-companies-in-the-run-up-to-its-ipo.D o

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Exhibit four: We Firm’s Revenue Assertion

Fiscal Yr Ended December 31, Six Months Ended June 30 2016 2017 2018 2018 2019

Income $436,099 $886,004 $1,821,751 $763,771 $1,535,420 Bills

Location Working Bills 433,167 814,782 1,521,129 635,968 1,232,941 Different Working Bills – 1,677 106,788 42,zero24 81,189 Pre-Opening Location Bills 115,749 131,324 357,831 156,983 255,133 Gross sales & Advertising and marketing Bills 43,248 143,424 378,729 139,889 320,zero46 Progress & New Market Improvement Bills 35,731 109,719 477,273 174,091 369,727 Basic & Administrative Bills 115,346 454,zero20 357,486 155,257 389,910 Depreciation & Amortization 88,952 162,892 313,514 137,418 255,924

Whole Bills 832,193 1,817,838 three,512,750 1,441,630 2,904,870 Loss from Operations (396,zero94) (931,834) (1,690,999) (677,859) (1,369,450) Curiosity and different revenue (expense), web (33,400) (7,387) (237,270) (46,406) 469,915 Pre-Tax Loss (429,494) (939,221) (1,928,269) (724,265) (899,535) Revenue Tax Profit (provision) (16) 5,727 850 1,373 (5,117) Web Loss (429,510) (933,494) (1,927,419) (722,892) (904,652) Web Loss Attributable to Non-Controlling Pursuits – 49,500 316,627 94,762 214,976 Web Loss Attributable to WeWork Corporations, Inc. (429,510) (883,994) (1,610,792) (628,130) (689,676)

Key Efficiency Indicators Workstation Capability (in ones) 107,000 214,000 466,000 301,000 604,000 Memberships (in ones) 87,000 186,000 401,000 268,000 527,000 Enterprise Membership Share 18% 28% 38% 30% 40% Run-Fee Income (in billions) $zero.6 $1.1 $2.four $1.eight $three.three Dedicated Income Backlog (in billions) $zero.1 $zero.5 $2.6 N/R $four.zero

Supply: The We Firm S-1, August 14, 2019.

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Exhibit 5: WeWork Income and Valuation Historical past

$zero

$500

$1,000

$1,500

$2,000

$2,500

$three,000

$three,500

$four,000

$zero

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018 1/1/2019

Pre-money Valuation Proceeds Annual Revenues

Notice: Varied media entities have barely differing valuations reported for every of WeWork’s financing rounds; these discrepancies probably have arisen as a consequence of opacity with respect as to if the possibility pool was set pre- or post-money in every of these rounds, in addition to to the portion of every financing spherical that was main versus secondary.

Supply: WeWork profile, Motate, accessed December 28, 2019, http://www.motate.co/firm/229-wework, inter alia.

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Endnotes 1 Nameless WeWork worker, in an interview with the authors, November 25, 2019. 2 Katherine Clarke, “Neumann on Faucet,” The Actual Deal, January 2013, https://therealdeal.com/issues_articles/

neumann-on-tap. three Maya Kosoff, “How WeWork Turned the Most Precious Startup in New York Metropolis,” Enterprise Insider, October

22, 2015, https://www.businessinsider.com/the-founding-story-of-wework-2015-10. four Ibid. 5 Clarke, “Neumann on Faucet.” 6 “The Little Trick WeWork’s Adam Neumann Makes use of to Allure Buyers,” The Actual Deal, October 19, 2017,

https://therealdeal.com/2017/10/19/the-little-trick-weworks-adam-neumann-uses-to-charm-investors. 7 Clarke, “Neumann on Faucet.” eight Alex Konrad, “Inside the Phenomenal Rise of WeWork,” Forbes, November 5, 2014, https://www.forbes.com/

websites/alexkonrad/2014/11/05/the-rise-of-wework/#3d6f7e716f8b. 9 Claire Boyte-White, “How WeWork Works and Makes Cash,” Investopedia, November four, 2019,

https://www.investopedia.com/articles/investing/082415/how-wework-works-and-makes-money.asp. 10 “What Is the Member Community?” WeWork, accessed January 9, 2020, https://Help.wework.com/hc/en-us/

articles/212046786-What-is-the-Member-Community-. 11 The We Firm S-1, August 14, 2019. 12 “Income of Worldwide Office Group (IWG) Worldwide from 2011 to 2018,” Statista, accessed December

20, 2019, https://www.statista.com/statistics/553936/revenue-of-regus-worldwide. 13 IWG, Annual Report and Accounts 2018, http://traders.iwgplc.com/~/media/Information/I/IWG-IR/reports-and-

displays/2019/consolidated-report-and-accounts-2018.pdf. 14 Ethan Rothstein, “Information As Market Wobbles, Rivals Take Goal At ‘Magic Cash’ WeWork,” Bisnow, August

18, 2019, https://www.bisnow.com/nationwide/information/coworking/coworking-peril-wework-ipo-industrious- breather-100397.

15 “WeWork’s $47 Billion Dream: The Lavishly Funded Startup That Might Disrupt Business Actual Property,” CB Insights, January 31, 2019, https://www.cbinsights.com/analysis/report/wework-strategy-teardown.

16 Ibid. 17 Konrad, “Inside the Phenomenal Rise of WeWork.” 18 Katie Warren and Taylor Nicole Rogers, “Meet Masayoshi Son,” Enterprise Insider, November 6, 2019,

https://www.businessinsider.com/masayoshi-son-softbank-net-worth-lifestyle-silicon-valley-estate-photos-2019- 6#sons-investment-strategies-are-considered-unconventional-in-silicon-valley-7.

