The WeWork “Acquisition” (with Dan Primack)

Transcript from https://podmenti.com/t/f5abcbecb87a3fcb

No, yeah, we'll cut this part out.
This is a first on acquired. Dan's gonna take care of it.
Hello.
Yeah.
Welcome to season five, episode six of Acquired, the podcast about great technology companies and the stories behind them.
I'm Ben Gilbert and I'm the co-founder of Pioneer Square Labs, a startup studio and early stage venture fund in Seattle.
I'm David Rosenthal, and I'm a general partner at Wave Capital, an early stage venture firm focused on marketplaces based in San Francisco.
And we are your hosts.
Today we tell an episode that in our initial season five planning calendar we had as an IPO episode.
And then uh that was pitifully canceled, and we were just gonna tell the crazy story of the antics that got it here.
But now it's shaping up to be a tried and true acquisition episode for us. So here on this episode, we will dive into the existential question of if we work, a once forty seven billion dollar company can be saved by soft banks.
Effective acquisition of the company.
And we are going to try to accomplish two goals.
First, to dive into the history of this company from the very beginning, and second
To try and see the core economic forest through the under governed trees and understand precisely the position that the business is in today. Listening to Dan's face during all this is priceless. If only we were a video podcast. Which brings me to the only appropriate way that we know how to tell this story is with the expert help of Axios's.
Dan Primack, who has been meticulously and astutely covering this company for several years.
Welcome to Acquired, Dan. Thanks for having me.
All right listeners.
Now is a great time to talk about a new partner of ours here on Acquired, Lagora.
The agentic operating system that is redefining how the world's best legal teams work.
Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?
So the founders did exactly what great founders do.
operate with obsessive customer focus.
They embedded inside a massive law firm for months.
They sat with the lawyers just watching how the work really gets done.
And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's Bet Here is interesting, since it lets each lawyer handle more complexity, any given person can increase the quality of their work.
and do higher value work. And this means that the pie can grow even as each individual task takes less time.
And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.
And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting.
The early Lagora numbers essentially
speak for themselves. When they have a head to head pilot with their top competitor, they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries.
And crazily, they went from one million
to a hundred million in ARR.
In about.
Eighteen months.

truly insane numbers. And that is the real test.
Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client.
If your legal team wants to check it out, whether you're a law firm or you're in house at a company.
You can learn more at Lagora.com slash acquired
And just tell'em that Ben and David sent you.
And now
On to We Work.
All right. On to We Work. Man. We were thinking about
how to frame this and talking with Dan a little bit before and um
You know, I think what we decided to go with, which is true, is like this is a tragedy. This is like a Greek tragedy. Particularly for thousands of people who, you know, by the time people listen to this might have lost their job. I mean, within hours of when we're taping this or a day within when we're taping this. Yeah. It's like uh, you know, I don't know, the Peloponnesian War or something. Like the outcome is predetermined and the actors are just caught up in
Forces beyond themselves. Minus one actor who gets a lot of money. And I guess gets an island in the Pelponicians' I think. Which uh Greek uh myth mythologi mythological character is is Adam Newman. Well uh was there a Greek mythological character who who just got to w to walk away with with all the riches and and leave all the responsibility behind? I don't remember that. There was usually a moral in the
Listeners, we sit here on Thursday, October twenty fourth in the morning, ten AM Eastern time, uh so you get a sense of where we are in this uh currently developing tragedy. Yeah, indeed. Well, all right, let's dive into act one.
The rise of We Work.
And to talk about We Work, you obviously have to talk about
The um protagonist, question mark of this, Adam Newman.
Who is Adam Newman? Self styled hero. Self styled hero. Uh so Adam, as many folks probably know, he was born in Israel. He's Israeli. His parents were both doctors.
His parents divorced when he was seven, and he ended up living in thirteen places over the next fifteen years.
Which is actually like pretty crazy. And
probably a lot of that goes into the ethos behind we work, including in the US. He spent a few years living in the US, then came back to Israel and he spent a number of years living on a kibbutz.
Israel which is like a
rural sort of communistic farm. Uh he was dyslexic, uh I presume is dyslexic.
But nonetheless, quite smart. He tested into the Israeli Navy Academy, Naval Academy growing up, became an officer, and he served in a kind of elite unit in the Israeli Navy for five years.
After that, he moves back to the US to New York to live with his little sister, Adi, who
who was actually Miss Teen Israel. No way. Yeah, totally. Uh and she was a model in New York.
uh and Adam, I guess, had always wanted to come back to the US and to New York. Um, they lived together in the city and he went to business school at Baruch College and his goal was getting out of the army just like
Many folks in Israel wanted to become an entrepreneur.
Wanted to start a company.
And so I I think this was probably while he was in business school or shortly afterwards. He he has his first great startup idea.
perhaps inspired by his fashion model sister.
Collapsible.
Women's heels. Yeah, uh pretty amazing. I actually couldn't find the name of the company, Dan. Do you did you remember? I don't remember it. No, and it's killing me now. No, but that's exactly what it was. Yeah.
Oh it was. I mean like amazing. That uh unfortunately didn't work for reasons that are lost to history. But undaunted.
Adam goes on and he starts his next company. The next company is called Crawlers.
with a K. And Crawler's true this is true. Now remember Adam I mean f folks listeners probably have some image of Adam right now. Um he actually does have five children now. Yep. Uh at the time he had no children. And Crawlers was a baby clothing company and the unique insight
innovation that they had. This is maybe going to presage we work here, is they had the the technological advance of built in knee pads in pants. So that as your children were crawling around on the floor, they would fall or falling on the floor.
This sounds like a Kramer thing. But it's also it's a little bit New York, like you think of the era, both of those, like collapsible heels, you know, baby clothes, like you think of New York in that time from an entrepreneurial sense. It wasn't
You know, there there was all this complaint, you know, there's not much tech, quote unquote tech coming out of New York, but a lot whether whether you want to call it fashion apparel, consumer consumer products. I mean that's also the Warby Parker era, et cetera. That's what was that. Yeah, we should we should set the time frame here. This is mid two thousands when all this is going on. So just pre financial crash. And yeah, tech in New York was like
There was Union Square Ventures there, but there was media, media tech.
was I mean, I guess was Foursquare around yet? Probably. Yeah. But but it would got so much publicity in Harmony. Maybe it wasn't around yet. One of those early New York companies. New York tech companies. Maybe Etsy was, but like these were not
People weren't building like real
tech companies in New York. Um well this we will continue on that theme. Whether we work is or not, yeah. Yeah. So it's right around this time while Adam is trying to make crawlers work that he goes to a party. And he went to lots of parties. Uh in fact he goes to a party at his own apartment. And uh
as we were doing the research here. Dan, I don't know if you saw this or remember this. Um I guess Adam had a habit. This must have been summertime
of in the parties that he would throw in his apartment, he would just walk around without a shirt on.
That I don't know, although there's a photo of him from like
Two weeks ago walking down New York Street without his shoes on which is insane in Manhattan, but was that.
Uh so Adam is shirtless at this party and a guest, a friend of a friend, shows up
And meets meets Adam in the elevator going up to the apartment.
And that man's name is Miguel McKelvey. Now Adam
I don't think we've mentioned yet is six foot five.
Miguel is six foot eight.
So maybe they were like the only people who could see each other in the elevator. And Miguel had a similarly interesting
Yeah.
So he grew up not in Israel, uh not on Ikebuts, but in Oregon
On a
Hippy commune.
Uh Wait, both We Work Founders have their
And it absolutely when we get further along, absolutely makes sense when you
Think about what we were tried to become.
Yeah.
Wow. Yeah. So Miguel was born to to a single mother, lived in this collective of
five single mothers and their children. He had four sisters, who were not biological sisters, but this commune was ten people, five mothers,
five children. Later there was a little brother uh that came into the picture about ten years later. But that was that was how he grew up in this collectivist rural
Commune outside of Eugene, Oregon.
He ends up he was very smart though, is very smart, goes to Colorado College for University, spends a couple years there, then ends up transferring back home to the University of Oregon, which is in Eugene.
Uh he does two things there. One, he plays basketball. Uh six eight. You can't wait. And Oregon is like a pretty good basketball team. Like he was like legit. And um
Two, he studies architecture and he gets his architecture degree.
So this is all starting to come together here. And it's gonna come together even more. He graduates
And in um true, you know, sort of free spirit fashion, he moves to Tokyo.
after graduation.
And because he has a friend over there and is like, Hey, you should just come like hang out in Tokyo. So he goes
Remember, Softbank is gonna act into the picture uh here, you know, in a little bit. Uh and in Tokyo, he starts his first company, a company called English Baby, which amazingly still exists today. We'll link to this in the show notes. Yeah.
Did it merge with crawlers? No. No, no. No. So uh Miguel was a co founder, he was not the CEO. The company ended up moving, spent a couple years in Tokyo, ended up moving back to Portland, Oregon. So it's still based in Portland.
An English baby is best described as like MySpace plus Duolingo. Uh so this is again like early to mid two thousands.
Yeah, it's probably not a bad idea. I think they were inspired by like
Do you guys remember growing up like this concept of you'd be like uh your schools would help you become pen pals with like students in foreign countries? I think that's what kind of inspired that. They wanted to do that on the internet. So like
Learn help foreign students learn English, you know, with friends in other countries. Yeah. So the tagline, which is still there on the website today, the motto of the company is learn English.
Find friends.
It's cool. Kind of amazing. So after that, Miguel works on that for a couple years and then he's like, you know, I have this architecture degree.
I should use it. I also he's also kinda always had this dream. He talks about this, he was on how I built this uh podcast. He always had this dream to kinda move to New York. So he just picks up, moves to New York, and he joins a small architecture firm in Dumbo in Brooklyn. And this is uh there were two architects there and he was working as a draftsman for these two architects.
And they had one major contract, which was the build out of the American apparel.
Retail stores.
All across the country.
So Miguel gets
drafted in as a draftman to basically this was when the you know era of American apparel they're just rolling out in a huge way
Kinda like We Work Wood.
all across the country opening up all these stores all with the same aesthetic that would come to sort of inspire we work here. To to bring it full circle, uh uh just before flying out to do this episode, I walked past the empty space in Seattle where the American apparel store used to be and was more recently filled by Glossier's pop up.
Which is just like to bring it the most full circle. Yeah. Yeah.
Are you are you are you implying there might be some empty We work spaces soon? Um
So it is this man that walks into the elevator.
And meets
Adam.
Yeah, at this party in this probably would have been like two thousand seven, maybe two thous early two thousand eight in New York.
And they get to talking at the party.
And Adam, it turns out is looking for office space for his
Burdening hypergrowth.
