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WeWork S-1t Show: How the Collaboration Giant went from a $ 47 billion valuation to talking …




  • Just six weeks ago, the collaborative giant WeWork was the country's most valuable technological startup.
  • Subsequently, it submitted the S-1 registration for an initial public offering, revealing a plethora of conflicts of interest and mismanagement by its magnetic and eccentric co-founder, Adam Neumann.
  • Investors, reporters and analysts, teased after seeing Theranos revealed as a huge scam and seeing that Uber failed to live up to the hype, and did not allow another visionary founder to pull wool over his eyes.
  • Neumann's IPO dreams crashed and burned, and now he has been blown out as CEO and observers wonder if WeWork can avoid bankruptcy.
  • Based on reporting from Business Insider and other news sites, this is the story of the six weeks that almost ended WeWork.

At 7:1[ads1]2 on a mild late summer morning in New York City, the WeWork registration papers Securities and Exchange Commission hit its website. The submission, called an S-1, was expected. It was a crucial step in what had been up to this point, an exquisitely choreographed march toward a first public offering for the world's most valued startup.

With the strategic valuation of $ 47 billion and an extremely ambitious founder and CEO, Adam Neumann – his goal was not just to make money or rent office space, he argued, but to "change the world" – WeWork had become a dazzling symbol of Silicon Valley's boundless boldness and self-reliance from the economic laws.

Early in the morning, thousands of investors and journalists would get their first real look at the company's financial condition and be able to judge whether WeWork was truly, as its founder claimed, on a path toward galactic dominance and unimaginable profits.

Almost immediately, all hell breaks loose. A steady stream of rapid-fire headlines detailed Neumann's self-care, mischief and bizarre behavior. In 33 days, the offer was flooded, WeWork's valuation fell 70% or more, and Neumann, who thought he would be the world's first billionaire, was abolished as CEO. What was supposed to be Neumann's coronation as a visionary became one of the most disastrously dangling attempts at debuts in business history.

It shouldn't be that way. WeWork was a unicorn, an almost invincible powerhouse with venture capital. The most brilliant minds in Silicon Valley and the most powerful global investors had disappointed billions of dollars into the coffin – how could it be anything but a safe bet? Validation by public market investors was a pure formality.

But two things had changed over the nine years since Neumann began constructing the myth of WeWork with the help of star-eyed tech journalists and hungry investors: Theranos and Uber. Autumn Theranos saw the investing public how an alleged multi-billion dollar scam could be spun from Silicon Valley bromides and the image of an idiosyncratic, enigmatic founder who inspired cult-like devotion. At Uber, they saw how machismo, hubris and accounting tricks could hide basic business challenges.

Unfortunately for Neumann, it was just the wrong time to be the visionary leader of a company of imperial dreams and unclear finances. Patience had run out.

This story about the six-week period since its August 14 filing is based on Business Insider's own reporting, as well as the Wall Street Journal, Financial Times, New York Times, Bloomberg, New York magazine, Vanity Fair, and other publications.

  Adam Neumann

Employee of WeWork Adam Neumann
Jackal Pan / Getty

Technical Mysticism, Pondering Hours and Don Julio Tequila

Neumann, a 40-year-old Israeli Navy veteran, is known for his signature look by long untested hair over a t-shirt and jeans and bold statements bordering on the bizarre ("On the one hand society," he once told New York magazine, describing his contemporary desire for social cohesion and cut-throat competition. on the other hand, you eat what you kill. ")

He spent time in a kibbutz, describing his early life as troubled. His parents divorced when he was seven, and he moved 13 times as a child and into his teens, according to a Reuters profile. He moved to New York in 2001, when he was 22, to live with his sister, a model, in Tribeca. He went to business school, "met every girl in town," and built unsuccessful businesses around foldable women's high-heeled shoes and baby clothes with knee pads ("Krawlers").

WeWork, which now has 12,500 employees, had always been a little different. Neumann founded it in 2010 with Miguel McKelvey, who was raised in an Oregon municipality. The bulk of the firm's business is to rent out space in buildings, then spruce it up and unpack smaller pieces for freelancers, startups and other businesses for shorter timeframes. While WeWork usually takes up 15-year leases, some customers may move out in a month.

