In this session, I interview Eliot Brown, a reporter at Wall Street journal since 2010, and author of:

The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion

We recount one of the most incredible startup stories of the last decade. The story of WeWork, and how it went from being the most valuable startup on earth in a few years to almost risking going bankrupt, in a series of dramas, conflict of interests, and turns of events!

This story is also turning into an Apple TV+ series.

What was your background when you actually started to cover WeWork? What actually prompt you to cover the WeWork story?

Eliot Brown:

Yeah, so it was many years ago that I first came upon them. I was at the Wall Street Journal in 2013 covering commercial real estate and the office market. I was just interested in new trends in the office market and how people were working. A lot of people were talking about co-working spaces. So I went down to lower Manhattan and met this one company that was leasing a lot of space. I heard the CEO was kind of fun and talkative, so that’s when I first came upon them when I met with Adam Neumann.

Gennaro [FourWeekMBA]:

Oh. I guess at the time, WeWork was one of the hottest companies in New York. It was very easy to end up hearing about that. But can you tell us a little bit more about the background of Neumann, who was the founder of WeWork. 

How was Adam Neumann’s life before getting in New York and the experiences that brought Neumann to actually create WeWork in the first place? 

Eliot Brown:

Yeah. He had a pretty interesting life. He grew up in Israel largely. He did a brief stint in the U.S., but his parents were doctors, they were divorced. His mom was kind of unstable and always moving them around, always spending all the money she had. So they were running out of money, even though she had a decent-paying career. He spent some time on a Kibbutz, which communal socialist experiment type thing in Israel. Someone we talked to remembers that even then when he was just a teenager, he was always brash and had this real desire to make money, which is kind of a funny thing to come out of a socialist-communist little village.

Fast forward, he did some time in the Navy in Israel, as is compulsory. Then he just wanted to get to New York and become rich. So he moved there. His sister was a supermodel, lived with her. She mostly supplied the money and he tried to start a baby clothes company, or he did start a baby clothes company that tried to make clothing that had knee pads for babies when they’re crawling. It was called Krawlers. The idea was that babies, their knees must hurt so here’s a way to make it so they don’t, and didn’t go very well.

Gennaro [FourWeekMBA]:

Yeah. Also, because I mean, at the time he was a guy in his 20s, and he was selling like a product for babies. He didn’t have babies, actually, probably didn’t even understand what being a parent was at the time. But also there is another interesting paradox of this whole story, which is quite curious. As you said, when he was a kid he had the chance to actually hang out in a Kibbutz, which is a sort of closed, gated community where there is this sort of communism where you share everything. How important was this experience to Adam Neumann, on the negative side and also on the positive side?

Eliot Brown:

Yeah. I mean, well, I’ll tell you what he said. Though, it’s hard to differentiate myth from reality. He said, on the Kibbutz, that he learned the value of community and how it’s great to share everything. This is a place that had one big dining hall for everyone in the community to eat at. At first, when he first got there, I think, they actually had unlimited meals and you would just take what you wanted, but then over time, it wasn’t working. It was financially or economically broken.

So they had to start charging people or limiting how much people could take unless they wanted to pay. At one point, nobody owned cars, they just had two shared cars for the community. But at one point they allowed you to not have to pay for power, and then everyone would just run the air conditioner all day long. So it was sort of broken in that sense. To listen to Adam, he learned that you should take the communal aspects but you need a real strict capitalist layer over that. He called it, WeWork was a capitalist Kibbutz, which is of course a pretty strong contradiction, but contradiction never really stopped Adam.

Gennaro [FourWeekMBA]:

Yeah, absolutely. We see that throughout this episode. The interesting part is that, of course, this experience as a kid in the Kibbutz actually was… Let’s say to recap a little bit, he learned that actually, yes, the community was important, but then on the other side, you needed to also give it sort of a business model to actually make it work. 

Even though, as we see throughout the story, actually, we were handed up sort of like Kibbutz where the money burned was a lot, there was a lot of talk about the community and a lot of buzz words. But also a lot of money burned along the way, so also we see that the company at a certain point was not financially viable. What happened next? 

Okay, Adam Neumann, he moved from Israel to New York City. He started to have some experiences as an entrepreneur with a field, as you said, a startup called Krawlers, where he sold clothes for kids. It didn’t work. Then suddenly something happened that actually gave him the idea of WeWork. 

What was a key event that made WeWork possible?

Eliot Brown:

Yeah, it was actually, he just was in class… He was always looking for new ideas. He was clearly just… He didn’t care what it was. It was, “I want to make money and this baby clothes thing isn’t working.” 

He met someone who ran an office space subleasing company, a little incubator-type environment called Sunshine Suites. It was the son of a classmate of his at college. That guy showed him around Sunshine Suites and showed him the business. 

Adam was really impressed by how much money he was making. So he saw that in Manhattan and he basically said, “We can…” He went back to a guy he had met who he was friendly with and said, “Hey, you’re an architect. Do you want to do this with me in Brooklyn?” 

Because they were working out of the same office, and that became his co-founder, Miguel McKelvey. So they started a predecessor to WeWork in Brooklyn when they convinced their landlord to essentially give them a floor and put up the money to do this, and all they had was the idea and sweat equity.