Company crawlers.
And is talking to Miguel and Miguel's like Oh yeah, like I'm an architect, like I like you know, I'm into I'm doing all this commercial space and Adam wants to wait eight years, my company the company I'm working for is gonna collapse. It'll be storefronts everywhere. Everywhere. Everywhere everywhere. Uh and so Miguel's like, dude
Don't go don't go looking for office space in Manhattan. Like that's stupid. Come to Dumbo. Rents are cheap here. It's super awesome. It's really hip. You're gonna like it a lot more. So he convinces Adam to move into the same building that his architecture firm is in Dumbo.
And this is two thousand eight.
The financial crisis is
happening. Rents are super cheap. Uh there's you know blood on the proverbial blood on the streets in New York. I mean I was there, we all remember this. Real estate is plummeting, and these you know two entrepreneurial guys, they kind of cook up this idea. They're like, there's some empty floors in this building that we're in here in Dumbo. What if we convince the landlord
to let us take over one of these floors
And then we can stuff some more people into it and like make the arbitrage on the rent.
And they decide this is a good idea, these two new fast friends.
And so they do it. They convince the landlords like well I can't move this floor anyway.
they give it to them and the idea is this is gonna become like Airbnb for office space.
And maybe the better analogy though is uh there's a Forbes article a couple years later in the early days of of We Work, and they say
Sort of like Airbnb, but maybe a better analogy is like an airline operator.
Really what they're trying to do.
Take a physic.
And squeeze as many people into it. Just like coach on an airplane.
And it's turn out I think the financial dynamics of this business look a lot more like an airplane operator than they do like Airbnb. But anyway.
It's actually a great idea.
Like very quickly the space gets filled up. They list it on Craigslist. They're like, Hey, we've got desks here.
They decide to call it green desk. They think like
This is gonna be eco friendly. That's what's gonna appeal to these types of folks that are like, you know, new age entrepreneurs. They care about the environment. They they start marketing. So it's like all seventh generation sort of like CPG stuff throughout the I think they might have.
They used only recycled desks and then the kicker is I I I'm sure this was
Probably fake, but they're like, We are powered only by wind power. In Dumbo, in in a bird building in Dumbo, they've changed their own grid. Hey, they're entrepreneurs. They're entrepreneurs. Um Throw a windmill on top of the building. Yeah. So uh I'm sorry, I'm just I'm trying to think of Brooklyn and I'm trying to identify my mind that the
first windmill I've seen there and I'm still trying. So it was the Dutch, you know, they put the windmills in the in the New York when they when they settled it. So
Like I said, though, it works great. Like there are all these people that are getting displaced from their traditional New York finance, you know, media, what have you, jobs and they're
they're starting businesses or they're freelancing and they're looking for stuff like this. And so the Craigslist postings that they're making are just getting all this demand. And within I believe within a month
they have the space like pretty much booked up. Then they start taking some more
floors in the building, the landlord owns a few other buildings nearby, they start doing this in the other buildings, and it really works.
Wait, so this is Green Desk now. Something bad happened to Green Desk or they just morph. No, something great happens to Green Desk, which is two years later
The landlord says, Man, this is like becoming a big part of my
Business.
And he unclear to me if he offered to buy or they offered to sell to him, but
They buy the landlord buys Green Desk from Adam and Miguel for three million dollars.
Which is pretty great. So this is two thousand ten. They raise no investment?
They, I believe, raised no investment. Now they had a third partner who was a guy, I believe, named Gil, who Miguel had worked with at the Architecture Firm. And I believe Gil at this point just takes the money and moves back to Israel. He was Israeli. But Adam and Miguel, they make like a pretty bold decision. I guess this is 2010. Remember this, like
They just made probably at least a million dollars each.
They could be living large in New York at this point in time. In Dumbo, at least. In Dumbo, at least. Uh, and man, to invest in Dumbo real estate in 2010, like you would have made a killing. But they say, no, we're gonna double down. We think that we've learned a couple things from Green Desk. We think that this product has

Let's take this across the water into Manhattan. And so they go, they decide to restart.
the company and they wanna go do this same concept in Manhattan.
But they've learned
One of the key things they learned is that actually this eco friendliness thing, like it sounds good, but that's not why people showed up.
People showed up because what they were really doing was they were selling
A culture.
They were selling a work space feel design culture.
And I think this is totally true. Like, Dan, I don't know if you'd agree with it. I think I you know what I mean, I think they were selling you know, if you think about
freelancers back then are people trying to start coming they they were selling the coffee shop is what they were selling without having to go and buy coffee and and there was actually in a desk. That's what they were selling. That's where you would go. And probably with worse Wi Fi at the time. So when I think
Regis and I WG is gonna come up in a minute. But again, this is not a super new idea. The idea of No, it's not I look in nineteen I'm gonna really date myself now. In nineteen like ninety four.
four in Cambridge, Massachusetts, in Kendall Square, where MIT is. I was uh working on a startup newspaper at the time and we rented an office space. And the big thing that that had was it had a common receptionist and and a and a mailbox.
That was huge, right? We could get mail to us and somebody would pick up the phone and would direct it to us. So I mean that was very much the early version, but that general idea and there was a bunch of different basically conference rooms and every company had one. Yeah. But I I bet though it probably didn't feel it felt probably kind of pretty crappy. Yeah, it did. No, it felt it felt like basically we were in a very large cubicle with a better wind with a window.
Yeah.
So this is an age old business, this subdividing real estate, basically leasing, taking on a long term liability where you rent out space for some low price because you're taking it in bulk, you subdivide it up, and then you rent it for a higher price in a short term. And in this case for what we work with becoming and and have some common shared services, which is you know the you know, particularly if you're a two person company
You don't want to have to deal with somebody answering the phone or how do we get, you know, broadband as a job or do we have to hire somebody to take the trash and all and and and get make sure the coffee machine is filled every morning. Yep. Yep. And I think just to hit on this one more time, because I think this actually is a big difference from We Work and and everything else.
What they did is they did that and they made it feel like you were
Like at a real place, not like you're at some budget low rent. It's like English Baby, right? It's cool.
Yeah, that's what it was. Yeah. It was cool.
It was cool. And there's multiple interviews with early We Work members that said, Yeah, I was working on a startup. It wasn't going well, but like my parents could still come to the office and they felt like I was doing something real, like I was a success. Like there was, you know, I was in a place, oh my gosh, look at all these great desks and computers and a receptionist. Like this energy here. Yeah. Ostensibly something was working.
Ostensibly, yes.
So and I think at this point in time something really was working. People wanted this. So they had to come up with a new name. So Dan, I think you know the story of uh I've heard rumors of the story. Adams never said it directly to me.
Uh the the rumors are that that Adam was partaking some stuff he would later partaking on planes and and that is when the name came up. This time on a couch as opposed to an airplane seat. Well maybe he was on the couch on his private ship. That's possible. That's fair. That's totally fair. We're referring to um
You know, the the reporting uh that came out in the last couple of months that Adam apparently smoked marijuana which shocked shareholders. Shocked shocked shareholders. Because apparently his major investors had never met him. Uh anyway, um so they they needed they obviously needed a name to replace Green Desk and they come up with we work.
So
This is like
Kind of an amazing entrepreneurial story. What happens next? So they start shopping for real estate in Manhattan, the least that they can take out on they're looking for a whole building.
that they want to do this. They want to go big. But even with the two ish million that they have between them, that's not really enough to get even in twenty ten.
a lease on a whole building and they wanna be in like real hip part of town. They wanna be in Soho, they wanna be downtown.
So they're going around there like
Go into all of these I don't even know how it works when a building's up for lease. It's like sort of an auction or like whatever it is. It's it's market by market. I I know I know in New York it's like one of the craest ways. So I'm sure there's
extra complications when you're looking to lease a whole building. A whole building, yeah. So while they're at a few of these whatever they were, they were like
moments where pe a lots of people who are interested in buildings would all be in the room at the same time. So they're at one of these
And they meet
A Brooklyn based real estate developer named Joel Schreiber. And he takes a shine to these guys. He's like an established pretty big time real estate developer.
And they
No, they need some more capital and so they
Kind of throw out.
something to him and say, Hey, we need some funding for what we're doing. You think this is a good idea.
Um how about you invest at uh forty five million dollar valuation?
And he says Sure, I'll buy a third of the company.
Which by the way, just I mean, again, go back nine years. I mean, when we you know, nothing that's under a billion dollars anyone pays attention to. That was a for a startup that didn't exist, that was an enormous amount of valuation of time. It is it is, but even then, I mean just so uh absurd. This is this is the Audacious. Yeah, audacious, fair. But this is the very first example of Adam
looking around, like i if this were a tech company, then what they would have gone and done is raised five hundred thousand dollars on a four million dollar premium evaluation. What Adam did was say, Oh no no, this is not that
Like
And also we're not gonna approach a traditional tech VC type person. So you pitch something unfamiliar, uh that's completely different to someone that's not playing the same game as everyone else, and you get a non tech investor in a non tech business at a non tech valuation and boom.
Very first time this playbook has been run.
Fifteen million dollars.
In the bank.
And so they take out a lease for a whole building in Soho.
They start
doing the renovation and so there's the lease, but then they have to
renovate this and turn it into a clear way it kind of makes sense that that you should feel like your fifteen million dollars is safe here. Normally when you're investing in a tech company, you're buying like laptops and then you're paying salaries. And in this scenario, you're getting something of value, this longish term lease
So that like at least if the b business goes kaput, then this major investor owns a third of a a a valuable lease. Yep.
And presumably you could repurpose that building and rent it out for other things. Which of course, by the way, as we go on is in theory the the the concept.
in part behind We Work's kind of massive valuation, which which makes what's just happened that much more nutty. So they start
renovating this building floor by floor. Doing the and and I believe
This we'll see if we can find some pictures.
We work as we know it today. Like this was it. Like they the all the aesthetic, the glass walls, the communal spaces, like they had this nailed kind of from their dream desk days from the beginning. So they start doing Plus beer taps. That was very important. Like in the early days when you hear about a We work, that was the first thing you did. They have beer taps in the office. Yeah.
Uh
I W G does not have bootcast. It's like the lowest cogs it's the the highest delta between value and perceived value.
That you could imagine. Or I guess between cost and perceived value.
Uh so as they're finishing each floor in this building, within
one quarter of each floor coming online, they're at a hundred percent occupancy. So like, Oh man.
This this is working. They start running the same playbook on other buildings.
In New York.
And Adam has a has a great quote on this. He says, During economic crises
There were these empty buildings.
And these people freelancing or starting companies, I knew there was a way to match the two.
If he had stopped there, that is like a brilliant entrepreneur, I would say. He has one more sentence, though.
