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The WeWork “Acquisition” (with Dan Primack)

Season 5, Episode 6

ACQ2 Episode

October 24, 2019
October 24, 2019

Join the Acquired Limited Partner program! https://glow.fm/acquired/ (works best on mobile)

It’s an IPO, it’s a bailout, it’s an... acquisition? We’re joined by the one and only Dan Primack from Axios to recount the epic saga of the We Company in all its tragic glory. How did this business somehow go from chopping up commercial real estate to elevating global consciousness to rewarding its ousted CEO with a $1.7B “platinum parachute”, all while the company can’t afford severance for thousands of soon-to-be laid-off employees? Where did it all go wrong? And most importantly, who gets the Gulfstream G650??



We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
October 24, 2019

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
October 24, 2019


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
October 24, 2019

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
October 24, 2019

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
October 24, 2019

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
October 24, 2019

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
October 24, 2019

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
October 24, 2019

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
October 24, 2019

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to Season 5 Episode 6 of Acquired, the podcast about great technology companies, and the stories behind them. I'm Ben Gilbert and I am the co-founder of Pioneer Square Labs, a startup studio and early-stage venture fund in Seattle.

David: I'm David Rosenthal and I am a general partner at Wave Capital, an early-stage venture firm focused on marketplaces based in San Francisco.

Ben: We are your hosts. Today we tell an episode that in our initial Season 5 planning calendar we had as an IPO episode. That was pitifully cancelled. We were just going to tell the crazy story of the antics that got it here. Now, it's shaping up to be a tried and true acquisition episode for us.

Here on this episode, we will dive into the existential question of, if WeWork, a once $47 billion company, can be saved by SoftBank's effective acquisition of the company. We are going to try to accomplish two goals. First, to dive into the history of this company from the very beginning. Second, to try and see the core economic forest through the under-governed trees, and understand precisely the position that the business is in today.

David: Listeners, Dan's face during all this is priceless. If we only we were a video podcast.

Ben: Which brings me to the only appropriate way that we know how to tell the story is with the expert help of Axios' Dan Primack, who has been meticulously and astutely covering this company for several years. Welcome to Acquired, Dan.

Dan: Thanks for having me.

Ben: Listeners, before we dive in, I want to take the sponsors of all of Season 5, Silicon Valley Bank. Earlier this week, I caught up with our sponsors. Let's dive in for a little Q&A.

We have with us today, Claire Lee, the head of Startup Banking at SVB. Claire, your team works with seed-stage startups globally, so you hear a lot of sentiments in the market. I know you do a startup outlook survey. What are startups sharing in there?

Claire: Yeah, sure. Thanks, Ben, for having me. The last [...] report that we released this year in 2019 showed that even in times of uncertainty, startups continue to be optimistic. The abundance of capital continues, at least for now, because there's a lot of VC [...] out there. That capital is highly concentrated in certain geos and sectors. For instance, we’re seeing it’s easier to raise enterprise companies over consumer. [...] we are seeing a lot of growth in LatAm, particularly in Brazil and Mexico.

Ben: Nice. What seems generally positive. What about the headwinds?

Claire: It's kind of tougher there at the moment. We see liquidity isn’t ripe right now. The ongoing WeWork saga doesn't help with so many employees with their options underwater. I think it'll be interesting to see what happens with M&A in 2020. I have a hunch that we'll start to see a lot more [...] as valuations stabilize come down.

50% of the startups that we poll said their long-term strategies is to be acquired. That probably holds true. Only 18% are planning for an IPO. Talking of IPOs, on the flipside, I think we expect to see a new wave of angels investing in startups and forming new startups post-IPO. I expect to see some newly-minted public company senior folks coming out and writing checks for startups. That's another positive.

Ben: That is certainly good news. Thank you so much, Claire.

Listeners, this is the 2019 outlook report. You can get that on SVB's website by clicking the link on the show notes. The survey is open right now for 2020. You can find another link in the show notes to take that survey for the 2020 report. I highly encourage you to do it. Thank you so much, Claire.

Claire: Thanks, Ben.

Ben: Thank you, SVB. Now, on to WeWork.

