A Cautionary Tale — The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion
He was revolutionary…until his company — valued at $47 billion — came crashing down due to a failed IPO. Once the founder of the world’s most valuable startup, Adam Neumann walked away from the WeWork scandal a millionaire in 2019 while the company was struggling to pay severance packages to its employees. It’s the age-old tale of recklessness and hubris in the startup world, both by investors and entrepreneurs.
So many financial bubbles and fallen unicorns fell prey to the same mistakes. The 2001 dot-com crash was the result of executives willing to forgo a profit in the name of growth. For a while, it worked; the NASDAQ composite grew over 500% between 1995 and 2000. But once the bubble burst, investor losses were estimated at $5 trillion. Did investors learn their lesson? Unfortunately not. Within the decade, the US economy saw another major financial crisis that led to a global recession: the housing bubble. Major investment banks, notably Bear Stearns and the Lehman Brothers, declared bankruptcy, needing the government and other banks to bail them out. The unemployment rate rose from 5% to 9.5% and the nation’s GDP fell by 4.3%.
In the startup world, there was Theranos. The medical technology startup was valued at around $10 billion at its peak. The founder, 19-year-old Elizabeth Holmes, was seen as the next Steve Jobs. Her company had even gone so far as to receive FDA approval and partnerships with Walgreens. 14 years after it was founded, the unicorn was exposed for inaccurate tests and the inability to run tests it claimed it could. Holmes was accused of defrauding investors. A year later, New York Magazine broke the story of Anna Sorokin. At 22 years old, the Russian immigrant posed as a German heiress with nothing to prove her identity but forged documents. She swindled $275 thousand from upper-class socialites, hotels, and major financial institutions like Citibank and Fortress.
All these events beg the question, why are reputable investors falling for these bubbles again and again? Looking back, the evidence was there, piling up right in front of them. The numbers didn’t make sense. And yet, they continued to believe in these “visionaries”. Investors wanted to be the ones to find the next big thing, and others were afraid of missing out. Especially when things appeared to be looking great. That was how, even after investors were burned, again and again, Adam Neumann still convinced major venture capitalists and banks to invest in WeWork. The startup was a simple real-estate desk-renting company that started at the perfect time. Founded in 2010, WeWork was established at a time when buildings were empty, big investors were looking for startups that could absorb money in big bundles, and startup culture regained traction. To attract Silicon Valley investors, Neumann began to market WeWork as a tech startup, claiming that it was centered around an app, and he pitched the company as a competitor to Airbnb and Uber. WeWork’s app was never widely adopted. But there was no way venture capitalists would believe a startup that rents desks by the month would be a tech startup, right? Wrong. One of WeWork's first investors was Benchmark, who invested $15 million during the startup’s round A funding. They raised the company’s valuation to $100 million. WeWork’s fast growth continued to attract VCs and banks, expanding to 600 locations in 23 countries within 9 years. At its peak, WeWork was valued at $47 billion. Neumann had an estimated net worth of $4.1 billion (Forbes). After the failed IPO, WeWork’s valuation fell to $2.1 billion and trades at $2.57 a share. Neumann has a net worth of $1.2 billion as of Dec. 4, 2022.
Written by Wall Street Journalists Maureen Farrell and Eliot Brown, The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion is a biographical account of Neumann and the rise and fall of WeWork. Written on a timeline that follows the money, the narrative focuses on key figures that turned the desk-renting startup into a tech unicorn. The authors detail the evolution of Neumann as WeWork went from a singular office to an international business, highlighting key things that should have been (and were) alarming to staff, board members, and investors, but were ultimately overlooked. Whether it be Neumann’s increasingly lavish spending, the inability to make sense of the valuation of his company through the financials, his selling of private stocks without the staff’s knowledge, or the faulty structure his business was built on in which he began to have partial ownership in some of the buildings rented by WeWork, his board members and investors seemed to be looking at the erratic founder with rose-tinted glasses. It demonstrates how far a good pitch and a charismatic personality can take you in this culture. Furthermore, this cult of personality led investors to believe in the promises being made rather than the numbers they saw. The want for who they deemed a visionary made investors even more susceptible to the founder’s erratic and illogical behavior.
