WeWork - The $47 Billion Disaster

does weworks implosion pose a systemic risk company went from a 47 billion dollar valuation to near bankruptcy in just six weeks it's been a kind of a phenomenal story to watch me work is facing a cash crunch at its current burn rate of 700 million dollars a quarter it's probably gonna run out of money by the first half of next year how and what is this company gonna do if it doesn't hit the public market and raise that money hi welcome to another cold fusion video the idea of a modern-day tech company is shrouded in glamor casual dress cutting-edge tech and a collaborative atmosphere which frees workers from mundane pigeon-holed work this dream is exactly what we work sells to people we work rents out co-working offices - freelancers small business owners and even some tech giant's the company was an exciting fast-growing startup on course to issue an IPO in September 2019 valued at 47 billion dollars things were going great for we work until people started looking into the company and more importantly their founder and CEO Adam Newman from a failed IPO to a disgraced CEO let's take a look at the story of work a premature pseudo tech giant which could be falling apart right in front of our eyes [Music] co-working has been around since the 90s and had been growing in popularity since 2005 riding on this wave we work was founded in 2010 though what made the company popular right from the start was their ability to tap into the market and sell an idea open spaces collaborative areas it was hip and fresh it didn't look or feel like a traditional office they focused on community drawing from their founders experiences of growing up in communal living spaces they framed themselves as a tech company employing data analytics tools and other smart tech to improve the efficiency of their spaces this led to an understanding of exactly how people use their spaces where to build next and how the spaces should look we work found themselves a target market and grew quickly the company received some big backing from investors such as Goldman Sachs JP Morgan and Softbank even Amazon invested in we work this year in total we work secured fourteen point two billion dollars in funding since 2009 though low interest rates made it easy for investment firms to pump cash into growing companies one of these cash pumpers was master Yoshi son the CEO of soft Bank he manages a one hundred billion dollar vision Fund we've covered son and his Softbank company in a previous video his rags to riches story is really amazing in itself and I'll leave the link for that below son had made perhaps one of the greatest investments of all time just a few decades earlier when he gave a young Jack Ma 20 million dollars to fund Alibaba in 2017 son famously met with Adam for just 12 minutes before deciding to invest 4.4 billion son had found a new apprenticed in Adam Neiman and in son Neiman had found a mentor but son's belief in Newman while it gave way to his rise may also have been part of the reason for his adventure downfall over the coming decades we work used money from its investors to amass 847 locations across 123 cities globally in fact we work with central London's biggest office occupier and also the biggest private office tenant in Manhattan but Adam Newman had bigger dreams for the company than just renting office spaces rebranding as the wee company along with we work is also we live essentially renting furnished apartment and more interestingly we grow which in its own words is a quote conscientious entrepreneurial school for young children with tuition fees between 20 2014 2013 words quote committed to elevating the collaborative consciousness of the world and quote we grow is run by a Rebecca Newman wife of Adam Newman and cousin of Gwyneth Paltrow the so called founding parents testify about the school's intangible strengths I see many schools that are very established at the big issue with those school is that they're behind we grow is teaching the children how to adapt to the rapidly changing world around us Emma Aussie but all of this apparent success had an air of doubt around it we work has secured funding they grew into a giant but they hadn't made a profit yet nevertheless after uber went public in May we work became the most valuable venture-backed company in the United States now it's not uncommon for a tech company to take a while to return a profit but we work although it likes to think of itself as a tech company really isn't we work is effectively a landlord they don't sell technology hardware or software they simply rent office space they use technology to make more effective business decisions but these days most companies do and therein lies the main problem with we work how's the landlord company supposed to make explosive returns and growth like that of a tech company beneath the facade of a successful tech company lay the true story a story of a company he hadn't yet turned a profit but was being hailed as a Titan of industry and a founder who got drunk on the allure of being a pioneer if you have a business that's mission driven you will attract the best people if you attract the best people remember this you have to treat them the way you want to be treated you have to take care of them I know today and I did not understand this in the past that the most important thing in our business and in every business are the employees in the people making it work every single day one reason that investors began to look critically a we work was that there was an obvious and inherent risk with the company's business model we work engages in an average lease of 15 years with a landowner this means that we work pays a fixed amount each year for the land to lease the company then charges people to use the space if occupancy is high or property prices increase then we work makes money off the space however if occupancy dips too low or property prices fall we work can't charge as much yet they still have to pay the agreed lease hence the company would be bleeding money to counter this we work as a company structure of subsidiaries which holds specific leases in different areas that way if one subsidiary has to fail it doesn't propagate to the rest of the business but many people still believe that we work wouldn't be able to sustain themselves in the myths of another financial crisis or similar crisis where fewer people are willing to rent co-working spaces and besides all of this massive cracks have appeared in the company the cracks became apparent to investors as we workers prepping for an IPO in four September 2019 the problems all started in January with Softbank a major investor in we work they backpedaled on a proposed 16 billion dollar stake in the company reducing that figure to just 2 billion this was blamed on a dip in soft banks share price but some people were concerned the soft bank was rethinking we work all together so as we work began his IPO filings investors were keen to see what all the fuss was about during the process for filing for an IPO a company is required to disclose a lot of information to potential investors this means financials business models disclosures among other things the company goes quite literally from private to public and this was where the suspicions of the 47 billion dollar valuation arose internal documents from weworks IPO filings revealed that it was losing more than five thousand dollars per new customer this was a terrible look for a company as more details came out the company's valley had dropped by nearly 80 percent just this year alone and then he blamed the financial situation but also there's many doubts about the company's founder and CEO Adam Newman to give you an idea of Adams character he trademarks the word we then had the company pay him 5.9 million dollars in licensing fees the Sydney Morning Herald has also called him the newest most hated man in America you're in a business where you're you're going out and you're securing long-term leases where you have a long term expenditure and you have very short term revenue obligations $650 a month and and the criticism goes something like wait till Adam sees a downturn how do you respond to that what value do you drive by actually going and telling the world what works and what doesn't work about another company that you have no access to their numbers you probably don't understand the business model but if you're just gonna express an opinion about something you might not know a lot about especially if that person is pi something from you don't do it Adam Neiman moved to the United States in 2001 and after a time in the Israeli Navy he studied business in New York his business venture before founding wework was a failed baby clothes company called crawlers that may pants with knee pads for crawling babies Adam Newman is an interesting character he has the typical confidence to dare to do anything the attitude of any Silicon Valley founder despite being