The WeWork “Acquisition” (with Dan Primack)

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with Axios's Dan Primack, dissect the tumultuous saga of WeWork, a company that went from a $47 billion valuation to a near-collapse within a matter of months. The discussion delves into WeWork's rapid expansion fueled by SoftBank's massive investment, the problematic governance led by CEO Adam Neumann, and the company's failed IPO attempt which exposed deep financial and operational issues. Despite its innovative office-sharing model and substantial revenue growth, WeWork's excessive spending on acquisitions, private jets, and other luxuries, coupled with Neumann's conflicts of interest and SoftBank's enabling role, culminated in a dramatic fall from grace. The episode concludes with SoftBank's quasi-takeover, which salvaged WeWork from potential bankruptcy but raised questions about the future of the company and its leadership.

• "Acquired" is a podcast focused on the stories behind great technology companies.
• Hosts are Ben Gilbert and David Rosenthal, who have backgrounds in startup studios, venture funds, and early-stage venture firms.
• They aim to explore the history of companies and understand their current business positions.

Welcome to season five episode, episode six of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert, and I'm the co-founder of Pioneer Square Labs, a startup studio and early-stage venture fund in Seattle.

I'm David Rosenthal, and I am a general partner at Wave Capital, an early-stage venture firm focused on marketplaces based in San Francisco.

The quote introduces the podcast and the professional backgrounds of the hosts, setting the stage for the depth of analysis expected in the episode.

• The episode originally planned to cover WeWork's IPO but shifted to its acquisition by SoftBank.
• The hosts aim to discuss WeWork's history and its present business situation.
• The discussion will include the role of SoftBank in potentially saving WeWork.

Today we tell an episode that in our initial season five planning calendar, we had as an IPO episode, and then that was pitifully canceled and we were just going to tell the crazy story of the antics that got it here. But now it's shaping up to be a tried and true acquisition episode for us. So here on this episode, we will dive into the existential question of if WeWork, a once $47 billion company can be saved by SoftBank's effective acquisition of the company.

This quote outlines the central theme of the episode, which is to analyze WeWork's journey from a highly valued company to one in need of rescue through acquisition.

• Dan Primack has been covering WeWork for years, providing expert insight for the episode.
• His presence is expected to add depth and accuracy to the discussion of WeWork.

Which brings me to the only appropriate way that we know how to tell this story is with the expert help of Axios's Dan Primack, who has been meticulously and astutely covering this company for several years.

The quote highlights Dan Primack's expertise on WeWork, which will contribute significantly to the podcast's discussion.

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• The service is positioned as a way for startups to focus on their core business by outsourcing non-core activities like accounting.

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The quote introduces Pilot as a sponsor and describes its services and growth, emphasizing its relevance to startups.

• The hosts describe WeWork's situation as a "Greek tragedy," with massive job losses and one actor walking away with significant wealth.
• They use historical analogies to convey the gravity of WeWork's situation and the predetermined nature of the outcomes.

This is a tragedy. This is like a Greek tragedy, particularly. For thousands of people know by the time people listen to this, might have lost their job. I mean, within hours of when we're taping this or a day within, when we're taping this.

The quote captures the dramatic scale of WeWork's crisis and the impact on its employees, likening it to a predetermined downfall as seen in ancient Greek tragedies.

• Adam Newman is a central figure in the WeWork story, with an eclectic background that includes living in multiple places and serving in the Israeli Navy.
• His entrepreneurial journey began with unconventional business ideas before co-founding WeWork.
• Newman's personal history, including living in a kibbutz and his sister's modeling career, influenced his business ventures.

Who is Adam Newman? Self-styled hero. So Adam, as many folks probably know, he was born in Israel. He's Israeli. His parents were both doctors. His parents divorced when he was seven, and he ended up living in 13 places over the next 15 years, which is actually, like, pretty crazy. And probably a lot of that goes into the ethos behind WeWork, including in the US.

The quote provides background on Adam Newman, his upbringing, and his path to entrepreneurship, which ultimately led to the creation of WeWork and its unique culture.

• Adam Newman and Miguel McKelvey founded WeWork after previous ventures and a chance meeting at a party.
• Their shared experiences in communal living influenced WeWork's culture and business model.
• The initial concept for WeWork was born from the economic downturn and the idea of matching empty buildings with freelancers and startups.