What separates us though is community. So even back then, even in, you know, twenty ten, uh defend him on that for a quick second, which is and we talked about this, like go back to the Green Desk days and and to your friend who said, Oh, you know, my parents came in and it looked like something was happening. Like
these freelancers, they weren't necessarily working with each other per se on the same project, but again, working next someone, it's the difference between working alone in like, you know, you could rent out a one office office, I guess somewhere, right? And you're alone completely with a door shut.
There's people around, there's an energy that makes you work more. It's the same reason why there's like even today questions about is it better for people to be in an office compared to, you know, all working remotely all the time. Yep.
Yep. Yeah, again, he's not wrong, but it is a But it does lead to some problems. He's not a hundred percent right either. So twenty eleven, this is actually really interesting. I was surprised by this. The next year in twenty eleven
Pepsi Co.
Takes out
a bunch of desks in that first Soho We Work and starts putting some of their
remote New York City based employees.
In the We Work. I thought that was a much newer phenomenon in We Work's business model. But it was actually from the very beginning, um, that big corporate clients were also saw the appeal of this. The next year
In July twenty twelve.
This catches the attention of
a number of venture capital firms including
uh storied Venture Capital Firm Benchmark, Benchmark Capital, and into the summer of twenty twelve
They lead a seventeen million dollar series A
in We Work at a ninety seven million dollar post money valuation. So a nice step up from like the original seed round, which was
Crazy to begin with. Uh, and again, back in twenty twelve, you know, a series A
at a hundred million dollar post. Like that's
A significantly higher valuation than Benchmark gave to Uber in Uber's series A.
Kind of crazy.
And uh uh in Forbes, Bruce Dunley gives a nice quote uh where he flew out to New York to see what was going on. He said, It reminded me a lot of eBay when I first met them in nineteen ninety seven. There was something going on
at both that you couldn't quite put your finger on. And I think this is an early uh early precursor to a lot of We work, which is there's something valuable here. You can't quite put your finger on it and thus it's hard to value.
And and that sort of gets taken advantage of over time. No
All that said, like
Everything up unto this point.
Dan can feel free to disagree.
It all makes pretty much sense. No, I don't disagree. I think it yeah, I think it does. Yeah, absolutely. Even this
Seemingly crazy investment by benchmark.
As we stand today, like that's a great investment.
And there was like yes, there was like is this a tech company? Is there is this just a real estate company? It is, but we'll we will come back to this benchmark investment and then the subsequent investments that uh in the background is that was going on, you know, you talk about the valuation, the part that d didn't get report at the time, none of us ever see.
is the actual governance terms that are sitting behind that valuation. Yeah. Is do you know if that was happening at the series A already?
Well had I I don't know for sure, but I don't I I believe Newman I mean Adam Newman even at the time VO owned a remarkable amount of this company. For example, compare uh Travis Kalnik was I think owed owned like six percent of Uber when he got booted, around six percent. Yeah. Adam owned a third of the company. Yeah. Uh so I mean he still I mean after all the soft bank money, et cetera. So he he r he controlled this thing. Uh
even in that early day. Those are well and it's interesting, you know, Adam of course had Miguel as his co founder.
I believe well now it's now obfuscated'cause they have their shares in an LLC, but I believe Adam
always had a greater economic percentage of the company than Miguel.
Um
If you remember back to Uber and Travis, Travis was not the founder of Uber. No. It was Garrett Camp. Travis was sort of But Adam had bigger peace than Garrett had of Uber. I mean, going forward.
Interesting. Yeah. Uh well well,'cause Garrett and and then Travis ended up splitting and but like there was some delusion like Travis didn't start in the same way as like I am solo founder of this company. No, again, I mean and we'll get into this, but I mean control was important to Adam and and in every way. Control really mattered. Yeah.
Yeah. So
After that investment, things continued to work well. They're opening lots of lo locations in New York. I think it was right around then that I remember the Seattle we work opening, uh where we were, Ben and I were there at the time. They were opening there was definitely in San Francisco, a number of cities around the country.
Expansion keeps continuing. They start to attract the interest of the financial community. So they raise
I believe three more rounds over the coming years led by investment banks.
by Jeffries and JP Morgan, chief among them, but also from Goldman Sachs, and they start pumping quite a lot of money into the company on on short order.
And so by twenty fourteen
The company now is valued at one point five billion dollars.
And is
Kind of quite large at this point.
Yeah, and how much do you think
had to do with the fact that they were New York based and not San Francisco based at any point. I I would think oh you mean in terms of the the leads. I I think two things. New York based, but also think about that. They they are still basically a real estate company. Or if you are if you are Goldman Sachs, if you're Jeffries, if you're JP Morgan
You have giant real estate investments. You have whole teams that are dedicated to they know that, you know, uh some sort of
app or some sort of, you know, machine learning something, something, they've got to put a lot of faith that the founder knows what they're doing. With this, they felt they knew what they were doing. This is this is them. This is real estate and it's on their block. Yeah. Well that's that's actually true. And and um
I believe by twenty fourteen
We work had become the single largest lesser of new
Available commercial square footage.
In New York City.
Like anybody, like think about like all of the real estate investment and property developers in New York.
We work with the largest. So of course they were attracting attention to these folks. And it goes and it goes back to what you said earlier, you know, the remember also what they are investing in. You know, an an app company can disappear just like that, right? There's a scandal or it doesn't work, there's no product market fit. Worst thing that happens here is you end up with a shell company that's got, as you said,
All the real estate commercial real estate in New York City. That's the worst case scenario. There are yeah, that that
That's pretty safe as venture capital investments. Right. You know, Goldman and JP Morgan, they're gonna be super happy to take over those leases if something goes sideways here. And let's think about how you how you might make that investment and arrive at a$1.5 billion valuation at this point. Is someone doing a discounted cash flow? Like is is someone actually saying
Well, if they continue growing at this rate for X years and we're looking at our
uh net operating margin and that we think that there's some chance that generate a billion and a half in cash flows.
Uh my
get I don't want to say I guess I would hope so. I have so little faith that people do that, or really do that, and don't just come up I there is a big part of me that believes, and and you guys can feel free to disagree, that people come up with a valuation and then they back their math into that valuation. If the first one doesn't work, they'll come up with another way to make the calculation go. But look, but there there was some reasonableness to it, right? Because you think about
how we work the the issue was always they had to spend a lot of money up front their upfront capital costs A to to lease the buildings but also to do the renovation right it costs money to they because they were doing full almost demo inside of these things almost down to you know the equivalent of studs and then rebuilding them inside that costs a lot of money and if you've got twenty year lease you are
Theoretically you're gonna you know, depending on the building, you'll
get to break even at year three or year four at seventy, eighty percent occupancy, and that's when you're really in the money. So that's how you're you're planning it. Yeah. You know, and it's interesting
I haven't quite thought about this till now as we've been going through it.
I think you could argue, Dan, that like the valuations for the tech venture capital community
Look a lot like what you said.
You know, Goldman, GP Morgan, Chuck they don't do this. They were looking at
the value of this real estate. And I
strongly suspect, having friends that were at some of these places on real estate investing teams at the time, they probably had big theses about like
Those years call it twenty ten to twenty fourteen were years to go big on investing in commercial real estate in major metropolitan industry. At the time, arguably boom by two thousand fourteen, fifteen.
Okay, so you're right. So the floor, you know, floor thirty on Sixth Avenue, that's there's got a it's got a intrinsic value to it. But WeWork has decided that they are going to rent it out to short termers for the most part. Yeah, maybe some Pepsi, but short termers, and they're gonna spend a fortune renovating it when it was already an office building, right? Generally most of them, maybe not the one in Soho, but most of them were probably already office buildings.
Could we have done better just calling Pepsi, calling somebody else, splitting the floor in half, and basically keeping the infrastructure exactly the same, maybe with a new coat of paint?
Yeah.
Maybe they could have.
So the net of all this is in June twenty fifteen, WeWork makes a really key hire.
They hire a man named Artie Minson who
who was the CFO of Time Warner Cable.
Uh now if you think about the cable business
Uh, this is the not the content business. This is the literally the pipes, the distribution of cable. Which is why he was perfect for this. Exactly. Cash flow business. Cash flow business, but the same thing, right? A huge upfront
infrastructure spend and you will get your money basically recurring revenue year after it'll take a while to get your your nut back, but then eventually it's a lot of money down the road and it's recurring. I mean I remember and limited supply also. I mean if you think about cable, there's in New York as everyone knows when uh you know when Time Warner decides to stop carrying a channel
You're out of lot. Same thing there's a limited amount of commercial real estate in New York. Yeah. I I remember
Back in uh
In the mid two thousands, I was in a media investment banker at UBS in New York, and I remember covering cable companies and the history of cable companies, as we've discussed a little bit on Acquired, was like nobody believed in them during the eighties and nineties when they were incurring huge losses doing all this build out of laying the cable, laying the pipes into
consumers homes, but then the switch flipped exactly like you said, Dan, and then they became cash flow monsters and people loved them. Uh and so I think a lot of this bet here was the same thing was going to happen with We Work. And Artie said that explicitly over and over again. He he felt he felt they were analogous.
And that's Ben Thompson's AWS analogy too that says, look, there's huge build out costs. It would be strange if this business weren't incurring huge losses right now in this era of rapid expansion of infrastructure. At some point it should flip.
Yeah, indeed.
This though It did, by the way. It did eventually. AWS. No, well no, and this we work just in the opposite direction. This is No, no, no, that you're not. This is
A switch does flip at this moment.
Unfortunately the switch that flips, I think was more in Adam than in the business. Yeah, so this this is the moment where until this point, the name We Work is in no way solid or in no way a head scratcher. It's
It's a really interesting company that seems to have product market fit, that's of course growing very fast, but no one's looking at the growth and saying like
there's something massively around here. The only concern I th I at least I remember hearing at the time was this argument and you know the Pepsi thing's interesting because the the enterprise piece of them in terms of renting to big enterprise companies wasn't well known and wasn't even that big within We Work in terms of its revenue at the time.
There was a concern that wait a minute, they are they're filling these with all these startups, these tech startups.
If the tech startup bubble bursts.
And that's on top of a commercial real estate burp. You've got burst, rather. You've got a bubble on top of a bubble and then the whole thing goes to hell very, very quickly. That's a great point. Yeah, that was. I I distinctly remember having this conversation, like late twenty fourteen of
uh I would be short this company purely because there's going to be a tech bubble that bursts soon, which here we are five years later. We're all still waiting for it to happen, or maybe it's happening right now. Um but but yeah, Dan, that's a great point. Yeah. You're right, but the growth makes sense. It's the reason they kept raising money at higher valuations. And they kept filling the buildings. I mean that's important. The buildings kept being full. Yeah, they kept being full
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So
Adam at this point
He's very wealthy on
Yeah.
