So, Adam Neumann, former CEO of WeWork, sued Softbank, WeWork’s biggest investor, over the latter’s decision to renege on a part of the bailout package they promised last year.
It’s a big headline. There’s a lot to unpack. So we’re going to take it from the top.
The Story
For the uninitiated, WeWork takes buildings on long term leases, they then spruce it up and rent the space to individuals, businesses, and startups. And truth be told, the company had a lot going for it.
They were expanding rapidly across the world. Their revenues doubled each year. They received big investments from the likes of Softbank and JP Morgan. And the startup’s valuation ballooned to a whopping $47 Billion.
That’s not all.
Softbank’s chairman Masayoshi Son even called the company the “next Alibaba,” and WeWork’s eccentric CEO was so convinced he would transform the way people work, he claimed the company’s mission was to “elevate the world’s consciousness.”
And buoyed by all the hype surrounding the company, WeWork decided to go public and raise money from the people.
Unfortunately, that’s when the scheme began to unravel. Because unlike Venture Capitalists with deep pockets, the public didn’t think the company was worth $47 Billion.
In fact, the public thought the company was worth very little especially since there were some very real concerns surrounding their business model.
For starters, WeWork was portraying itself as a tech company when in fact it was just another real estate startup.
I mean, telling other people that you are using software to automate stuff at your workspace or that you’re leveraging machine learning to forecast demand does not change anything. It only makes you look silly.
In fact, strictly speaking, tech companies look nothing like WeWork.
Because being a tech company doesn’t just mean you have some fancy tech going for you. It means soooo much more.
For one, most tech companies boast low variable costs — meaning they can keep growing exponentially without spending a lot of money. They also have low capital requirements — meaning they don’t have to spend exorbitant amounts of money buying real tangible assets in a bid to set up the business. And most importantly they don’t borrow a lot — meaning they can sustain business operations without having to binge on debt.
And WeWork fell short on all three criteria.
The company had high variable costs because adding more customers meant higher maintenance, more security, added refreshments, and extra space. All of which costs money.
Also, capital requirements were off the roof.
This was a company that was taking buildings on long term lease contracts and renting it on a short term basis. Meaning they had to spend a lot of money hoping the cash would keep coming in — which, unfortunately, wasn’t coming in at the same pace it was going out.
Most importantly, despite the exorbitant amount of money they raised by selling bits and pieces of the company, they were still liable to pay $18 billion in long-term lease obligations as of June 2019. So no way was this a tech company.
The second problem was Neumann himself.
So, right before the company was about to go public, WeWork disclosed some sensitive details about their corporate structure. It was reported that Neumann would have 20 votes for every share he held in the company as opposed to the one vote regular investors were entitled to.
The argument here was that founders need superior voting rights to be able to steer the company in a direction that would prioritize long term interests over short term spikes in the company’s share price. But on the flip side, this also meant Neumann had an uncomfortably tight grip on the company as he controlled over 50% of the total voting power.
And Neumann wasn’t exactly a stand-up guy either. The man had conducted multiple shady transactions including buying property and then renting it out to WeWork. He was also borrowing from the company at negligible interest rates. There was also that time when he made WeWork pay $6 Million to himself for a trademark he owned (“We Company”). And all this culminated in rather spectacular fashion when he sold $700 million worth of WeWork stock just ahead of the IPO
Not exactly the kind of confidence-inspiring stuff you expect from a CEO who wants you to buy his company’s stock.
Long story short, investors baulked at the issue and WeWork had to suspend the IPO. But the company still needed money and they were desperately looking for an intervention.
Thankfully, Softbank’s CEO, Masayoshi Son came through once again.
Only this time he knew he was walking into a lose-lose proposition.
Think about it.
If they don’t infuse cash, WeWork goes bust and Softbank takes a $10 billion hit on their portfolio. If they do infuse cash, they still have to figure out how to turn the company around and that’s no easy feat either.
Nonetheless, after some deliberation, Softbank chose the latter route and doubled down on their bet by offering WeWork another $9.5 Billion.
The rescue package included a $1.5 Billion investment into WeWork. An offer to buy $3 Billion worth of shares from other investors. A $5 Billion loan to the company and close to a Billion dollars in cash to the company’s co-founder Adam Neumann.
In return, SoftBank was expected to corner 80 percent of the company and Neumann was expected to leave (which he did).
And who knows? Maybe a turnaround was possible.
But then, Coronavirus happened and with major cities shutting down and stringent social distancing measures being implemented, WeWork’s offices quickly turned into ghost towns.
Meanwhile, Softbank had troubles of its own. The company only recently said in a statement that they were likely to report losses of close to $12.5 billion this year.
So with more financial trouble looming on the horizon, Softbank decided to back out. They refused to buy shares from existing investors claiming that the offer was subject to certain conditions that WeWork hadn’t met and simply looked the other way.
So first, WeWork decided to sue Softbank for reneging on the deal. And now Adam Neumann has also joined the party.
That’s it. That’s the end of the story. It took a while to get here. But hopefully, the detour was worth it.
Until next time…