Tech-based investors are so focused on the continued growth of a company that they overlook its profitability. Just like in the ’01 dotcom bubble, investors were so enraptured by the growth of WeWork’s revenue that they ignored the fact the company was actually losing $3000 per minute. Neumann used the investor’s focus on growth to his advantage, driving home how quickly WeWork was expanding whenever he spoke with potential funders. Additionally, WeWork already had reputable investors. Everyone believed in Adam Neumann. Within 16 months, WeWork managed to grow from a $1.5 billion company to $10 billion. Then came Softbank. Masayoshi Son, the CEO, wrote Neumann a $4.4 billion check after a 12-minute tour. Son was warned by Softbank’s due diligence team that WeWork had wildly missed their previous goals and was seeing greater losses. He ignored the warnings and encouraged Neumann to think even crazier. Neumann took the advice and ran with it, pouring money into tangential businesses without a clear vision of what the company was.
What Neumann did know was that WeWork was meant to be something beyond office space. It was meant to be a community. However, in the name of this mission, Neumann was burning through his funding fast. Beyond the regular parties thrown at the office, Neumann required employees to attend Summer Camp: an elaborate weekend-long retreat that featured major concerts, tournaments, yoga sessions, etc. Though it wasn’t an event that generated profit, it fueled investors’ beliefs that WeWork would be a generation-defining company and that Neumann was transforming the industry. After all, WeWork’s employees were happy and the younger generation wanted to work there. Heavily influenced by the few but significant data points that were Amazon, Facebook, and Apple, investors decided to leave Neumann in control of the company. Luckily for Neumann, this was a period of time when investment banks and VCs were chasing after high-risk high-reward ventures while marketing themselves as “founder friendly.” However, Neumann was losing the balance between greed and dedication to his company, and there were no checks and balances in place.
Though it’s important for employees and investors to believe in the vision of the founder, it’s equally crucial for checks and balances to be in place to prevent a founder from spiraling out of control. In the case of WeWork, staff and board members failed to speak out on Neumann’s increasingly erratic and questionable behavior. Although it seemed Neumann no longer had the best interest of the company in mind, particularly when he began to sell his own shares and bought stakes in the buildings WeWork was renting, his board members did little to stop him. Who were they to question the man who (seemingly single-handedly) created this multinational company? After all, this was the man who investors at JPMorgan, Softbank, and Fidelity believed in. The company was centered around Neumann. Not only did this make investors overlook warning signs from the business’s financials and put their faith in Neumann’s promises, but it made it more difficult for employees and board members to speak out against him. With no one in opposition, Neumann burned through funding, investing in unrelated businesses and pocketing millions for himself. WeWork continued to operate at a loss.
Normally, after a catastrophe like WeWork, the founders end up in some sort of legal battle with disgruntled investors. Elizabeth Holmes was sued for defrauding doctors, patients, and investors, and omitting information about the problems with Theranos’ technology and tests. Anna Sorokin was sentenced to three years in prison in 2019 and is now facing deportation. Adam Neumann? A billionaire working on his next venture — Flow. Yet ironically another real-estate venture, Flow aims to address “the US housing shortage, a lack of social interaction in a remote world, and the inability of renters to gain equity” (Molla, 2022). Reportedly, Flow has already raised $1 billion, with Andreessen Horowitz — a major venture capital firm in Silicon Valley — as its biggest investor. In a statement explaining the rationale behind funding Flow, Andreessen explains, “Adam is a visionary leader who revolutionized the second largest asset class in the world — commercial real estate — by bringing community and brand to an industry in which neither existed before.” He continues by stating, “it’s often under appreciated that only one person has fundamentally redesigned the office experience and led a paradigm-changing global company in the process: Adam Neumann.” Sounding familiar? I think so too. Since the failure of WeWork, Neumann has remained a millionaire. It’s difficult for me to see where or when Neumann has proven himself to have learned his lesson. Though little is known about his new company, there have been reports that Flow will involve a technological aspect to justify its billion-dollar valuation before its launch. To me, it all sounds like a repeat of WeWork: a real-estate business going out of its way to become a tech company. Beyond his real-estate venture, he has also dove into the crypto world with Flowcarbon. Flowcarbon, backed by Andreesen Horowitz’s crypto division, aims to fight climate change by trading carbon credits. The crypto startup raised $70 million in its series A funding. It seems as though Neumann’s wild tendencies and ambitions haven’t affected investors’ faith in him. Neumann’s status as a cult of personality has yet to fail him.
A parable for investors, entrepreneurs, and the startup world, The Cult of We warns of the dangers of the cult of the founder. Investors become even more vulnerable to the vague promises of the founder when they want, even need, the startup to succeed. Greed and hubris blind judgment and cause people to ignore the glaring red flags in front of them. It’s important for all players in the startup world to focus on the basics: sustainability, feasibility, and profitability. Sometimes, the fear of missing out can be a good thing. The book warns us to not let the herd mentality override our judgment. Growth, while important, cannot always be expected to occur at an exponential rate long term. Rather, we need to find the balance between sustainable growth and profits.