David: All right. On to WeWork. We were thinking about how to frame this and talk with Dan a little bit before. I think what we decided to go with, which is true, is this is a tragedy. This is a Greek tragedy.

Dan: Particularly, for thousands of people who, by the time people listen to this, might have lost their jobs within hours of when we're taping this or a day within when we're taping this.

David: Yeah. It's like the Peloponnesian War or something. The outcome is predetermined. The actors are just caught up in forces beyond themselves.

Dan: Minus one actor who gets a lot of money. I guess it's in the island of Peloponnesian.

Ben: It was grandchildren. I'm sure they have their own island.

David: Which Greek mythological character is that?

Dan: There was a Greek mythological character who just got to walk away with all the riches and leave all the responsibility behind? I don't remember that. There is usually a moral in the stories, aren’t there?

Ben: Listeners, we sit here on Thursday, October 24th in the morning, 10:00 AM eastern time. You get a sense of where we are in this currently developing tragedy.

David: Yeah, indeed. Let's dive into Act 1: The Rise of WeWork.

To talk about WeWork, you obviously have to talk about the protagonist? Of this? Adam Neumann? Who is Adam Neumann?

Dan: Self-styled hero.

David: Self-styled hero. Adam, as many folks have pointed out, is born in Israel. He's Israeli, his parents were both doctors, his parents divorced when he was 7, and he ended up living in 13 places over the next 15 years, which is actually pretty crazy. Probably a lot of that goes into the ethos behind WeWork, including in the US—he spent a few years living in the US—then came back to Israel, and he spent a number of years living on a kibbutz, Israel which is a communistic state-farm in Israel. He is dyslexic, but nonetheless, quite smart. He tested into the Israeli Naval Academy growing up, became an officer, and he served in an elite unit in the Israeli Navy for 5 years.

After that, he moves back to the US to New York to live with his little sister, Adi, who is actually Miss Teen Israel.

Ben: No way!

David: Yeah, totally. She was a model in New York. Adam, I guess, always wanted to come back to the US and to New York. They lived together in the city. He went to business school at Baruch College. His goal was getting out of the army just like many folks in Israel, wanted to become an entrepreneur, wanted to start a company. I think this was probably while he was in business school or shortly afterwards, he had his first great startup idea. Perhaps, inspired by his fashion model sister, collapsable women's heels. Pretty amazing. I actually couldn't find the name of the company. Dan, did you remember it?

Dan: I don't remember it. It's killing me now. No, but that's exactly what it was.

David: Yeah. It was amazing. That, unfortunately, didn't work for reasons that are lost to history. Undaunted, Adam goes on, and he starts his next company. The next company is called Krawlers.

Folks or listeners probably have some image of Adam right now. He actually does have five children. At that time, he had no children. Krawlers was a baby clothing company. The unique inside innovation that they have—this is maybe going to impress WeWork here—is they had the technological advance of builtin kneepads in pants. If your children were crawling around on the floor or falling on the floor [...]. This is a real problem.

Ben: This sounds like a Kramer thing.

Dan: It's a little bit New York. If you think of the era, both of those, collapsible heels, baby clothes, you think of New York in that time from an entrepreneurial sense. There were all these complains, there's not much "tech" coming out of New York. Whether you want to call it fashion, apparel, consumer products. That's also the [...] here, et cetera.

David: We should set the time frame here. This is mid-2000s when all these are going on. Just pre-financial crash. And yeah, tech in New York was, there were [...] there.

Dan: There was media. Media tech. Media and ad tech.

Ben: Tumblr had done well or was rising.

Dan: I guess. Was FourSquare around yet? Probably. It got so much publicity because it was one of those early New York tech companies.

David: People weren't building real tech companies in New York. We will continue on that.

Dan: Whether WeWork is or not, yeah.

David: It's right around this time while Adam is trying to make Krawlers work that he goes to a party. He went to lots of parties. In fact, he goes to a party at his own apartment, as per the research here. Dan, I don't know if you saw this or remember this. This must've been summer time. In the parties that he would throw at his apartment, he would just walk around without a shirt on.

Dan: That I don't know. Though, there's a photo of him from two weeks ago walking down the New York Street without his shoes on which is insane in Manhattan.

