WSJ: WeWork: A $20 Billion Startup Fueled by Silicon Valley Pixie Dust; CEO OUSTED REMAINS CHAIRMAN

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WeWork: A $20 Billion Startup Fueled by Silicon Valley Pixie Dust
WeWork: A $20 Billion Startup Fueled by Silicon Valley Pixie Dust
CEO Adam Neumann sells investors on his vision for communal workplaces—critics say it’s an overvalued real-estate play
Eliot BrownUpdated Oct. 19, 2017 2:21 p.m. ET

Before arriving, the 38-year-old chief executive typically sends staffers a directive: “Activate the space.” WeWork’s employees swarm a lounge to host an impromptu party with pizza, ice cream or margaritas.

When Mr. Neumann and his guests walk in, he often remarks how the office always seems filled with life, according to several former employees.

Fueled by showmanship, an expansive vision and the occasional shot of tequila, Mr. Neumann has propelled the New York-based office-space provider into being one of the world’s richest startups. With a valuation of more than $20 billion, or about 20 times annualized revenue, it is the fourth most valuable U.S. startup after Uber Technologies Inc., Airbnb Inc. and rocket company Space Exploration Technologies Corp., known as SpaceX. WeWork’s valuation has galloped higher in each of the past five years.

Mr. Neumann has dazzled tech investors by portraying WeWork as a Silicon Valley-style company that provides a “physical social network” for millennials. Top investors include SoftBank Group Corp. and its tech-focused Vision Fund, which added $4.4 billion in August.

Others in the real-estate industry and some Silicon Valley investors say the company’s well-crafted image belies the mundane nature of its business. WeWork takes on long-term leases for raw office space and builds out the interior with flexible spaces and modern design that it then subleases for terms as short as a month.

IWG PLC, an office-leasing company with a business model similar to WeWork’s, manages five times the square footage and has about one-eighth the market value.

Boston Properties Inc., the country’s largest publicly traded office landlord, owns five times the square footage that WeWork manages and has a market capitalization of $19 billion.

WeWork’s strategy carries the costs and risks associated with traditional real estate. Its client list is heavily weighted toward startups that may or may not be around for long. WeWork is on the hook for long-term leases, and it doesn’t own its own buildings. Vacancy rates have risen recently, and the company is increasing incentives to draw tenants.

“If you had positioned this as a real-estate company, it wouldn’t be worth this,” said Barry Sternlicht, who runs Starwood Capital Group LLC, with more than $50 billion of real-estate assets under management. Mr. Neumann “dressed it up and made it into a community, and that turned it into a tech play.”

A team of workers in their WeWork space in Argentina this summer. Photo: Alfieri Mauro/La Nacion/ZUMA PRESS

Venture capitalists and mutual funds have poured billions into companies claiming they can upend traditional industries whether through the use of technology or their unique appeal to millennials. Startups in the business of selling meal kits, mattresses and razors have received tech-like valuations based on the idea their rapid growth can continue for years.

Mr. Neumann in public remarks often compares WeWork to ride-hailing company Uber and home-rental service Airbnb, whose valuations soared on the premise they were technology platforms, not taxi or hotel companies.

Sources: the companies

Some of the air is now coming out of that balloon. Shares in Blue Apron Holdings Inc.,the meal-kit maker, are now trading at half the price of its IPO. Juicero Inc., the seller of a cold-press juicing system, announced in September it was halting operations after having raised $100 million in venture capital.

At WeWork offices, options include a single desk in an open space, dedicated offices with doors, and full floors for more established companies, including Amazon.com Inc. and International Business Machines Corp.Common spaces have couches, foosball tables and beer kegs for meetings and socializing, and events take place frequently.

The model has proved popular, with 150,000 individuals renting space in more than 170 locations globally.

Mr. Neumann, who declined to comment for this article, has said WeWork is neither a real-estate company nor a tech company. The “We Generation,” as he calls it, craves sharing and collaboration rather than isolated offices. “They’re coming to us for energy, for culture,” he said at an event this summer.

