Overall though his contribution to massive capital mis-allocation is a huge net negative for my opinion of him.
Now I know that not everyone could be as convincing of a liar as Neumann, but most of us have the ethical boundaries to not really try. So all you can really say is that of the people who are morally bankrupt enough to try to steal as much money as possible, he seems better at it than average.
But... as far as I'm aware he didn't hide any of this from his investors. They just handed over the cash no questions asked until the grift got too blatant (I think it was the trademark ownership/name change that was the straw that broke the camel's back.)
I find it interesting to try to derive rational explanations from seemingly irrational actions. If Softbank really are supposed to be some of the most sophisticated investors, did they get hoodwinked by an even more sophisticated conman or are they just colossally more stupid and failed to do basic due dilligence?
Though wildly speculative on my part, I can see a more cynical reason that would explain these seemingly incomprehensible actions. That is that Softbank knew Neumann was a conman from the start and they invested in him because he was conman. Why would they do that? Because the VC game has changed a lot in the 20 years since the first dotcom wave. Early stage VC firms no longer bet on making money from the long term health of the company. They can get their returns by selling to later stage VC firms. So it doesn't matter to them if the company's business model is bogus. They only need the company to generate enough activity and growth metrics to inflate the valuation into the stratospheric level and then dump it on late stage VC investors and then the public as the company makes its IPO. In this way it's not much different than a classic ponzi scheme. And in that case it's in Softbank's interest to find a conman who can pull off the charade long enough and well enough for them to make their exit.
The counter argument to that is Softbank didn't sell off a meaningful part of its position before WeWork filed its S-1. That's when everything really fell apart -- when the internal financials of the company were exposed and everyone could see what a house of cards the company was.
In that case maybe Softbank did get taken in just as everyone else did. Or maybe they just didn't expect Neumann to fumble the exit as badly as he did.
That's exactly the thing. He didn't ignore the rules. It's expected that founders lie, and the super-rich in charge of these giant investment funds are supposed to be the smartest people in the world, that's what entitles them to command the huge resources they do.
The game we agreed to was that these fund managers were supposed to efficiently allocate capital to worthy causes. Neumann made it extremely apparent that there's no guarantee that some rich banker will allocate anything efficiently at all. The bankers already skewed the system, Neumann beat them at their own game.
That doesn't make him a saint, it doesn't even may him "good", but I still think it's nice that SoftBank got fucked.
..Which makes me wonder if the 'super rich' were on some big money losing scheme that somehow made them money elsewhere, against taxes or similar?
The Producers (1967) Official Trailer
The bellyflop is probably the one that will be remembered the longest though.
[1] Which are a real thing! Caused by a fungus: https://www.cell.com/current-biology/pdf/S0960-9822(18)31602...
You never expect a CEO to personally buy PPE (Plant, Production Equipment) and lease it back to his employer. But hey, if it's not against the rules, and the board is stacked in your favour, why not?
- The founders made money
- The employees made money
- The customers made money in the form of steeply discounted products and services
So really, the only people to lose out were VCs, especially since a lot of these startups haven't really had a chance to IPO and grift out the little guy (at least in my market).
and the teachers' pensions that went into funding those VCs
At this point I don't know what goes through the VCs heads. Are they just in denial about the previous failure, and they are doubling down like a degenerate gambler at the casino? Are they confident that if they get on early, they will be able to pass the bag to someone else, so they don't give a flying fuck? Or is Neumann able to create alternate reality force fields around him, like Steve Jobs? (Unlike Jobs, it seems Neumann doesn't transform anything but the numbers of zeros on his bank account, though)
I literally don't have the faintest idea of how these people think.
[1] https://www.forbes.com/sites/iainmartin/2022/08/23/adam-neum...
This is... not saying much.
The FTX collapse has been eye-opening on this front. FTX was a less serious business than the coffee shop your neighbor opened in 2018, in terms of the books it was keeping. The IRS will be up that coffee shop's ass at the drop of a hat if they claim a bedroom at home as an office, and your neighbor's coffee shop will have a thick packet of receipts and books accounting for every penny spent, at least after they learn their lesson after the first year. FTX could literally not answer the most basic of business questions with any specificity. I'm not talking projections, I'm talking past history. FTX's books were basically a one page napkin scrawl in Excel.
