Inside WeWork's IPO Disaster

this morning again. After that rocky, now another unicorn is preparing to go public, and if the last few weeks are any indication, it could end up being the rockiest I p O of all of them. Today in the show, you'll be hearing from our startups reporter Ellen Hewitt, well trace we Works meteoric rise to a forty seven billion dollar company and the chaos of the last few weeks as it scrambled to keep its I p O alive, with its controversial CEO now stepping down, Can we Work

still pull it off? You're listening to Decrypted, stay with us, So, Ellen, I want to start today's episode at the very beginning, tell us about we Works founder Adam Newman. Adam Newman is forty years old and he was born in Israel and grew up in various parts of the country, including for a period of time on a kubboots, which he likes to reference a lot because the company that he ended up founding, we Work, is all about community togetherness.

The metaphor is almost two on the news. And of course, his co founder, Miguel Mcalvey, also lived on a commune in Oregon when he was a kid, says, as you might know, is sort of an Israeli commune, and so they like to emphasize their communal backgrounds when they talk about the origin story of We Work, which is all about sharing and doing things together sort of. It's also

about real estate. M he served in the really Navy and then came to the US and attended college in New York and was sort of a entrepreneur type person. Is a big dreamer, very visionary type of person who sees an idea and thinks, of course I can do that, and and did and attempted to do several different businesses before he started We Work, including most famously people liked Reference one, in which he had a company that sold baby clothes with kneepads for babies that crawl, and he

also had a company that made high heel shoes. He was a little all over the place. He likes to tell a story about how by the time I was twenty five years after I arrived to New York City, I was thirty pounds lighter than today. I was smoking a pack of cigarettes a day. My hands were shaking violently, and I was confused and lost than he met his now wife, Rebecca Paltrow Newman, who you might guess from her name is actually related to Griddeth Paltrow, with actress

their cousins. Rebecca went on the first state with me and within five minutes. Now I say five minutes to be nice, but it truly took ten seconds. She looked me straight and died and she said, you my friends are full of And she told him that he should kind of get his life in order. She told him, you're ambitious, you're smart, but this isn't working. There are some things that you need to get in line. This is after college. Yeah, this is after college. And yeah.

The starting of we Work was something that came about when Adam and mcguel were working in an office space that was maybe under rented on. Landlord was having trouble filling it, and they suggested to the landlord, why don't you parcel up this space into smaller pieces and we can rent out just like smaller entrepreneurs or small businesses, and sort of this idea of co working, like why don't we bring in a lot of different tenants into this one space. And they did that for a while

and it was called Green Desk. And then my understanding is that Adam and Miguel sold that business to the landlord of that property and then went often started what would become we Work. They had this idea of making the we vision much bigger than just renting office space.

But they did start with the vision for we Work, which is taking out less, cutting them up into smaller parts of an office, maybe a desk here or there, or like five desks in a small office, and then renting them out to freelancers, startups, entrepreneurs, people who need flexible access to space. We Work was founded in so I think it spends the first few years kind of getting ramped up, and in twelve they had seven locations. The valuation was reported at maybe a hundred millions, so

the next year evaluation of maybe around four. And then by they started having international locations, so they opened in London. They had twenty three locations at end of the year, they became a unicorn. First off, how have you how does this work? Have you been able to build a five billion dollar company in four years? They raised money at a five billion dollar valuation. It's phenomenal and it's

a great concept, and it's continuing to explode. So starting to put them in the ranks of some of the biggest startups coming out of I won't say Silicon Valley because they were New York based company, but out of the sort of startups boom that was happening in this period of time. Then in things start to get much more heated. They get a big investment from soft Bank.

