Must Suck to be Masa…

Sean Cornelius

WeWork’s recent debacle seems like it’s finally coming to an end. WeWork which was going to IPO at a staggering $47bn and valued at near $60bn by some bankers has now begun the recapitalization process with Softbank with a valuation now closer to $8bn. They fired 2400 employees last week right after Former CEO Adam Neumann rode off into the sunset with his 1.7bn dollar buyout. A company spokeswoman said in a statement: “As part of our renewed focus on the core WeWork business, and as we have previously shared with employees, the company is making necessary layoffs to create a more efficient organization.”. Softbank’s vision fund now owns 80% of WeWork and plans to insert former T-Mobile CEO and Adam Neumann impersonator John Legere. These operational changes are Softbank’s bid to regain investor confidence, but we will be looking at the factors that led Adam Neumann to become the sacrificial lamb and what lessons VCs and founders can learn from him.

Figure out your unit economics

It’s simple and at times redundant but, there is a reason why VCs are always asking about unit economics. Understanding your business’s ability to profit off each client is vital to any business. Any investment is just the trade-off of short term liquidity for future cashflows. So, as important as acquiring customers is it means nothing if you can’t transition to a profitable business model that returns cashflows to investors. Given that WeWork demonstrated the ability to get tenants to pay top dollar for very little space, so if- a big “if”- they manage to get their costs under, controlling the underlying enforces their competitive moat. The bottom line is your bottom-line matters, even for a “growth” company.

Ensure healthy corporate governance

Adam Neumann didn’t exactly inspire investor confidence. WeWork’s corporate governance was weak, but mostly because “In the past, we had companies like Google and Facebook going public with big governance red flags, and everybody said, Well, that’s a feature, not a bug. That’s what you get with a founder-led entity,” says corporate governance expert Nell Minow, Vice Chair of ValueEdge Advisors. “But now it seems the market is understanding the risks of poor governance particularly with some of the self-dealing in this company.”

Neumann apparently was so important to the company that it listed him as a risk factor in the public filing: “Adam Neumann, our Co-Founder and Chief Executive Officer, is critical to our operations. Adam has been key to setting our vision, strategic direction and execution priorities,” the offering states. “If Adam does not continue to serve as our Chief Executive Officer, it could have a material adverse effect on our business.” One thing for sure: Having him serve as CEO has been plenty averse to the offering, which has been postponed.

There was also massive board oversight. The board and Softbank (who owns the largest share of the company) successfully got Neumann to step down after managing to surpass the dual-class share structure. Neumann also had some unorthodox governance practices such as his self-dealing business relationships and non-board member wife picking his successor in the event of Neumann’s death or disability. After WeWork’s original S-1 filing there were a variety of amendments which included:

  • Neumann giving profits he received from related real estate transactions to the company, appointing a lead independent director by the end of the year.
  • Having the board — not his wife — select any CEO who happens to succeed him, and;
  • Appointing Harvard professor Frances Frei to the previously all-male board.

Despite heading in the right direction, it didn’t erase the fact that the original governance lapses were beyond the pale. “To launch in the current environment with an all-male board was a huge red flag,” says Ric Marshall, a corporate governance expert with MSCI. “It speaks poorly of everybody on that board that they didn’t have more consciousness than that.”

The concept that founders know best and should have the reigns to take the company in whatever direction he or she sees fit is not uncommon amongst many tech companies. The idea that founders are infallible is dead. Founders need the support of board members, advisors, and their team to make informed decisions, which is why a dual-class share system in my eyes doesn’t work, and why I think that the WeWork board and shareholders got lucky that Neumann resigned.

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Too much money CAN be a bad thing

Without an excess of capital, you are forced to be a little more disciplined and strategic on where you get bang for your buck. By keeping start-ups hungry you can ensure greater levels of capital efficiency. While interest rates remain low, don’t expect the flow of money to stop, said David Golden, managing partner at Revolution Ventures. He noted that big checks from investors could inflate values, making it more difficult to raise funds later — another issue highlighted by WeWork’s recent valuation struggles.

Don’t Bullshit

Be honest about your company value, how you function, how you sell yourself, etc. WeWork was going after a “trillion-dollar market opportunity for community enlightenment”. Sounds great, but, how does a coworking space revolutionize community living? By being honest about your flaws you can actually problem-solve with investors as opposed duping them. Be ambitious
Looking at WeWork, we can argue that its founder and investors made poor decisions along the way which led to its current state, but I still find it hard to question their decision to be ambitious and accept loss-making as part of its longer-term strategy to succeed. As important as being risk-averse is, risk tolerance is admirable, as long as there is an element of risk aversion. Softbank’s Son says, “Recently, I’ve been telling founders to ‘know your limit’, knowing your limitations will help unleash limitless possibilities.”. As ironic as it is to hear, it’s important for entrepreneurs and VCs to continue to push the limit of what is possible

Closing thoughts

VC is functioning well, as it has been over the past few decades. People are realizing that the role of VC is not as easy as it appears. It is not about chasing the latest fads and hottest start-ups, pumping ludicrous amounts of money and then collecting 26x multiples a couple of years later. At the end of the day, understanding loss-making as a transitional phase towards profitability, taking calculated bets, exercising value discipline, thinking long-term and seeking exceptionally outstanding returns will always be hallmarks of a good VC.

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