He talks of “space as a service,” a play on the concept of software as a service, in which a provider makes software available to users as they need it over the internet. He calls the company a “platform”—like a computer operating system—from which it can sell other services such as insurance or software.

Mr. Neumann told WeWork’s PR representatives to push back against characterizations in the media of WeWork as a real-estate company and instead describe WeWork as a lifestyle or community-focused company, according to people familiar with the instructions.

“We frankly are our own category,” said Artie Minson, WeWork’s president and chief financial officer in an interview. “We use real estate and services to empower our community.”

Source: the company

 

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He said the company’s valuation made sense because investors are looking to WeWork’s plans for growth and millions of members in the future.

At 6 feet 5 inches with a mop of dark hair, Mr. Neumann stands out in a crowd of suit-clad commercial landlords in New York. He carries himself like a tech founder, sporting fashionable sneakers, T-shirts and multiple days of stubble. He tells his young workforce they are making the world a better place by creating more communal workplaces.

Colleagues say he holds late-night meetings that can start at 11 p.m. and run for hours. Multiple people who traveled overseas with him say he insisted they stay up the whole night working. “I don’t think he ever sleeps,” said Michael Eisenberg, an early WeWork investor and an adviser to Mr. Neumann who currently is a partner at venture-capital fund Aleph.

Bruce Dunlevie, a partner at Benchmark Capital Partners who sits on WeWork’s board, said charismatic, creative and motivated entrepreneurs are valued differently by investors “based on their ability to figure out how to skate to where the puck is going to be,” he said. “Adam has many of those qualities—he’s just a very charismatic, compelling person.”

Communal desk space in a San Diego WeWork branch last year. Photo: John Gibbins/San Diego Union-Tribune/ZUMA PRESS


From WeWork’s tiny early days, Mr. Neumann talked about how he was building a $100 billion business, two friends said. He has said the company will have one million individual tenants—which he calls members—in the near-term, and has signaled the company will eventually list shares, without specifying a timeline.

WeWork’s investors said the company’s nearly $1 billion in annualized revenue, based on October’s projected revenue, shows how both startups and established companies are embracing co-working.

Similar investor hopes surrounded IWG, the flexible workspace provider, which was called Regus when it went public in 2000. Demand plummeted in the dot-com bust, leaving it with high fixed lease costs and sinking rents from subtenants. Its U.S. business sought bankruptcy protection. IWG is valued at around $5,600 for each desk, compared with WeWork’s $135,000 per desk.

“WeWork is nothing but Regus with a paint job—it’s newer, cooler,” said Frank Cottle, chairman of Alliance Business Centers, a large network of serviced offices. WeWork’s valuation, he said, “makes no sense.”

Mr. Minson said WeWork’s valuation is based on its growth potential, unlike IWG’s.

Mark Dixon, IWG’s chief executive, said he learned a tough lesson about doubling in size every year. “If you expand too rapidly at any one point in the market, that can catch you,” he said.

Artist Bert Rodriguez attended a WeWork event at a Miami WeWork office last year. Photo: JP Yim/Getty Images


SoftBank, the Japanese tech company led by billionaire Masayoshi Son, invested more money than any other into WeWork with its August infusion. Some executives at its $93 billion Vision Fund argued against the deal, saying the price was already too high for what they viewed as a real-estate company, according to people familiar with the matter.

Mr. Son said he would urge his friends’ companies and those backed by SoftBank to lease space with WeWork to help with its rapid expansion, according to the people. SoftBank declined to comment.

A decade ago, Mr. Neumann was a small-time entrepreneur in his 20s living with his sister, a model, in her Tribeca apartment. Mr. Neumann, who was raised on a kibbutz in Israel, was struggling with his first startup idea—women’s shoes with collapsible heels—which failed to take off. His next venture was baby clothes with knee pads called Krawlers.