David: No shirt, no shoes.

Ben: He was within two hours of the board [...] CEO.

Dan: It's possible they took a shoes. We don't know.

David: Adam is shirtless at this party. A guest—a friend of a friend—shows up and meets Adam in the elevator going up to the apartment. That man's name is Miguel McKelvey. Adam, I don't think we've mentioned it yet, is 6 feet 5 inches. Miguel is 6 feet 8 inches. Maybe they were the only people who could see each other on the elevator.

Miguel had a similarly interesting background. He grew up, not in Israel, not on a kibbutz, but in Oregon on a hippie commune.

Ben: Wait. Both WeWork founders have their origin stories from commune?

Dan: [...] when we get further along, it absolutely makes sense when you think about what WeWork tried to become.

David: Yeah. Miguel was born to a single mother, lived in this collective of five single mothers, and their children. He had four sisters; not biological sisters. This commune was 10 people, 5 mothers, 5 children. Later, there was a little brother that came into the picture about 10 years later. That was how he grew up, in this collectivist world commune outside of Eugene, Oregon.

He was very smart. Goes to Colorado College for university, spends a couple of years there, and then ends up transferring back home to the University of Oregon in Eugene. He does two things there. One, he plays basketball. Oregon was a pretty good basketball. He was legit. Two, he studies architecture. He gets his architecture degree. It all started to come together here. That's going to come together even more.

He graduates. Through a free spirit passion, he moves to Tokyo after graduation because he has a friend over there. He's just like, "Hey. You should just come and hangout in Tokyo." He goes. Remember, SoftBank is going into the picture here in a little bit.

In Tokyo, he starts his first company. A company called English, baby! which amazingly still exists today. We'll link to this in the show notes.

Dan: Did it merged with Krawlers?

David: No. Miguel was a co-founder. He was not the CEO. The company spent a couple of years in Tokyo and ended up moving back to Portland, Oregon. It's still based on Portland. English, baby! is best described as MySpace plus Duolingo. This is early- to mid-2000s.

Ben: That sounds like a good idea.

David: Yes. It's probably not a bad idea. Do you guys remember growing up with this concept of your schools would help you become penpals with students in foreign countries? That's what kind of inspired that. They wanted to do that on the internet. Learn, help foreign students learn English with friends in other countries. The tagline, which is still there on the website today, the motto of the company is, "Learn English. Find Friends. It's cool."

After that, Miguel works in for a couple of years. Then he's like, "You know, I have this architecture degree. I should use it." He also always have this dream. He talks about this, he was on How I Built This podcast, he always had this dream to move to New York. He just picks up, moves to New York, and he joins a small architecture firm in Dumbo, Brooklyn. There were two architects there. He was working as a draftsman for these two architects. They have one major contract which was the buildout of the American Apparel Retail Stores all across the country.

Miguel gets drafted in this. This was when era of American Apparel. They were just rolling out on a huge way, kind of like WeWork would, all across the country. Opening up all these stores, all with the same aesthetic, that would come to inspire WeWork.

Ben: To bring it full circle, just before flying out to do this episode, I walked past the empty space in Seattle where the American Apparel store used to be, and was more recently filled by Glossier's pop-up, which is to bring it the most full circle.

David: It's this man that walks into the elevator and meets Adam at this party. This probably would've been in 2007 or maybe early 2008 in New York. They get to talk in the party. Adam, it turns out, is looking for office space for his burgeoning hypergrowth company Krawlers and is talking to Miguel. Miguel is like, “I’m that type of guy. I’m doing all these commercial space,” and Adam wants to—

Dan: If you can wait eight years, here is my company. The company I’m working for is going to collapse. There will be storefronts everywhere.

David: Yeah everywhere. So, Miguel is like, “Dude, don’t go looking for office space in Manhattan. That’s stupid. Come to Dumbo. Rents are cheap here. It’s super awesome. It’s really hip. You’re going to like it a lot more.” He convinces Adam to move into the same building that his architecture firm is in Dumbo. This is 2008. The financial crisis is happening. Rents are super cheap. There’s proverbial blood on the streets in New York. I was there. We all remember this. Real estate is plummeting.