And the list of venture capital was not just long, but prestigious.
Jeepers, Sequoia, give me a billion dollars as an "investment" and I'll personally guarantee you that you'll lose no more than half of it. I've got a napkin right here that says "cryptocurrency" on it. Apparently that's enough for you; where lambo?
When the rumors first broke out that 3AC was toast, no one believed it. Zhu Su was perceived as the smart, wise man of crypto. No way HE would be so reckless.
Then when FTX rumors broke out, no one believed it, again. He was on the cover of magazines, hanging out with Tom Brady, writing these thoughtful pieces about crypto, and was our torchbearer in Washington...
Ironically, the folks with the scammiest public reputation (Justin Sun, Tether folks, even CZ/Binance) are still standing.
VCs are notorious for being herd animals. We've been in (and are hopefully leaving) an era of easy money. I think people don't generally question what they're doing as long as it's working, and easy money plus a bubbly tech sector means that investing hasn't been particularly challenging.
So I suspect a lot of them have just been uncritically doing what worked for them in the past. And "worked" here isn't defined by building successful businesses, because that's a very long feedback loop, but by more immediate proxies like praise from bosses/colleagues, chasing clout in the industry, getting more money from LPs, getting paid themselves, and feeling smart when people listen carefully to what they think is wisdom.
All that is hopefully about to change. As Buffett says, "Only when the tide goes out do you see who has been swimming naked."
s/VCs/humans/
Social proof is a thing wherever you go, whatever you do?
So to answer your question, I think this is way they think: "If this goes wrong, I don't have any real personal skin in the game, and there are a bunch of smart people at other firms that are putting their money in. I better be in because if I don't allocate this capital it goes away. And if I miss a big one, that's worse than losing."
Add the complexities of timing. In fact, even if you thought crypto (or various stocks) was bullocks, you could have made a whole lot of money if you got in and out at the right time.
Amazing to see how efficiently some of the biggest grifters exploited this dynamic to funnel money straight from investors and into their own personal net worth, while building businesses that couldn't have possibly been profitable. It didn't matter, though, because they needed the sense of scale and growth to continue grifting investors.
WeWork, Theranos, and FTX are widely known examples. Two of those founders acted criminally and have been arrested. Neumann was shockingly good at perform open-book grifts that benefited himself, but investors looked the other way.
One of my favorite stories from this era is Pipe, a fintech company with a business model that didn't really make sense to anyone familiar with their industry. They raised hundreds of millions at multi-billion dollar valuations, then the entire founding team of 3 people just stepped down: https://techcrunch.com/2022/11/22/pipes-founding-team-steppi...
They're trying to spin it as a narrative about being 0-1 builders, but it's hard to take them seriously when 3 people are stepping down simultaneously right after getting a huge bump to their personal wealth. Raising money was their goal, building a perception of a successful business was only useful as far as it supported transfers from investors to their bank accounts. Would be fun to see how much they sold in secondaries.
And for the VCs it has often worked out. If you're fast enough to get something IPOed before the bubble pops, who cares if there's a real business model?
Personally, as somebody who thinks actually delivering value is important, I'm delighted that this era of easy money and massive hype might be ending. Hopefully companies soon will have to be able to actually turn a sustained profit before IPO.
And I don't know about you, but I'm immensely enjoying WeWork's fall. It never made any sense, and since the wheels came off before the IPO, it's not retail investors who are taking the loss here.
I agree with everything else, but I'm not a fan of this modern era of schadenfreude that seems to be ever present on tech sites. Theranos and WeWork were certainly fraudulent enough to laugh at, but it's created this effect of fraud-voyeurism that feels more tabloid than news; more celebrity gossip than business news. It also encourages shallow misunderstandings. Real estate can be a profitable business, and certainly many developers turn a profit by reasonably financing and pricing their offerings. But a lot of people are opining about WeWork being unprofitable. Unprofitability is not the same as an exaggerated market cap.
