Transcript: WeWork rework

This is an audio transcript of the Unhedged podcast episode: ‘WeWork rework’

Ethan Wu
In the easy money era, we saw a lot of crazy business ideas and crazy founders get funded, but there was perhaps no easy-money founder that was as easy money as Adam Neumann, the head of WeWork.

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He turned a real estate company subleasing office space into a tech company that was going to elevate your consciousness to a level never before seen. And it ended in tears for the investors. Today on the show, why some big-name investors wanna bring Adam Neumann back. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I’m reporter Ethan Wu here in the New York studio, joined by reporter Ortenca Aliaj, who as I understand is basically best friends with Adam Neumann.

Ortenca Aliaj
Yes. I’m here to elevate Unhedged listeners’ consciousness.

Ethan Wu
Well, I’m already feeling elevated. My consciousness is, at least. Well, so Ortenca, you covered this for a while, right? You’ve been kind of in the thicket of WeWork for some time.

Ortenca Aliaj
Yes. I came into the WeWork story relatively late. It was after everything had sort of fallen apart and it was about to go public through a deal with a special purpose acquisition company (Spac). And I followed Adam Neumann around the party at the Stamford Hotel whilst eight months pregnant.

Ethan Wu
Oh wow. How was that?

Ortenca Aliaj
Tiring.

Ethan Wu
Yeah, sounds tiring. I wanna take it back though, because I feel like it’s just been a few years. People may not have fresh memories about WeWork. The broad scope of it is, you know, like there’s very straightforward business model, right? They buy buildings, they sublease out chunks of them. They make them pretty. Kombucha on tap, beer on tap, you know, fancy glass doors or whatever, straightforward business. What happens is a lot of money got poured into it by one particular investor. That’s SoftBank of Japan, run by Masayoshi Son. And the whole thing went a little bananas, didn’t it?

Ortenca Aliaj
It did. Just a quick clarification. The WeWork business model was long-term leases so I don’t think they bought a lot of their buildings. I think they were, that was the sort of liquidity mismatch. They were taking on these long-term leases and providing short-term leases to people who are renting. And yes, that was the entire business model effectively, with some apps and websites. And they got repackaged into a big tech company, or that’s how they market themselves, at least.

Ethan Wu
We could argue about how tech it really was.

Ortenca Aliaj
Yes, exactly.

Ethan Wu
But before we get into it a little more, what was your favourite moment of the WeWork saga that was? So many to choose from.

Ortenca Aliaj
There’s so many to choose from. I don’t know if you’ve read the book that came out by the two Wall Street Journal reporters, which was great, but my favourite moment is obviously just smoking pot on a plane. Truly flying high.

Ethan Wu
That’s just called Tuesday for Elon Musk, right? My favourite moment — I had to dig back in the archive for this a little bit — was they had this summer camp, right? They had like an annual summer camp where all the employees would have like a big bonfire. They have their own little Burning Man, essentially. And there’s a great anecdote in New York Magazine from a few years ago where one employee told the reporter that they would camp out in tents, and she woke up one morning to see urine pooling on the top of her tent. And she just had to sort of pray that it would not fall on her. She’s just looking up at the urine, hoping for the best. So anyway, this is all to say like, it got a little crazy. Got a little crazy at WeWork.

Ortenca Aliaj
We urinate.

Ethan Wu
Not a Bridgewater. (Both laugh) All right, let’s get this back on the rails. Like you said, Ortenca, and thank you for the corrective, they would take long-term leases. They would sublet about on sort of a short-term basis. There’s some kind of real business model there. And there are other companies that actually do that for real. But WeWork ended up getting to this, you know, preposterous valuation with all this venture capital money from SoftBank and the whole thing, it kind of imploded. I mean, what was the story of the fall? Just, you know, given briefly.

Ortenca Aliaj
Yeah. I’ll give you a 30-second version. So it got this enormous valuation upwards of $40bn when SoftBank invested in it or the last investment it made in it as a private company at the time before it filed an S-1, which is a filing that you make for an initial public offering for your shares to float in the stock market. And when it filed the S-1, the investors looked at it and were like, wait, there’s a lot of conflicts of interest here. And this guy, Adam Neumann, who runs the company, he’s getting, you know, paid for kind of insane things, like he trademarked the “We” collection of brands.