And soft Bank is a Japanese conglomerate that over the last few years has made a ton of very large investments in Silicon Valley, has kind of inflated valuations and funding ground sizes in a way that even a casual observer might have started to notice. And soft Bank comes in and invests four point four billion dollars in we work Um and sets the postmoney valuation at about twenty billion dollars. Okay, so we get in eighteen we Works worth about twenty billion dollars, making it one of the

biggest startups in the world. It's flying high. What happens next? So at the end of the start being stories about a potential majority takeover of we Work from soft Bank. So there's soft Bank is apparently floating this plan to invest something like sixteen billion dollars in we Work, which would give SoftBank a majority stake in the company, which is kind of unprecedented. That's not usually how venture investing works, and the deals discussed. This is happening sort of around

Christmas time. And to underscore just how big of a deal, sixteen billion dollars is, I mean, that would make it one of the largest investments ever made in a private company. Yeah, it's huge, one for the record books. But as the discussions keep going on, soft Bank changes its mind. The Japanese conglomerate announced Monday it's investing and additional two billion dollars in the coworking startup, a step back from sixteen billion dollar investment that would have given soft Bank and

controlling steak over. What ended up being announced was Softing had invested two billion dollars in we Work and the new valuation was around forty seven billion dollars, which, to be clear, would be a huge investment for almost any other company. For we Work, given that there had been done these other stories about how big the investment could have been, people generally saw it as soft bank scaling

back it's commitment to the company. This is kind of like the first crack that appears and we works fundraising machine. It is a pretty public setback, whereas is at least interpreted by the public as a pretty serious setback for their fundraising. So then in late April they announced we filed confidentially, which means that they're at least starting the process of going public. So that that really sets us into gear as reporters covering all the steps towards becoming

a public company. And that and one of the biggest days for a company in the lead up to an I p O is the day when that filing with the SEC becomes public. We've been expecting this, but it's the big day. It's the big day. It's finally coming out there. This is called the S one, So the document is called the S one. The day that it becomes public is sometimes called the S one. Flip um. I kind of really early for it. And and yeah,

as soon as the document is out there. People are immediately combing through it looking for all sorts of information, and this is like hundreds of pages long. The S one showed that revenues were growing, but that losses grow basically as quickly as that, and in the year of the company had a close to two billion dollars in revenue, but also close to billion dollars in losses um, which means that they're losing a lot um compared to the

amount of money they're bringing in. That's a lot of money, right, That's a lot of money, even for Silicon Valley start up. Yeah, I think even even my Silicon Valley standards. That's a very high rate of growth and very high rate of losses. And there was a pretty stunning disclosure in the S

one documents too. Yeah. The related Party transaction section is where they discussed potential conflicts of interest, and there was a lot of stuff in there, including this one detail that a few people noticed about how Adam Newman had owned the trademark rights to the word we and had sold them to we Work, which had recently rebranded as the We Company UH and had accepted six million dollars in exchange um. And that was pretty shocking to a lot of people. Yeah, I mean I was shocked when

I read about it. It feels really improper. Yeah, you know, it's a small amount of money compared to you know, the billions of dollars that we talked about related to WE work. But I think the ethos behind it just didn't sit right with people when they read about it. And there were a few other disclosures too, and the prospectives. Yeah,

certainly some stuff that raised eyebrows. For example, the amount of control that Adam Newman has over the company made it such that even the board couldn't remove him if they wanted, And if he became incapacitated or no longer able to serve as CEO, his wife, who is also a co founder but who is not part of the board, would play a major role in picking his successor, which is pretty uncommon. Usually that's a role for the board

of directors. So there were a lot of stuff that people looked at and just thought like, this isn't how most public companies are set up to be run or to be governed. Okay, So at this point in late August, investors are starting to have some pretty serious doubts about we Work the company, and also some serious doubts about its CEO. Adam Newman walk us through the next few weeks.

Then we're starting to get closer to the date when it's expected that the company might start the road show, which is the process for going around and getting investors to here a formal pitch about the company and maybe make some commitments to how much they might buy at the I p O. So this is Adam Newman flying around the world talking to some of the world's biggest investors. Please please buy some we Work stock when we go public. Yeah,

this is sort of the like pre sale pitch. But this is when the company and the banks have to start putting out, you know, a general idea of what the valuation of the company might be. And this is where things start to get a little complicated. So the banks that are leading the i p O are JPMorgan and Golden Sacks. And it starts to become clear that potential investors in we Work stock are not in agreement that the company is valued or should be valued at