And it is this man that walks into the elevator and meets Adam at this party in this probably would have been like 2007, maybe early 2008 in New York. And they get to talking at the party, and Adam, it turns out, is looking for office space for his burgeoning hypergrowth company, crawlers, and is talking to Miguel.

The quote narrates the serendipitous meeting between Adam Newman and Miguel McKelvey that led to their partnership and the eventual founding of WeWork, inspired by the economic climate and their personal experiences.

• Importance of community and collaborative environment in workspaces.
• Working alongside others can enhance productivity and energy.
• Remote work versus office work debate in terms of productivity and collaboration.

"These freelancers, they weren't necessarily working with each other per se on the same project, but again, working next to someone. It's the difference between working alone in like, you could rent out a one office office, I guess, somewhere, right? And you're alone completely with the door shut. There's people around, there's an energy that makes you work more."

This quote highlights the value of a shared workspace where freelancers, despite not working on the same projects, benefit from the communal energy and potential for collaboration.

• In 2011, PepsiCo utilizes WeWork space for remote employees.
• This early corporate interest was unexpected and indicative of the broader appeal of WeWork's model.

"The next year, in 2011, PepsiCo takes out a bunch of desks in that first Soho WeWork and starts putting some of their remote New York City based employees in the WeWork."

This quote reveals that large corporations recognized the benefits of WeWork's flexible office spaces early on, challenging the assumption that it was a newer trend.

• In July 2012, Benchmark Capital leads a $17 million Series A in WeWork.
• Comparison of WeWork's valuation to other companies like Uber.
• Discussions about the nature of WeWork as a tech or real estate company.
• Governance terms behind valuations are not always visible.

"And in the summer of 2012, they lead a $17 million Series A in WeWork at a $97 million post money valuation."

This quote signifies a major step in WeWork's funding, with a top venture capital firm making a significant early investment, reflecting confidence in WeWork's potential.

• Adam Newman's significant ownership and control over WeWork compared to other founders.
• Newman's co-founder, Miguel, had a smaller economic share.
• Early on, Newman's control over WeWork was substantial.

"For example, compare Travis Kalanick was, I think, owned, like, 6% of Uber. When he got booted around 6%. Adam owned a third of the company after all the Softbank money, et cetera."

This quote emphasizes Adam Newman's unusual level of control and ownership in WeWork, far surpassing that of other notable startup founders.

• WeWork's expansion into various cities and the attraction of financial institutions.
• By 2014, WeWork valued at $1.5 billion.
• Discussion on the role of New York's real estate market and financial firms' familiarity with it.

"So by 2014, the company now is valued at $1.5 billion and is kind of quite large at this point."

This quote marks a significant milestone in WeWork's growth, with its valuation reaching $1.5 billion and drawing significant interest from investment banks.

• WeWork as a real estate company with tech elements.
• The safety of real estate as an investment compared to tech startups.
• WeWork's strategy of upfront investment in leases and renovations.

"There's a limited amount of commercial real estate in New York."

This quote points to the intrinsic value and limited supply of real estate in New York, which underpinned WeWork's business model and attracted investors.

• Artie Minson, CFO of Time Warner Cable, joins WeWork.
• Comparison of WeWork's business model to the cable industry's historical growth and cash flow.

"They hire a man named Artie Minson, who was the CFO of Time Warner Cable."

This quote indicates WeWork's strategic hire, drawing parallels between the company's model and the cable industry, which also involved significant upfront infrastructure costs followed by recurring revenue.

• Adam Newman's personal wealth and property investments.
• WeWork's extravagant events and cultural practices.
• The perception of these practices changes with the company's fortunes.

"They rent out all of Universal Studios one day, and they get the chain smokers to perform, and they start doing this thing called WeWork Summer camp."

This quote illustrates the lavish spending and grandiose culture at WeWork during its rapid growth phase, which later faced criticism.

• In 2016, WeWork raises funds from Chinese entities at a $16 billion valuation.
• Discussion on WeWork's position among the world's most valuable startups.

"They raised just under half a billion dollars from two Chinese entities that value the company at $16 billion."

