“Too much money and no guardrails:” WeWork book authors dish on collapse

Whenever Eliot Brown heard another wild Adam Neumann anecdote, he’d tell his editor. And the response would be: “Why are you not working on a profile of him again?”

So Brown, armed with a perma-smirk and a background in real estate reporting, started gathering string. There was plenty to go around.

Even in an era of Silicon Valley excess, Neumann, the co-founder and chief executive of WeWork, distinguished himself. When Brown’s profile ran in the Wall Street Journal in September 2019, it was a bombshell, detailing just how worried investors in the office-space leasing company were about its conflicts of interest, shoddy governance and mounting losses as it prepared an initial public offering.

Brown’s colleague, capital markets reporter Maureen Farrell, then got a call from a top banker. “I read the article and there’s zero chance [of the IPO],” the banker told her. “Adam Neumann will not be the CEO within 48 hours and the company will not go public.”

“I was like, ‘Wait, what?’” Farrell recalled. “And he said, ‘Yeah, the lead anecdote of the flight to Israel with the marijuana in the box — no banker can stand up and take this company public anymore because it’s an illegal act and no one can let him be the CEO anymore.’”

The banker was right. WeWork, once the fifth highest-valued startup in the world, was not going public and hemorrhaged billions in enterprise value. Neumann was out, as were his cronies.

But there was more: The story of WeWork became a reckoning for high-growth, venture-fueled startups and the financial ecosystem that enables them. That is the subject of “The Cult of We,” Brown and Farrell’s new and deeply reported book. (Read TRD’s review here.)

The Real Deal caught up with the authors to chat about the book, the characters it explores and the lessons real estate and the broader business world can take from it.

WeWork vice chair Michael Gross has such a big presence throughout the book. Why were you so obsessed with him? To me, he’s the poor man’s Aaron Eckhart.

Farrell: We found him to be just an incredibly fascinating, under-the-radar character. It seemed like he was the man who was able to translate Adam Neumann into Wall Street speak. He had this background as a hedge fund manager, was the CEO of Morgans Hotel Group and was Adam’s BFF for a long time. People talk about him in pitch meetings as being absolutely masterful. Obviously Adam Neumann was [too], but in a very eccentric way that charmed and captivated people. You put Michael Gross in the mix and it was more polished, an amazing combination that led to incredibly successful fundraising.

“When Adam was raising money at a $5B valuation, one senior manager was like, ‘This makes no sense.’ Six months later, Gavin Baker jumped in at $10B”

Brown: He played the role of the pump-up guy. There was a bit of irony with him and Adam in that neither of them used a computer, and they were the two people selling this as a tech company. He would make things fun. He’d also make things understandable and play the role of investment banker and be this presence. Adam really needed him around.

A lot of the WeWork coverage focused on the symptoms — the excessive spending, the crazy culture. What separates “The Cult of We” is that you looked at the disease itself.

Farrell: I love how you describe it. There are these guardrails that are supposed to exist and each step of the way, they didn’t. Whether it’s the board of directors — why didn’t they stop him? — the venture capitalists, SoftBank, the bankers doing his IPO. So we thought it was important that if you’re going to understand the whole story, to understand each piece of it.

Brown: The goal is to follow the money. The stuff we can add is, what’s the environment that created this? Adam is just a product of this. It could have been someone else. And maybe that would have been rum instead of tequila and yachts instead of jets, but this is a product of what happens when there’s too much money and no guardrails.

You also hit upon the FOMO culture. It manifests with Gavin Baker [then a Fidelity hedge fund manager], the early big investment that gave WeWork validation, and again with Bill Rudin and Mort Zuckerman and Jamie Dimon. How much of that FOMO is symptomatic of Silicon Valley and how much is specific to WeWork?

Farrell: It was very much a product of too much money chasing too few deals and Adam Neumann being absolutely masterful and brilliant and manipulative. Knowing that this FOMO existed and knowing each step of the way how to use it to his and WeWork’s advantage.

When Adam was out raising money at a $5 billion valuation, one of the senior managers there was like, “This makes no sense. We have to pass.” And then when he [Neumann] came back six months later, Gavin Baker and team jumped in at a $10 billion valuation. At JPMorgan, we have this character, Jimmy Lee, one of the top bankers there. Adam was very close to him, really respected him. Lee had this ability to cut through the BS of Adam and question things. And when he passed away very suddenly, it was around the same time that everyone started courting [WeWork]. Clearly, Jamie Dimon came to [Neumann] at points and questioned him. But the bank itself was fighting for the lead role on the IPO up until the bitter end.

A lot of people called WeWork out early on, but then you had some blue-chip landlords buying into the story.  Rudin at 110 Wall Street with WeLive, Zuckerman coming in as an investor. What was the real estate industry thinking?