forty seven billion dollars. In fact, they think it should be valued a lot less. You know, there were some stories that suggested Goldman Sacks had told we work, we think you can be valued at sixty five billion dollars, And in these later discussions it turns out that, okay, now, maybe we're discussing valuations of twenty billion dollars or fifteen billion dollars um. In the last few days, I've even seen headlines that suggest ten. So all of a sudden,

things are in flux. We work slash Adam Newman would really like to continue with the i p O. Meanwhile, banks and other involved parties, for complicated reasons, they are like, look, we would rather you not proceed with an IPO if if the valuation is going to be so low. So, guys, the longer this drags on, the more difficult it will be for we work to actually complete and offering, which could mean I mean now, and we should note here that this is really not how an i p O

is supposed to go. For a company that was valued at forty seven billion in the private markets to then try to go public out evaluation, that's you know, one third, one four, That is crazy. As you're reporting on this, what's going through your head, It's it's kind of shocking. I think when you cover a private company you spend a lot of time thinking about it, and then as it gets close to I p O, all a sudden, all these public market investors, public market machinery starts paying

attention to it. And even though as someone who was pretty familiar with we Work, I knew that there was a lot of discussion and skepticism about its valuation, it was still really surprising to see just how dramatically it dropped in this month or so of discussing a potential i PO valuation price. And so I was just sort of watching it on all unfold, and we're trying to stay ahead of the news, and it just seems like

it's becoming a more and more stressful situation. Internally. You have to imagine there's just a lot of tense discussions going on inside between different parties about should we move forward with this? I mean, why is we Work pushing so hard for the i p O when it's getting so much pushback. It doesn't seem like that big of a deal to wait it out if investors have so many concerns. Yeah, So, when we Work talked about the I p O, their plan is to raise around three

billion in cash by selling new shares the market. That's what an IPO does. But in this case, it's not just the three billion dollars at stake, which they do need. It's that they have these agreements with these banks where they're going to get access to six billion more of UM debt that they could access to help the business run.

But it's contingent on having a successful IPO, raising three billion in IPO and doing it in So there's this immense pressure not just for three billion dollars, but for a total of more like nine which is more on the scale of the amount of money that they need to keep the business going. So with a total of nine billion dollars at stake, walk us through what WE worked does to see if it's I p O. Well, it starts by responding to some of the criticisms that

have come up since the first public S one. So for example, Adam Newman agrees to sort of walk back this six million that he received in exchange for the trademark of WE. So that's a relatively small all concession, but a concession nonetheless. Yeah, and they actually continue to make more changes. They file another amended S one a few weeks later, and that one has more changes this

time focused on corporate governance. So some of the changes include changing the super voting shares from twenty votes per share down to a mirror ten, so still super voting, but just a little bit less so. And now the succession plan for a CEO following Adam no longer includes his wife, Rebecca Newman. Now it's going to be picked by the board of directors, which is more in line with what you'd expect from a public company, and they've pledged to add more independent directors to the board, so

they're trying to balance out his power. So this is we Work really doing everything it can to appease investors. Yeah, it's trying to make changes to see if it can make it work. But ultimately we Work has canceled its road show this week and is postponing it's i p O here it's a parent company is delaying the offering until at least October. They come out with a statement saying that the IPO is going to be delayed, although they are committed to doing it in calendar year nineteen.

Are reporting suggests that that means it's probably gonna happen in mid to late October, and that gets us into this past weekend, Yes, a very dramatic weekend. On Sunday, there was news that maybe a board meeting this week where some directors are expected to encourage Newman to step down as CEO and take the position of a non executive chairman position. Some of the board members and investors and WE Work, we're starting to have discussions about whether

Adam Newman should step down as CEO. So this is a very dramatic change. And what was super interesting about it was are reporting and other people's reporting showed that among those supporting this plan were members of the board from soft Bank and Masochison, the head of soft Bank, Yes, someone who has traditionally been a big champion of WE Work and of Adam. And then just this morning West Coast Time, Tuesday, September reporting that Adam Newman basically is

expected to step down as We Companies CEO. However, it comes out that Newman has decided to step down. I know, it was really shocking. I've had a very busy morning, and yeah, it seems like there had been a call with the board of directors and the executives this morning decision was finalized, and the news started to leak out that Adam Newman will no longer be CEO. He's going

