What the Downfall of WeWork Says About Tech Capitalism

Some 18 months ago, a friend of mine was approached on LinkedIn by a WeWork executive. Coffee ensued.

Arriving late, heavy of handbag and wild of gesture, after about 20 minutes, the woman leaned in: “What are your terms?”

It took him a split second to realise he was being offered a job on the spot. Within the next split second, it began to dawn on him it would be easy enough to extract a six-figure salary from his frazzled interlocutor.

He turned it down, telling me at the time: “It was obvious to me that this company was out of control, and if I’d had to involve myself, it would have been chaos, a car crash, and I would have resigned anyway within three months.”

Only in the past fortnight has it become obvious that he dodged the biggest bullet of his professional life. As WeWork circles the plughole, its internal jargon is spilling into the public domain. Staff talked of their length of service in WeWork years. A year at WeWork was so intense, so furious, so baffling, that it was like ten at a normal company. “The turnover rate was truly, truly, truly insane,” one employee told Business Insider.

If you live outside of a major metropolis, you might have bypassed the Triffid explosion of WeWorks. Five years ago, they were rare. Now they’re everywhere. A whole block within sight of Liverpool Street Station in London is a WeWork campus. You’ll notice a general air of gaiety – there are concierges, and balloons are occasionally visible, as though a children’s birthday party for a 31-year-old Richie Rich is about to kick off.

Which, in many ways, it was. Adam Neumann was that age nine years ago, when he and his wife bootstrapped the business out of Oregon. As the decade opened, they were in the right place to fill its biggest trend.

Trend One: The financial crash had lead to great surpluses of cheap vacant office blocks.

Trend Two: As a result of the crash, surplus employees were being parcelled-off into the gig economy by companies ever shier of overheads, contracts, and annual increases.

Solution: Fill the empty office blocks with this new urban precariat, and garnish it with the kind of ‘lean’ digital economy startups that were just taking off as the rubble settled.

Creamy Filling of the Solution: Filament bulbs. Lots of them. Neon signs saying “hustle harder”. Quilted fabric chairs in midcentury modern. Potted plants. To be inside a WeWork was to experience a perfect capsule museum to the design aesthetic of the 2010s, like a roided-up IKEA-sized Oliver Bonas.

At the centre of it all, the duo of Adam and Rebekah Neumann hustled harder than a thousand neon signs.

Adam Neumann was every bit the McAfee/Bezos hybrid, high on his own supply of crusading bluster and rectal-shelving insights about the nature of work in the modern age. Lank-haired, often barefoot, Neumann was an Israeli hippie – a kibbutz kid – who would give long, mesmerising God-flecked quasi-TED talks to his employees in which he laid out his vision: a vision to be the Apple of place, the Amazon of work.

When he told employees he was working towards a $100 billion – yes, billion – stock market flotation, few doubted him. (By way of comparison, Twitter initially listed for a mere $12 billion.) Although it later became evident he had plucked the number out of thin air, it had a gravity to it – it was pleasingly round.

When Neumann came to visit a WeWork, he reportedly demanded $140 tequila on-hand so he could bro out with his employees. He required that the music pumping at conversation-macerating levels. The office parties were legendarily boozy. Neumann seems to have downloaded his personality from Gavin Belson, the megalomaniac Silicon Valley exec. He was not just the kind of guy who listens to his Blinkist audiobooks at 1.4x speed. Neumann had the full complement of time-saving neuroses, so much that he often employed a two-car strategy. If you were doing business with him, you’d ride in a car while he was on his way to his next meeting.

His wife was, if anything, even more special. Rebekah was a one-time actress, and cousin of Gwyneth Paltrow, who’d majored in Business and Buddhism at Cornell. Like any true Hollywood Buddhist, she was uptight, demanding and exceedingly precious about worldly things. She was the design guru, and she loved white – her employees once had to disassemble and re-paint her office telephone as it was not the required colour. Rebekah went through six executive assistants in two years.

Together, the pair moved the tech bro maxim, “move fast and break things”, towards breaking point.

The staff were driven hard by Neumann’s vision. Many had stock options dangled in front of them in lieu of bigger salaries – stock options now worth about as much as Jim’ll Fix It medals.

Events are still moving fast. On the 3rd of October, the FT reported that a record ten percent of the company’s debt was being shorted – the market was placing a big bet against them ever being able to repay their loans. The ratings agency, Fitch, downrated their bonds to junk status. In September, Neumann stepped down as CEO. Right now, around 20 executives, including his wife, are being purged, as the new management team attempts to get a hold on WeWork’s dizzying debts.

Effectively, the Neumanns’ empire was a paper tiger – a vast pile of credit based around access to capital. To take their dream to the highest heights, all they had to do was convince two very powerful men who gave them money to corner the market, and then, very nearly, to sell that dream to the stock market in an IPO that was meant to kick off this summer.

The first of those men was Jamie Dimon, CEO of JP Morgan. It was Dimon whom Adam Neumann convinced to become his first banker, turning the company from a startup into a national concern. To go global, Neumann then lent on Softbank CEO Masayoshi Son. A tech investor, Son had made some smart early bets on the likes of Yahoo!, but seems to have forgotten that this wasn’t a tech bet at all. This was a kind of Potemkin capitalism – a nice-painted façade backed by absolutely nothing.

In recent years, new tech has meant a world where companies within emerging markets are increasingly forced to follow the leader. Some of those companies genuinely have a business model underneath: loss-making Uber might be one. Loss-making Deliveroo may even turn out to be another. Amazon has withstood decades of barely breaking even to finally start making profits within the last five years.

In the ‘new paradigm’ world of tech startups, investors are seduced to throw their money into these loss-making black holes with the promise of market domination, the natural monopoly that comes from being top dog. “Look at our market share,” the refrain goes. “Just imagine if we had this much market share and we were profitable…”

WeWork took that approach: they took Son’s money, splurged on buying buildings, and then sold off the desk space at below market rates to smash the competition.

Anyone can be a market-leader if they’re prepared to make nothing but losses, and WeWork proved excellent at losing money. They ate the competition, and distorted the entire market, in which businesses without access to Dimon and Son still had to keep their heads above water. People said they had ‘great potential’ until, this summer, they had a reckoning with reality. In order to keep their $6 billion debts rolled over, a clause in the contract stipulated that the company would be forced to start work on their IPO.

When it finally emerged, the market hated WeWork’s offering. “There could not be less excitement about this IPO,” an analyst at a large investment firm told Business Insider.

Not because of the New Age blathering that had found their way into the normally sober world of ’S-1’ filings. Nor even because Rebekah had apparently treated the S-1 brochure “like the September edition of Vogue”, commissioning way more photos than would usually accompany the document, and hiring a former director of photography from Vanity Fair to produce them.

When the money-men ran the ruler over the balance sheets, they realised that the amount of money it was losing was far larger than they had imagined. In fact, it was losing $219,000 every hour of every day. There was no way to sustain those kinds of losses without strangling growth. This was not a new paradigm; it was a dangerously out of control credit hose.

Adam Neumann’s dream is dead, but at least he leaves with plenty of time to work on his spirituality. It turns out the casino was always rigged. There was plenty of self-dealing going on: turns out Neumann owned many of the properties that WeWork then rented back off of him. And it turns out he’d already cashed out a sizeable portion of his equity ahead of the IPO. Neumann’s got $700 million in the bank. That ain’t going nowhere. He’s set for the rest of his life, and then some cryogenic post-life he is no doubt booked-in for.

@gavhaynes