Brown: I talked to a bunch of landlords and at first, there was a lot of skepticism and people just didn’t understand the model. As the valuation grew, they switched — people who were cynics started to believe it, which is the opposite of what should have happened. I remember a couple of conversations along the lines of “I still don’t really get it, but who knows, maybe it’ll work out.” The reason is kind of obvious: Landlords want tenants. So it was really strange to see the whole real estate world coalesce around it and accept it. And when you sort of point out the obvious, they’re like, “Venture capital’s not really my thing. I just know that they’re paying me rent and I got good guarantees.”

WeWork broke dozens of leases. They’re in lawsuits on others. Landlords are getting a lot less than was promised. I remember a landlord for one of their earlier buildings told me, “I actually have a strategy. I don’t want to have a really high rent because if things go bad, I want them to cancel the other lease and not mine.” And then I saw a news alert a few weeks ago that that building was still one of the ones that WeWork broke the lease on.

What was the collateral damage in Silicon Valley from the WeWork blowup?

Farrell: The biggest immediate casualty was SoftBank CEO Masayoshi Son’s Vision Fund II. He was very close to closing yet another deal with various players, including Saudi Arabia’s wealth fund. Everyone just got very nervous watching what was happening at WeWork, so these commitments started falling away. Masa saw that so clearly, and that was why he was so fixated on getting WeWork out the door, so this whole Vision Fund II wouldn’t fall apart.

Brown: Katerra, Oyo. Up and down the SoftBank portfolio, companies that had been proceeding on this plan of “burn through gobs of cash” were then suddenly told by SoftBank, “Oh no, no, no, no, no. We meant, you have to be profitable.” And so suddenly everyone had to cut [costs].

Could you speculate on what would have happened in proptech?

Brown: There was this icy chill that happened right after WeWork. I’ve had a lot of founders tell me that everything that happened with WeWork just cast this awful pall on anything related to property, which is not totally fair. The problem with WeWork was that they were taking a very clear real estate company and selling it as a company that should be getting a tech valuation. But there’s actual tech in real estate — there are companies that are actual tech companies and should probably be getting tech valuations. But instead they got real estate valuations.

“He pushed things so far. All of these things are what crushed the IPO and then the company”

If you’re doing pure lease arbitrage, which is what WeWork was, you were raising money and getting a high valuation because of the glow of WeWork, in the same way that these random electric vehicle startups that have nothing but a PowerPoint are valued at $2 billion because Tesla is valued at $650 billion. Then when WeWork imploded, the Industriouses of the world and Knotels of the world suffered a real hit. But honestly, the world recognized what their actual business models were.

Farrell: Speaking of Knotel, we have to watch the potential comeback under CEO Michael Gross!

There was a momentous meeting with Adam and Lex Greensill [founder of now-disgraced Greensill Capital].

Farrell: Lex Luthor. It seems like from our reporting, Masa was completely flipped out that this [WeWork] IPO is going to go off the rails and destroy the whole Vision Fund. If he could keep it private, it wouldn’t get marked-to-market. So he calls in Lex Greensill who has earned a very large degree of notoriety.

Brown: Adam flies to Tokyo and he’s really expecting that Masa is going to give him money to avoid the IPO. And so then he’s horrified to see that Masa just unveils this guy.

Speaking more generally, were they prudent about where they took money from? If you look at the cap table, as the company matures, it is mostly blue-chip investors.

Brown: I don’t think it’s that they’re prudent. They just manage to always find the ones who had the most to give. They generally went with the highest bidder at every single opportunity. But it happened that those were often some of the best of the best.

There’s a fascinating bit of geopolitics in the book. When Adam Neumann, who is Israeli, is courting Saudi-backed SoftBank, there’s this caveat that comes up.

Farrell: Masa has committed $4.4 billion to him. Adam and a whole entourage wind up going to Japan to meet Masa and have a big sit-down. And Masa has, or is about to close, his big giant deal with Saudi Arabia’s Public Investment Fund. So there are many [Saudi] emissaries there and Adam and Michael Gross and others give a whole presentation. Afterwards, someone relays the message to Adam that “you need to give some sort of a promise not to invest in the Israeli military.”

Adam is completely horrified by this request. People said that there was a wake-up [call] to what it might mean to take money from Saudi Arabia. What does this mean for him and for the company? He really flipped out and said, “Well, I’m not going to take the money.” Other people talked him down and convinced him to move forward.

And the timing: Saudi crown prince MBS had just taken over PIF. Masa Son is trying to raise money, so he’s pushing and shoving deals through because he doesn’t want to upset the balance of anything else. MBS wanted to be the biggest investor, Masa wanted to run the biggest fund and Adam wanted to have the company with the highest valuation. A triple threat that makes for an amazing story.