These two are two entrepreneurial guys. They cook up this idea. They’re like, “There are some empty floors in this building that we’re in, here in Dumbo. What if we convince the landlord to let us take over one of these floors and then we can stuff some more people into it and make the arbitrage on the rent.” They decided this is a good idea.

These two new fast friends, they did it. They convinced the landlord. He’s like, “Well, I can’t move this floor anyway.” They give it to them and the idea is this is going to become like Airbnb for office space. There’s a Forbes article a couple of years later in the early days of WeWork and they say, “Sort of like Airbnb but maybe a better analogy is like an airline operator,” because really, what they’re trying to do is take a physical asset and squeeze as many people into it. Just like coach on an airplane. It turned out, I think, the financial dynamics of this business look a lot more like an airplane operator than they do like Airbnb.

Anyway, it’s actually a great idea. Very quickly, the space gets filled up. They listed on Craigslist. They’re like, “Hey, we’ve got desks here.” They decided to call it Greendesk. They think like, “This is going to be eco-friendly. That’s what’s going to appeal to these types of of folks that are new age entrepreneurs. They care about the environment.”

Ben: Then, they only stock environmental products so it’s like all Seventh Generation sort of like CPG stuff throughout the—

David: They used only recycled desks and then the kicker is—I’m sure this was probably fake—they’re like, “We are powered only by wind power.”

Dan: In Dumbo, [...] building in Dumbo, they changed their own grid?

David: Hey, they’re entrepreneurs. They’re entrepreneurs.

Ben: Throw a windmill on top of the building.

David: Yeah.

Dan: I’m sorry. I’m trying to think of Brooklyn. I’m trying to identify in my mind, the first windmill I’ve seen there. I’m still trying.

David: It was the Dutch. They put the windmills in New York when they settled in. Like I said though, it works great. There are all these people that are getting displaced from their traditional New York finance, media, what have you jobs and they’re either starting businesses, or they’re freelancing and they’re looking for stuff like this. The Craigslist postings that they’re making are just getting all this demand and I believe within a month, they have the space pretty much booked up. Then, they start taking some more floors in the building. The landlord owns a few other buildings nearby. They started doing this in the other buildings and it really works.

Ben: This is Greendesk, not WeWork?

David: This is not We Work. This is Greendesk.

Ben: Did something bad happened to Greendesk?

David: No. Something great happens to Greendesk, which is two years later. The landlord says, “Man, this is becoming a big part of my business.” It’s unclear to me if he offered to buy or they offered to sell them, but the landlord buys Greendesk from Adam and Miguel for $3 million, which is pretty great. This is 2010.

Ben; They raised no investment?

David: They, I believe raised no investment. Now, they had a third partner who was a guy I believe named Gil, who Miguel had worked with at the architecture firm. I believe Gil, at this point, just takes the money and moves back to Israel. He was Israeli. But Adam and Miguel make a pretty bold decision. This is 2010. Remember, they just made probably at least $1 million each. They could be living large in New York at this point in time.

Ben: In Dumbo at least.

David: In Dumbo at least. And to invest in Dumbo real estate in 2010, they would’ve made a killing, but they said, “No, we’re going to double down. We’ve learned a couple of things from Greendesk. We think that this product has some form of product market fit. Let’s take this across the water into Manhattan.” And so, they go. They decided to restart the company and they want to go do this same concept in Manhattan. One of the key things they learned is that actually, this eco-friendliness thing, it sounds good, but that’s not why people showed up. People showed up because what they were really doing was they were selling a culture, they were selling a workspace feel, design, and culture. I think this is totally true. Dan, I don’t know if you would agree on that.

Dan: If you think about freelancers back then, they were selling the coffeeshop, it’s what they were selling without having to go and buy coffee and there was actually a desk. That’s what they were selling because that’s where you would go, and probably with worse wifi at the time.

David: Regis and IWG is going to come up in a minute. But again, this is not a super new idea.

Dan: Look, I’m going to really date myself now. In 1994 in Cambridge, Massachusetts in Kendall Square where MIT is, I was working at a startup newspaper at the time. We rented an office space. The big thing that that had was it had a common receptionist and a mailbox. That was huge. We could get mail to us and somebody would pick up the phone and would direct it to us. That was very much the early version, but that general idea, and there was a bunch of different, basically, conference rooms and every company had one.