Ranee Kamens, Krawlers’s initial designer, said he was “very, very, very focused” on making money and seemed to relish the social whirl. “It was always a party in his house, a lot of good-looking people” she said. “He enjoyed being part of that scene.”

Krawlers struggled, and Mr. Neumann merged his company with high-end baby clothes company Egg by Susan Lazar. In 2008, he and two friends persuaded a landlord to start a shared office space in Brooklyn as a side project, thinking they could sublease it for a profit. Demand proved surprisingly strong.

Mr. Neumann and Miguel McKelvey —an architect raised on a commune in Oregon—struck out on their own and formed WeWork in 2010. They started pitching Manhattan landlords on shared office and residential space. Mr. McKelvey is now WeWork’s chief culture officer.

Joel Schreiber, a Manhattan-based real-estate investor, said he was captivated by Mr. Neumann and his vision early on. After a three-hour conversation in 2010, the entrepreneurs offered him a 33% stake in WeWork for $15 million. “I didn’t negotiate—I said yes,” Mr. Schreiber said. “I loved Adam’s energy.”

Wyclef Jean performed at a WeWork event in Detroit in May. Photo: Scott Legato/Getty Images


Mr. Eisenberg, a partner at venture firm Benchmark Capital at the time, said he pitched the company to his partners. They saw WeWork as a way to tap into the trend of college-educated millennials moving to major urban centers. They were wary of real estate, but the partners decided, “Let’s give him some money and he’ll figure it out,” said Mr. Dunlevie, the Benchmark partner in charge of the deal. Benchmark led a $17 million funding round in 2012.

Bigger investors began piling in, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co.’s asset management arm, investment bank Jefferies and mutual funds T. Rowe Price Group and Fidelity Investments.

Mr. Neumann has told friends and associates he sold more than $100 million of WeWork’s shares, said four people who spoke with him about it, an unusually large amount to sell before an IPO, according to transactions made public in other startups’ listings.

A WeWork spokeswoman declined to confirm or deny the share sales but said Mr. Neumann is still the company’s largest shareholder.

When WeWork was valued at $10 billion in 2015, he said he was worth $3 billion, according to a person he spoke with. He won full control of its board after a change to its voting structure in late 2014.

Mr. Neumann’s personal properties include a $15 million Tudor estate north of New York City, a West Village townhouse, a house in New York’s Hamptons and a rental apartment by Manhattan’s Gramercy Park. He has five children with his wife, Rebekah Paltrow Neumann, a cousin of actress Gwyneth Paltrow.

WeWork office space in Seoul last year. Photo: YONHAP/EPA/SHUTTERSTOCK


In January, WeWork rented out Universal Studios Hollywood theme park for a night for a staff party with a private performance by Grammy award winners The Chainsmokers. At a company-sponsored summer camp for staff and tenants in the Adirondacks, Mr. Neumann arrived by helicopter.

The CEO makes his penchant for tequila well-known, and landlords and others who have visited the office say they have been treated to healthy pours, often the pricey Don Julio 1942.

On a Monday morning in Philadelphia a few years ago, he coaxed Jared Kushner, the real-estate developer who is now senior adviser to President Donald Trump, into a bar where he insisted they do shots of tequila, according to multiple people familiar with the exchange. The two had been looking at a Kushner-owned property that WeWork ended up leasing.

On its website, WeWork touted “tequila tasting happy hours with the whole community” as an amenity. After questions from The Wall Street Journal, the language was changed to “cheese tastings with the whole community.” A WeWork spokeswoman said the change was unrelated.

Last year, WeWork posted revenue of $436 million, missing a target set in 2014 of over $700 million, according to the company and projections provided to investors.

Mr. Minson, the finance chief, said WeWork doesn’t expect profitability this year. In 2014 it had projected it would have income of $500 million by now. Mr. Minson said WeWork could be profitable tomorrow if it weren’t investing so much in growth.