It often seemed like a real estate company that set up a higher level of consciousness. Together with his wife Rebekah, a devout devotee of Kabbalah and a cousin of Gwyneth Paltrow, Neumann cultivated a kind of tech-bro mystique, combining violent hours and always expectations with a free flow of alcohol and hippie wisdom. Rebecca started a private elementary school and played WeWork's community of tenants.

Adam walked barefoot around the office. He once decided that no one should eat meat in the office or buy it at company expense accounts. He also participated hard: Neumann was known for drinking Don Julio in 1942, the $ 149 tequila per bottle. And he smoked marijuana in the office, in his various homes, and elsewhere, told people who had seen him smoke it to Business Insider.

The Prisoners of Success

The Prisoners of Success soon followed. In recent years, Neumann bought at least five homes, including a $ 10.5 million Greenwich Village townhouse, another in the Hamptons and another, a 60-acre property north of New York City. In 2017, he spent $ 35 million buying four apartments in the same building in the toned Manhattan area of ​​Gramercy Park. He bought a $ 60 million Gulfstream jet for WeWork which flew around the globe to London, Panama, Dominican Republic, Tokyo, Hong Kong and Hawaii, among others. Neumann's successors move to sell it.

The company's prospectus reflected Neumann's eccentricity. It opened with a dramatic statement: "We are a social company committed to maximum global influence. Our mission is to raise awareness of the world." The inner cover bore a dedication to "the energy to us – greater than any of us, but in all of us." It included a commitment from Neumann to donate $ 1 billion in cash and shares – assets they had not yet earned – to charity, as well as a pledge to save 20 million acres of rainforest.

Rebekah Neumann had significant influence over the language of the filing – internally referred to by the codename "Project Wingspan" – according to two sources with knowledge of the process. It listed the company's underwriters in a circle instead of the usual pecking order. Months earlier, they had changed the company's name from WeWork to We only to better communicate huge ambitions. An earlier version of the prospectus listed a series of competitive advantages under the heading "Our superpowers."

If WeWork IPO were to be a validation of Neumann's grand spiritual plan, for his sponsor and main supporter Masayoshi Son, CEO of Japanese conglomerate SoftBank, it would confirm his controversial strategy of pledging billions of dollars into promising startups and pressures them to spend a lot of money to dominate the market. Son was collecting money, although some of his biggest investments, such as the Uber shipping company, had failed to meet expectations. This would be the stamp of approval he badly needed.

Son and Neumann had met for less than 30 minutes back in 2016 before Son decided to invest in WeWork. Eventually, he would pledge $ 10.7 billion, either from SoftBank's coffins or from a separate vehicle created by Son called the Vision Fund, which collected $ 100 billion from supporters including Saudi Arabia. After these investors wanted to put in more money (Vanity Fair reported that Neumann arrived late and hung out for an investor meeting), it was SoftBank's $ 2 billion investment round in January 2019 that secured WeWork's last $ 47 billion valuation.

Bankers and investors had also bought the syringe drug. JPMorgan Chase and Goldman Sachs ran the IPO, dangling potential market caps of $ 63 billion and $ 96 billion, respectively.

Representatives of Neumann, WeWork, JPMorgan Chase and Goldman Sachs declined to comment on the record for this story. A Softbank spokesperson did not immediately respond.

 Japan's SoftBank Group Corp CEO Masayoshi Son attends a news conference in Tokyo, Japan, November 5, 2018.

SoftBank CEO Masayoshi Son
Kim Kyung-Hoon / Reuters

"We have a history of losses"

Trouble began almost as soon as the 359-page S-1 filing hit the Internet. Investors, analysts and journalists began digging in, and did not like what they found: a laundry list of potential conflicts between Neumann and the company, a Byzantine corporate structure and losses that grew even as revenue doubled. The company did not explain how it would be profitable. The section revealing risks to investors was almost 30 pages long.

The potential conflicts were astounding: Neumann owned an interest in four buildings that WeWork rents. He had received personal loans from the company at lower prices than the market to finance his lavish lifestyle. One, for $ 362 million, was related to an early exercise of stock options (and has since been repaid). He had a $ 500 billion credit line secured by the shares. Perhaps most worryingly, he had bought the trademark of the "we" name through a holding company, and WeWork paid him $ 5.9 million to license it. Quotes from "related parties" in the prospectus – revelations that the company was operating that could enrich an employee, director or officer – totaled more than 100.