19 Katrina Brooker, “WeFail: How the Doomed Masa Son–Adam Neumann Relationship Set WeWork on the Street to Catastrophe,” Quick Firm, November 15, 2019, https://www.fastcompany.com/90426446/wefail-how- the-doomed-masa-son-adam-neumann-relationship-set-wework-on-the-road-to-disaster.

20 Polina Marinova, “How Enterprise Capital Mega-Funds Are Widening the Funding Hole,” Fortune, March 22, 2018, https://fortune.com/2018/03/22/venture-capital-funding-gap-softbank.

21 Ibid. 22 Brooker, “WeFail.” 23 Ibid. 24 Nameless WeWork worker. 25 Maureen Farrell and Eliot Brown, “The Cash Males Who Enabled Adam Neumann and the WeWork Debacle,”

Wall Road Journal, December 14, 2019, https://www.wsj.com/articles/the-money-men-who-enabled-adam- neumann-and-the-wework-debacle-11576299616.D o

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26 Nameless WeWork worker. 27 Ibid. 28 Brooker, “WeFail.” 29 Ibid. 30 Nameless WeWork worker. 31 Ibid. 32 Ibid. 33 Scott Galloway, “WeWTF,” No Mercy/No Malice (weblog), August 16, 2019, https://www.profgalloway.com/

wewtf. 34 The We Firm S-1, August 14, 2019. 35 Alison Griswold, “Get Prepared For Some Inventive Accounting in WeWork’s IPO Submitting,” Quartz, August 13,

2019, https://qz.com/1685919/wework-ipo-community-adjusted-ebitda-and-other-metrics-to-watch-for. 36 Ellen Huet, “WeWork Gave Founder Loans as It Paid Him Hire, IPO Submitting Exhibits,” Bloomberg, August 14,

2019, https://www.bloomberg.com/information/articles/2019-08-14/wework-gave-founder-loans-as-it-paid-him-rent- ipo-filing-shows.

37 Matt Levine, “We Appears Out for Our Selves,” Cash Stuff, Bloomberg, August 19, 2019, https://www.bloomberg.com/opinion/articles/2019-08-19/we-looks-out-for-our-selves.

38 Randyl Drummer, “WeWork Provides Harvard Professor to Board, Reverses Its Trademark Buy From CEO,” CoStar Information, September four, 2019, https://www.costar.com/article/404213830/wework-adds-harvard-professor- to-board-reverses-its-trademark-purchase-from-ceo.

39 Rani Molla and Shirin Ghaffary, “The WeWork Mess, Defined,” Vox, October 22, 2019, https://www.vox.com/recode/2019/9/23/20879656/wework-mess-explained-ipo-softbank.

40 Rebecca Aydin, “WeWork Cofounder Rebekah Neumann, Cousin of Gwyneth Paltrow, Reportedly Demanded Staff Be Fired Inside Minutes of Assembly Them As a result of She Disliked Their ‘Vitality,’” Enterprise Insider, September 18, 2019, https://www.businessinsider.com/wework-rebekah-neumann-adam-gwyneth-paltrow- energy-goop-2019-9.

41 Matt Levine, “What If We Needs to Wait?” Cash Stuff, Bloomberg, September 10, 2019, https://www.bloomberg.com/opinion/newsletters/2019-09-10/money-stuff-what-if-we-wants-to-wait.

42 Eliot Brown, “How Adam Neumann’s Over-the-Prime Fashion Constructed WeWork. ‘This Is Not the Approach All people Behaves.’” Wall Road Journal, September 18, 2019, https://www.wsj.com/articles/this-is-not-the-way-everybody- behaves-how-adam-neumanns-over-the-top-style-built-wework-11568823827.

43 Ibid. 44 Matt Levine, “We Needs a New Boss,” Cash Stuff, Bloomberg, September 23, 2019,

https://www.bloomberg.com/opinion/articles/2019-09-23/we-wants-a-new-boss. 45 Nameless WeWork worker. 46 Maureen Farrell and Eliot Brown, “SoftBank to Increase Stake in WeWork in Deal That Cuts Most Ties With

Neumann,” Wall Road Journal, October 22, 2019, https://www.wsj.com/articles/softbank-to-take-control-of- wework-11571746483.

47 Paige Leskin, “All the Uncommon Investments WeWork’s Cofounder Adam Neumann Has Made, From a Medical Marijuana Supplier to a Wave Pool Maker,” Enterprise Insider, September 24, 2019, https://www.businessinsider. com/wework-adam-neumann-investments-wavegarden-laird-superfood-full-list-2019-9#but-lairds-company- isnt-the-only-superfood-business-in-which-wework-has-invested-wework-has-also-put-money-into-kitu-life- which-makes-dairy-free-protein-heavy-superfood-coffees-creamers-and-espresso-5.

48 Nicolas Vega, “WeWork Staff Request ‘Honest’ Layoffs in Letter Blasting ‘Greed’ of Ex-CEO,” New York Put up, November eight, 2019, https://nypost.com/2019/11/08/wework-employees-request-fair-layoffs-in-letter-blasting- greed-of-ex-ceo.D o

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49 Gabriel Sherman, “‘You Don’t Convey Dangerous Information to the Cult Chief’: Inside the Fall of WeWork,” Vainness Honest, November 21, 2019, https://www.vanityfair.com/information/2019/11/inside-the-fall-of-wework.

50 Matt Levine, “How Do You Like We Now,” Cash Stuff, Bloomberg, October 23, 2019, https://www.bloomberg.com/opinion/articles/2019-10-23/how-do-you-like-we-now.

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