But as they keep raising money, he starts
Doing it's it's unclear exactly the
method by which he did this, but he starts taking uh quite a bit of money off the table.
Some c definitely from selling his own shares. We won't know and there were all there were employee tenders. I mean he I I am told at least that every time there there's some debt stuff too with JP Morgan, but in general every time he sold shares it was part of an employee tender. Well I was gonna say, yeah, then the w what we do know is that
By the time we get to now, he has I believe it's a five hundred million dollar
loan facility, personally, from JP Morgan.
backed by his we work share. So which is effectively a way to be
selling without actually selling
Your share's a long way five hundred million dollars, that's a lot of money. Man's got a lot of houses.
That's it. So he starts doing two things. Well, he does have five children. Well, I uh look, I agree. If I had five children, I too would have ten houses. So I don't rudge that at all. But but yeah, he starts buying residential property
Uh, he owns four
multi million. We're talking like
ten plus million dollar properties in the New York area alone.
Dan, I think you're right. Ten
residential properties around the world. Tenor or in that ballpark. Well he also sees gosh there's these companies like we work that will pay a bunch of money to me if I own a building to to lease it for me. So I gotta figure out a way to get into this building ownership business.
more problematic thing that he starts doing is he uses starts using this money to invest in commercial real estate.
And this is a huge conflict of interest because I mean and h he it is it's uh it's an obvious conflict of interest. His argument was always I remember hearing about this and actually asking about this. This is before I joined Axis is if w when we brought him and his wife Rebecca to to a fortune conference in Aspen, I remember asking about this.
His basic argument was we were having a hard time. So I I almost think he did some of the commercial real estate earlier, because at least his argument was we were having a hard time at points convincing landlords to let us in because they viewed us as this venture back startup. Oh, we're gonna sign a 20 year lease, but where are you really gonna be in five years? Or you're not you're gonna be gone and
But if I buy the building or I have a piece of the building, well will least do we work'cause I have faith in it. So I'm solving that I'm solving for that problem. But you're right.
Obvious conflict of interest. Right. Well, I mean out of it might make sense. Which in theory, if you had an independent board of directors, which had oversight, would be able to manage and and and and silence. Yeah. That logic might make sense, but then
The obvious answer is start investing
have We work start buying buildings. Not Adam personally. Which is what they ultimately get to. But which is right. Yeah. Not Adam personally and then leasing the buildings back to
We work, but that he's profiting on. The other thing that I mean, this is just standard, like ridiculous start up stuff. Uh they uh uh which is sad to say at this point, but they rent out all of Universal Studios one day and they get the chain smokers to perform and they start doing this thing called We Work Summer Camp. Um actually started at Rebecca's
family's property, I think in upstate New York, somewhere like
I don't think it's the Catskill Catskills, but somewhere sort of like that looks a lot like that. There's a there's a few really great pieces reporting on this. Um but it's like a hundred and fifty acres of land. Um her family I think is independently wealthy. Actually her cousin is Gwyneth Paltrow. Yes, yeah.
Yeah. It you know what again, this is one of those things that sounds so stupid and it is. I I remember the first time I called, I think it was I had talked to like who was running PR uh for We Work of the Time, and I called and I get a text back saying, sorry, I'm at camp right now. I said to a colleague, I think he's bringing his kid to camp, and she responds, he doesn't have a kid.
Said, but he says he's at camp. He said, Oh, he's at We Work Camp, and that began a whole conversation. What the hell are you talking about? But I will say, like, look at Google. Google still does this. So if things are going well, no one cares, and when things go badly, this looks just
Awful. So when you have a monopoly in an eighty five percent gross margin business, you can do shit like this. You can by the way, I as I said, I came from Fortune magazine. The old stories for Fortune from before my time were when they had a blowout, the Fortune five hundred issue was, you know, the kind of the Vogue issue, right? It was massive. And I guess maybe like
Ten years before I'd gotten there, they had a blowout issue and they brought the entire staff from you know most junior to the most senior, everybody to Hawaii for a week. So I mean
That in retrospect was really dumb. But you know, great. Like, you know.
Exactly. But here we are in a I don't know, ten to twenty percent gross margin business that's purely right now, like all the cash in the bank is investor dollars, none of it is profit dollars. Correct, you know.
Yeah. So
The peak of this period of the company is twenty sixteen.
They raise just under half a billion from um
Two Chinese entities, uh that value the company at sixteen billion dollars.
Uh and that was I
I think that was the first time they crossed the ten billion dollar.
valuation threshold. And now they're among the top like
Three most valuable
Startups in the world, to quote unquote startups.
And but we work Uber Airbnb. And then he takes on the Chinese ones, but at least for the US, yeah.
Yeah, for the U at least for the US. And I think that was twenty sixteen. That was before I think people really maybe Dropbox at that point was already there, but close maybe not quite. It was like in the five ish because it went IPO around ten. Yeah. Yeah, but Uber Airbnb and then that those were the three. Well and and I think actually a lot of the Chinese companies hadn't even been started in twenty sixteen yet. Yeah, like
Pinto a Duo, I think I started in like twenty seventeen. Like it's crazy. So uh
So benchmarks two for three in these uh these three big ten billion dollar platforms. Well plus there's uh Snapchat was kinda up on its, you know, rise at that point. So yeah, everybody's sitting pretty.
Enter.
Soft bank. And
It's uh
One of a kind founder.
Mashi san. Listeners, if you don't hear the Imperial March playing, know that it's because I checked with Disney and we did not get the copyright authorization to put that behind this section. So we've talked a lot about Southbank on this show, including doing a whole episode on the Vision Fund.
We're now in early twenty seventeen.
Softbank has just raised the vision fund. And we're gonna talk a lot about their motivations and everything that happened here along the way.
But
One thing I think to really keep in mind, like they have
A hundred billion dollars to put to work. They read it.
Theoretically.
And they're
goal uh that they're clear about is they want to deploy this capital
in less than five years.
How do you deploy a hundred billion dollars, which as we've talked about, is the largest fund of any type in any asset class ever raised in history.
How do you do that?
Let alone in tech companies.
You need to find some companies that can absorb
massive chunks of capital.
So they start looking around and they say, Where can we put this money?
Uh
Uber is obviously one example that they put quite a lot of uh number of those billions into.
But here's this interesting company called We Work. It's already one of the highest valued startups in the world.
And they have this interesting capital dynamic. They're very capital intensive.
They scale with capital, they take on these long term leases.
And they want to move into Asia.
And they wanna move into Asia. Exactly.
This feels like the perfect fit.
We could really put
a lot of billions to work in this company.
And then
You know, get through our deployment phase in fund one and just like, you know, any good fund manager, then go raise our next fund. Yep. Now, David, is this is Softbank Vision Fund's mission to invest in technology companies ha ha
How does that start to factor into the picture and ha and and By this point we work believes it's a technology company.
I mean, I I mean the one thing y you didn't say when I thought you were going when you talked about that inflection point was it's starting to to be honest, the AWS example is pretty good, right? It is starting to add lot or believes it's starting to add lots of services on top of the real estate, right? So beyond the beer taps and and and the and the decor, it's trying to add all these services, and some of those are social network for members. All that stuff, uh event.
But nonetheless, that that's the idea. And I think that's part of it. But it's also if you're Massa, you're SoftBank looks at what they believe are transformational shifts in how people either live
or work, right? So they invest in Slack, for example, right? That's a they think that's a fundamental change in how people work from collaboration. In this case, they think this is a fundamental change in how people work from a physical location standpoint. So this works for that from a thematic standpoint.
thematically, but economically, this doesn't have the high fixed cost, low variable cost component that a tr a true sort of pure technology business would have. No.
Not at all.
I think is to underscore again, as we said, it has this
other extremely attractive element to Softbank.
How much money could they put into Slack? They couldn't put that much money in. And Uber Uber they could only plug a ton in because it was in crisis. Yeah, it was in a management crisis. They took advantage of a situation. If even if you look at Vision Fund, they had put a ton of that was uh was money uh that they had already invested in R that that they basically just transferred over to take a big chunk. It if you're doing privately held companies, as you say
It is hard. It was the big question when they raised, how are you gonna deploy this in any reasonable way? Yeah, and so here's this like
perfect vehicle. So this is amazing. Dan, you may know more details on on this on how this happens, but the soft bank team is scouring the world looking for companies like this. We work as top of the list. So
They
set up a you know sort of like final diligence meeting where Massa's gonna come over to New York to We Work headquarters. They have two hours booked with Adam, gonna see the whole space, gonna spend a lot of time with Adam.
And as the story goes, uh
the time when Massa's supposed to show up arrives. Adam's all like, you know, ready. He's activated the space as he uh says that he does. Uh and um
Moss is nowhere to be found.
Time goes by.
Waiting, like an hour goes by.
Finally, Masa shows up and he says, I'm really sorry.
I only have twelve minutes.
And so they do a quick walk through in the space and then he says to Adam.
I gotta get in a car to the airport.
You can get in the car with me if you want and we can talk about this.
Adam gets in the car with him. Masa pulls out his iPad, as the story goes, and
draws up with his like finger on the iPad.
a sketch of like the terms of a deal.
The terms being that Softbank would invest an initial four billion in total out of the company. Out of the vision fund. And that's one billion for international expansion into uh any outside the US. One point
three billion of primary capital into the company and one point seven billion in secondary to basically buy shares from existing shareholders. No new cash. Including
Adam. Including Adam.
They sketch this on the iPad in the car.
Massa signs his name to it.
Adam signs his name to it and then of course like the team. And it's important just for those who don't understand Vision Fund, to get an investment from Vision Fund, at least one I think it's like over a hundred million dollars, you do need Moss's approval and and that can't be via phone. It's gotta be an in person meeting. This isn't a normal venture fund where
one partner meets with the s or maybe two partners meet with the CEO and then they bring it back to the partners and they discuss it and they have an investment committee and a vote. No, if you want this, Adam had to meet with Massa. This has been true for anyone who's raised money from that. Yeah, wow. Lots of friends. It's what, a hundred companies now? I'm not sure what I'm not sure what the number is, although vision fund one is basically
full in terms of new companies. Yeah. I I have friends who've gone through this, like where
the soft bank investment team will, you know, work on a deal together and then it's like, Okay, well
We're gonna fly you over to Tokyo or wherever in the world. Usually you have to get on the city. Usually you go to Tokyo, yeah.
So
Uh it's done. So now all of a sudden uh they valued the company at twenty billion dollars.
which was you know, was already valued at sixteen. But
This was
Four billion dollars of capital.