He had also used company money to fund what appeared to be pet projects, including several devices related to Neumann's love of surfing. It led a $ 32 million investment in surfer Laird Hamilton's startup, Laird Superfood, and sank $ 14 million into Wavegarden, a surf wave pool company.

Neumann had almost total control. WeWork wanted three share classes, including two that gave Neumann 20 votes for each share. At death, the wife would have the power to appoint a new CEO, independent of the board.

But perhaps what made WeWork different are the apparent problems with the company's business model. It was on the hook for $ 47 billion in future rental payments to building owners, while it had only committed $ 4 billion in revenue. Last year's loss jumped to $ 1.9 billion on revenue of $ 1.8 billion – for every dollar it earned, it spent two. For the first half of this year, the losses climbed to $ 904 million, although revenues doubled to $ 1.54 billion. The company also used a composite metric called the "contribution margin" – renamed "community-adjusted Ebitda" which was much more malicious earlier this year – which made it harder to understand how the underlying business was performing.

"We have a history of losses, and especially if we continue to grow at an accelerated rate, we may not be able to achieve profitability at a corporate level," the filing firm said, "for the foreseeable future."

There was a lot to go inside. At the end of the day, both the Financial Times and the Wall Street Journal suggested that the company might have to reduce its valuation to attract interest. Analysts quickly came into conflict, with Fitch Ratings moving that day to downgrade the company lower to rubbish territory over its negligible spending, among other factors.

If that wasn't enough, Neumann got another bad omen: Faraday Grid, a UK-based startup that wants to build new power transformers that Neumann had invested £ 25 million earlier this year, filed for bankruptcy.

It was less than 24 hours since the company's filing was made public.

"A masterpiece of veiling"

Triton Research's Rett Wallace would later call the prospect a "masterpiece of veiling."

NYU marketing professor Scott Galloway wrote a countdown of the company entitled "WeWTF." John Coffee, a University of Columbia professor and director of the University's Center for Corporate Governance, told the Financial Times that to navigate past investor concerns about the company's structure, market volatility and a tougher stock market climate, Neumann "had to go through a trial of fire."

While some of the company's advisers were surprised by the speed and depth of the negative reaction, according to a person familiar with their thoughts, WeWork executives remained silent on the company's outlook throughout the week and into the summer weekend. WeWork bonds rose more than 3% in the hope that the IPO would pay off.

But the brutal headlines kept coming: On Monday, August 19, the editor of Financial Times WeWork and Neumann blasted for the lock he kept on company under the title "Beware of the Controlling Founder's Dead Hand." In the New York Times, Kara Swisher asked, "WeWork: Is there anyone there?" Another FT op-ed headed with "WeWork's Magical Thinking Explains a Wrong Model."

"Hype is one of the technology's most magical qualities," wrote Elaine Moore in FT. "Like Uber and Lyft, no one can say for sure if the business actually works."

The company's advisors continued to survey investors, trying to drum up support for a stock exchange listing that they hoped would raise at least $ 3 billion. They did not receive a positive reception. Just after 4pm on Monday, August 26, Neumann jumped on WeWork Gulfstream for a 13-hour renewal flight across the Arctic to Tokyo to talk to SoftBank investors about the IPO state.

The discussion centered on two possible alternatives – whether SoftBank would be a major buyer of publicly traded shares, which will be hotly debated for several weeks after, or if the Japanese conglomerate might inject a new snail of operating cash so that WeWork could delay the offer.

The calls ignited a long-standing disagreement within SoftBank, where some execs had argued against investing more money in the company. However, Son remained committed to Neumann and his vision. And he kept swaying considerably. Neumann needed the money – $ 9 billion in IPO revenue and bank debt – to fuel his continued global ambitions.

 Adam Neumann

We founder and CEO Adam Neumann
Getty

A humiliating comedian

But in early September something had to give. WeWork's bankers had no luck in drumming up enough support for the IPO, heard from investors concerned about signs of Neumann's self-dealing and skepticism about the business model.