This quote captures a pivotal moment when WeWork's valuation soared due to significant investment from Chinese investors, placing it among the top-valued startups globally.

• SoftBank's Vision Fund aims to deploy $100 billion in less than five years.
• The fund's strategy to invest in companies that can absorb large capital injections.
• SoftBank's thematic investment approach and interest in WeWork.

"Here's this interesting company called WeWork. It's already one of the highest valued startups in the world and they have this interesting capital dynamic."

This quote discusses SoftBank's decision to invest in WeWork, seeing it as a prime candidate to absorb a substantial portion of the Vision Fund's capital due to its business dynamics.

• SoftBank's investment in WeWork includes conditions for board membership.
• Newman's continued emphasis on control despite new board members.
• The sketching of a $4 billion investment deal on an iPad between Masa and Adam.

"Softbank would invest an initial 4 billion in total out of vision company, out of the vision fund."

This quote describes the significant investment deal between SoftBank and WeWork, highlighting the unconventional and rapid manner in which it was agreed upon.

• Different stages of investment had varying governance and voting structures.
• The original voting structure at the time of Benchmark's investment was not as founder-friendly as it became in later rounds.
• Founders of "hot startups" gained significant control post-Facebook's Yahoo deal rejection, influencing terms in subsequent funding rounds.

"But what the governance was at various points along the way, I can say with 100% confidence there's no way that going back to the original benchmark investment, that the voting structure was like this."

This quote by David Rosenthal highlights the evolution of governance and voting structures from the initial investment stages, implying that founder control increased over time.

• SoftBank's aggressive capital deployment strategy allowed them to significantly influence company governance.
• SoftBank's investment terms were highly favorable to founders due to their willingness to invest large sums.
• The dynamic between SoftBank and founders was based on shared growth ambitions, impacting board decisions and governance.

"So they basically arm Adam to go back to the board holding a piece of paper that says, I'm going to get literally billions in investment dollars. And the terms can kind of be as Adam friendly as they want."

Ben Gilbert's statement explains how SoftBank's capital gave founders like Adam leverage over board decisions, leading to founder-friendly terms.

• Adam Neumann's leadership style was characterized by unilateral decision-making and a growth-oriented mindset.
• Decisions such as banning meat from WeWorks were made despite concerns, showcasing Adam's authoritative governance style.
• Adam's environmental initiatives were contrasted with his use of a private jet, highlighting inconsistencies in his leadership.

"And so people raised all these legitimate concerns, and he sat there, he took them all in and just got up and said, yeah, we're going to ban meat, and walked out and then announced it before and just announced it. And that was that. And that's how these things worked."

Dan Primack describes a specific instance where Adam Neumann made a decision to ban meat from WeWorks without board consensus, illustrating his top-down approach to governance and decision-making.

• The board and investors had to balance the desire for capital with the loss of control.
• Acceptance of SoftBank's terms was seen as a pivotal moment for board influence.
• Investors potentially profited from their initial investments, influencing their decisions regarding company control and growth.

"So this is the pivotal moment where if you accept this term sheet as the board, this is the last opportunity that you have to exert any measure of control."

Ben Gilbert points out the crucial decision faced by the board in accepting SoftBank's terms, which would significantly affect their future control over the company.

• WeWork's aggressive expansion was fueled by substantial investments, such as the purchase of the Lord and Taylor building.
• The company's growth led to a significant increase in employees and the need for larger headquarters.
• The rapid expansion was part of WeWork's strategy to dominate market share.

"So they take this money, they turn around right away, and they buy the Lord and Taylor building on Fifth Avenue in New York for $850,000,000."

David Rosenthal comments on WeWork's immediate use of investment funds to purchase a landmark building, exemplifying their aggressive capital deployment strategy.

• Adam Neumann's practices, such as rewriting history to include his wife as a co-founder and purchasing a private jet, raised questions about governance.
• The decision to ban meat from WeWorks was part of a broader vision to create a community beyond coworking spaces.
• These controversial practices were part of Adam's vision but were also seen as deviations from traditional business norms.

"Adam and his wife, Rebecca, who at this point, has been rewritten into history as a co-founder of the company."