Still, I hope Theranos and WeWork are good, cautionary tales of the downsides of easy money.
I have spent years having to endure the horseshit from places like Theranos, WeWork, and the entire cryptocurrency industry. I knew it was horseshit. The people spouting it could have known it was horseshit if they had bothered, but they did what was in their short-term interests without regard to harm to others.
I am going to enjoy seeing them get whatever paltry and belated comeuppance that karma visits upon them. If they ever suffer as much pain as they've inflicted, I might change my tune, so feel free to come back to me then. But in the meantime, I will enjoy whatever sense of justice served I can extract.
[1] https://knowyourmeme.com/memes/we-should-improve-society-som...
You can just not read the articles. Your sense of mistreatment seems out of proportion.
It was fairly obvious the musical chairs had stopped, and yet he managed to sell his standing-only-spot at chair-valuation.
SoftBank should be sued by its investors over that farce.
https://nypost.com/2022/08/15/wework-founder-adam-neumann-sc...
WeWork is unprofitable, but mostly because we’ve known for hundreds of years that paying long term liabilities (e.g. leases) with short term funding is a model that quickly goes belly up.
I equally don't like the schadenfreude as you, but I also equally don't like the propping up of ridiculous business models like WeWork and Juiceros of the world that the media does.
Live by the sword, die by the sword.
Publicity giveth, publicity taketh away.
The schadenfreude does not happen in a vaccuum. Silicon Valley is addicted to the Steve Jobs messiah narrative, which is why they constantly deify 'personality' CEOs like Holmes, Neumann, Kalanick, Musk, even out and out frauds like SBF.
You do not see gloating about people getting busted for PPP fraud, because those are anonymous nobodies, that have not had a PR machine behind them pushing Galt-esque tales about their exploits and soapboxing their bizarre ideas about the future of millions, dreamed up from their NYC penthouse bubble.
If you dress someone up as Superman, there will be chuckles when he's found out to be a guy in muscle suit wearing his underwear on the outside.
There's not a lot of clarity about what value they bring to the table (since the companies that pay their salaries are often unprofitable) and it's not always obvious what work they actually do (hence the prevailing meme that no one works at FAANG).
Of course, the reality is that numerically, most tech workers don't work for FAANG or hot startups, but public perceptions are usually colored by the most visible subgroup, which happens to be overpaid startup bros.
forgive the link, i guess the original tiktok was deleted.
The period of exuberance will return wearing different clothes.
It sure does give me a really good and warm fuzzy feeling about the stability of our economy to see VCs repeating the same hyped up exaggerated valuation and bubble that was already done in the 1995-2000 era "dotcom 1.0" boom and bust cycle.
You sound like me in 2001 or shortly thereafter.
I disagree with this characterization of WeWork. Were they extravagantly blowing money on stupid things? Yes. Was the CEO directly enriching himself through his leadership? Yes. However, the business of being a landlord and renting office space is a pedestrian and profitable venture. It’s just not a sexy startup idea worth billions.
The food delivery startups accept payments, take their cut, and pay out to restaurants & drivers. From a purely financial viewpoint they're paying out a lot of money, perfectly normal in VC land. But they are also taking in an absolute mountain of money, and if you squint, can all look quite a bit like top-line revenue. If you then slice open the business operating costs, and look at how much it costs them internally (accounting only for salaries, rents and operating costs) to service a delivery, the per-unit revenue/cost figures are off the charts.
Physical retail intake, and virtual goods unit production costs. What's not to drool over?
It was an interesting point - and being thoroughly cynical, likely based in reality.
In a recession a real commercial landlord has existing tenants on long-term leases, limiting their downside. But WeWork's big selling poing was flexibility, so even if the pandemic hadn't happened I think the next recession would have wrecked them. And that's before we get to how it was basically a giant bet against remote work.