to become non executive chairman. The company has picked two new co CEOs to take over, and our sources say that these are permanent and they're not meant to be interim CEOs. They are Artie Manson, who's the CFO, and Sebastian Gunningham and other executive. Both of them are WE Work senior executives who notably have experience outside of we Work at companies like Time Warner, Cable and Amazon, so

they will be leading the company effective immediately. Um Adam Adam's voting shares, which were original twenty to one and then We're made ten to one, are now three to one votes, so we no longer has a majority voting control of the company. His wife, Rebecca Newman, who was a co founder and the CEO of the education arm of We Work, is leaving the company. She will no

longer have those titles. There's a lot that's happening, and there was even a statement from some of the executives, and my favorite line from Adam statement says the scrutiny directed towards me has become a significant distraction and I've decided that it is in the best interest of the company to step down as chief executive. So that's that, you know. I was expecting this dramatic showdown where he would still try to cling onto power, but it sounds

like ultimately he decided to not fight the investors. I mean, we don't know how dramatic the discussions were behind closed doors, but it did happen very quickly. Insiders that I have been chatting with this morning trying to get a sense of what their thoughts were, have told me, Yeah, they they're not surprised that this happened, but they are surpreasent how quickly it happened, because there was clearly pressure to

make a big change. It just usually these things are very complicated, so there may be more bumps along the way. There may end up being a search for a different CEO. We'll just have to keep watching. So what does this mean for the I p O. I think it's going to affect how quickly they can do it, because it's

just such a major upheaval. The company has said that they will continue evaluating the optimal time for an IPO, which I think, if you read between the lines, means they want to keep doing it, they just don't want to commit yet to when it's going to happen. Um, there's still a need for money. The company still has

to get cash to keep growing. There were there was also language some of the press releases, and there's been some reporting that suggests that in the coming weeks and months there may be some major changes at the company in order to cut costs. So you can imagine there's an opportunity for layoffs or changes in some of the

side businesses. You know, apart from we work, which runts out office space, in this remain business, they run an elementary school, they have a residential business, they own a they own meetup dot com, they have a coding school. There's a lot of stuff that is pretty ancillary to we works business that has been part of their acquisition strategy.

Those avenues seem like they might be more vulnerable now to changes this debacle over the last few weeks, from the plunging valuations to the corporate governance issue to the CEO drama. I'm sure you're exhausted now, I'm a little tired. What do you think will be the lesson that the rest of the industry takes from this. I think they're going to reevaluate a few things because this whole we Work saga has been emblematic of a few trends that we've been watching in Silicon Valley for the last year

or two. First is whether this brash, visionary, take no prisoners um the Travis Kellen yeah, whether that style of CEO has a long lifetime is able to go from the scrap young startup to the public company. I think people are questioning whether that's the right and prized attitude

to have a founder. And then I think we're also seeing this big gap between private market valuations and public market valuations, and you're seeing how a few investors in c a CEO gets to set a private valuation um that everyone else disagrees with, that that actually maybe doesn't hold water um in a big way. Right. Sometimes I think everyone understood there was maybe going to be a little bit of difference, but we work, we're talking about a major difference and that has had big effects for

the company. And then last, I think we're going to examine the role of soft bank. Soft Bank has sort of barged in and become this huge, influential, controversial investor in Silicon Valley, and they've come in with this particular investing vision, which is to, you know, invest a ton of money, try to make one of the companies in a particular sector be the richest and therefore the most successful one. And we're starting to see that maybe that

is not the best strategy for venture investing. And when we look back at this time in history, I think stopping it's gonna be a major part of it. We're gonna be examining whether their approach is a good idea, Ellen Hewitt, we will continue posting your stories on Bloomberg dot com Slash Technology. Where else can our listeners follow your reporting. You can find me on Twitter at Ellen Hewitt, that's h U E. T Um, and you will occasionally see me on Bloomberg t V or on Bloomberg podcasts

such as this one. Thanks for being on the show today, Thanks for having me. M Decrypted is produced by Miyaki Ito and Ethan Brooks. Emily Busso and Anne vander May are story editors. Francesca Levie is the head of Bloomberg Podcast. We'll see you next week.