That was a step order.
of new capital coming in and one point seven of that going to existing shareholders, which again we don't know the details, but
Imagine a lot of that was to Adam. Yeah. And also notable time, uh they get two board members too. It's important. They they put two people on the board of directors at this moment.
Yeah. Which that had to be stomach churning for Adam, who's obsessed with control. Well, I as we will learn later, he had two people on the board of directors, but you know, they have as much control over financial decisions there as my kid does in my house, right? Like they she can ask for things and complain about things, but in the end I get to decide what we buy and what we don't buy.
Dan, do you know so famously now Adam has a twenty votes for every one share in the company that he has. Do you know if he
got this as part of the deal? I do not know.
At some point along the way.
Again.
We can't go back. We don't have the documents to sort of forensically examine what the
But luckily there will probably be class action lawsuits somewhere. So we will get these documents. It's just a question of time. But what the governance was at various points along the way.
I can say with a hundred percent confidence. There's no way that
going back to like the original benchmark investment.
that the voting
structure was was like this.
Yeah.
I don't know that that's true necessarily. I mean think benchmark and it's not just benchmark, but all of them were so bent over backwards for any for yeah, I mean, go back to the Zuckerberg thing, right? Like
Think of Zuckerberg, he turns down a billion dollars from Yahoo when the entire board, including his investors, wanted him to take the deal.
He was able to do that, and and as you know, I mean, after that so many other founders of quote hot startups were able to get some return, whether it was twenty to one or not.
I I have no doubt that after the benchmark deal and the B and the C rounds
Adam could ultimately whatever he had, it was more than the rest of the board combined. Yeah.
What is really interesting here is the the the soft bank dynamic that comes into play with boards because they're basically the only entity that is going to do the things that they're gonna do because they so aggressively wanna put this capital to work. So they basically arm Adam to go back to the board and
holding a piece of paper that says I'm gonna get
literally billions in in investment dollars.
And
The terms
can kinda be as Adam friendly as they want. You can look you look at the rest of the board. The board's not gonna say, No, we don't want two billion dollars here to what, two point
three billion dollars of new capital coming into the company.
Like almost any terms they're gonna be happy with that, especially because what Softbank does is they say
Also, if you don't take it, we're gonna find someone who competes against you who will.
And and also with SoftBank, they and Adam are peas and a pot in this, right? Adam Adam is a grow, grow, grow, grow person. And that is what Softbank's model has been really with most of its companies that it that Vision Funds invested in, right? You know, think of DoorDash, think of Uber. It has been this idea that
If you buy no matter what the industry is, if you buy market share, you can suffer the losses, we will make money eventually. And so in the case of We Work, that is
New markets, new cities, new buildings, buy, buy, buy, and here's your checkbook. We're gonna do this, and that's exactly what Adam wants to do. Yeah, yeah. I mean, there's a famous uh story also of uh they have a closing dinner uh for the investment in Tokyo after it happens.
And uh supposedly Masa asks Adam.
Uh and Miguel.
Um
Who would win or sort of rhetorical question. Who would win in a fight? Who wins in a fight?
The crazy guy or the smart guy.
And
Adam answers right off the bat, the crazy guy. Hamasa says yes.
The problem is you're not crazy enough. So he's, you know, we talked about this in our prep for this. Massa, in a lot of ways, is feeding
Adam's instincts here. Absolutely. I mean it enabled and he's an enabler. But but beyond that, he's more than that. He's an enabler who's also like pushing him from behind. I mean the
As I said, they they were perfect for each other in the sense of they both wanted the same thing. And and you know, leaving the money out of it, Maso, you know, when you hear founders saying, you know, I want this investor because they see the same vision I see, Maslow was that guy. Yeah.
Yeah.
So this is the pivotal moment where if you accept this term sheet as the board, this is the last opportunity that you have to exert any measure of control. This is basically
You're faced with this
It's almost like Kobayashi Maru. On on one side here.
you cannot take two point seven billion dollars of fresh capital in a company that needs a crap ton of capital.
On the other side
you can accept your fate that
what all then happens in the next two and a half years
Something along those lines.
you you're you're you're letting happen. It's not gonna necessarily play out exactly like it did, but you're basically saying this is the Soft Bank and Adam show. We're about to do a bunch of crazy.
Did Benchmark take money off the table in that deal? They might have. They did an Uber from SoftBank. So like you might also be saying, Well, okay
We're getting our principal back plus, you know, three X our principal. So we're already in the money. Worst thing that happens is we're three X in the money or five X or whatever the hell the number is. So you know, go for it. And then make make us you know, make us the next Google, make us the next Facebook. Yeah, yeah. Get the exactly like you're at the you're at the casino at this point, you know? You've gotten
Three extra money back.
Let it all ride, you know? Like So those are the incentives. And we've talked about the board of the investors. We've talked about uh Adam is looking for this partner in crime and Softbank is looking to go put billions and billions of dollars into something because boy are those management fees sweet when they have these huge funds and they can actually put it to work. Yeah. It's also crazy too. I mean
Let's just think about this for a minute.
This was like mid twenty seventeen.
That was two years ago.
Uh like this was very recent. It feels five years ago. It feels ten years ago. Uh so much has changed. So they take this money.
Uh they turn around right away.
And they buy the Lord and Taylor building, uh, on Fifth Avenue in New York for eight hundred and fifty million dollars. Which, you know, I d I don't know, I'm not a real estate investor. I don't know how to judge like whether that was a good investment or not, but now all of a sudden you're now in a new league of capital deployment here.
And this is for their head I mean, it's partially the the they'll use some floor short. We were this is because they feel they need new headquarters,'cause they have gr physically grown out of theirs and they're out of space. And I will say, from being in their headquarters even
A few months before all hell broke loose this year, it was crowded. Like it was legitimately crowded. They hired a lot of people. Yeah, I mean they had uh fifteen thousand employees. Yeah. Uh
Until this week. Now that Lord and Taylor store is going to look like an American apparel store, the one you pass by. It's gonna look very similar. Oh man, how history repeats itself.
They also at this point uh purchased the infamous Gulfstream G six fifty private jet.
purchased by the company.
for Adam's use uh for sixty million dollars.
Right around the same time, Adam and his wife Rebecca, who at this point has been rewritten into history as a co founder of the company.
As best as we could tell in our research.
She and Adam were together when they started the company, but
Was not actually like It's a fascinating too,'cause usually co founders get written out of stories, not written in. Like the the you know, Silicon Valley is littered with people who legitimately co founded companies who don't get to be part of those narratives. In this case
In the in the sort of like sci fi world, uh this is referred to as a retcon, uh retroactive conversion. Yeah. Sort of retcon that person into that role. Uh
Again, we don't know for sure, but um so anyway, they uh the two of them decide right around the same time.
that uh going back to the green desk environmental roots of the company
They really should ban meat.
From it would have such an environmental impact
If they banned meat from
We were existed. And I have heard a backstory of this. And I again I'm not gonna I'm not gonna claim that this is completely true, but the back the a story I heard when this decision came up, or when Adam proposed this decision, was that internally they said no. Uh like his people internally said, For example, we have salespeople who
who go and try to sell things to potential customers or maybe meet with landlords.
Are they not and they're gonna pick up the tab, right? You know, I'm I'm a salesperson.
If the person I'm with gets a burger, can they not buy it?
And because Adam had actually s basically said, No, no company money will be spent on meat. Well, that is a problem. And so people raised all these legitimate concerns, but this goes to the govern later to the government because this wasn't a board issue, but raised all these legitimate concerns and he sat there, he took them all in and just got up and said
Yeah, we're gonna ban me. And walked out and and and then announced it before the like and just announced it, and that was that. And that's how these things worked. Yeah, at the same time that he's flying around on a private jet, which very sustainable environmental impact. Cover your ears and ignore the c cognitive dissonance.
Nothing wrong with any
Me, but like uh in theory, but the it's part but it's part of this idea that the that we work, you know, uh what was that line you said, the the community line, right? I mean Adam and I I believe this was sincere. Uh
He believed We Work was more than a co-working space. You know, any time if you've ever been in a We work and you get in the elevator to go up to whatever the floor is, there's a schedule of events. These events have nothing to do with quote business as it is. It is farmers markets. It is, you know, uh it's yoga. It's stuff like that.
He legitimately believed that and he also believed that that was a way to keep customers that when you okay, maybe now my three person company now is a twenty person company, we should maybe have our own space, but man, we like it here. Yeah.
Yeah. Totally.

Again, not wrong. It just got so perverted over time. Um the uh

So fast forward to this year and um
You know, the probably
I I think in many ways, once this came out in the IPO filing, this was the straw that sort of broke the camel's back. Um
We've talked about everything that that's happened up until now. In January of twenty nineteen
We work changes its name
to the Wii company.
And in doing so, We Work did not have the trademark
for the name the We Company.
Who had that trademark?
Adam had that trademark uh via an entity he controlled called uh Wee Holdings, I believe.
And so we work at Adam's direction.
licensed that name from his own company
for five point nine million dollars.
And um I I again I d I'm just sort of speechless here. And the and the defense of Adam Newman in this, and which I'm not gonna make, by the way, because I said this was horrible. Uh, but the the defen the argument was that was that this was a tax issue. Was that that that it had a val that Adam had created it, it had a value, and if he simply gave it it's kinda like you can't just give your friend a
brand new car. You just can't do it. There's a tax liability with that. That if you'd simply given it to the company.
Now.
This is also a person who did have a five hundred million dollar loan from JP Morgan. This is someone who had taken, you know, hundreds of millions of dollars. He could have sucked up the taxes and how and again, even if it's one of those things that the board at the time was willing to do, how nobody was able to
flag it and convince everybody internally before it became publicly disclosed is a just endless discussion. Yeah, like how this would look. Yeah. Um even even if there it's one of those things that even if you could make a valid on paper argument for it, the the optics are so god awful you don't do it.
Yeah.
David, I have a name thing I gotta talk to you about after this.
We're changing the name. We're going to be the acquired company. No. Um acquired media LLC is a great name.
Right around this same time
News comes out, remember SoftBank and their motivations. They want to dump a lot of money in here. So now we're in the beginning of 2019. We're two years into the vision fund. I can't believe that was that was act that was this. That's when the news comes out. The the discussion between SoftBank and Adam or or we workers are going on in late two thousand eighteen, and Adam does think he has a deal.
Yeah. Well and again, so like let's like w one of the things I wanted to we wanted to do on this episode is talk about
Why is SoftBank doing what they're doing throughout all this?
Okay, so we're now two years into the vision fund.
They've deployed a lot of it, but
They're thinking about and talking publicly about Vision Fun too.