On Wednesday, September 4, the layoff began. Neumann agreed to return the $ 5.9 million payment he had received from WeWork for the rights to use the "We" trademark term. The company also announced that Frances Frei, a Harvard professor and advisor to the company since March, would join the board and respond to criticism over the lack of a single woman. Newspapers reported that the company was preparing to launch its IPO roadshow as soon as the following week.

But the day after, another drum flooded with negative news about media valuation. While some had suggested early on that the company's high valuation might need to be trimmed, things had gone quiet as advisers tricked investors. No more.

Numerous outlets reported that the company was considering selling shares at 50% of the latest private valuation, or $ 20 to $ 30 billion. Still, some business insiders still hoped to get something in the range of $ 25 to $ 30 billion.

It was a humbling comedy from the hype that had followed the company and Neumann for years. Any lower and WeWork would be forced to wear the insulting crown of Silicon Valley's largest ever audience.

The reasons for the strike were well publicized, although members of WeWork's camp tried mightily to paint it as a sound step: FT said the company's insurance companies were concerned about listing the company too high and risked a repeat of what happened to Uber, which has fallen about 33 percent since its debut.

Desperate attempt to keep the IPO on track

By September 8, the company now assessed a valuation below $ 20 billion that had been moved just a few days before. WeWork had planned to launch the roadshow the following day, and yet the company and its advisers were still meeting to see what they could do to drum up more demand.

By Monday, if not sooner, SoftBank decided it had seen enough. Leaders of the $ 100 billion conglomerate and Vision Fund pushed Neumann to leave the IPO.

For SoftBank, it was a fantastic reversal. After plowing more than $ 10 billion into the company and taking a 29% stake, the company and its leader, Son, needed a big profit. Still, a public valuation of just one-third of the private value it had given WeWork as late as January could not do.

By Thursday, September 12, WeWork considered reducing Neumann's voting rights from 20 votes per share to 10 votes in an effort to win investors. Neumann "desperately" tried to keep the IPO on track. WeWork canceled a planned town hall.

Friday was a big day. WeWork hoped to begin its roadshow the following week, and it made another attempt to empower investors with changes in the company's management. The company announced public changes that day, and took the steps FT previewed, and made a number of other changes at the same time. The company cited "feedback from the market" for the adjustments, saying that no member of Neumann's family would sit on the board. The plan for Rebecca to elect a successor in the event of Adam Neumann's death was also scrapped, and the filing said the board had the option of removing the CEO.

Reuters reported that the company was looking at a valuation of $ 10 billion to $ 12. billion. It will value the company at less than $ 12.8 billion in total equity it collected during its nine years of operation.

Neumann remained obliged to proceed with the IPO, hoping to complete the listing before Rosh Hashanah, so that he could observe the Jewish holidays. In talks earlier that week with Softbank, the CEO said he did not expect any changes over the next 12 months, and what he really needed was more money to fund his expansion plans. Neumann also expected a $ 6 billion loan that his bankers would give WeWork – but only if he managed to raise at least $ 3 billion in the IPO. Later on Friday, the company announced plans to be listed on the Nasdaq.

The interaction between Neumann and his advisers was full throughout the process, according to people familiar with the matter. The CEO resisted some of his advisers' proposed changes to the IPO filing, particularly around the control and voting structures, said one of the people. And JPMorgan insisted on revealing some of the transactions with related parties that would later cause investor backlash. Neumann did not even listen to its biggest sponsor, SoftBank, who wanted to shrink the IPO.

He plowed ahead, and SoftBank had little choice but to go along with the plans of the man they had invested so heavily in. By Friday afternoon, news reports suggested that SoftBank was prepared to serve as an anchor investor in the IPO, buying at least $ 750 million in shares in the offering.

Over the weekend, WeWork, SoftBank and its advisers hoped that changes in corporate governance, valuation, and the promise of SoftBank support would be enough to start the long awaited roadshow.

That would be some of the longest 48 hours of Adam Neumann's life.

 FILE PHOTO: The WeWork logo appears at the entrance to a collaborative space in New York City, New York, January 8, 2019. REUTERS / Brendan McDermid / File Photo

FILE PHOTO: WeWork logo appears at the entrance to a collaborative space in New York
Reuters

A bombshell hits

By Monday, instead of launching the roadshow, WeWork announced plans to postpone the listing until after Jewish holidays. Even with Softbank's anchor investment, the company and its advisers had decided it would still raise less than the $ 3 billion it needed to unlock the $ 6 billion loan it needed to continue operating.

to complete the IPO by the end of the year. Any further delay beyond that, and the time will expire on the terms of the loan, which had to be renegotiated.