I put that as the CEO self dealing. He purchased buildings and rented them out to WeWork. Had WeWork purchased the buildings themselves, the model would have been on far firmer footing. Again, I agree there was too much glamorous spending and living in the limelight, but landlords can obviously turn a profit if they keep the expenses reasonable.
While they'd avoid having to pay rent in empty units, they'd still not any leases
WeWork was not operated in a way to succeed. I am only taking issue with the notion that the core business model (renting real estate) is flawed. Had there been a willingness for modest, organic expansion and not jet-fueled-VC-hypergrowth, the company could have succeeded.
Right, but that’s what Adam Neumann did for himself, then made WeWork his tenant.
Neumann is collecting the rent. WeWork is paying rent.
He took the profitable part out of the company and gave it to himself (for a subset of properties, at least).
That’s the scandal.
Matt Levine had a great theory on this. It basically boiled down to:
"If I wanted to short the VC market how would I do it?"...and basically point to what Adam Neumann did:
I can’t quite say that Neumann improved the allocation of capital, but there are certain parallels. Neumann too … look, here I am speculating, and I don’t mean to speak for Neumann’s subjective experience of his WeWork career, but from the outside, in hindsight, objectively, one could describe it like this: He spotted a bubble in venture-subsidized fast-growing money-losing capital-intensive low-margin tech-adjacent companies, noticed in particular that SoftBank seemed to be on the long side of that bubble, and set himself up to profit on the other side—by raising money for his own ultra-unicorn, by setting up the governance of that unicorn in a maximally self-interested way, and by selling and margining a bunch of his personal shares. 6 When investors like SoftBank were frenziedly buying unicorn stock, he was frenziedly selling it. He set himself up to profit from the collapse of the unicorn bubble, and accelerated that collapse. Lessons were learned, and he taught them. Now he’s rich.
https://www.bloomberg.com/opinion/articles/2019-10-23/how-do...
If you actually believed that your employer had a promising business opportunity, the rational thing to do is to raise capital and compete with them, not go work for them. This is why salaried employment is a market for lemons, and a fair bit has been written about this in economic literature.
All of these businesse can easily be profitable. Shared offices have been a thing forever and easily turn handsome profits. As do cab companies, courier companies, restaurants...
What isn't possible is turning in enough profits to justify the mammoth valuations.
Holmes is in jail, SBF probably on his way, but that Adam Neuman, for what it worth, is apparently not accused in any fraud. He's "just" a failed founder that costed his investors $$$, not unlike many, many others.
They'll invest in a series of companies, as those companies are failing, they'll buy them out with one of their successful companies (possibly a later stage investment, cheaper in a less costly market) then the once successful company also can't survive.
On paper, it looks like they have 3-4 successes to balance out their one failure. For their personal portfolio, it's also great too, and helps them raise more money.
If they're really successful, they'll oust the CEO of one of the once successful but in down market companies, really boost their shares; and if lucky that investment will exit.
Isn't it unethical? The VCs in the podcast All In and the firm a16z defended Neumann because he bootstrapped a real-estate sector into a billion-dollar business even before getting huge VC investment. I don't doubt that, but didn't everyone say the most the important thing in a leader is integrity? Yet I hardly see how one can trust Neumann again as he skimmed his own company's money.
VCs defend it because they were riding along w Neumann the whole time, throwing more and more money into the trash fire as the we work valuation rose to insane levels. And of course they were the first to get out with a profitable return before things come crashing down.
We now know that Neumann had access to large personal lines of credit from large banks secured by his we work equity. So these transactions allowed we work to have access to properties without taking on liability for a mortgage but enjoying perhaps a more reasonable landlord that wouldn’t terminate a lease or refuse to renew in order for extract the value of renovation (which is unfortunately really common).
I am not justifying any particular action or transaction, just saying 1. The facts matter in this situation because it could have been totally in the company’s interest 2. We should equivocate we work with others like FTX where the facts appear that they told customers they would safeguard assets as a custodian (which has a very specific legal definition and set of obligations FTX must abide by) but then used the assets for risk taking investments without disclosure or Theranos where they knowingly lied about their technology it’s efficacy and prospects for further advancement. Both of those were fraudulent misrepresentation.