Gennaro [FourWeekMBA]:

Mm-hmm (affirmative). This is interesting because this will connect also to the next step. How did actually Adam Neumann convince the landlord in the first place to actually rent the property? I mean, those were, just remember, two guys in their 20s trying to enter the real estate business in New York, which is extremely competitive. Yet they managed to enter that business. 

How did Neumann and McKelvey manage to enter the real estate business in one of the toughest cities on earth (NYC)? 

Eliot Brown:

Yeah. I mean, I think Adam just… The main theme here is that Adam is one of the world’s great salesman. Even though he had no experience in real estate or had no idea what he was doing, he was able to just by talking, sell the landlord on this vision that didn’t exist. This is a constant theme. He did it actually decently well with baby clothes, but the problem is the product was no good and wasn’t really a market that made much sense. But he at least could like draw a crowd of people around him interested in buying these baby clothes at these baby clothes conventions. It was merely just the power of persuasion and gifted salesmanship that got the landlord to commit.

Gennaro [FourWeekMBA]:

Yeah. We’ll see that this is a recurring theme, the ability of Adam Neumann actually to convince people in his grandiose vision. Actually, this startup turned out to be successful also because, for a little bit of context, we were in the years 2010, when we went through one of the biggest recessions of our times, especially in the U.S. So it’s also true that there was some convincing by Adam Neumann, but then on the other side, it’s also true that many of those commercial buildings were also empty. 

It was hard for real estate owners to actually turn them into profitable commercial buildings, so definitely this might have helped also Adam Neumann as he was rising to become a successful entrepreneur. What happened next? I mean, this startup actually worked, but the interesting part is that as soon as it started to work out, Adam Neumann had ready a grandiose vision for the future. 

How Green Desk played a key role for WeWork to be built? 

Eliot Brown:

Yeah.

Gennaro [FourWeekMBA]:

Yeah. The first attempt to make it in the real estate scene in New York, what happened next?

Eliot Brown:

Yeah. I think basically Adam was just not content with making hundreds of thousands of dollars. He wanted to make millions. Then quickly when he saw that millions might be attainable, he wanted to make billions of dollars. Basically he just, from 2011 or so onward, when he started WeWork, he was in constant fundraising mode and just was always sort of climbing to the next larger rung of the ladder, or always looking for the bigger fish that had lots of money. 

Early on in 2010, he found some small backers. Then he got introduced… WeWork opens one or two locations, and then he gets introduced to some people with more reputable names, and then gets them and then gets like a third location.

Then the thing that really took off, and that gave him huge sparkles in his eyes for what the future could be, was when he first discovered venture capital, and that they were looking exactly for the type of thing that Adam wanted, which was to make a giant business. He realized that venture capital is where the money is. So he started talking to venture capital firms and got one of the best ones out there interested in him. They gave him a series A investment in 2012.

Gennaro [FourWeekMBA]:

Yeah. As we see, this is a key point where Adam Neumann had learned how to play the fundraising game. 

Actually, we can say that he was one of the best at playing that. He will go through many rounds and manage to keep control over the company, but there is also… Before we move forward to that story, there was also a person that played a role in Adam’s life behind his main partner, which was McKelvey as you said, which was probably the opposite of Adam Neumann. 

There was also Rebekah Paltrow who would eventually become his wife. Can you tell us a little more about the story, just some of the things that you also tell in the book that are quite interesting to understand how the couple came together, and how also Rebekah shaped Adam as a person moving forward?

Eliot Brown:

Yeah. I think they were met by chance, the two of them, through a friend. She had a lot of what Adam was interested in. I mean, Adam loves status and social power, and celebrity. 

She is the first cousin of Gwyneth Paltrow. Then she also, I think, quickly saw Adam, as a friend though, she saw him as a project and is like, “Here’s this guy who has a failing business and is full of BS. Maybe I can enlighten him.” She’s very spiritual, so she had him immediately like start… She’s like, “If you’re going to date me, you have to have a spiritual side.”

She took him to the Kabbalah Centre, which is a Jewish mystical, mysticism thing, and got him really involved there. Then he really liked that because lots of rich people were there. So he got to network with rich people. I think overall, she infused WeWork and Adam with this woo-woo spiritualist side of things. 

Maybe the way to think about it is, WeWork, when they talk a lot about us and the power of community, that was the Rebekah side, I think. Adam was more focused on the rapid growth and making billions side. Together, they melded to create WeWork.

Gennaro [FourWeekMBA]:

Mm-hmm (affirmative). Yeah. It’s important that you mentioned the Kabbalah Center, which was… I don’t know how to define it, probably like a new age New York community where many famous people also hanged out, many wealthy people hanged out, which was also an important source of connection for Adam in the early years of building up WeWork. 

A couple of points, which are very important. As you said, Rebekah Paltrow, which was the cousin of Gwyneth Paltrow, eventually would turn out to be the wife and the main companion of Adam Neumann as we go through this journey, because we’ll see she would play also a role in the company, big role in the company. 