from New York but Neumann wasn't your typical startup founder in many other ways as interest in the IPO grew so did the list of reports of not just about we work but about Newman himself from his use of drugs and alcohol to his tirades in the workplace was as if Newman lived in an alternate reality a reality perhaps fed by those around him Ashton Kutcher and Newman were close even pitching a shark tank style idea to a TV network but it was never picked up but perhaps it was messy oshi son who gave Newman an untouchable status in the tech world son will proclaim that quote we work is next to Alibaba unquote and also telling Newman you need to think bigger with the confidence of having such a figure believe in you who else could tell you otherwise Newman wanted his staff to work hard and play hard Adam said that he likes how alcohol brings people together during executive retreats extravagant cases of 110 dollar a bottle tequila were reportedly always within reach it was said that the drinking of these retreats started in the morning in 2016 several weeks after Neumann fired seven percent of his staff he held a company-wide meeting but not just any meeting after telling the staff that the cuts were necessary he brought out trays of tequila shots and then brought in a famous rapper from the group who Run DMC to perform Niemann and some of his staff danced while others stood around amused according to friends and former executives there was a case of Adam Newman trying to smuggle cannabis into Israel a country where it's very much illegal and one trip on his private jet to Israel with some friends upon landing the flight crew found a stash inside a cereal box realizing that they'd been tricked into international drug trafficking the pilot and crew immediately flew back leaving Newman stranded in Israel Adam Newman also liked to smoke before meetings and on private plane trips like many other founders he's also not a fan of a suit and tie he preferred to walk around the office barefoot Newman would call a personal trainer to visit him in the office for a midday boxing session then would continue about his day walking around the office covered in sweat speaking of his office he had a private office with his own meditation room complete would beat a whiteboard for his free flowing ideas and a large apparently photoshopped image of him surfing but if all of that wasn't enough Newman was also very impulsive on a video call with his executive team he ordered a company-wide ban on meat leaving the team to scramble together to figure out how to enforce the ban yet former employees say that they've since seen Newman eat meat himself other times he proved to be a tyrant raging through the office a former employee testified quote no one wanted to get in his way he even got berated or humiliated or asked to do some impossible tasks and quote one time he called a meeting to demand the manager responsible for buying a new coffee machine without his approval to step forward a number of his close friends and family hold executive positions within the company sometimes according to an employee they'll sit in on random meetings and leave without saying a word there are currently three lawsuits against the company one for age discrimination and two for sexual harassment but aside from the parties and non-traditional approaches it was Newman's financial dealings that have the investors skeptical he collected rent on properties that he owned himself from we work somewhat of a conflict of interest he also borrowed hundreds of millions of dollars from we work at interest rates below 1% he purchased a sixty million dollar company jet despite the company losing one point six billion dollars that year he also sold hundreds of millions of dollars of company shares over the years it seemed like he didn't have any confidence or care about the company's future as report after report came out newman must have known that he wasn't damage control investors were unanimously slamming we work as a bad investment and reports about Nieman's character began filling the headlines the IPO was put on indefinite pause and Newman was forced out of the company and had to resign as CEO that sixty million dollar jet that Newman bought also has to go shocking to many Neiman will still walk away from the company he founded with 1.7 billion dollars while many thousands of the company may lose their jobs also in the end Softbank reportedly would have invested fifteen point four billion dollars in the we work disaster more than the gross domestic product of Jamaica well I still want to invest more and I want to increase some of my investors as muscle sure you get too excited and too much concentration into one company don't go too far two months [Music] we work isn't a tough situation the business model is risky it hasn't turned a profit and investors just forced out the company's charismatic yet reckless founder and CEO the company is fast running out of cash and in dire need of investors this resulted in a five billion dollar investment from Softbank in October 2019 and now Softbank has control of the company for we work to restart their efforts towards an IPO may prove to be just as difficult as fixing the damage Nieman has caused it's a very real possibility that we work could be heading to bankruptcy court that would be a catastrophe of epic proportions in pure dollar terms the fall of weworks valuation is right up there with all time value destruction champions like Enron WorldCom and Lehman Brothers not only this but he could shake the very foundations of the concept of investing in a unicorn company these pin vestment banks should have known better we've seen people fall victims to these charismatic types before this house of cards was coming down this is a failure in misunderstanding what the marketplace is find me another example of creating a company that you know loses fifty cents out of every dollar of revenue and in explain to me how that works he needs to think about what's best for the company at this point and I don't think it includes him it hasn't been a good time uber lyft slack Dropbox and beyond mate are all trading below their IPO prices Fitbit traded $50 a share after its IPO in 2015 but when it was recently bought by Google it was only just seven dollars a share but what makes the we work disaster so interesting is that it never made it to the public markets it seems that people are no longer willing to buy the hype of IPOs of course the number one casualty of the wework disaster has been messy oh she son the chairman of Softbank he's lost billions but not only that his reputation as an expert investor may be damaged and finally in all of this there's one major cloud hanging over we work and it's something outside of their control the health of the financial markets themselves to explain it briefly there's a problem in the repo market the repo market is basically the mechanism that keeps the whole financial system running on a daily basis on Tuesday September 17th 2019 there was a catastrophic failure of some kind until this day no one in the public can really be sure what it was but as a result up to a hundred billion dollars a day has been pumped into the system to keep it going if you look at the balance statements of the New York Fed mortgage-backed securities made up a significant portion of these funds it would seem like there's a problem in the real estate sector once again if this is indeed the case another real estate downturn would obliterate we work in the blink of an eye that model has gone bankrupt multiple times before what happens is you arbitrage the risk of short term leases with long term debt so you go buy a building and put debt on it when rates go up and there's an economic slowdown is in the recession you go bankrupt so no I won't be investing in that if you invest in that you should realize that's another money loser right now no matter the outcome it doesn't look good for we work as it stands time will tell with the wework story so there you have it that's the story of how a company went from being valued 47 billion dollars and hailed as a start-up poster boy to having to cancel an IPO and forcing their erratic CEO out and it's a story that could cause a shift in how we view IPOs that's the story of we work so far next week in the next episode of cold fusion we'll be taking a look at the popular app tic toc you might not know but it's now the number one social media app in the world and the company behind it is the most valuable private company on the planet if you want to see all of that and more in the next episode definitely subscribe so you don't miss it so thanks for watching I really appreciate it don't forget to check out the cold fusion podcast and also follow me on Instagram and Twitter anyway this has been - gogo and you've been watching cold fusion and I'll catch you again soon for the next video cheers guys have a good one cold fusion is he thinking [Music] [Applause]