And trying to start fundraising for that. People are still like like shaking off the shock that Vision Fund One happened. Like this notion that oh we're about to go do it again, a hundred billion again. Yeah. Yeah. So now
Speaking as a fund manager, like any fund manager, you can't
y y it is in your fund documents that you cannot go raise a successor fund until typically you are at least two thirds, if not more,
deployed and reserved of your initial fund.
So they're now sitting here and I don't I don't know exactly how much capital they had deployed out of Vision Fund One at this point, but they're like, We wanna raise fund two, we gotta deploy fund one.
So news comes out that they're talking about and like you said, Dan Adam thinks there's a deal for SoftBank and the Vision Fund to invest sixteen billion
More.
And we work. And by the way, this is the first time the issue of control comes up because the the story the news stories that come up were that that SoftBank would basically buy a majority stake in the company, which even though I don't think it was ever explicitly said, the assumption is if you own most of the company, you get to make most of the rules which we thought until yesterday. Which we thought until yesterday. Uh but Adam apparently, at least from what I'm told, was never
going to give up control. And that this becomes this issue of you might own fifty two percent, but I still have control. And that I don't think that was the breaking point of that deal, but that was always something I always heard from Adam's people internally at We Work was
that he always felt the reporting on that was wrong'cause quote, he was never ever going to give up control in a soft night deal. Interesting. Interesting. Yeah,'cause it was not Adam that blew up that deal.
No.
No, it was Softbanks LPs.
So at least according to the reporter. David, walk us through this. I thought Venture Capital was a blind pool. Not envisioned. Saudi Arabia has a Saudi it's actually funny, Saudi Arabia doesn't have a veto. They can't kill a deal. But Saudi Arabia, which and I'm gonna you probably know this better than me, I think they're like thirty or forty percent of the fund. They can say you can't use our money for this, and they are uh for anything over a certain number.
them out. They are they have a right to basically say that's the same.
You go do the deal.
But were carved out of this one. And Yeah. Interesting. Which is not typical in a Venture Fund agreement, but there's a large. So you should get a little bit of extra say, shouldn't you? There's a lot of things that are not typical about the Vision Fund. Um
But
Regardless of whatever control they had, they had the ultimate hammer.
Which LPs.
always have, which is like we're evaluating you about whether we're gonna do fun two or not. And I
I have to believe that that was ultimately
the leverage they had and why SoftBank backed out of the deal was they're like, Oh shoot.
Actually if we do this jeopardizing. There's also tense relationships at this point. Remember when you're thinking now this is a little bit after, but in October of two thousand eighteen. We're talking December, January. In October of two thousand thirteen is when uh the Jamal Kushoge gets killed. Thousand eighteen. Two thousand eighteen, sorry, I apologize. Uh Massa decides
He's not gonna go to their big conference. He'll he's actually gonna show up in Saudi Arabia and meet behind the closed doors, but he's not gonna sit on stage. So things are tense. This is Davos in the desert. Davos in the desert, correct. Which is happening very shortly. Happening this coming Tuesday. Masa is speaking this year.
Yeah.
Well someone needs to raise a fund.
And that that just shows
It it's it's all written out right there. I mean
And it's uh
Uh not to m no, I'll make a value judgment on the show. Like that's a that's a horrible thing to go after the events that transpired and represent
your your organization there and participate.
Clearly, clearly, desperately needs to raise a fund. Absolutely. Yeah.
Yeah.

So uh the deal falls apart.
Softbank does end up investing
Corporate, I believe, not the vision friend.
two billion dollars in WeWork at this point in time. Because We Work needs the cash. They've been grow, grow, grow. They bought the Lord and Taylor Taylor building for eight hundred fifty million. And they've been making decisions bait because remember, this de the bigger deal fell apart really at the last minute, as far as We Work was concerned. They were making and think about the time again
End of year Q four, that's when you're making all your plans for the next year.
They expected to have the money. They were I don't know whether they were officially signing lease or not, but they certainly had the engine running. Yeah. Totally.
And and to explain the Softbank Corp thing, this is SoftBank the gigantic telecom that's been around for thirty, forty years, that b that
Precipitate came before the Vision Fund. This is off their balance sheet rather than a balance sheet that's off Bank Corp expects to grow in two thousand nineteen because they've agreed to sell Sprint.
A deal that's still not closed. Interesting. Yes, yes. Wow. We did the T Mobile Sprint episode so long ago I forgot that it hasn't closed. Has not closed. Still being still in court. Yeah, still uh antitrust regulation. But I believe they just they got they got through antitrust, but about uh a dozen state attorney generals are are suiting to block it. So we will see.
I'll see. Wow. So
Okay, so now s now We work needs a plan B. They need capital to
fund this plan and probably a lot of these lease commitments are in place already.
So what's what's the ultimate
Uh raise a point here that we wanna talk more about
There's essentially
Only one buyer.
Of we work shares.
At this point.
And that's Thoughtbank. Like
Or the public market. Or the public market. Well the belief is or the public market. The public market was not a buyer. There's no other
private investment.
uh firm or entity that we work could go to for financing at this point in time. Uh some might call this a price discovery problem. Yeah, indeed. Uh so the only alternative is well
public markets. Let's tap the public markets. So in April of twenty nineteen, just
Like three months after this deal falls apart, they file confidentially with the SEC to go public. Uh it gets reported that that's this is happening. They filed technically in December.
Technically find confidential. Yeah, they they they thought it they did it.
Oh what was the ex they gave an explanation which I didn't think made a lot of sense, but they did,'cause why else would they have done? Uh some something about the timing in the year. But yeah, they filed officially confidentially in December. It got reported several months later. Wow. Is that like uh help us understand that timeline versus a normal IPO timeline. Was this rushed?
Uh no, that makes sense. If you were to file confidentially in December, they they knew kind of similar to how Uber knew or Lyft knew that this was un that this company was relatively unusual and that the SEC was going to have more questions than it would have, you know, for a run of the mill company. Uh so you file in December with the idea
First idea, maybe we'll go public in late spring, but we'll probably go public in September. We are working on this big soft bank deal, so we don't have to, but we'll have this in our back pocket. You do it in December, no one's paying attention until January anyway. Go through a bunch of revisions. You don't want to go public in the middle of the summer. You'll come out right when Q three happens, you'll be out you'll be out the door.
And indeed that was what they tried to do. Yes. Uh so August comes around of this year, just two short months ago.
And they file the public version of the yes one, which means like
the train has left the station. Like once the public version of the S one comes out
the process is going. Yeah, it should be six weeks and then you're up, you're probably six weeks and you're public.
And
All hell breaks loose. I mean, Dan, you were more than anyone on top of this. It's one of the most remarkable S ones that's ever been written. And not just because look, let's let's start with the obvious, right?
There was huge revenue growth. You know, the the the base if if you only read like to the whatever it is, like the eighth page where you see kind of the top line financials, even though the losses were massive, which wasn't a secret, because remember, WeWork had been kinda like Uber had done, even though they were private, had been disclosing financials for a while for two reasons. One, because they wanted
People probably not to be shocked by the S one eventually. And two, they had done a bond offering, a public bond offering about a year and a half earlier. So they had public disclosure requirements anyway. So the top line, look, revenue growth was huge and it was billions of dollars of revenue. This wasn't a small thing. Losses were huge, billion dollars of losses. Uh, but then you had to keep reading. And to be honest, these things are like a hundred pages long.
And this this I think is the longest I've ever read. It was like
multiple hundreds of pages. It was very long and lots of reporters kept going to different sections and finding things that were shocking and surprising. And you kept looking at and going, No, that can't be right. And you would have we had conversations like
It says this, but it doesn't really, right? Like what am I'cause these are written by lawyers and bankers. What does it really mean? And good lawyer and also partially because, you know, you talked at one point about, you know, Adam has some real estate.
We work has is this series of LLCs. Every building is its own LLC. So it's an incredibly even even if everything's on the up and up and there's it's an extraordinarily complex organization structurally, and all that comes out in the S one. Yeah, even without I mean that there's I think it's page I'm gonna lose it, but the first twenty pages here.
There's their org structure. Here it is. Page sixteen.
of the Wii company that owns the Wii Company MC LLC that has the Wii Company partnership and then the Wii Work Company's LLC and then the all the countries and like this is before you get to buildings.
Yeah. And remember they'd also they'd raise or are still are, or maybe not now, they'd been raising a massive fund. You know, you talk about oh yeah, we work should have bought the buildings. Well, they were doing that. They wait they were raising a massive fund, which Adam was going to have a a stake in, but just like everybody else that we work would, and that was gonna go buy buildings, and that was again that's another separate entity, which is then leasing out and all that. But yeah, look, we learn a lot of stuff. This is
This is where we learn about the trademark thing. This is where we learn about the extraordinary amount of control he had, even to the point where if something were to happen to Adam, like he were to die,
The board doesn't get to replace him. His wife Rebecca gets to decide the succession plan. And if she dies too, then their children. We we learn that they are also going to give away an enormous amount of money and charity after this IPO. I think he's committing to a billion and Adam has given I will say Adam has given a lot of money in charity over the years out of some of that money. He hasn't put it all into houses and golf streams.
Uh, but I think they commit that they're gonna give a billion dollars over ten years after the IPO away from proceeds. Which is it's fascinating. There's actually in this document a section that says charitable commitments of our co founders and other senior leaders. That is very atypical of the very typical and by the if if if this
had become official if this IPO gone forward, he would have I think been legally obligated to do so. I mean he was he was ob this wasn't a giving pledge which is signing something that Warren Buffett gave you and you know, if you don't do it, what's gonna happen to you? Th this had the force of law behind it in theory. Yeah.
Or at least the force of the SEC version of the much much weaker law. No, much weaker law. Yeah, yeah, yeah. Exactly. Yeah.
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So
Let's talk about what we don't learn in this document. So what I
was really trying when we were talking about doing this episode, in my head I'm like, okay, I wanna tell people what the macro story is here. And then the the question in my mind was, is this actually a good business at steady state if we work stops expanding. So I'm scrolling and scrolling and scrolling in hundreds of pages.
You can't actually ascertain, hey, of the cohort of your buildings that are at scale, what are the gross margins? What are the unit economics? They keep saying we have really strong unit economics, and then the only financials they give are this like massively blended one that is
uh uh you know uh a very, very basic PL that shows uh the the business including all of the expansion. So really difficult to tease out what losses are actually incurred at
maturity. They have this silly graph that has no y-axis with like this this curve that basically shows, hey, the buildings are break even after six months.