David: It felt probably pretty crappy.

Dan: Yeah, it did. It felt like basically, we’re in a very large cubicle with a window.

Ben: So this is an age old business. This subdividing real estate, basically leasing, taking out a long-term liability where you rent out space for some low price because you’re taking it in bulk, you subdivided it up, and then you run it for a higher price in a shorter term.

Dan: And in this case, WeWork will become and have some common shared services, which is, particularly if you are a two-person company, you don’t want to have to deal with somebody answering the phone, or how do we get the broadband hooked up, or do we have to hire somebody to take the trash, and make sure the coffee machine is filled every morning.

David: I think just to [...] because I think it actually is a big difference from WeWork and everything else. What they did is they did that and they made it feel like you are at a real place, not like you’re at some budget low rent.

Dan: It’s like English, baby!, right? It’s cool.

David: Yeah.

Dan: That’s what it was.

Ben: And there are multiple interviews with early WeWork members that said, “Yeah, I was working on a startup. It wasn’t going well, but my parents could still come to the office and they felt like I was doing something real, like I was a success. I was in place, oh my gosh, look at all these great desks, computers, and receptionists.”

David: This is energy here.

Ben: Yeah. Ostensibly, something was working.

David: I really think at this point in time something really was working. People wanted this. They had to come up with a new name. Dan, I think you know the story.

Dan: I’ve heard rumors of the story. Adam has never said it directly to me. The rumors are that Adam was partaking in some stuff he would later partake in planes and that is when the name came up. This time on a couch as opposed to an airplane seat.

David: Maybe he was on a couch on his private jet.

Dan: That’s possible. That’s fair, totally fair.

David: We’re referring to the reporting that came out in the last couple of months, that Adam apparently smoked marijuana.

Dan: Which shocked shareholders because apparently his major environment have never met.

David: They obviously needed a name to replace Greendesk and they came up with WeWork. This is an amazing entrepreneurial story what happens next. They start shopping for real estate in Manhattan. They’re looking for a whole building that they want to do this. They want to go big. But even with the $2-ish million that they had between them, that’s not really enough to get, even in 2010, at least a whole building. They want to be in a real hip part of town. They want to be in SoHo. They want to be downtown. They’re going around. They’re going to all of these, I don’t even know how it works when a building is up for lease, is it an auction?

Dan: I have no idea.

Ben: It’s market by market. I know in New York, it’s one of the craziest ways. In New York, when you’re looking for an apartment, you hire a real estate agent. That’s how nuts the real estate market there. I’m sure there are extra complications when you’re looking to lease a whole building.

David: Lots of people who are interested in buildings would all be in the room at the same time so they’re at one of these and they meet a Brooklyn-based real estate developer named Joel Schreiber. He takes a shine to these guys. He’s an established, pretty big time real estate developer. They know they need some more capital and so, they throw out something to him and say, “Hey, we need some funding for what we’re doing. If you think this is a good idea, how about invest at a $45 million dollar valuation?” He says, “Sure, I’ll buy ⅓ of the company.”

Dan: Which, by the way, go back nine years, nothing that’s under $1 billion genuinely pays attention to. For a startup that didn’t exist, that was an enormous amount and a huge valuation.

David: That is an enormous amount today.

Dan: It is, but even then, I mean, just so absurd.

Ben: But this is the very first example of Adam looking around. If this were a tech company, then what they would’ve gone and done is raised $500,000 on a $4 million pre money valuation. What Adam did was, “Oh, no, no. This is not that.” Also, we’re not going to approach a traditional tech VC type person. You pitch something unfamiliar that’s completely different to someone that’s not playing the same game as everyone else and you get a non tech investor in a non tech business at a non tech valuation and boom, the very first time this playbook has been run.

David: $15 million in the bank and they take out at lease for a whole building in SoHO. They start doing the renovation. There is the lease, but then they have to renovate this and turn it into WeWork.

Ben: We should clear that it makes sense that you should feel like your $15 million is safe here. Normally, when you’re investing in a tech company, you’re buying laptops and then you’re paying salaries. In this scenario, you’re getting something of value, this long-ish term lease, so that at least if the business goes kaput, then this major investor own ⅓ of a valuable lease.

