We [Used to] Work [But Not Anymore]

I begin with a disclaimer.  I am neither a venture capital professional nor a real estate professional.  I do not pretend to be able to pick out the next new disruptive wave in business and I do not find real estate intrinsically interesting.  Nor have I done a deep dive into We Work’s financials.  And I did not really begin to follow the We Work story until last week.

But I have cleaned up dozens and dozens of corporate messes, and helped fix or restructure scores more, and the We Work and Adam Neumann drama immediately captured my attention. 

Because we’ve seen this movie before.

Theranos Rerun.

As I began to dig into the articles, I was immediately struck by the parallels between Adam Neumann and We Work and Elizabeth Holmes and Theranos. 

-        Holmes and Neumann both built a religious cult based on grandiose claims, a persona and signature “look.”  Holmes mimicked Steven Jobs, down to the black turtleneck.  Neumann had his high school stoner look, complete with shoulder length hair.  Theranos employees complained that they knew where Holmes was in Jobs’s biography by the quotes she was spewing out.  Even her voice was manufactured.  Neumann brashly wished to be the first trillionaire and bragged that he was “going to lease more space than they [JPMorgan] do.”

-        Holmes and Neumann had a significant other that was involved in the business.  Elizabeth Holmes had “Sonny” Balwani that was the enforcer, threatening employees with legal action if they divulged “confidential” information (whether it was confidential or not).  Neumann had his flaky wife Rebekah Paltrow Neumann, former actress and Adam’s “strategic thought partner” or, as I call her “Chief Proselytizing Officer” who put out vacuous mission statements for the company, like this treasure from the company’s S-1 “We are a community company committed to maximum global impact.  Our mission is to elevate the world’s consciousness.”  Take a cleansing breath and you could almost smell the incense burn.   Her startup WeGrow is being shuttered.

-        Most importantly, each gained the admiration of one or more respected individuals from the Establishment that lent credibility.  Holms had George Schulz; Neumann had Jamie Dimon as his personal banker.  Each got someone credible to “fall in love” with them that provided air cover for their mismanagement (and in Holmes’s case, outright fraud). 

-        Each was an ego maniac that retained tight control over the company.  Holmes did it through threats.  Neumann did it with his manipulation of stock ownership.

Neumann took the Theranos playbook, tweaked it a bit and managed to extort $1.7 billion from Softbank.  Holmes was not so fortunate.  She will go to trial next year on fraud charges and her law firm quit because they haven’t been paid.  Holmes committed fraud by manipulating data.  Neumann (thus far as it appears, manipulated only the desires of his lenders and investors.

 What went wrong at We Work?  

My conclusion is everything.  We Work was a MASSIVE failure in several areas.  In the dichotomy of Steven Kaplan at the Booth School of Business, was this a failure of the horse or the jockey?  I believe it was both on a massive scale.  It was a failure of diligence on the part of J.P. MorganChase.  It was a failure corporate governance (Neumann engaged in a myriad of suspect insider transactions).   It was a failure of balance sheet management—servicing long term obligations with short term cash flows was a built-in structural failure.  (See Sam Zell’s comments.   (https://www.youtube.com/watch?v=X-33_A_YsWg)).              

 Ironically,  in yesterday’s WSJ, SoftBank announced that it was going to examine the corporate governance in its portfolio companies.  Talk about locking the barn door after the horses got out.

Why the We Work  scares me.

-        Jamie Dimon has reputation of being one of the best risk managers in the country.   Dimon earned his reputation at Citi by sidestepping the Long Term Capital Management debacle.  He further cemented his legacy during the financial crisis of ’08 and talked about “fortress balance sheet.”  Yet J.P. Morgan jumped in on this one with both feet.  They were in the equity, debt and the investment banking portion.  Dimon “fell in love.”  This leads to two important questions.  If Dimon can get taken, who else?   If J.P. Morgan can do a pratfall, what else is out there in these financial institutions?

-        Worse, We Work gives legs to Elizabeth Warren’s view of the world.  Once of the basic premises is that successful risk taking is rewarded and that this rising tide lifts all boats.  Neumann managed to disrupt the lives of some 4,000 people (and in the end had to delay layoffs because he didn’t even have the cash to pay their severance) and dissipated billions of dollars in wealth and yet managed to pocket a cool billion, land a $200 million consulting agreement and had his personal debt refinanced.   This is a terrible sign that something in the capitalist system is amiss. Even capitalist purist Cliff Asness posted, “It [We Work] will pass.  But, this story, hopefully briefly, makes me see some of the appeal of socialism.”  Frankly, I am surprised that Elizabeth Warren hasn’t picked up on the We Work story.   It is a real black eye not just to the banking, real estate and venture capital markets, but, I think, lends legitimacy to the complaints of Warren, Sanders, AOC and people of their ilk.  If I were on Warren’s campaign committee, Neumann would be featured in our campaign ads.

-        We Works also bolster’s one of  Peter Thiel’s assertions that innovation has slowed dramatically, that we innovate in bytes and not stuff.   There have been businesses that have married technology to an old line business--- Dominoes comes to mind.   Neumann tried to create an illusion that you could defy financial constraints by bolting space maximizing algorithms and a cultish corporate culture and failed spectacularly.  We Work also provided evidence to support Theil’s claim that there is just too much money around that funds don’t know what to do with.  And that leads them to “want to believe” instead of applying a healthy dose of skepticism.

After all is said and done, Neumann’s empire crumbled when his company’s story was scrutinized by the market rather than just the wise ones at Softbank and JPMorgan.

There is wisdom in crowds.