But like not much more detail than that.
by the time they filed the S one learned the lesson from Uber, which had a similar problem. Uh which which is, you know, every look, every single company I think I've ever talked to
tells me that even though they're losing a lot of money, their unit economics are fantastic. I'm waiting for someone to say, well, unit economics are kind of mediocre. No. Unit economics are always great. But you're right. And and that was an issue with Uber, right? Guess what they don't tell investors not either. But when you looked inside Uber's documents, you could not figure out how much what what were the unit economics per ride, particularly for Uber Eats per delivery.
you couldn't figure out any of that. I think that has been an ongoing problem for them. And We Work was the same way, right? You and and you should have been able to, because We Work had been saying things over the years like
Again, like Uber in mature for them, mature markets where they had been X number of years or had X number of buildings, we were building profitable even understood, there there's there's overhead, there's marketing.
But you couldn't even figure out that on in that building in Soho that they'd been in for four years, take out all the overhead
Is the building profitable?
No freaking idea. No idea.
Which is a problem because if the argument was Artie Minson's argument, like with a cable company, eventually you could figure that out. What was the you know, was deciding to lay
Pipe in Seattle.
Did that make money in the end? After a certain amount of time you should be able to say yes or no. Yeah. In this case
They didn't. They it it wasn't even that they couldn't, they didn't.
And the backstory that you keep hearing
And
part of this is probably self serving about bankers and board is that these things were indeed raised, not by the SEC, but these things were raised by bankers and boards. And just like with Adam and the meat thing, he basically waved his hand and said,
Don't worry about it. This is how we're doing it.
Well
So
Needless to say.
Potential public market investors react terribly to this, as does the media and everybody. Um
First problem is the governance, as you keep saying, Dan. So September thirteenth
We work announces is changing the corporate governance.
And Adam is still gonna have the super voting shares, right? But they're gonna be weaker. They're I think it was supposed to go down to three to one, if I'm correct. It was twenty and then ten and then. Twenty and then ten and then three. Right. So he it was gonna low the the succession thing was gonna change. The board was gonna be able to determine who was his replacement, was there one? And they were allowed to fire him.
Which was important. And by the way, that's unusual. Because again, think of Facebook.
Board can't fire Zuckerberg. Uh I don't think Alphabet they can fire Larry Page. Yeah that was interesting that the board now, even though they didn't have the votes.
The one thing they could vote on would be to fire Adam Newman. Now this was Dan correct me if I'm wrong.
This was an announcement. This was not an actual change. These were things that were going to happen upon the IPO.
Uh ex yes and no. And that's where things get very tricky because as we know, they do fire Adam Newman. So they
clearly got the ability to do so, or maybe they just persuaded him he had to step away. Uh either way, we
We being you, me, the media, every everyone is under the impression.
at that moment that these changes have been made. It is codified. It's talked about in an SEC document. And again it comes this question of, Okay, is this something you've done or is this something that is effective as of the issuance d the the actual you know shares being off or being issued. That
remains unclear. Because I believe when we get to the end of this in just a sec, Adam still has the twenty to one. If not twenty, he has at least ten. I believe he still has ten. He still controls the votes as of well, as of two days ago. Yeah. So
Then September twenty fourth, Adam is out as CEO. The board is replaced. He remains chairman. He remained he becomes chairman. Yeah, executive chairman. Yeah.
Even that wasn't enough.
to get the IPO back on track.
They announce after that they're pulling the IP. Well let's just go back quickly because this is important. This is where Softbank plays, even before Adam gets fired. There start to be reports over a weekend that Softbank
is pushing to have the IPO postponed. Now remember, Adam wants this thing to go forward. To be honest, the board wants this to go forward as well, and obviously the bankers want this to go forward. It's an interesting leak. It's an interesting leak and SoftBank will not cop to it, but if you go to who had incentive
to leak this, because this is a really damaging thing to leak. This isn't just like, oh, you know, maybe earnings projection. This is really damaging. This is saying in perspective investors, this thing shouldn't happen. That's a real freaking problem. And and and by the way, the biggest investor who's got two people on the board, they should know this company well, doesn't want it to happen.
So Softbank is clearly somebody at Softbank is leaking this. And then there's the question of why. Why would SoftBank be torpedoing its own portfolio company? And the best explanation I've come up with, or at least the one that everybody affiliated with we work, those who support Adam, those who don't, uh
Everybody seems to believe it's a soft bank. This goes back to vision fund, which is
If this goes public and it goes public, say at a valuation, uh I'm gonna make this number up now of 15 billion. Cause now they were getting investor feedback. This thing's not going at 49, it's probably not going at twenty. If it goes public at fifteen, Softbank then is obligated to revalue its existing shares.
in We Work. And what does that do? It means when you're going to the Saudis or to Apple or whoever else
Our IRR on our existing fund has gotten a lot lower because you said earlier, this is one of the biggest investments there. It is it has a significant
any valuation change has a significant change to Softbank. And remember Softbank had
previously marked it up.
to forty nine billion. It had done an insider deal, it marked up on its own, so the the reduction would have been massive. Yeah. And it would have cratered
They've got they've got seven, eight billion in because they they continue to put in more convertible notes too. There's a lot of money in, but it and again just yeah, and the value of it, it just would have been they had marked it up themselves. If they had just kept it at cost, things would have maybe been a little bit better. But yeah, it leaks it leaks out and it becomes a a cavalcade and eventually Adam leaves.
But'cause then there was again, there was first talk Softbank wants the IPO not to happen, then Softbank thinks Adam Newman should leave.
Well
Adam's not leaking that. There's no reason for anybody else to be.
Um softbank's looking at.
Yeah, wow. So
The net of all of this is
That uh I should say for the record, SoftBank says they didn't leak it.
There we there we have it. We don't know who did. Somebody did.
The net of all of this is that
The company is now running really really on fumes.
shockingly low on cash because they remember how much money they were planning to get. They're looking to bring in three billion dollars via the IPO. And then they had also agreed, JP Morgan had arranged a massive six billion dollar debt package, which was concurrent to the IPO. So we work
In
in whatever it is in August, looks at its balance sheet and says, We're running really low on cash.
But come end of September, we're gonna have nine billion dollars. And they had banked that in their brains and in their models. And at that point, if you got nine billion dollars coming in September,
Spend and by the way, really spend because wouldn't it be great if we go public right after Labor Day.
Then five weeks later, we can come out with Q three financials which show massive growth. And so let's goost the growth now. Yeah. Yeah.
So I think Dan you had reported
Something's gotta happen by Thanksgiving because they're gonna hit it. I overstated it. I I I heard by Thanksgiving, uh, but apparently they would have been out of cash by the end of next week. Although it is unclear how much of that's related to severance, et cetera, they were gonna have to pay to these thousands of people they're laying off. But yeah, they they were
They were almost out of money. They need money.
So
Yesterday, as we sit here.
The
outcome of this is announced.
Southbank is acquiring the company.
without acquiring. Which no one can explain to me. Still. Including SoftBank. So no one can explain. So let's walk through what that package looks like. So SoftBank is going to well first of all, uh to get Adam to step aside
uh from the board position, they are uh paying him a hundred and seventy five hundred eighty five million. A quote consulting fee, which gives them three things. Adam gives up his uh super voting shares and
Adam steps down as executive chairman, and those are the two official things. The unofficial thing is he votes for the deal. There, there's a there's an alternative package, and there's questions about how real it was, but there's an alternative package led by JB Morgan. It includes things like Star Wood, Barry Sternlicht, who's a you know, serious real estate investor. There's an alternative package. There are people on the board who prefer that package because they think it leads to IPO quicker.
But
Adam again didn't give up the voting control. So Adam gets to decide and he takes a hundred and eighty five million dollar bribe, which his people say is in the best interest of the comp of the employees because there's a tender offer as a piece of this, which you'll discuss.
But
Yeah.
They pay them off. And by the way, what a remarkable thing to learn. If you are an activist investor like Elliot, who spends all this time, for example, with ATT, like working with small shareholders and stuff to convince the board to maybe vote.
I wonder if Paul Singer's ever thought
What if I just gave the independent directors ten million dollars each? Wouldn't that be faster, easier and by their votes?
It's unclear at this moment if that's illegal because to be honest, from what I can tell and bot so long as you can have a defensible fiduciary argument in this, he's gonna be a consultant to the company within we work, is this legal? And they said, We can't tell. And then said, Because no one really considered this, right? Like
I don't know, like it and the way he said it to me was that we also don't have anything in there. What happens if we learn that like we work can actually work well on Mars? It's not in the documents. We didn't think about it.
W I think the only guaranteed outcome here is that
Uh the SEC is going to have lots of job openings and guaranteed like employment, you know, for for a number of years. At least the New York office of the SEC. Well there's gonna be a lot of we work people together. Let's go through the rest of the package because in addition to that hundred and eighty five million dollar consulting agreement
They are doing a tender offer of three billion dollars. So uh to Adam and anybody else at the company. Or and investors at nineteen dollars and nineteen cents a share, which goes back from a valuation perspective, years. Yeah, four years, three years. Right. So that's uh in it it's looking like about a billion of that will buy Adam's shares. Up to a billion. He doesn't necessarily have to sell it all. It's hard to imagine he won't, but
In theory he doesn't have to.
So
Interestingly you pointed on that nineteen nineteen number. Um
That's
That strike price, if you go back to the last time that the stock was valued around there, you brought this up earlier, was around twenty fourteen, which
Was
Around the time when uh We work had about a thousand employees. So 14,000 of the 15,000 employees.
Have
been issued stock options that are underwater. That's what we think. I mean as we discussed before the show, there's a I mean valuation stuff. There's a four or nine A valuation, which is what sh shares are really valued at, and that's different than the official price. So it's possible there's another thousand that but even even if you're slightly in the money, there are taxes on top of this. You weren't expecting this, so a lot of people might not have exercised
options and if you deal with this stuff you realize that if you haven't exercised your options, you're actually paying higher tax rate than people who did a year ago. And and I have been told there's certain people who got actual stock grants, which is different than options, just were handed stock
basically free uh in in lieu of cash.
I ha I doubt that was very much. If that existed, those people are in the money. But look, no, most people who've joined We work in the last couple of years who
a couple months ago, honestly, might have been taking out mortgages, might have been taking out loans. Why wouldn't you, right? You've got a forty nine billion dollar company, any bank would loan against that. Yeah. Or at least loan something against that. And they are they are two things. They they get nothing out of that financially.
And thousands of them are literally gonna be out of work. Yeah, so they're they they don't get nothing for their stock and they don't even have paychecks. They'll get some severance, but not much.
Really sad.
The last component of this deal is a five hundred million dollar loan.
um to Adam. I'm sorry, this th there's a couple more parts of this deal. The five hundred million dollar loan to Adam personally from SoftBank Corp, which off of their freaking balance sheet. Which he will use to basically repay his loans to JP Morgan.