Ethan Wu
And then attempted to sell it back to the company though the transaction was eventually reversed, after widespread criticism.

Ortenca Aliaj
Yes. Anyway, investors looked at it and they were like, no, we don’t want to invest in this. And I think that was the start of the end for WeWork because everything had come out into the open, right? I mean, the whole machination had been exposed.

Ethan Wu
Yeah. And that started its kind of, you know, long march down toward bankruptcy from a couple months ago, which is a story that is about WeWork, but it’s also a story about commercial real estate, which we talk about all the time on this show as a, you know, potential crisis risk. But I mean, that’s a market that has struggled, and WeWork was not immune from it. And perhaps it was one of the more exposed companies in that segment. And it declared bankruptcy when — in the middle of last year, was it?

Ortenca Aliaj
Yes, I think so. So at some point, my two worlds collided and WeWork went public through a special purpose acquisition company, which is a shell company that takes private businesses public. So it did eventually manage to do a public listing but at a much lower valuation. I believe it was around $7bn or $8bn. By that point I think it was still spiralling. Then we have this, you know, bad real estate market. People are working from homes. They’re not really going into offices. And it has leases in this sort of overexposed areas, which I think is what they’ve tried to rein in. And then it filed for bankruptcy, which was a big slap in the face for SoftBank.

Ethan Wu
Yeah, yeah. And at that point Neumann was long gone. You know, Adam had been let go of a long time ago.

Ortenca Aliaj
Was long gone, had taken a lot of money to be long gone. SoftBank had given him a pretty hefty package for him to leave the company. And he’d started his own other real estate company called Flow, which is basically an apartments business.

Ethan Wu
He couldn’t stay away. (Both laugh) He needed to do more real estate stuff. So toward the end of last year, the state of play is WeWork is in bankruptcy, Neumann is off flowing his Flow. And, you know, I think a lot of people saw it as sort of the end of the story and like maybe WeWork would restructure. But that is not, at least right now, that does not appear to be what’s happening. There is interest in bringing Neumann back, in buying WeWork out of bankruptcy. What’s the idea here? Who are the investors involved? Why would anyone wanna take another dice roll on this guy and his bankrupt real estate company?

Ortenca Aliaj
Yeah, this is really interesting. The fact that Neumann can get Wall Street backing — and I will say backing with the caveat that he doesn’t currently have financial commitments. He’s in talks with several, with hedge funds.

Ethan Wu
But like big names.

Ortenca Aliaj
Big names. Yeah. So Dan Loeb’s Third Point, which is a big hedge fund based in New York and is known predominately for shareholder activism. And the other one is Seth Klarman’s Baupost Group. People who are listening might know Seth Klarman. He’s a very, very famous value investor. His letters are sort of like mini Warren Buffett letters and he has a huge following. So yeah, these two very prestigious and respected figures in finance have been talking to Adam about potentially investing in WeWork.

Ethan Wu
Why, right? Like, why? This Neumann guy walked away from incinerating an incredible amount of value — billions and billions of dollars. And now people wanna give him more money? I mean, it seems like patently insane.

Ortenca Aliaj
Yes. Adam Neumann’s ability to raise funds is genuinely quite enviable. We also just saw this with his new property company, Flow, where he managed to convince Andreessen Horowitz, a very famous VC firm, to give him more money for another real estate company with a very similar concept, except for you don’t work there, you live there.

Ethan Wu
You flow there.

Ortenca Aliaj
You flow there. We live. (Both laugh) So what we get from people that we speak to is, look, WeWork is still a good business. It needs to cut back on certain things, but it’s been streamlined. It’s cut costs a lot. It’s closing down a lot of offices and trying to become a much more lean operation. And for them, it probably represents a business opportunity. The real question is why with Neumann, you know, that they don’t; neither of these firms need Neumann to come back into WeWork. And that, we don’t know.