Brown: A hundred percent. It was this constellation of forces and individuals. I studied history in college and there’s intellectual history versus social history. Is history about powerful men having chance encounters? Or about the collective society? And in this case, it was about the actual men, who happened to have this same mindset of “go big or go home,” coming to power at different times. So Masa is trying to raise by far the world’s largest investment fund at the very time that an autocrat with a country and the bank that’s one of the biggest in the world happens to want to spend a ton of it on not oil, and he happens to love Silicon Valley tech.

“The media as an organism really added fuel to the fire”

I envision it like there’s a scene in “Arrested Development” where they’re in Tokyo and Masa is like, “Oh, I’m raising this $100 billion fund.” And MBS is like, “Well, I just happened to be giving away money for Silicon Valley.” It’s this short window because MBS really fell out of the geopolitical favor a year later [after the Saudi state-ordered killing of journalist Jamal Khashoggi]. So had [the SoftBank deal] not happened in this 18-month period, none of this would have happened. And then they also found Adam, who was like, “I will promise you absolutely everything. Just give me all of the money in the world.”

When WeWork had a lot of cash, they were thinking about basically becoming an M&A shop, talking of acquiring Cushman & Wakefield and CBRE’s property-management arm.

Brown: The real estate acquisitions were a bit of financial alchemy. Adam basically realized that the market is valuing him based on his revenue and WeWork was essentially trying to buy real estate companies [to] get all the revenue associated with them.

Adam [also] wanted to expand the business from just office leasing to “we want to do absolutely everything in the real estate space and be the go-to shop for everything.” And one way to do that quickly is to buy the biggest people who already do that. And because the world is valuing you as a tech company, even though you’re much smaller than CBRE, you could think of buying CBRE. The conversations didn’t get terribly far. I mean, they did look pretty closely at Cushman and Wakefield, but ultimately decided not to — I think the WeWork people were not very impressed.

I interviewed Brad Hargreaves from Common and he brought up a really interesting point: He said in the context of real estate, some of the conflicts of interest — investors in both the operating company and property company, for example — were totally par for the course. Adam’s mistake was trying to do them in the tech world.

Brown: That is largely true for small buildings. If you take it up to the giant institutional level … you don’t see Brookfield and Blackstone buying buildings from [Blackstone president] Jon Gray.

I would push back on that. Brookfield buys a lot of stuff from Brookfield.

That is a very fair point as they’ve done like nine transactions between Brookfield companies that have confused everyone. Okay. But Blackstone does not end up buying from Jon Gray. I think that it’s also the difference with a public company. You just don’t see companies that are filing S-1s with multi-page lists of crazy conflicts where the CEO owns all these things and is getting fees and rent. The strange part to me is not that Adam did this at first and bought a small stake in [WeWork location] 175 Varick. It’s that once he realized he was on this venture capital path and this IPO path, he didn’t pull back. He actually continued or accelerated the exact same thing.

In 2018, he was buying property in downtown San Jose. His intent was to eventually have WeWork own it all.

Farrell: Every step of the way, it seems like he pushed things so far. All of these different things are what crushed this whole IPO and then the company. It could not be a public company when you have all these conflicts of interest — it’s why it narrowly missed making the public markets. And again, where were the adults? There should be someone here telling him, “This is going to come back to haunt you.” And it’s kind of crazy each step of the way that they did not.

I want to end with a media question because you cannot extricate the narrative of WeWork from the narrative of its press. I’m thinking of the two Forbes covers and the tons of puff pieces. But I’m also thinking about after the meltdown, one of the big sticking points was that $5.9 million trademark. That’s not really a big deal but it became a huge deal in the media. I remember seven articles in one day on Business Insider, tiny nitpicky things that any startup would have. So since we’re all journalists here: Where did we fuck up?

Brown: The media as an organism really added fuel to the fire for years. And this was not just with WeWork. This is with everything in Silicon Valley where, the tech press, Forbes, TechCrunch, Fast Company, they were way too close in mindset to venture capitalists. Venture capitalists like to portray a vision of what might happen. And then, you know, the press’ job is to write reality, but these publications were really buying that vision as it’s essentially something that already happened.

We in the press fell too much into a herd mentality. We should have been providing more context. Then, when it was falling, people were saying “this business model is completely doomed. It makes absolutely no sense.” But it makes sense at a [certain] valuation — there’s actually a company that already does this business model. The media portrayed it as too stupid of a concept, not just as an overvalued company.

This interview has been condensed and edited for clarity.

(Write to Hiten at [email protected] or @hitsamty on Twitter. To check out more of The REInterview, a series of his in-depth conversations with real estate leaders and newsmakers, click here. You can order “The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion” here. )