The day after the IPO was shelved, Neumann admitted on an internal webcast to be humble. It was a new low for the founder. He now understood, he told his employees, that the skills he had developed to run a private company had to be adapted to run a public company. At that point, board members had begun to think about how they could force him to retire, according to several reports.

Just after noon, the bombshell struck.

Wall Street Journals Eliot Brown dropped a 2864-word, deeply reported article describing Neumann's frequent marijuana use and propensity to drink images of Tequila. The newspaper told of a flight to Israel where the jet owner was recalled after finding marijuana in the cabin. And of a layoff discussion followed by tequila shots and a performance by a member of Run-DMC.

The article was a turning point in how his investors and employees saw him, according to a person with knowledge of these views. In the coverage that followed across news organizations, the CEO's marijuana use would often be mentioned.

Gliding against possible bankruptcy

It was. Last Sunday, Softbank pushed Neumann out of space. Faced with charges of drug use, erratic behavior and earlier despite pursuing the IPO, even after his biggest investor warned of patience, Softbank had lost faith. Some large investors had said they would not invest unless the company brought in a more experienced manager. Several investors even thought of threatening the CEO with legal steps related to his own trading. A board meeting was scheduled for later this week.

On Sunday, Neumann sat down with JPMorgan CEO Jamie Dimon, whom he liked to call his personal banker. Like consigliere J. Pierpont Morgan a century before, Dimon was in the midst of the greatest corporate history of the moment. The two men discussed what could be done to get the delayed IPO back on track, Business Insider first reported. Dimon also brokered talks with Neumann's advisers over two days at the bank's headquarters downtown, said a person familiar with them.

Dimon was more than a neutral ear. In addition to serving as the bank's top IPO advisor, JPMorgan has lent hundreds of millions of dollars to Neumann. WeWork revealed Neumann's $ 500 million personal credit line from JPMorgan, UBS and Credit Suisse, of which $ 380 million was deducted. The CEO had an additional $ 98 million from JPMorgan in the form of mortgages and other loans. WeWork was part of Dimon's plan to replace the duopoly of Goldman Sachs and Morgan Stanley, which runs tech's hottest IPOs.

Later Sunday, Neumann had dinner with Bruce Dunlevie, one of WeWork's oldest directors and a partner with the Benchmark Capital investor, to discuss his options. Dunlevie and Dimon had supported Neumann's desire to remain CEO, but nothing more: Dunlevie broke Neumann's news at the dinner that he was leaving SoftBank. He wanted Neumann out. A spokesman for Benchmark Capital declined to comment.

On Tuesday, September 24, while Neumann's fate hung in the balance, WeWorks rallied at JPMorgan Madison Avenue headquarters. The octagonal building was at the center of the company's biggest US debacle again after hosting last-ditch efforts to save Bear Stearns before the 2008 financial crisis hit. On floors that roamed the Grand Central Terminal, the WeWork board met for hours to discuss what to do. When they came out of the skyscraper's granite walls, Neumann had been voted out. Finally, Neumann voted against himself.

He wanted to retire and be without a leader. He had lost control of the company and saw his vote reduced to 3 votes per share, giving him a minority of votes. He can only nominate a minority of directors.

In a statement, Neumann told employees that "since the announcement of our IPO, too much of the focus has been on me."

The Board named WeWork executives Sebastian Gunningham and Artie Minson to replace Neumann, and the company began considering such unimaginable alternatives as slowing growth, cutting thousands of employees to focus on its core business of renting office space and getting rid of side businesses like Rebekah's school to control costs and – perhaps – restore investor confidence. When the company was recently asked to respond to concerns about its business model, the company said it intends to fully meet its lease obligations.

The company began formalizing talks on a renegotiated loan of around $ 3 billion, which was expected to require the collection of additional equity.

The Economist publicly wondered if anything could be done to stop "WeWork's slide against possible bankruptcy."

Last Thursday, SoftBank talked about another $ 1 billion injection. Meghan Morris, JK Trotter, Meredith Mazzilli



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