But pretty much she brought Adam Neumann toward this path of spirituality, but we’ll see also that a lot of it was empty, meaning that there were a lot of buzz words and some of this spiritual stuff was so translated in financial metrics that they would later use when WeWork would eventually try to IPO.

But yeah, just two key points. 

Rebekah Neumann also brought Adam Neumann within a circle of people that would help him especially in the first years to kick off the company, because there were many interesting connections. Then also many on the circle of his wife also were people that eventually became very close people within the company. It was like the top management within WeWork, because as we’ll see, the company was managed in a very family-oriented way. The aspect of this community and spirituality is also used as leverage to actually have employees work way behind what they were supposed to. Which as we’ll see, it’s another contradiction of the whole WeWork story, which also makes it so, so interesting.

As we move forward, there is an interesting fact. We have this company, WeWork, again there is this guy coming from Israel. He goes to New York, the city, it’s incredible. He has probably the most incredible time of his life. He’s in his 20s. After a few attempts of building up a successful startup, he face various times one of the major failures, as we said, was like Krawlers company selling baby clothes. Then after he moved to Green Desk, which was the first real success. Also, the first exit, because from Green Desk, Adam Neumann would actually cash out about half a million or something like that, which he would later use for creating another startup, actually WeWork.

But the interesting part is, WeWork was created and you said the company was growing. Again, we are in the context of the year 2010, and going forward just the end of the recession, many of the commercial spaces were empty. It was also probably easier to start the company in that sense, by leveraging the short-term lease aspect of the business. But the WeWork of the early years, we’re talking about especially 2012, it was actually a profitable company. I mean, how was this company at the beginning? Because it’s interesting to see the change or so over the years.

Eliot Brown:

Yeah. In its history, now 12-years old, WeWork has had one profitable year and that was 2012, I think. Might have been 2011. I think what happened at first is they did really hit on this geyser of demand and realized that there was this Millennial, hipster-ified, very Berlin-like or Brooklyn-like demand for casual office space, and not having something that looks like a cubicle. 

They found just a lot of people working as graphic designers who wanted to be around others. That was real. The other thing that happened, as you mentioned, was the real estate market was much different. Landlords really… Rents were very low because it was after the recession.

So WeWork is basically… I mean, the business model is just arbitrage. They lease office space at one rent and then they sublease it at a different rent. That arbitrage was working really well at first because the rents that they would rent from landlords were really low. Then the graphic designers and photographers, and whoever else was wanting to take office space was willing to pay a decent rent. That made for a great business. The flaw came when they thought they could scale it and replicate it around the world really rapidly. Thus began their many years of really large losses.

Gennaro [FourWeekMBA]:

Yeah. After this point, WeWork was, as we said, a profitable company. Adam Neumann had a grandiose vision were to bring the company going forward. He actually secured the first deal, which was with Benchmark, that I think valued the company over 100 million after a very short period of time, which was really a lot of money. Yet this was not enough for Neumann because later on, as you were accounting in the book, actually there would be another deal also with Goldman Sachs, where Adam Neumann played his cards very, very well. 

How did WeWork manage to become a valuable company, at least in the private market so quickly? Can you tell us a little bit of the main deals that actually made this possible?

Eliot Brown:

Yeah. With Benchmark, I think that was one of the most influential investments, or it was the most influential investment in WeWork’s history, and that guided lots of things. Because Benchmark is this really well-known name in Silicon Valley, they were the first big check into Uber. They became famous by backing eBay early on and making one of the best returns in all of the venture capital ever. He basically just met one of the partners through networking, and really impressed him with his drive and his salesmanship, and then showed off the business. He was like, “Look, it’s already profitable.” These guys are used to software companies. So then he impressed another partner there and eventually convinced them that…

I think they basically thought, “We don’t really know much about this business. It does look like real estate, but he seems to like this incredibly talented entrepreneur who has all the bravado and salesmanship that make a good tech entrepreneur these days.” So they gave him the money. Then what happened is, that brought on a lot of other interest from other investors later. 

He did turn down investment from Goldman Sachs the next year because the valuation was too low. It was only $200 million and he thought they should be worth 400 million. Then he found someone to value him at 400 million, and then soon thereafter J.P. Morgan’s asset management arm valued them at a billion and a half dollars. 

It really… I think in venture capital, a lot of these investors will look to each other for signals, and if everyone is running in one direction, they all start running in one direction. That’s basically what started early on with WeWork and Benchmark.

Gennaro [FourWeekMBA]:

Yeah. As we see, hearing the story, actually the ability of Adam Neumann to turn the narrative around the company will change various times. To use a buzz word, would pivot various times throughout the years. Because for instance, as you said, Adam Neumann managed to make the company valued at almost half a billion. 

He also knew at the time that being a tech company meant being valued way more than you had on the balance sheets. So at the time, he started to think already about a business model, because right now the software-as-a-service industry is a huge industry. You have many multi-million dollar players. It’s a huge market.

WeWork runs a membership model that gets monetized via a set of packages that include ancillary value-added products and services to enable companies to scale or shrink their workspace on-demand. WeWork defined its revenue model space-as-a-service claimed to be more scalable than traditional commercial real estate.

