As It Happens

WeWork hype was never anything more than 'unicorn feces,' says business prof

The initial buzz over real-estate startup WeWork can be blamed on a "consensual hallucination between investors and founders," says business professor Scott Galloway.

The real-estate startup dazzled investors by painting itself as a technology company, says Scott Galloway

In this Jan. 16, 2018, photo, WeWork founder and CEO Adam Neumann, attends the opening bell ceremony at Nasdaq in New York. (Mark Lennihan/The Associated Press)
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The initial hype over real-estate startup WeWork can be blamed on a "consensual hallucination between investors and founders," says business professor Scott Galloway.

The company that rents communal office space has been scrambling for cash since its attempt to enter the stock market floundered last month, a stunning fall from grace for a company that has until recently been considered one of the most highly valued startups in the U.S.

Now Japanese tech giant SoftBank is sweeping in to rescue the company and pushing aside its charismatic co-founder Adam Neumann, who could reportedly walk away with nearly $1.7 billion US.

"SoftBank is a firm believer that the world is undergoing a massive transformation in the way people work. WeWork is at the forefront of this revolution," SoftBank's founder Masayoshi Son said in a statement.

Galloway, a marketing professor at New York University's Leonard N. Stern School of Business, first rang alarm bells about WeWork's unsustainable business model in 2017, and wrote a scathing takedown of the company on his personal website in August.

Here is part of his conversation with As It Happens guest host Helen Mann.

I would love to hear what you think of the $1.7-billion payout that it seems Adam Neumann is now in line for?

EBay acquired PayPal, one of the most successful payment platforms in history, for $1.5 billion. I mean, this is a budget greater than the budget for the National Endowment for the Arts or the Peace Corps combined.

So $1.7 billion comes out to about $850,000 per employee that is about to be laid off at WeWork. So by any stretch of the imagination, this is an unprecedented payout.

At one time, WeWork was valued at $47 billion dollars. What made the company so attractive to investors?

There's sort of what could be best described as a certain level of consensual hallucination between investors and founders. They're chasing sort of this halcyon effect of trying to find the next Google or Facebook.

But realistically, even though SoftBank may have valued internally WeWork at $47 billion ... arguably, the company was really never worth that.

Neumann will reportedly walk away with nearly $1.7 billion US to sever most of his ties to WeWork. (Mark Lennihan/The Associated Press)

Regardless of what the actual value should have been, what was it that that drove those numbers? You know, it looks like it was a real-estate company. It would lease, I think, office space, maybe buy some up, rent it out to others, sometimes tech entrepreneurs. It envisioned itself as something else. It called itself "the largest physical social network" in the world. But I'm wondering how you get the value from that?

In the U.S., there's a kind of an algorithm of hallucinogenic value where profits have been replaced by technology, or a technology overlay, and growth.

So this is a company growing very fast. It was growing 70, 80 per cent a year. But it was also scaling its losses just as fast.

Then they used the word "technology" 123 times in their S-1 [the form companies file to U.S. Securities and Exchange Commission when going public], trying to position themselves as, in fact, a technology company.

So as long as the markets are willing to buy that story, companies will continue to try and position themselves as technology companies and replace profits with top-line growth.

But I think the markets have finally said this doesn't make any sense, and the music has stopped and there's obviously too few chairs here. So this might be coming to an end.

Was it ever a technology company?

No. I mean, the closest they have to technology was they had an app for reserving conference rooms.

Did it ever actually own any of the workspaces?

No. As a matter of fact, one of the reasons this company's probably worth less than zero is that they have $42 billion in long-term lease commitments over the next 15 years. And they leased other people's office space.

As a matter of fact, that $47-billion number meant that the one floor they leased in, say, a 10-storey building was being valued more than the entire building they were leasing one floor in. So this never made any sense.

Facade of WeWork Toronto during its grand opening at 240 Richmond St. W. on Sept. 28, 2017. (Arthur Mola/WeWork/The Associated Press)

Do you see any similarities to the Theranos story?

I think Adam Neumann will go down in history, actually, as one of the greatest poker players and negotiators in history who was able to lose $17 billion in someone else's money and get a 10 per cent commission on that, or even a 20 per cent commission, and walk away with $2.5 billion.

But I don't think there's outright evidence of fraud. He wasn't hiding anything here. I think he was just taking advantage of a moment in time.

You started to poke holes in the company back in 2017. What was it about WeWork that made you skeptical at that time?

I brought a core competence to the situation called math. And I just saw a company that for every $1 in revenue it was taking, it was spending $2. 

I don't claim to have any special skill here other than basic arithmetic. This company never made any sense.

It kind of buttresses the notion that a lot of these unicorn companies are a conspiracy between their founders and their IPCs, trying to pump the company up with corporate communications executives, a very charismatic CEO, an incredibly compelling story and then foist, quite frankly, what I'll refer to as their unicorn feces on unwitting public market investors.

Japanese investment firm SoftBank will infuse The We Company, WeWork's official name, with more than $5 billion US in urgently needed capital. (Koji Sasahara/The Associated Press)

You mentioned SoftBank, and this is the Japanese investment bank that's basically bailing out the company or taking it over. Why are they doing that given the valuation questions that you're raising here?

I think some of it is cultural, and that is Masayoshi Son, founder of the $100 Billion Vision Fund, which is the largest growth fund ever assembled, to have his largest investment be taken over by American banks and sold for pieces or sold for scrap, I think ... would be a tremendous loss of face.

So this wasn't an investment in WeWork as much as it was an investment in the reputation and the face-saving of Masayoshi Son and SoftBank.

Do you think this unraveling would have happened so quickly if the company hadn't tried to go public and had to publish the share sale prospectus?

No. The autopsy on this company will assign death by S-1, and that is you have to credit the disclosure requirements of the SEC, forcing them to put their numbers down on paper, their corporate governance down on paper, give academics and analysts in the media the opportunity to do real diligence on this company.

And once that was in black and white on paper, the marketplace had a collective gag reflex on this company.


Written by Sheena Goodyear with files from The Associated Press. Interview produced by Chris Harbord. Q&A has been edited for length and clarity. 

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