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‘At What Point Does Malfeasance Become Fraud?’: NYU Biz-School Professor Scott Galloway on WeWork

Former WeWork CEO Adam Neumann in 2017. Photo: Noam Galai/2017 Getty Images

Back in August, Scott Galloway, a professor of marketing at NYU Stern School of Business, published a scathing critique of WeWork and its enablers on his website, No Mercy/No Malice. Titled “WeWTF,” Galloway called WeWork’s $47 billion valuation “insane,” “seriously loco,” and “an illusion.” In September, he wrote a follow-up (“WeWTF, Part Deux”) after the company postponed its long-awaited IPO. “The lines between vision, bullsh*t, and fraud are pretty narrow,” he wrote. “Something is wrong. Something stinks. Something … Just. Doesn’t. Add. Up.”

Galloway’s posts seem exceptionally prescient given the events of the past two weeks. Last week, WeWork CEO and co-founder Adam Neumann was forced to step down after the company’s valuation dropped at least $30 billion in a matter of days. And on Monday, WeWork officially pulled its IPO. Galloway says the company is in triage and that a great WeWork unraveling, the effects of which will be felt for years, is only beginning.

What are your initial thoughts on WeWork pulling its IPO filing? How does the company rebuild toward another IPO? 

Dude, there is no IPO. I’m taking a bit of a victory lap here. I said in 2017, this was the most overvalued company in the world. I said earlier this year that the IPO was not going to happen. This is now a distressed asset. IPO? It’s comical that people are still using those letters.

How much of the company’s problem was solved when Adam Neumann stepped down? 

At this point, I would say about none. He and SoftBank entered into a suicide pact, and he jumped out of the plane before it hit the ground. He pulled the rip cord. He has exited the suicide pact with $740 million, and everyone else gets to ride this out to its logical end, which will likely be a bankruptcy file.

The company has enough cash to get through Q1. It’s spilling $700 million a quarter. SoftBank — to be clear, SoftBank is the only firm in the world that will put money into this thing right now — has to do one of two things. They either have to go back to their limiteds and say, “We’re probably putting good money after bad,” and create an argument for why there’s still value there, or they have to go [bankrupt]. The interesting thing is whether or not these individual locations are special-purpose entities, meaning they can break the leases by declaring bankruptcy across multiple special-purpose entities. In other words, they may have employed what hotels do: If the Four Seasons New York goes out of business, it’s its own corporation. It just goes out of business. It just declares bankruptcy and gives the building back to the bank, but it’s not guaranteed by the headquarters in Toronto. Some of the reporting I’ve seen is that they have special-purpose entities so they can potentially close a bunch of their properties.

But that doesn’t rescue the entire idea of WeWork, right? It just scales it back. Is their profitability dependent on the chance that some WeWorks work and some don’t? 

There probably are a minority of WeWorks that are cash-flow positive and could sustain a corporate headquarters with 80 percent fewer staff. They have 15,000 employees; I don’t see any path that doesn’t involve 5,000 to 10,000 layoffs in the next 60 days. Then the question is how to restructure. This is now a distressed asset that requires immediate restructuring. So does SoftBank want to put more capital in? If SoftBank does not want to put more capital in, they can’t cut costs fast enough and it will be a Chapter 11. If SoftBank does want to put money in, they need to basically cut costs. They’re going to need to close a massive number of offices, and they’re going to need to lay off somewhere between a third and two-thirds of staff at corporate. The consensual hallucination here continues. This is a distressed asset in free fall that is inarguably worth less than zero. Because all we have here is an entity burning $700 million a quarter.

Why has it taken so long for people to realize that? We’ve had three weeks of a disaster, and people are still talking about the IPO like it’s something the company can still accomplish some day. Why? 

CNBC wants to be friends with Jamie Dimon and Masayoshi Son. It’s hard to believe that the prom queen is addicted to diet pills and a heroin addict. The fall from grace here has been so dramatic and yet so fucking obvious.

It’s safe to assume that board members already knew all of the details about Neumann’s antics that have been reported recently. So why force him to step down now? 

As long as the charade continues, they were willing to go along with it. You’re right, his hard partying and yoga babble were seen as features, not bugs, until the market threw up on it. Now, all of a sudden, the board is acting shocked. The board didn’t fire this guy; the board enabled him. It was the media and academics that fired the guy, and the institutional investors. The notion that all of a sudden the board has figured it out and decided to make a change? Basically, as long as people were willing to buy into this charade, they kept it going as long as the music kept playing. But that they have two executives now as co-CEOs is kind of comical.*

Where does the comparison to Travis Kalanick begin and end? 