But at the time, of course, Adam Neumann had already a mind to frame WeWork as a tech company and to frame it as a space-as-a-service business model. 

PropTech stands for property technology, is a relatively recent movement in the real estate industry. A movement is an innovative approach that uses technology to optimize how consumers and real estate professionals interact with property. PropTech, therefore, leverages digitalization to help property managers, owners, builders, and landlords to manage their assets.

This will be also one of the things mentioned in its financial prospectus as the company would try to IPO much later on in 2019, as we’ll see. There will be a very important step. Before we get to that, though, there is a very important point to highlight, which is part of the contradiction of the whole story of WeWork and Adam Neumann. 

As he was closing those deals, actually he was carrying some also personal deals out of those venture capital investments. 

Can you tell us a little bit more about how Adam Neumann managed to actually pocket from those investments and also finance his own lifestyle?

Eliot Brown:

Yeah. I think one of the most… The important theme that runs through Adam and WeWork’s story are that Adam loves money, and he loves personal enrichment. Even though this is all a company that’s literally named We, and he would very frequently say things like, “You need to put we over me. This is about all of us. It’s not about an individual.” 

He was probably the most selfish person I’ve ever covered, as a reporter. He, starting in the first round of funding, took some money out for himself. I believe it was around a million, could be off by a million there. Then basically every round after that, with a couple of exceptions, every time he would negotiate to take out greater sums for himself.

Each time the board of directors or the investors thought, “Well, he just needs a little more money. Then he can have a nice lifestyle, and then he’ll be focused on the business.” But he would negotiate these rounds where these investors would come put in money. 

They’d be like, “Ah, I want to put in 200 million.” He said, “Well, I only have room for 150 million, maybe you could buy some of my shares.” It’s the type of thing that just… I think he just liked it. 

He likes money. Later on, he would borrow money and I think he also would buy properties and lease them to WeWork. These became really problematic later on in life, and later on in WeWork’s life. But at the time, he was just very focused on one thing.

Gennaro [FourWeekMBA]:

Yeah. Two key points. One, of course, there’s nothing bad in liking money, especially if you’re doing business. The problem is, he was on the one side predicting the gospel of the community, and on the other side, he was cutting deals on the back of his own company. Another also key point is that as we move forward, actually, this would become even worse. 

We’ll see that the whole structure of the company would be actually probably created on the backbone of making sure that this company could finance the personal lifestyle of Neumann and his family. Again, the interesting part is that on the one side they were sort of predicating to everyone how they ought to live, but then they also were doing the opposite of that, so probably this is something that didn’t help.

But going back to the business story, I think there was… After we go, just to recap a little bit, we have the first investment by Benchmark, which is quite a known venture capital firm. 

Of course, for the first companies that cut into deals with Adam Neumann, they saw the company was valued at the time, there was a big opportunity. That anyhow, probably by giving the money to someone with this grandiose vision, like Adam Neumann, would have created a valuable company. For them, the initial risk was relatively low.

As we move forward, of course, there would be a lot of other cases in which the context was right also for Adam Neumann to take advantage of the situation. 

There would be like a turnover event in which pretty much WeWork got valued over a billion. It entered the unicorn-verse, and actually, it entered the decacorn, meaning a company valued more than 10 billion when he cut a deal with a mutual fund, with Fidelity. 

Can you tell us a little bit more about how WeWork managed to become a Decacorn in such a short period of time? 

Eliot Brown:

Yeah. I think in this year and a half stretch, I think, so it was I think very early 2014 through mid-2015, they went from being worth a billion and a half to 10 billion, and not much had changed in the business. They were just continuing at pace. Adam pivoted from marketing WeWork as the physical social network and playing off, he’s like, “The iPhone was about I, we’re about we.” 

To focus much more on the hot trend at the moment in fundraising, which was the sharing and the sharing economy. So Uber and Airbnb were the hot companies at the moment, and so he said, “Just like Uber and Airbnb use cars and apartments, we do that with offices.”

Now, that of course was a completely different business model, neither Uber nor Airbnb actually leased or owned their cars, they’re using other people’s. They’re in theory just a tech marketplace that connects people. WeWork was leasing buildings, building decks, spending money to buy glass and beer and kombucha, and paying people at the front desk. It was very what we call an asset-heavy business model. 

But regardless, he was able to still capture the moment and the vibe of FOMO, fear of missing out, that investors were feeling when they were throwing money at Uber and Airbnb, and get lumped in that. He found very willing, eager investors in mutual funds, and mutual funds that were actually competing with each other. 

They were overlooking WeWork’s negatives and just focusing on the positives because I think they needed to believe a story because they were suddenly interested in spending a lot of money on unicorns.

Gennaro [FourWeekMBA]:

Yeah. Also, a very important point to highlight, also to make the audience understand the context, here we are living in a time, 2014, 2015, where mutual funds were late in the game and they were taken aback also by the fact that index funds had become extremely successful. 

They were trying to actually show that they could be successful as well by playing the venture capital game. Also, the amount of money that was available to them was so large that also placing a large check for the venture capital firms, it was a small check for actually the mutual fund, the firm. For Fidelity also giving a few hundred million dollars check to WeWork was very small compared to the ability and the firepower that the mutual fund had.

