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WeWork Has Bigger Problems Than Adam Neumann

Photo: David ‘Dee’ Delgado/Bloomberg via Getty Images

If WeWork didn’t exist, critics of technology unicorns and their sky-high valuations would have had to invent it.

The company takes stereotypes of hot, huge, privately held businesses to extremes: It loses money but makes it up on volume. It has nonetheless posted high valuations inflated by the boundless optimism of SoftBank head Masayoshi Son, who has invested through his Vision Fund. It has a flamboyant founder, Adam Neumann, who makes bizarre pronouncements about wanting to be president of the world. And it has proposed to go public with a governance structure that gives said founder essentially unlimited control over the company.

WeWork’s last private-funding round pegged its valuation at $47 billion, and the company hoped to go public with a valuation somewhere in the ballpark of $65 billion. When it became clear the company would have trouble hitting even $20 billion, it made some concessions on corporate governance — for example, Neumann’s outsize voting rights, which allow him to control the company even without a majority stake, will now last only until his death, not in perpetuity. But those concessions have not been enough to generate sufficient market interest for an IPO at a price that WeWork and its existing investors find satisfactory, so it is being delayed — at least until October, but, let’s be honest, probably longer.

When you have a company like WeWork, whose high valuation is paired with low or negative profits, investors must necessarily be betting on the brilliance of the company’s founder and strategy. Maybe this enterprise isn’t that big or that successful right now, the thinking goes, but there is a vision that will let it grow massively and become very profitable in the future — and that vision belongs to the visionary whom we are trusting with our money.

This hope is a reason investors have put up with the deterioration of corporate-governance standards at flashy companies in recent years, including dual-class share structures, where the founders get a degree of control that far outstrips their actual ownership stakes. It’s not just about investors being desperate to get into the next hot company (though it is about that); it’s also about the investment itself being a bet on the founder’s long-run vision. Why would you need to constrain the founder’s freedom to make unconventional choices when your interest in those unconventional choices is why you got into the company in the first place?

And this, I think, is why WeWork’s concessions on governance haven’t come close to saving its IPO. If investors think Adam Neumann isn’t the sort of person they can trust to control his company absolutely and forever, how could they think he’s the sort of person who’s going to deliver such a change in WeWork’s economics that would justify a valuation in the tens of billions of dollars? If he’s just a regular, fallible CEO of the sort who needs tight supervision by a board, isn’t he also the sort of CEO whose company merits a normal valuation relative to its apparent profit potential?

Matt Levine of Bloomberg likes to describe WeWork as a company seeking to exploit an arbitrage opportunity: It wants to get debt financing like it’s a real-estate company (at low interest rates, because real estate is a tangible asset with persistent value) and equity financing like it’s a technology company (at high valuations, because technology companies have massive growth potential). That seems clever, but maybe it’s too clever by half. After all, WeWork isn’t exactly like a real-estate company. Most importantly, it owns very little real estate; it leases space (sometimes from its CEO, oops) and subleases it on shorter terms to its clients. That’s a much more risky business than traditional real-estate ownership, making WeWork a relatively unattractive borrower. And WeWork is also not exactly what you’d look for in a hot, fast-growing technology company. It has a lot of annoying logistical needs: It needs to obtain and build out space, manage that space, acquire customers through in-person interactions, and the like. Those things are expensive to do, which is why WeWork is losing money, and they will remain expensive as the company grows. The need to do all that physical stuff calls for a lower equity valuation relative to revenues than for a company like Facebook, which can dominate its industry globally with relatively little physical infrastructure.

So maybe the core problem with WeWork is that its business model has less potential than people thought. Maybe the lenders are realizing it has unattractive technology-company aspects (high risk, few tangible assets) and the equity investors are realizing it has unattractive real-estate-company aspects (big, annoying physical footprint). Even if you get Adam Neumann to stop throwing tequila parties in the office, stop passing down arbitrary edicts declaring that the company won’t let employees expense meat, and stop leaving cereal boxes full of weed on private jets, those problems will remain.

The investor focus on bad governance structures is a red flag about WeWork: It says the investors don’t trust Neumann to make them tons of money. If a CEO is the sort of person you can’t trust to run free, a better supervision structure might make his company more valuable at the margin, but it can’t support the sort of wildly high valuation that past investors have ascribed to WeWork.

WeWork Has Bigger Problems Than Adam Neumann