And then a one point five billion dollar investment
at a share price of around eleven dollars.
So
Somehow
There are two different
And that values the company at eight billion dollars.
Uh
I believe. Uh I'm I think in the end is a little bit over ten, I believe. But again, it is so convoluted no one really quite knows. And I think at this point you could say that the
The old valuation models that we use for most of these companies, right? It's the value this is series A value, this I think is all just out the front of the window at this point. So this gets to the market discovery or the the price discovery problem that I alluded to earlier. When you have only one party who can buy and the leverage keeps swinging all over the place.
They just keep valuing it up, down, up, down, all these different places depending on a specific moment in time. Yeah, there's there's no way to ascertain what the price should be because there's only one party that can and is willing to and keeps buying.
Yeah.
It's wild.
And and then the final piece, because we kept saying that they've bought the company, except they say they didn't. Uh they have a majority stake in the company, but they claim they will not control the votes on the board. And the way they say they get to that is they are going to significantly expand the board. But when you ask them.
Uh, okay, what's the size of the board, and then most importantly, who's going to appoint those new board members? There are no answers. When you ask We Work, internal official spokesperson for We Work internal, you ask her that. She said, She said to me yesterday, she said, call SoftBank. I said, Why would I call SoftBank if SoftBank's not the one who's controlling this?
call soft bank. Uh when you call softbank, uh we haven't either I don't know if it was we haven't determined or no comment, but I mean look
They're for whatever reason they're claiming they're not controlling this, they're in charge. They should be. They own most of the company, they own most of the shares, and whether or not most of those board members are salaried
Soft bank employees or not.
they're gonna be beholden to Softbank or in some way related. Okay, so this is the last piece, which conveniently is acquisition category on this show. Why is Softbank doing this? Here's here's my thoughts. There are I think there are two reasons. One, I can't remember where I read but I didn't come up with this idea is uh Cyphius, uh the committee on foreign investment in the US
Softbank is of course a foreign entity. They're a Japanese company. Now they would be buying
uh control of a US company, they've had issues with Ciphyus in the past. So this just like short circuits that that could be a risk to the deal. Say, Oh, we don't actually own it, so we don't have to go through Cypheus. I I don't think that covers because even a minority state, for example, they had to go thy for their Uber deal. Yeah. Yeah. So yeah, I don't think that's the real reason.
I think the real reason is
I don't think they want to I'm pure speculation.
I don't think Softbank wants to consolidate WeWork's financials on their balance sheet. No way. Because now remember the balance sheet of this company is
enormous liabilities of all these leases. Softbank has a lot of debt that they have taken out at the corporate entity. Remember, they're a telecom provider. They have debt that debt is basically junk bond rated status. They're one of the most highly leveraged companies that exist. Like you look at it, they would make a private equity person blush. Exactly. And so now if they
All of a sudden consolidate this balance sheet.
Jack up the liabilities on the balance sheet, that's gonna torpedo their debt ratings at the corporate level. That's gonna increase their cost of capital hugely. That's terrible for the company. So I think they're doing all these gymnastics to a
A to avoid that happening. But then B, why do all these gymnastics then you get back to the vision fund and at this point I don't even think it's about raising vision fund two. I think it's about just trying to salvage vision fund one. They can't let We work go to zero. We work is gonna die, as you said in like
Maybe the the JP Morgan would have standard. I mean look the thing that's interesting, there's a bunch of I mean
This is still a real business, right? This isn't you know I I've seen oh this is the next Theranos. No, Theranos didn't had a product that didn't work. This has a product that worked. It's still you know, like go to any city. There are people who walked and went to work this morning to We work and not who work for We Work. Lots of them. They have real buildings, those buildings still exist, all that stuff. There will still be thousands of employees left even after the massive layoffs.
Uh, obviously certain facilities will close that are underperforming. Uh obviously expansion slows down. Um, but it is a real business. I I will say that.
Massa the the word soft bank isn't arbitrary right. Soft is the software piece, right? I I believe I'm a tech visionary, but the bank part is important too. He is a financier. So the stuff you said about, you know, the balance sheet, that's all real.
I will say that I will bet
Yeah.
Softbank still believes long term there can be a business here. The one thing about Masyoshi san is that I've always found fascinating is he made an enormous amount of money uh in the dot com boom.
Huge money. In fact, I saw him sitting next to Bill Gates at one point. And he said to Bill Gates, he said, at one point, he said, in the late nineties, I was richer than you.
He said two weeks later, I was broke. Uh and that's true. And what happens to most people who went through that dot com bo Mark Andrews now always talks about how people who went through that are too risk averse. That's true, usually. You are, because you you you were so scarred by it. Masa went the other way. Massa decided to take all that risk.
again and he he he caught the Alibaba train and he did great with it. But like most and then he decided to go over the top
That's why he's so unusual. And I would say with this, he might look at it and say
Things are really bad right now, but there is a business. I still believe in the thesis of the business. Maybe the management.
Got w got away from us.
If I can get in what I believe is relatively cheap and control this thing.
Maybe we can make a go with this. So here's my attempt to put a bow on the whole thing.
Which is, you know, we talked about this in the Vision Fund episode. This is the largest fund of any type, any asset class raised ever, masquerading as a venture capital fund. Well, wait, that doesn't make sense. Venture capital funds shouldn't be bigger than private equity funds. Is this an unmasking of the vision fund for what it is is a private equity fund. And when you look at this, gosh, they just made a one point five billion dollar
Equity
purchase that now has them owning a majority of the company. Oh, and they they levered uh five billion dollars of debt on top of it. Wait a minute, I've seen this playbook before and they paid out and they paid a CEO to go away, which is a very private equity leverage buyout thing to do. Totally. So now all of a sudden like
Yes you've now.
taken out the time frame of which they're going to realize returns on this asset. But if they can turn this around,
Turn it into, you know, what it does still have the potential to be not.
the same kind of business everyone thought it was, but a good business and a big one. Yeah. With real estate assets all around the world.
Well, now maybe they just saved the Vision Fund. I mean I I will say I I will say though, there is an ongoing question of why they didn't let JP Morgan do the bailout. Like I almost get the sense that JP Morgan looked at this and said
with Softbanks deal.
All right.
If you want this problem, your problem, take it. Like I I I it was almost like a hot potato. I don't quite understand why Softbank was willing to catch that. Well,'cause again, JP Morgan was gonna now you could argue it would have been too much debt and the company would have sunk under the debt. You could make that argument.
But it was money. It was money. It was a it was it was lifeline. It was runway.
This brings us to uh what we normally call what would have happened otherwise. This episode I'm gonna call the bizarro world we work. We've got this comp. It's IWG. Last year they did three point three billion in revenue. This business ends up looking a lot like we work at maturity. Um that was profitable, two hundred million in operating profit. Their market cap is about four point six billion.
So we're getting close to the neighborhood of where
You know, you're basically buying a business that looks like IWG, you run that for a while, it's gonna be s you know, profitable for you. So I look it great private equity pickup. Exactly.
Exactly, exactly.
Alright, well let's bring this home.
So we work as in a place now where they have
Six and a half billion in the company, some debt, some equity.
We sit here today, we will see if that is enough to have them figure it out over the next year, maybe IPO at some point. We don't know what the future will hold.
what we're gonna grade here today is SoftBank's pseudo acquisition here of We Work.
Woo um I'm gonna give him a
Uh uh uh
A B minus uh the the the low part is for why exactly again, I think they should let JP Morgan probably take it, but man, they were creative.
Like you you deserve something for like you might have gotten to the wrong answer, but you got there in a fascinating way. So you really can't knock the hustle here. No.
And by the way, remember, they wanted control of this company a year ago.
They got it.
Even though they didn't officially get it.
They got it for a lot less money, too.
So Softbank Corp has put in
The two billion dollars from earlier this year.
And now another one and a half billion in equity capital. So th the corporation themselves outside of plus the three billion tender, that's equity. They're buying it from shareholders, but that's new equity they're buying. Good point. So they have spent
What's that? Six and a half billion.
to own a majority of this company. Now
the the Vision Fund poured eight billion dollars in and the the business even isn't even worth the combined amount of that. But if you look at what SoftBank did, they made a bunch of management fees off the Vision Fund and paid six and a half billion dollars to own
An asset that's probably worth about six and a half billion dollars.
I'll give one the one catch that maybe I would give a lower grade would be it's unclear who runs this. They've spent a lot of money without having a CEO. There are there's these co CEOs uh who are there, Sebastian Cunningham and Artie Menson, who we talked about earlier.
It remains unclear if they are staying.
Or not. Uh, maybe they're getting a good deal of cash to stick around. That's unclear. They've put Marcella Clora, the CEO of Sprint, in his executive chairman, which is
mind numbingly strange, mainly because Massa said, Well, we're gonna originally we're gonna bring Marcello in so we can figure out what's really happening the company. Again, you had two directors. What
Where where what were they doing? And why do they still have jobs if they couldn't figure those basics out? But like but but Marcello is a telecom guy. Yeah. They're
Do they believe these two are the right horses or not? That's unclear. It's a lot of money to spend without knowing who's really gonna be running it in six months.
I'm in for your B minus, David, where are you?
It's so hard to conflate.
I think just like this story has illustrated.
All of these series of decisions along the way.
By everybody involved. Many of whom were like many of which decisions were
Terrible decisions. I think it's why, like, in the beginning we frame this as like this is a tragedy. Like this is the sum of
the system that has created this. So now if we're to grade specifically this decision by SoftBank.
Um
Yeah.
I
Think
There's if you're on the fence, take employee sentiment into it. They have to own this thing and they have some very angry people working on it right now. Yeah. So I yeah, I think I'm in for the B minus for slightly different reasons, which is
The reason it's that high is
This is a save. Like
'Cause this was gonna go to zero. Uh if the w maybe the JP Morgan thing would happen, maybe it wouldn't. So it saved
But on the other hand, there's a very strong case to be made that this is throwing good money after bad. Uh so um you know, and that's that's never a good position to be in.
So yeah, B minus. There we are.
We'll check in in a year or so. I'm sure we will.
Well, if the cash lasts that long.
Listeners, thank you for going on this journey with us. Um, Dan.
Where can listeners find you?
Oh, at axios.com I can get my daily prurata newsletter at sign up. Axios.com or just type AxiosParata into your podcast thing because we've got a daily podcast as well.
And I will say Prata is
Excellent.
Like much of the details that we've gotten over the last
few years about this company have been uh that that Pro Rada is the first thing that I read when I wake up in the morning. So thank you for for doing that. Appreciate it. Dan.
The first thing I write when I wake up in the morning. Awesome.
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