Sales of services such as software make up 5% of revenue, and its upscale dormlike housing business, WeLive, has just two locations. WeWork recently launched a fitness club.

Occupancy of offices open a year have fallen to 90% from 97% last year, according to the company. WeWork this year doubled commissions for brokers that bring new tenants to 20% of a year’s rent—at least twice the rate of most competitors—and it has recently passed out fliers with offers of free rent outside a London subway station.

WeWork said its marketing costs per tenant have stayed flat in the past year and that brokerage commissions are a small cost.

—Liz Hoffman contributed to this article.

Corrections & Amplifications
Bruce Dunlevie is a partner at Benchmark Capital Partners who sits on WeWork’s board. An earlier version of this article incorrectly spelled his name. (Oct. 19, 2017)

 

[☑︎#VoteDemocrat]

 

[Donald J Trump]

Yea I bet
I smelled scam a paragraph in

 

[Anerdyblackguy]

This is white privilege in a nutshell. No black person can ever do this. Ever!!

 

[MrPentatonic]

This is white privilege in a nutshell. No black person can ever do this. Ever!!

lmao

 

[Crude Abolitionist]

I just bought stock in Blue Apron Holdings cause of this.

Let me come up on these white people who hate going to the grocery store like normal folk lol

 

[☑︎#VoteDemocrat]

This is white privilege in a nutshell. No black person can ever do this. Ever!!

read the part about his first two businesses

 

[hashmander]

and cause i'll never get the opportunity to finesse these dumbasses in this glorious manner. 2017: the year of IN YO FACE white privilege. they outchea on us.

 

[GnauzBookOfRhymes]

Shyt is hilarious. But one thing I've realized after having been old enough to remember the dot com, tech and housing bust is that while people laugh about how people are getting "finessed", the vast majority of the parties involved know very well that it's going to bust. It's just a matter of propagating they hype enough that the HUUGE investors (pension funds etc) jump in, so that everyone can cash out.

The idea itself is not bad for the entrepreneur, but at the end of the day all they're doing is subleasing space from companies that may have 3 floors in a building but only enough paying tenants for 2 floors. And if they're already locked in for a 5 year lease, there's no loss in leasing that space to WeWork (or one of the other 20 companies in the arena).

 

[☑︎#VoteDemocrat]

Shyt is hilarious. But one thing I've realized after having been old enough to remember the dot com, tech and housing bust is that while people laugh about how people are getting "finessed", the vast majority of the parties involved know very well that it's going to bust. It's just a matter of propagating they hype enough that the HUUGE investors (pension funds etc) jump in, so that everyone can cash out.

The idea itself is not bad for the entrepreneur, but at the end of the day all they're doing is subleasing space from companies that may have 3 floors in a building but only enough paying tenants for 2 floors. And if they're already locked in for a 5 year lease, there's no loss in leasing that space to WeWork (or one of the other 20 companies in the arena).

Part of me wonders if they are just selling people on this "virtuous investing" bullshyt. Its so obvious that its all a scam too. The VCs know this shyt won't last either.

 

[re'up]

I see these shirts and that logo everywhere in downtown San Diego, had no idea it was a start-up, I always connected it with Ivanka Trump, but I knew I was off base.

 

[Hawaiian Punch]

This is white privilege in a nutshell. No black person can ever do this. Ever!!

Ever! And if we tried we be in court facing fraud charges.

 

[GnauzBookOfRhymes]

Part of me wonders if they are just selling people on this "virtuous investing" bullshyt. Its so obvious that its all a scam too. The VCs know this shyt won't last either.

nah, it's just selling another way to commodify "millenials"

everything that we associate with millenials - physical dislocation; the gig economy; social everything (including copiers lol) ; lack of money for a physical office; flash over substance (desire for a trendy address). it's all there.

 

[Jhoon]

The collapsable heel never caught on?

read the part about his first two businesses