Dan Primack discusses the unconventional action of retroactively naming Rebecca Neumann as a co-founder, which was unusual compared to the norm of co-founders being written out of company histories.

• The public S-1 filing revealed surprising information about WeWork's financials and governance.
• The IPO attempt exposed the company's complex structure and questionable practices, including the trademark licensing deal with Adam Neumann.
• The failed IPO highlighted the limitations of WeWork's governance and raised concerns among potential public market investors.

"It's one of the most remarkable s ones that's ever been written, and not just because. Look, let's start with the obvious, right? There was huge revenue growth."

Dan Primack discusses the unusual and concerning aspects of WeWork's S-1 filing, emphasizing the shock it caused in the market due to its disclosures and complexity.

• SoftBank's decision to invest or not significantly influenced WeWork's financial strategy.
• The dynamics between SoftBank and its LPs, particularly Saudi Arabia's role, affected investment decisions.
• SoftBank's continued investment was crucial for WeWork, especially after the larger funding deal fell through.

"SoftBank does end up investing corporate, I believe, not the vision fund. $2 billion in WeWork at this point in time, because WeWork needs the cash."

Ben Gilbert explains how SoftBank's investment from its corporate funds, rather than the Vision Fund, was a critical lifeline for WeWork after the collapse of a larger deal.

• WeWork's financials were difficult to understand, even for mature markets and long-standing buildings.
• Inability to determine the profitability of individual buildings, such as the Soho location after four years.

"Is the building profitable? No freaking idea."

The quote underscores the lack of clarity regarding the profitability of WeWork's individual buildings, which is a fundamental aspect of business assessment.

• Concerns over WeWork's corporate governance and the power held by CEO Adam Neumann.
• WeWork announced changes to governance, including reducing Adam's super voting shares and allowing the board to fire him.
• The changes were supposed to happen upon the IPO, and it was unclear if they were effective immediately.

"Adam is still going to have the super voting shares... the board was going to be able to determine who was his replacement was their one, and they were allowed to fire him, which was important."

The quote highlights the planned changes to WeWork's governance structure to address concerns and potentially improve the company's appeal to public market investors.

• Reports of SoftBank pushing to postpone WeWork's IPO and later influencing the ousting of Adam Neumann as CEO.
• SoftBank's potential motivation for leaking damaging information and its impact on the company's valuation.
• The leak suggested that SoftBank, a major investor, did not support the IPO, raising doubts among prospective investors.

"SoftBank is pushing to have the IPO postponed... SoftBank is clearly somebody at SoftBank is leaking this."

The quote suggests that SoftBank was behind the leaks that aimed to delay or alter the course of WeWork's IPO, reflecting internal conflicts and strategic maneuvers.

• WeWork's severe cash shortage due to the failed IPO and reliance on expected funds from the IPO and debt package.
• The company's spending in anticipation of incoming funds and the subsequent need for a significant financial injection.

"They are looking to bring in $3 billion via the IPO... spend. And by the way, really spend, because wouldn't it be great if we go public after Labor Day, then five weeks later we can come out with Q3 financials which show massive growth."

This quote illustrates WeWork's aggressive spending in anticipation of a successful IPO, which backfired and left the company in a precarious financial position.

• SoftBank's complex financial package to take control of WeWork without an outright acquisition.
• The package included a tender offer, consulting fees to Adam Neumann, and investments at various share prices.
• SoftBank's strategy to avoid consolidating WeWork's liabilities on its balance sheet, possibly due to their own debt status.

"Softbank is acquiring the company without acquiring... They have a majority stake in the company, but they claim they will not control the votes on the board."

The quote reflects the complexity of SoftBank's strategy to gain control over WeWork without the typical implications of an acquisition, such as consolidating financials and liabilities.

• Discussion on the potential for WeWork as a business despite current challenges.
• SoftBank's belief in the underlying business model of WeWork and the possibility of turning it around.
• The risk of SoftBank's investment and the uncertainty surrounding WeWork's management and direction.

"SoftBank still believes long term there can be a business here... If I can get in what I believe is relatively cheap and control this thing, maybe we can make a go with this."

This quote captures SoftBank's long-term belief in the viability of WeWork's business model and their willingness to invest heavily to gain control and potentially steer the company towards profitability.