Again, they had to show that they could actually enter the game and be innovative where retail investors would otherwise have invested just in index funds, which are just replicas of indexes that we have. 

There is no active management and they get… Let’s remember that mutual funds get a lot of management fees for the work that they do. If you don’t perform well on the market, then why do you exist in the first place? This was a little bit also the context, and Adam Neumann understood that and understood how to take advantage of that. 

What happened… a few details of the Fidelity investment, because there was also the same pattern that we see throughout the story where also there, Adam Neumann did a couple of things. One was that he also managed to get a few million for himself, I guess, out of the deal. The other key important point is that he managed to create a control structure where he had control of the company, even if he was going to sell most of the shares.

Can you tell us more about the Fidelity investment? 

Eliot Brown:

Yeah, precisely. I think that is one of the most important points in the whole WeWork story that enabled it to be so fiery and crazy. Somewhere around 2014, ’15, ’15 I guess, he gave himself 10 times the votes of everyone else essentially, or most everyone else. Normally in business, or in corporate America, you have share is one vote. 

So if you happen to own 51% of the shares of the company, you control the company. Adam ultimately only held 25, 30% of WeWork, but could have stayed the majority shareholder by selling off a lot of his shares, because he had 10 shares per vote. 

This was essentially meant so he could rule it as his own company, and not be responsible to shareholders. That was, I guess, something that was really taking off in Silicon Valley, and has continued to. All because of this myth of the founder, or mystique of the founder, depending on how you see it.

Silicon Valley venture capital firms were just enamored with founders because these were the people who would take their money. So they would lavish them with praise and say, “You guys are amazing. You’re a special person, please take our money. 

You’re so special that if you take our money, we’ll let you keep control of the company, even if you own less than 50%.” That’s what was happening with Adam. He saw that happening at companies like Snap and Uber, and he wanted it himself, and WeWork was a hot company so he got it.

Gennaro [FourWeekMBA]:

Yeah. We’ll see later also as WeWork would approach the IPO in 2019, after a series of twists, how this thing out the whole… the corporate structure and corporate governance structure will get even crazier than that. We’ll see that. But at some point in 2015, there was a person, don’t know if the name is pronounced right, it was like a Shorenstein which understood that WeWork was a bubble. 

How did Shorenstein actually manage to understand that WeWork was in a bubble already in 2015?

Eliot Brown:

Yeah, you’re referencing this landlord that we’ve made into a little character, Brandon Shorenstein.

Gennaro [FourWeekMBA]:

Shorenstein, yeah.

Eliot Brown:

He was this really young heir to this fortune in San Francisco, the smart guy. I think for people who… For myself as a journalist at the time, and for people who would sit down to think about it and didn’t have money at stake, it was pretty clear but not 100% clear that nothing about WeWork made sense in terms of its valuation. 

It was just, at heart, a real estate company. Because the people who were going there were renting space, not because they wanted community but because they wanted office space, and they were paying office rents, and WeWork had office space-related costs. If there was something like value to the energy in the space, it wasn’t showing up in… Which is what Adam said. It wasn’t showing up in their finances.

Brandon Shorenstein, I think he basically just had dealt with Adam a few times and realized that there was this sketchy side to him, because Adam tried to give himself a stake in a building that they were talking about buying, and then leasing. 

Brandon thought that was pretty sketchy. It ended up not happening. Then he just looked at the business model more and was like, “This makes no sense.” I think that was… If you weren’t part of the herd, you could step back and be like, “What is going on here?” But what happened with WeWork is, Silicon Valley operates as a herd, and so all these investors were just looking at the other investors and looking at Adam and believing in the future that was a myth.

Gennaro [FourWeekMBA]:

Yeah. As we move forward, I think there is an important point to highlight. Adam Neumann understood that if you were WeWork and you were actually running a commercial building as a tenant, you were also contributing to improving the whole building, the whole neighborhood. 

He wanted to have a piece of cake of that. So there was this structure of the company where at a certain point he started to also invest in the stakes of the buildings where he was going to lease with WeWork. 

Also here, we have a rising conflict of interest where we have Adam Neumann on one side with a company that invests in the property, and then on the other side as a tenant with WeWork. As we know, the landlord and WeWork as a company have two different objectives.

The landlord wants to increase the lease, and then WeWork wants actually to decrease the operational expenses going forward. This will be very important. Yet going forward, important institutions like also J.P. Morgan gave him a credit line of $500 million, we have seen in 2015. 

This is a very interesting point. As we move forward, there was a turning point for Adam Neumann to finally, let’s say, amplify as much as possible his vision, which was the encounter with Masa Son. 

Can you tell us a little bit more about the encounter between Neumann and Masa Son? 

Eliot Brown:

Yeah. Well, there are a couple of times in that… a couple of first encounters. He first came across Masa in India at the start of 2016, and he had had this raucous trip where he was really drunk and overslept, and missed important meetings. 

But eventually, he goes to this big startup event and meets Masa Son there. This very time that Masa is trying to be… He’s a very active investor in the dot-com boom, and then shirked back and lost a lot of money and focused on telecom. Now he was eager to get investing in startups again. He makes a brief impression on Masa.

