The WeWork Saga Was Even Nuttier Than We Thought

By TradeSmith Research Team

The era that ran from 2007 to 2019 was the most epic in Silicon Valley history.

In 2007, Steve Jobs introduced the first iPhone. Then came the rise of Facebook and Twitter, the founding of Airbnb and Uber, the genesis of Bitcoin, the dominance of mobile apps, and the ubiquity of the “gig economy.”

And then, finally, the spectacular collapse of WeWork closed things out.

In 2019 — before the IPO was pulled and the CEO fired — we explained why WeWork represented everything bad about Silicon Valley. After WeWork’s implosion, the nutty stories started pouring out — and they are still pouring out.

For instance, the Financial Times had a jaw-dropping deep-dive piece this week titled “WeWork: How the Ultimate Company Lost its Billions.” Here are some of the nuggets:

  • Masayoshi Son’s decision to invest $4.5 billion in WeWork was made in 28 minutes.
  • The SoftBank Vision Fund came close to investing an additional $16 billion in late 2018.
  • The deal terms said co-founder and then-CEO Adam Neumann could only be ousted “if he committed a violent crime.”
  • The terms also said, if he went to jail, Neumann could regain control after he got out of jail.
  • Son killed the deal on Christmas Eve 2018 because Neumann wanted a noncompete agreement.
  • Morgan Stanley said WeWork could be worth $104 billion post-IPO. Goldman Sachs said $96 billion.

The IPO was pulled, of course, after the prospectus revealed small details like the CEO’s habit of smoking weed on the company’s $60 million private jet.

Now WeWork’s official valuation is somewhere in the single-digit billions, and the most realistic valuation might be zero (it still isn’t clear whether the company will ever be profitable).

It doesn’t look like it, but the craziest part of the whole saga might be the noncompete agreement.

Just think about the insanity of this train of events:

An entrepreneur co-founds what is essentially a money-losing real estate company in 2010. Eight years later, he is a billionaire on paper, with multiple billions invested at a $20 billion valuation.

A deal is very close for another $16-billion-plus, from the same investor, which gives the entrepreneur-founder iron-clad control and a $10-billion-plus fortune — all tethered to a company with sketchy accounting and a questionable business model that is still losing money after eight years.

Instead of doing everything under heaven to get that deal done, the entrepreneur-founder says “No, I want a noncompete agreement” — from the guy who wants to give him $16 billion! — “to make sure there aren’t any WeWork competitors.”

Meanwhile Masayoshi Son, the investor writing the cartoonishly huge checks, is conflicted because, along with a $20 billion wager on WeWork, he might want to throw billions at some other outfit losing huge sums in the same space.

So, the deal falls apart on Christmas Eve 2018, and four months later, WeWork files for an IPO because it is booking $1.9 billion a year in stone-cold losses and running out of kindling. At the same time, the bankers say the company could be worth as much as $104 billion, and then investors gag at the prospectus and the whole thing collapses.

How does stuff like this happen? The author Charles Mackay caught the gist of it in 1841, in his book “Extraordinary Popular Delusions and the Madness of Crowds:”

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.

In order for WeWork to happen, a great many people had to be sucked in: The investment bankers who lent to WeWork and set up the IPO; the venture capitalists who invested alongside SoftBank; the Wall Streeters and investors who saw anything relating to the “gig economy” as golden regardless of valuation or business model; and of course, Masayoshi Son himself, a man who had once made some of the greatest tech investments in history (buying huge stakes in Yahoo in 1996 and Alibaba in 2000) and who desperately wanted to top himself.

It always seems to get crazy at the end, because that is how human nature works. And yet the WeWork saga, when all is said and done, was so nutty it might not be topped for decades.