We work was instead a related party transaction that arguably has a win-win for both parties and was signed off by the board after full and complete disclosure.
Do mortgage providers consider it enough to show a signed multi-year tenancy agreement as sufficient collateral to offer a 100% value mortgage, and therefore Neumann didn't need to put in any cash himself?
I'm pretty sure he didn't apply for a traditional mortgage through a traditional lender in the way that we plebians or even publicly traded companies do. He has a long history of using his charisma and star power to get private individuals to make completely idiotic deals that benefit him and leave them holding the bag.
As a common person, I've been looking into this myself with my RSUs and option grants. But there aren't credit lines that banks offer using equity as collateral for the common person.
I guess when your net worth is high-enough, you can pull anything off with the banks.
The closest "normal" people can get to this is with real estate.
Fidelity Fully Paid Lending Program [1]? not quite what you're looking for, but still generate cashflow from owned equities.
[0]: https://www.schwab.com/pledged-asset-line [1]: https://www.fidelity.com/trading/fully-paid-lending
Disclaimer: i am not a fiduciary, nor a financial professional. this is not financial advice.
Plus, he still has something like 88m shares still in wework[3]. Hopefully he didn't margin-loan those shares.
Safe to say, he did better on wework than anyone else - a rare moment where the founder of a failed company has a better outcome than the investors
1 - https://www.fool.com/investing/2022/01/04/wework-co-founder-... 2 - https://archive.vn/bBW2d 3 - https://fintel.io/n/us/we/neumann-adam
"Neumann led WeWork to a failed attempt at an initial public offering in 2019 and was ousted shortly afterward. As part of the original bailout effort, SoftBank had agreed to buy $3 billion in stock from WeWork investors, including close to $1 billion from Neumann."
https://www.latimes.com/business/story/2021-02-26/softbank-s...
Neumann had lines of credit from banks secured by his wework equity. Kind of like a home equity line of credit but with stock instead of a home.
This is Neumann's "Flow" company that a16z backed with $350 million this summer. Scheduled to launch next year, will be interesting to see how it fares in this new interest rate environment.
https://techcrunch.com/2022/10/18/a16z-chris-dixon-adam-neum...
Neumann used age-old strategy to ignite this business: throw VC money to create foundation for business while doing that at loss. When he signed the over the top leases, no one - and I repeat no one - ever thought we were going to be off of 0% interest rates. No one thought real estate will plunge. It made sense at the time and VCs threw even more money as everyone held same view. In alternate universe, COVID would have never happened, QEs would have continued for another decade and WeWork would have been highly profitable monopoly.
This is not to say Neumann acted in unethical manner. He used WeWork cash and assets as his personal property. But keep in mind VCs always thought of WeWork as his "family business" just like how they thought of Facebook as Zuck's family business.
Perhaps they should have pivoted to become an incubator!
August 2022 https://a16z.com/2022/08/15/investing-in-flow/
WeWork has burned through nearly all of it. The company has $500 million in undrawn debt commitments from SoftBank and has said it expects to end 2022 with $300 million in cash, less than one-third of what it had at the end of 2021. Its debt contracts allow it to borrow another $500 million'.
Wikipedia: https://en.wikipedia.org/wiki/Adam_Neumann
As WeWork CEO, Neumann on multiple occasions purchased buildings and then leased the space back to WeWork.[56] Observers noted this as a potential conflict of interest and one that would not be allowed if WeWork were a public company.[57] During his tenure as CEO of WeWork, Neumann also purchased US$90 million worth of residences, including a 60-acre (24 ha) estate in Westchester County, New York, a 6,000-square-foot (560 m2) condominium near Gramercy Park, two homes in The Hamptons, and a US$21 million mansion in Corte Madera, California.[19]
Neumann has begun purchasing apartment buildings and, as of early 2022, owned some 4,000 apartments worth about US$1 billion, primarily located in the American South.[58]'
In 'Generation Hustle' someone is left holding the bag...