Then the next time was much more important. He meets him… WeWork is looking to raise a lot more money and Masa has just gotten the commitment to raise the world’s largest investment fund, principally from Saudi Arabia. Masa is in New York and on his way to Trump Tower to meet the president-elect. 

He swings by WeWork where a mutual acquaintance had organized the meeting, and he has 12 minutes. Adam whisks him around and shows him the tech section of WeWork. Then on the car ride up to Trump Tower, Masa sketches out a $4 billion investment in WeWork, which became the second largest investment in a startup ever.

Gennaro [FourWeekMBA]:

Yeah. For some recap of the story, we go from 2015, where again, WeWork had reached the valuation… It was a decacorn, so it was a company worth more than 10 billion. 

Of course, the question for Adam Neumann was, “Now, what do I do next in terms of fundraising to still increase the value of my company to bring it to be like 15, 20, or $50 billion company?” 

This might seem crazy because how do you actually can even do that? But for Adam Neumann, there was something that he could do. He started to think about other potential investors to enter the company. He started to do fundraising campaigns, especially in China.

Eventually, as you said, he had this encounter with Masa Son, who was the founder of SoftBank that was at the time the largest investment fund that had secured over $45 billion from Prince Salman. 

This gave SoftBank a lot of liquidity. For a little bit of context, Masa Son, the founder of SoftBank was also let’s say respected as an investor because he had done one of the most successful investments in the tech world, which was the investment in Alibaba where, I don’t remember exactly, but I think he put something like 10, $20 million and he-

Eliot Brown:

20, yeah.

Gennaro [FourWeekMBA]:

Yeah. Probably $20 million and he made like billions out of that investment. 

That gave him the aura of success, even though as you said, he failed to actually consolidate in the communication industry when he tried to merge Sprint and T-Mobile. 

It was stopped by regulators. I mean, there were many things that happened in the middle. 

Can you tell us a little bit more about this character, the character of Masa, and how actually Masa unleashed the potential of Adam Neumann in the worst possible way that would lead also to the whole story?

Eliot Brown:

Yeah. I think Masa just has this absolutely insatiable appetite for risk and is willing to keep betting the whole farm again and again on things that he feels strongly. 

He has a very strong trust in his gut. He’ll even say it at investor calls telling investors, “Numbers are fine to look at, but really the way to invest is by using your gut.” He’s like, “It’s like Yoda, use the force.” This became, as he likes to say, briefly the world’s richest man in 2000 for a few days before the stock market, or the tech bubble popped. Then he proceeded to lose more than anyone had ever lost in history. He was trying to come back on the ascent when he met Adam and was doing a decent job making his way there. He was a billionaire again.

Then comes across Adam, and then he just had… His way of approaching startups was to always… It was almost comical how similar it was. Without even knowing much about a company, he’d basically frequently tell companies, 

“You’re not spending enough on growth. You need to increase your marketing spend. You need to grow faster.” People around him would coach these companies who met with Masa to say, basically knowing that Masa would tell them that they would say, “Well, I’m doing this.” Then they’d just be ready to be like, “Okay. Well, if I had twice as much money, I’ll grow three times as fast.” That was his way of being, and he also told Adam once famously, “You aren’t crazy enough. You need to be crazier.”

Gennaro [FourWeekMBA]:

Yeah. That definitely helped Neumann to push in a direction that would lead to the WeWork story. But what happened next? Like 2016, 2018 WeWork secures this huge amount of money from SoftBank, and now it has to expand as much as possible. I know from the book that there are many crazy that happens, especially Neumann that starts to do acquisitions that don’t make any sense you recount also one acquisition of a company called Wave Garden, which actually made artificial waves for surfing. 

What happened next? How Neumann changed after SoftBank investment? 

Eliot Brown:

Yeah. Basically, as WeWork’s valuation grows, Adam’s head and ego grow, and his ambitions grow. It’s not just to make a big office space company, he wants to… I think at a certain point, he really saw himself as a world leader and on par with heads of state. 

We have a couple of anecdotes where he went to the capital in the U.S. and met with Chuck Schumer, U.S. Senator. After he meets with him, he likes it so much he turns to his staff and he says, “No more mayors from now on. From now on, only senators.” 

He meets with Justin Trudeau of Canada once, and then they wanted to have another meeting and Adam reschedules it at the last minute and is like, “Justin Trudeau can meet my schedule,” which is not how you usually deal with the head of state. And he almost didn’t go to a meeting with the British prime minister, Theresa May.

He had a very big opinion of himself. He would tell people, “If I were to run for anything, it would be president of the world.” Obviously, an office that doesn’t exist. 

This is just what came with seeing WeWork grow and seeing his wealth swell on paper and seeing all the money being thrown at him. With Masa, they contemplate this much, much, much bigger investment where Adam asks SoftBank for $70 billion. 

For context, no company had ever raised more than a total of like 15 billion out in the private markets. They sketch out a vision for WeWork and Masa and he writes on paper that they expect WeWork to be worth 10 trillion… Am I going to get this right? $10 trillion in a few years, by 2028.