Ethan Wu
On the other hand, you know, maybe he has a plausible case to make — Neumann, that is — that well, the idea was there, right, that, you know, maybe Neumann is like a master vibes curator and he can just make the greatest office of all time everyone wants to go work in. And everyone I’ve ever talked to who’s been in a WeWork is like, it’s nice. I like the kombucha on tap, you know? It’s a nice environment. It feels open, it feels modern. Maybe that’s the sales pitch, is that yes, it got a little crazy. But we’re at such modest starting valuations, ie bankruptcy, and the fundamental idea is still sound. And the bankruptcy gives us the ability to renegotiate our leases, which are crucial, especially in a real estate market that’s resetting. You could really get much more favourable terms in 2024 on your leases than you could in, you know, 2019 or whatever. Maybe that’s the pitch. At least that’s how I imagine it going.

Ortenca Aliaj
Yes, I think that’s the pitch in a broad macro way, let’s say. But what really happens next is up to the creditors. The largest or among the largest is obviously SoftBank.

Ethan Wu
Yeah. Yeah.

Ortenca Aliaj
But I think it’s funny because Adam has come into the process. I know he’s tried to help WeWork raise money in other occasions which weren’t made public so we don’t know about them. But he’s come into the process quite late. WeWork has already started bankruptcy proceedings and a lot of the creditors are currently focused on renegotiating leases with landlords and figuring out how the ownership structure is going to work after the company comes out of bankruptcy. Now, I’m not saying that if Adam Neumann came to the table with $5bn and funding is secured, to borrow a phrase from Mr Musk, they wouldn’t leap at it, because at the end of the day, they’re there to make money. But from the people involved that we’ve spoken to, they don’t see Adam as the future of WeWork.

Ethan Wu
On the SoftBank side, that is. 

Ortenca Aliaj
Several creditors, not just SoftBank, but yes, a lot of the creditors that are currently involved. One of the interesting aspects of this is that if something was to happen and Adam did make it back into WeWork, it would kind of put Masayoshi Son and Adam sort of forcibly back together, which I think is really interesting because SoftBank has put about $16bn into WeWork in total — a company that is now bankrupt. It’s a big, big, faux pas for them. I mean, faux pas is a very soft word. Actually, it’s a disaster. And I don’t get the impression that they are necessarily keen on starting that relationship back up again. But again, SoftBank is trying to salvage a pretty bad investment and I think they’d rather do it without Neumann.

Ethan Wu
Yeah. Why didn’t SoftBank, you know, wash their hands of this earlier? You would think at some point you’d wanna cut your losses and just sell the debt to someone else or turn it into equity and sell it to someone else. I mean, how are they still involved in this?

Ortenca Aliaj
Yeah, it’s weird. They provided more funding, actually. We reported on this with my colleague Eric Platt. When WeWork went into bankruptcy, they had to wire another $1.5bn.

Ethan Wu
Right, bankruptcy financing.

Ortenca Aliaj
Right. Exactly. And at a certain point, yeah, most investors have been like, I mean, I’m done. This isn’t happening. But clearly, there is some belief. Also, I should say the people who were involved in WeWork at SoftBank were very senior people like Rajeev Misra and maybe it’s an emotional attachment. VC investors tend to have an emotional attachment to the companies that they invest in.

Ethan Wu
I mean, clearly they believed in WeWork on some level, whether it was just like Neumann’s salesmanship or the fundamental pitch of a, I don’t know, vibes-driven real estate company, consciousness-lifting real estate company. They believed in it on some level, which is why they made such a massive investment in the first place. And the fact there was senior involvement at SoftBank shows it wasn’t just Masayoshi Son’s grand gamble. It was something that, there was some amount of buy-in on the team.

Ortenca Aliaj
Yeah. We can’t forget the fact that WeWork is still the dominant company in co-working spaces, right? It dominates that market as a name. So there must be some way to make a business out of it.

Ethan Wu
Yeah, yeah. Well, maybe second time’s the charm for WeWork and we’ll see if Neumann is along for the ride.

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All right, Ortenca, we’ll be back in a moment with Long/Short.

