Investors in WeWork should sing the Beatles 1964 lament, “I Should’ve Know Better.” The company’s IPO plan floundered when its $47 billion valuation plummeted 80 percent the week it was supposed to price—and for good reason.
As I pointed out several months ago in multiple outlets, bombastic founder and now ex-CEO Adam Neumann’s sale of over $700 million of his own shares just ahead of an attempted IPO was a sign that his real estate empire, the largest office-space holder in New York, London, San Francisco and Washington, D.C., was house of cards. His sale of a trademarked use of “WE” back to his own company and covert ownership of several of the buildings that he leased to WeWork was classic self-dealing.
Neumann’s global shared-space office complexes sprawl with fun foosball games, bean bag furniture and Nespresso machines for nomadic 20-somethings, but the glam factor couldn’t hide the huge financial gap of $47.2 billion of long-term lease commitments and only $3.4 billion in short-term leases to tenants revealed in his S1 filing.
The unrealistic market growth expectations brought losses of $120,000 a minute and $5,200 per customer, in contrast to longstanding successful global competitors. For example, the truly pioneering 40-year-old Serve Corp. of Australia is now in 34 countries, and newer competitors like Mindspace, Knowtel, and IWG/Regus, are gaining momentum.
Furthermore Neumann’s owner-controlled governance system permitted naming his own board, and his wife selecting a successor if he were incapacitated. We’ve seen such abuses before. Tyco was founded in 1960 as a government supplier of advanced technical materials. After just a decade under “Deal a Day Dennis” Kozlowski, it had morphed into a dizzying conglomerate of more than 3,000 unrelated acquired businesses, encompassing intercontinental cables, surgical supplies, retail inventory systems, baby diapers, home security alarms and commercial lending.
The company’s practice of flamboyant toga parties and boisterous bravado created a strategic smokescreen of confusion that analysts failed to see through for far too long. When the smoke dissipated, Kozlowski and his finance chief Mark Swartz were accused of stealing $150 million and sent to prison, and the company collapsed.
WeWork, which changed its name to the We Company, was at least honest about truly becoming a “wee” company. Beware of believing bosses who rely on:
1) Big Mouths: CEOs like Steve Jobs, Elon Musk and Tom Edison were effective self-promoters but had substance to sell—not just sizzle like Neumann. Those who questioned Skilling or Theranos’s Elizabeth Holmes were threatened.
2) Big Momentum: Worldcom’s Bernie Ebbers, a barroom bouncer and motel owner, was so busy stapling together businesses that he didn’t have time to hire a general counsel, leading to prison for him and the then-largest U.S. corporate bankruptcy. Dizzying rollups like US Office, Valeant, and Tyco, fueled their growth by more growth—until they collapsed.
3) Big Money Manias: Driven by backers like Softbank’s Vision Fund, real estate experts shrugged their shoulders and jumped in on the WeWorks frenzy, akin to Solomon Smith Barney Jack Grubman fueling the Worldcom fraud.
4) Big Magic: No scientist could understand the mystery of Theranos’s technology and the company’s CEO refused to show them. Yet, overly busy marquee political names eagerly hopped on board in pursuit of relevance and riches.
In the end, you don’t need to be Bethany McLean to size up a CEO with a plan so bold, it defies basic accounting. Just remember: if something seems too good to be true…