Travis is guilty of being an asshole. That was more like frat-bro-culture problems. The market is going to have to decide how thin the lines are between vision, bullshit, and fraud. Nobody ever accused Kalanick of fraud. You’re going to start hearing that a lot more at WeWork. If Goldman Sachs told them that they were going out with a valuation of $60 billion to $90 billion and the thing is worth zero two weeks later, are Goldman that stupid or were they told something that wasn’t true? There’s reports that they were giving 100 percent commissions to put tenants in the buildings and then figuring out some sort of accounting jiujitsu to try to turn those expenses into revenues. The notion that they brought in people to solve the problems of their own making — they’ve invited pyromaniacs to put out the fire. The first thing they did was sold the $60 million plane that the board bought or approved. Either Adam hadn’t told them about the plane or they approved a $60 million plane. At what point does malfeasance become fraud?

You talk about “non-carbonated fraud” that WeWork may have committed. Do you think there will be investigations? 

I don’t know. To be fair, I don’t think anyone’s accused them of presenting numbers that were fraudulent. There have been some postings about the way they were classifying expenses. I don’t know that it’s illegal, but the fact that someone took out three-quarters of a billion dollars and you’re going to have 15,000 employees, I would imagine that somewhere between 1,000 and 3,000 thought they were going to be millionaires in a couple weeks, and they’re getting zero. There’s going to be a lot of anger toward Adam Neumann. I don’t know how that manifests itself. There’s definitely going to be civil suits. There’s definitely going to be lawsuits. But it will be interesting if an attorney general sees a path to the governor’s mansion by filing some sort of suit. We have not heard the last of this.

Adam Neumann fired? He was liberated. This guy just played this perfectly. Could you imagine what his life would be like right now? If he was still CEO? Showing up every day to an office where he had sold $750 million and everybody else was trying to figure out how they were going to pay the rent on the new apartment they had moved into because they thought they had $7 million in We stock?

It really makes you rethink that picture of Neumann walking around barefoot in the middle of the tempest.

Why wouldn’t you be happy? You haven’t even begun to see the anger that will be unleashed on Adam Neumann. He has 15,000 people right now who are stuck cleaning up. They feel like circus clowns shoveling the shit behind the elephant of Adam Neumann. He has taken $750 million and left a toxic-waste cleanup.

Is this a case of self-delusion? Did Adam Neumann believe his own story?

I don’t know. I speak from some experience as a CEO in the ’90s in the internet days: If you tell a 30-year-old male he’s Jesus Christ, he’s inclined to believe you.

Have you ever met Neumann? 

Yeah, I interviewed him onstage at the JPMorgan alternative-investments conference three years ago.

How’d that go? 

It was fine. I thought he was dreamy and full of shit. It’s easy to say now, I remember saying, “What do you have here that’s defensible?” There’s going to be a lot of fallout here, but one of the things, there’s going to be an overdue immune reaction. We’ve decided the narrative has superseded numbers. I think that’s going to change. It’s already changed. Basically Uber started the decline and WeWork has massively increased the momentum. It’s like we’ve had this cocaine-fueled party at Studio 54, Uber was the lights starting to go on, and now they’ve gone on so bright it’s like you’re in an operating room. Endeavor couldn’t get out. Basically, these guys have totally shit in the IPO pond.

What other companies are still in Studio 54 right now? 

There’s a lot of them in the SoftBank portfolio. Wag, Compass. These things were kind of insane. Peloton. Peloton is getting pelted so to speak, because that’s more yoga babble. Delivering happiness. It’s a good company, it’s just overvalued. The marketplace is sort of saying that after WeWork and Uber, there’s two types of companies in the unicorn space: ones that are overvalued and ones that are just going to zero.

You can only blame charismatic CEOs for so much. What is wrong with investors? 

There’s a few things at play here. One is just a function of the marketplace. It’s frothy, and there’s more capital than operators. Any operator who has a vision and can promise the potential and convince people they can be the next Google or Facebook can attract billions of dollars right now. The reality is there’s more money out there. We reached “peak founder” with Travis Kalanick. Now, there’s always a tension between capital and founders around who has power. Ever since Steve Jobs and Bill Gates, slowly but surely the pendulum has swung back to the founder. In the ’90s, founders didn’t survive. We were seen as crazy, and once the company became real, we were to be shoved to the side and some 55-year-old CEO from PepsiCo was supposed to come in and be the real CEO. Then when Jobs was ousted and a series of gray-hairs came in and almost brought the company to the ground and he came back and took them from $3 billion to $300 billion, that changed everyone’s perception of founders. Then Bill Gates took a company from zero to $500 billion. So Bill Gates and Steve Jobs totally changed the market’s viewpoint on founders and the balance of powers shifted way back to founders. Founders were seen as DNA and visionary. We’ve not seen another peak. It’ll start swinging back. This is a train wreck.