At the time, no company had ever been… Apple wasn’t even worth a trillion dollars. Excuse me, he really just has this incredibly inflated sense of what WeWork is capable of and so starts to do crazy things like thinking he should… He tells [inaudible 00:48:39] he wants to buy Lyft. He wants to buy Sweetgreen. 

He wants to buy all the commercial real estate firms, Cushman and Wakefield, CBRE, Regus/IWG. So he just tries to buy… In the end, he only ends up buying relatively small companies at very high prices, like meetup.com, and they buy a coding academy, and they start an elementary school. But WeWork just shoots in lots of different directions and Adam is increasingly unhinged.

Gennaro [FourWeekMBA]:

Okay. Pretty much he was crazy. They had this thinking that the company would be valued at 10 trillion, and this was a shared thought between Son and Neumann. 

The duo together was unleashed to something that we had probably never seen. But then in 2018, going forward, there is market turbulence. The liquidity starts to be much less available than before. 

SoftBank is the main fund, the vision fund, SoftBank actually burns out billions of dollars. At this point, actually, Son had promised Neumann to buy out WeWork, make it a private company, and bring it to become, as you said, a $10 trillion company by 2028. 

But things changed. Masa Son also had to change direction because the fund was not going in the right direction and he was getting different pushbacks from the main investors in the fund. 

What happened next when the SoftBank final investment was pulled off? 

Eliot Brown:

On Christmas Eve in 2018, they’re literally done with this deal. It’s ready to close, and it’s going to be the largest ever buyout of a startup, and then Masa backs out. He calls Adam while Adam’s in Hawaii and says, “This isn’t going to happen.” 

Then Adam is shaken and realizes WeWork is burning an enormous amount of cash because, since 2013, the company’s been basically spending $2 for every $1 it takes in. They’re basically, at the current rate, if they kept accelerating, they would be out of cash by the end of the year, 2019.

He realizes they need to IPO, which is, he’s basically found all the private money there is to find in the private markets and you have to turn to the public markets. 

WeWork quickly starts to pivot to try to go public and reveal its finances. It’s going to be judged in the market, as opposed to just one or two industries that determine a price. 

That sets it down on the path for its ultimate demise because private markets were acting as a herd and he was able to manipulate that herd. The public markets are, I guess, maybe a much bigger herd and the magic was going to wear off.

Gennaro [FourWeekMBA]:

Yeah. As we said, different turns of events where he was supposed to go private, getting bought by SoftBank for 20 billion, be just a private company, and realized his multi-trillion-dollar valuation dream. 

Then finally the market turned on its back and therefore SoftBank had to change direction. It couldn’t finance anymore the acquisition of the WeWork in the private market. 

Then on the other side, actually WeWork turned out to be one of the largest failures that SoftBank had taken. Therefore, also for Masa, there were huge drawbacks. Because for bit context at the time, Masa was trying to raise a second mission fund that was supposed to be even larger than the first one, and they would’ve taken over the whole tech world. 

But as the WeWork story unraveled actually, he wasn’t able to secure additional funds because there was no other investor, even in the Arabic countries, that were available to give money to Masa as the situation had evolved in this way.

Then we go to the IPO. WeWork figures, “Okay. Let’s go to the IPO. We go public and we get the money from the public.” But things also happen very faster, where they listed… 

Actually, they submitted the S-1 form. Which for a bit of context is a form that you had to send over to the SEC, the Security, and the Change Commission, in order for you to list on the public market. 

This S-1 form was actually, remember seeing it in 2019 as soon as it came out, it was more like a marketing plan. There were different things that made the public go crazy about the IPO, WeWork. 

Can you tell us a little bit some of the details about what happened during the WeWork IPO attempt?

Eliot Brown:

Yeah. I think there were three things that were kind of crazy about the S-1 when it… When it dropped, I was hiking with some friends and it was a multi-day trip and there wasn’t cell service for some of the days. 

Then I turn on my phone and I just get flooded with these text messages before I’m able to check the internet. It was all just like, “Oh my God, did you just see this?” I knew what it was. I knew WeWork… 

Because I knew they were preparing this. I knew people just found their financials crazy. There were three things, I think. It was worded in this kind of crazy way, very Rebekah Neumann, where they dedicated it to the Energy of We. Then talked about how the company’s mission was to elevate the world’s consciousness.

Then there were the basic financials of the business, which were pretty abysmal. Then the third was probably the most concerning, which is, it was just filled with conflicts of interest. 

These things that had been written about, some by me beforehand, were some of them where he was leasing properties to the company, and the place was filled with relatives of him and his wife in the upper management. What then happens is, people also see how he had profited off of literally the name We. 

It wasn’t much money, but he’d sold the trademark to the company. I think the internet went crazy. I’ve never seen such a one-sided take on a company before an IPO. Everyone was like, “What is the deal of this company?” No one was defending it as a good investment. That’s a really bad place to be in when you’re trying to IPO because a lot of that is about momentum. So basically the bankers who are working on the deal just watch and quickly realize the evaluation is going to be much lower than Adam had hoped.