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Welcome back. This is Long/Short, that part of the show where today we talk about Nvidia because there is nothing else to talk about. The stock beat earnings again. Its market cap’s all the way up to $2tn. It’s up like 12 per cent today. I mean this is like the unbeatable stock of the moment. And it’s not just Nvidia’s price too. It’s like propping up a bunch of other stuff. Like in the FT today we called it like the global catalyst for stock markets going up everywhere. And it’s even having like random spillover effects on like completely ancillary companies. Like there was this, there’s this story of these like two little stocks, Ortenca, that I know you were looking into a bit that Nvidia redisclosed that it had shares in, but it was already public information beforehand. And yet the stocks went up.

Ortenca Aliaj
Yes.

Ethan Wu
What’s up with that?

Ortenca Aliaj
It’s the tide that lifts all boats, including these two companies that I had never heard of but it seems you have, Ethan. One of them is called SoundHound. Although SoundHound seems to have the word AI after its name now, so I don’t know if that was always the case. If it’s ever been just SoundHound.

Ethan Wu
It used to just be . . . I mean, like, I’m like a legacy user of SoundHound just because I randomly installed this like music-finding Shazam competitor when I was a child. But yeah, it’s just like a music-finding app. I don’t know why it’s AI, I’m sure there’s some angle on the pitch deck or whatever. But yeah, like SoundHound is up like 100 per cent in the past month for absolutely no reason. Like it was known that Nvidia owned this company.

Ortenca Aliaj
It was. Yeah. So the reason that Nvidia had to make public its ownership stakes is because it hit over $100mn in stock ownership, and that means that you have to disclose to the SEC what you own. So this wasn’t new information. The market already knew that Nvidia had invested in SoundHound and this other company called Nano-X, but for some reason people continue to buy. And it’s wild because I’ve been reading about it now because I’m too old to know what SoundHound or Shazam are. (Ethan laughs) And initially I thought it was SoundCloud and I was like, I’m happy for SoundCloud, which is what I use. But in 2022, it had to basically do all these salary cuts and cut staff. And now, two years later, it’s booming.

It’s weird though, right, because I guess we can argue all day about whether Nvidia is actually worth $2tn. But it does seem like a lot of this is massive hype. And I’m not calling. I don’t want to say that I’m calling the market top, but I’m just conscious of the fact that this has become a feature of the stock market over the past sort of decade, where there’s these massive booms in a certain asset class. We actually saw this with, you know, special purpose acquisition companies, which I was saying I covered for two years, where everyone piles in and then all of a sudden the bottom falls out. Go, Nvidia!

Ethan Wu
Yeah. I mean, the one thing you can say in Nvidia’s favour — and we’ve discussed this on the show a bit — is real earnings growth, right? I mean again like the stock went up today not because, you know, people were like, AI, yeah! It was real profit. They’re generating a tremendous amount of sales. It’s only going up. It continues to be what are already really optimistic expectations. So I mean that’s the one thing you could say is like disanalogous between Nvidia and AI now and then like the dotcom companies of 20 years ago are their stretched valuations. And is Nvidia stretched? That’s like a real and important debate. But that at least seems to be one piece of it that’s not quite the same as, you know, tech bubbles past.

Ortenca Aliaj
Yeah. And to be clear, I don’t think Nvidia’s valuation itself is the issue. I think it’s when investors start piling into these other ancillary stocks just because they’re associated with that company.

Ethan Wu
Yeah. Are we, is this like implicitly we’re short SoundHound? Is that the conclusion of this Long/Short? It’s a good app. Like, I again, I like this app. I don’t own the stock but, you know, it does the job, right? It tells me what song is playing.

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All right. Listeners, I’m sick of talking about artificial intelligence. I would like to hear from some real intelligence, specifically some intelligent questions for me, Katie and Rob. As I mentioned the last show, we’re doing a listener questions episode in the near future, and we’d love to hear from you. ethan.wu@ ft.com.

All right, Ortenca, thank you for being here. We’ll have you back soon. And, listeners, we’re back in your feed on Tuesday with another episode of Unhedged. We’ll catch you then.

A previous version of this transcript said that Adam Neumann “trademarked the word ‘we’ and then sold it back to the company”. It has been amended to clarify that payment for the “We” trademark collection was eventually, after widespread criticism, reversed.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

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