What is the biggest takeaway from the WeWork story? 

The bigger story here is SoftBank. WeWork is the opportunistic infection that is going to kill the Vision One Fund. It’s beyond repair. Between Uber and WeWork, you have $20 billion of the hundred billion. One is likely going to be a zero — that’s WeWork — of $11 billion. So it’s hard to imagine they’re even going to get their investors their principal back. WeWork is ground zero. If the only way it can survive is a deliberate strategy to make it a shadow of itself — massive layoffs, massive restructuring — there’s only thing they can do. JPMorgan and Goldman Sachs? These guys were about to collect $130 million in fees and then prop up some equity analysts to tell their private-wealth managers in the marketplace that this thing was $40 billion to $60 billion. And according to Goldman, it was worth $60 billion to $90 billion! What does that say about them? What happens to the New York and Chicago commercial-real-estate markets where WeWork was the biggest and the second-biggest tenants? What happens to IPOs? The reverberations here are going to be pretty dramatic. WeWork declined in value more in 30 days — SoftBank and all these smart people had their shares on their books at $47 billion — it went to zero in 30 days. That’s more value destruction than the three biggest losers in the S&P 500 lost all year. Macy’s, Nektar Therapeutics, and Kraft Heinz. The three worst performing stocks in the S&P 500 this year, their value destruction pales in comparison to the value destruction of WeWork.

But there is a silver lining. The marketplace stepped in. The mandatory disclosure that the SEC requires in the form of S-1. The autopsy here will reflect death by S-1. Then, media and academics read the S-1 and started applying this incredibly prescient competence called math. Essentially what happened is that the employees of We who didn’t get a chance to sell, SoftBank, and some other institutional investors have lost $47 billion. Had this consensual hallucination gone on for 60 more days, retail investors would have experienced that loss. So this is a good thing! This is the markets working. Whereas Uber, the consensual hallucination continues. They have to maintain the illusion of growth. They have to maintain the growth story. Without the growth story, they’re worth 20 percent of what they’re worth now. I think that chops off 50 to 80 percent in the next 25 months. WeWork can start from zero. If they act crisply enough, it can still be a nice, cute office-sharing company. Uber has to maintain the hallucination. Uber has to keep chasing that eight ball.

What does the WeWork fallout look like? 

There will be some pain at SoftBank, but they’re all billionaires. They’ll be fine. It’s embarrassing for Masayoshi Son, but big deal. MBS’s Saudi Arabia investment fund? Couldn’t happen to a nicer group of people. It’s the latent collateral damage that is the real hurt. It’s the employees. It’s a lot of landlords who are going to incur a lot of pain because in exchange for ten-year leases, they put in huge improvements for these spaces which they won’t be able to recapture if WeWork moves out. And you also have a lot of IPOs that will be affected, but I think that’s a good thing — Peleton’s a great company, but it’s not worth $8 billion. Everyone’s kind of been woken up from their trip.

In terms of human toll, this is where the real damage starts. This has been a really interesting and romantic story about the fall of Adam Neumann and SoftBank. They’ve got it wrong. Adam Neumann came in, smoked his own supply, and walked out with three-quarters of a billion dollars about the time that people in hazmat suits showed up. It’s like the guy at Chernobyl who refused to believe what was going on was given three-quarters of a billion dollars to leave before shit got real. That’s what happened here. So he and his family will literally have to go into hiding. There will be threats against his life. There’s going to be so much anger here.

If you want to talk about real toll here — the real toll is that there’s somewhere between 5,000 and 15,000 WeWork employees who took a job and a big part of their compensation — the reason they took these jobs was because of equity value. And it’s impossible not to count your money 30 days out from an IPO. It’s impossible to tell your husband to not start looking at houses. It’s impossible not to tell your parents, “Let’s think about going on a family cruise together.” It’s impossible not to start thinking that you can afford that new car. $47 billion? We’re probably talking about several thousand people who were going to be millionaires. Now most of them are probably thinking that in the next 30 days there’s a one-in-two chance I don’t have health insurance. You want to talk about the sheer human toll? The notion that Adam Neumann was fired? My God, he got on the last helicopter out of Saigon.

*This story has been updated to reflect that WeWork’s new co-CEOs were executives at the company, not board members.

Marketing Guru Scott Galloway: WeWork Is a Distressed Asset