Gennaro [FourWeekMBA]:

Yeah. Fast forward, they submit this S-1, the internet goes crazy, Twitter goes crazy, as you said, many articles. 

You also contributed to that, I guess, with one of your articles shaking the situation even further. But the thing goes out of control and pretty much what happens next is that Adam Neumann… 

As you said, the evaluation was supposed to be over 40 billion, but then he would end up being way less also than 8 billion. So it was from a company worth almost 50 billion to less than 10 billion was like a huge drop. Actually, the company was risking going to zero because the money was running out. So it was risky going bankrupt. 

Pretty much there was pressure on Adam Neumann to leave the company. 

What happened next when Neumann was ousted?

Eliot Brown:

Yeah. They’re basically about to start the roadshow to go IPO, and then I’m working on a story kind of about how crazy he is, or people around him think he is, and all the crazy stuff he does, and how he tells people he wants to be president of the world, and how he’s a total party animal. 

After we send them fact-checking questions on that, they postpone the IPO realizing that you can’t have this article come out in the middle of a roadshow, which is the two-week period before an IPO. Then the article comes out and the board at that point realizes that Adam just can’t be CEO. 

The company can’t go public with him at the helm. Then they say, “Either we’re going to quit or you have to quit because even though you control the board, we aren’t going to support you as CEO.”

He realizes the financially rational thing to do and doesn’t want the company to go to zero. So he steps aside, and the dream is done. Then soon thereafter the company is about out to go insolvent. 

They had even less cash than they thought they did. They raced to put together a rescue plan and cut thousands upon thousands of jobs, and raised multiple more billions of dollars, and it ends up being from SoftBank at this $8 billion valuation. 

Then I think the most poetic part of the end of this saga is that, right as Adam’s negotiating with SoftBank because he still controls all his shares, he gets them to give him one of the most generous, if not the most generous, severance packages of all time. He leaves with, depending on how you want to count it, a $185 million fees, another billion that he can sell of his own stock that he already owned. 

Then they refinance a $500 million loan at a favorable rate. So basically has access to $1.7 billion, just to stop being the CEO of the company that he… Stop being on the board and controlling the company that he founded.

cash-the-money-or-was-there-a-legal-battle">Did Neumann eventually cash the money or was there a legal battle?

Eliot Brown:

Yeah. That’s what they agreed to, then there was a legal battle. He ended up getting… He actually ended up renegotiating again in his favor. He ended up doing quite well. 

He ended up getting over $200 million of cash, and if WeWork stock hits a certain threshold he gets much more money, another 200 million-plus. 

He tended to be a really awful negotiator when it came to buying property… buying things with WeWork’s money, but for his own compensation, he was an excellent negotiator.

Gennaro [FourWeekMBA]:

Yeah. The end of this story is that eventually, I think in 2020, as Adam Neumann got out, he cashed the money also. But WeWork eventually would manage to get listed through SPAC, the special purpose acquisition vehicle where he managed to, I think, to get listed eventually. 

The company now, if I’m not mistaken, is worth about $5 billion. There is a movie coming out as well, I think, from Apple Plus. Is the sorry based also on your book, I mean…

Eliot Brown:

That one, a eight-part TV show, is actually based on a podcast that, if you grumbly ask me, I would say is largely based on Wall Journal stories. But that’s probably not how they would refer to it. I’ve seen the first few episodes, Jared Leto stars as Adam and he is very good at emulate… From the accent to just the mannerisms, he really gets Adam. Yeah, it’s a fun tale.

Gennaro [FourWeekMBA]:

Yeah, absolutely. This is the perfect story to make it into a movie or like a series, absolutely. To close this up, I think the story of Neumann is incredible, is not like a tyrannous thing, but very close to it for, in some ways, even though the underlying business was good, was a good business just extremely, extremely overvalued. 

What were some of the key lessons you think we can learn from this story?

Eliot Brown:

I think that the biggest thing that I took away is that smart people can really lose grip of… Even smart investors can really lose grip of reality or gravity. When you go in a herd, you can just forget your bearings. 

With WeWork, it was just so obviously, in hindsight, and to summarize at the time, a real estate company. But just because of the power of persuasion and these incentives that were baked into venture capital, everyone saw it as a software company or a tech company, even though it really exhibited almost no similarities other than fast growth, which was really just fueled by more venture capital.

You had literally some of the top minds in finance, I mean Jamie Dimon and David Solomon from Goldman Sachs, and down to some of the best venture capitalists and mutual funds, and thousands of people at WeWork all just believing this thing, that was completely hollow. I think you need to have the critical thinking, and in bubbles, in manias, we forget to do that. That, I think is for me the biggest takeaway.

Gennaro [FourWeekMBA]:

Yeah. Yeah. Also, the contracts between private and public markets. Especially when there’s a lot of liquidity, it’s very easy to fall into those traps where if you’re able to control the narrative, you can actually get a much larger valuation, as Adam Neumann did. For the audience that is going to be listening, of course, they can read the whole story in The Cult of We, which is a great book, a lot of fun reading it. Thanks, Elliot, for joining the conversation. It was a pleasure.

Eliot Brown:

Sure thing. Really enjoyed it.