Channel: ColdFusion

Views: 2,964,374

Rating: 4.91889 out of 5

Keywords: Coldfusion, TV, Dagogo, Altraide, Technology, Apple, Google, Samsung, Facebook, Tesla

Id: QHQTzeve7OM

Length: 19min 58sec (1198 seconds)

Published: Wed Nov 20 2019

Reddit Comments

[u/BeerCzar]

All I keep seeing about Wework online is that it is a piece of shit company that is about to implode. Whenever I watch TV though I am surprised by how many commercials I see for Wework. They seem to be trying really hard to convey to the general public that everything is OK. It is so strange.

[u/Ru4pigsizedelephants]

I'm definitely investing every penny I have in this dynamo company.

[u/rpbanker]

Wow, they didn't waste any time getting that doc out. WeWork's IPO just failed a couple of months ago.

[u/opiburner]

I still can't believe their ousted CEO is receiving a 1 BILLION golden parachute severance. That is the craziest shit I've ever heard!

[u/daydaylin]

Wow this is interesting. I used to work in a wework office a few years ago. I even got a free shirt from them lol.

[u/spoopycheezy]

Its a nice place to work if you enjoy a glass jail cell.

[u/zebra-in-box]

Haha, i knew someone would make a film about it.

[u/Retireegeorge]

What was their business proposition - is it just a virtual office / incubation business?

I don’t understand what was so exciting about it? That they were a one stop shop for all business services and supply?

[u/GullibleDetective]

Love this channel