David: And presumably, you could repurpose that building and rent it out for other things.

Dan: Which of course, by the way, as we go on, is in theory the concept in part behind WeWork’s massive valuations, which makes what just happened that much more of a problem.

David: That much more nutty. They start renovating this building floor by floor. We’ll see if we can find some pictures. WeWork, as we know it today, this was it. All the aesthetic, the glass walls, the communal spaces, they had this nailed from their Greendesk days from the beginning.

Dan: Plus beer taps. That’s very important. In the early days, when you hear about WeWork, that was the first thing you hear, “They have beer taps in the office.”

David: IWG does not have beer taps.

Ben: It’s like the highest delta between value and perceived value that you could imagine, or I guess between cost and perceived value.

David: As they’re finishing each floor in this building, within ¼ of each floor coming online, they’re at 100% occupancy. They’re like, “Oh man, this is working.” They start running the same playbook on other buildings in New York and Adam has a great quote on this. He says, “During an economic crisis, there were these empty buildings and these people freelancing or starting companies, I knew there was a way to match the two.” If he had stopped there, that is a brilliant thing an entrepreneur would say. He has one more sentence though. “What separates us though is community.”

Dan: I’m going to defend him on that for a second. We talked about this. Go back to the Greendesk days and to your friend who said, “Oh, my parents came in and it looked like something was happening.” These freelancers, they weren’t necessarily working with each other per se on the same project, but again working next to someone, it’s the difference between working alone and you can rent out a one-office office and you’re alone, completely, with the door shut. There are people around. There is an energy that makes you work more. Even today, questions about is it better for people to be in an office compared to all working remotely all the time?

David: Again, he’s not wrong.

Dan: But it does lead to some problems.

David: He’s not 100% right either. This is actually really interesting, I’m surprised by this. The next year in 2011, PepsiCo takes out a bunch of desks in that first SoHo WeWork and starts putting some of their remote New York City-based employees in the WeWork.

Dan: I thought that was a much newer phenomena in WeWork’s business model.

David: I thought so too, but actually from the very beginning, big corporate clients also saw the appeal of this. The next year, in July 2012, this catches the attention of a number of venture capital firms including Story venture capital firm, Benchmark Capital and in the summer of 2012, they lead a $17 million Series A in WeWork at a $97 million post money valuation. A nice step up from the original seed ground, which was crazy to begin with. Again, back in 2012, a Series A at a $100 million post, that’s a significantly higher valuation than Benchmark gave to Uber in Uber Series A. How crazy.

Ben: And in Forbes, Bruce Donnelley gives a nice quote where he flew out to New York to see what was going on. He said, “He remind a lot of eBay when I first met them in 1997. There was something going on at both that you couldn’t quite put your finger on. I think this is an early precursor to a lot of WeWork, which is there is something valuable here, you can’t quite put your finger on it thus, it’s hard to value.” That’s sort of gets taken advantage of over time.

David: Now, with all that said, everything up unto this point, Dan can feel free to disagree, it all makes pretty much sense.

Dan: No, I don’t disagree. I think it does. Absolutely.

David: Even this seemingly crazy investment by Benchmark, as we stand today, that’s a great investment. There was like, “Is this a tech company? Is it just a real estate company?”

Dan: It is but we will come back to this Benchmark investment, and the subsequent investments that in the background, is that what’s going on. You talk about the valuation, the part that didn’t get reported and none of us has ever seen is the actual governance terms that are sitting behind that valuation.

Ben: Do you know if that was happening at the Series A already?

Dan: I don’t know for sure. Adam Neumann even at the time of IPO, owned a remarkable amount. For example, Travis Kalanick, I think, owned like 6% of Uber when he got booted, around 6%. Adam owned ⅓ of the company after all the SoftBank money, et cetera. He controlled this thing even in those early days.

David: Adam, of course, had Miguel as his co-founder. It’s now obfuscated because they have their shares in an LLC, but I believe Adam always had a greater economic percentage of the company than Miguel. If you remember, back to Uber and Travis, Travis was not the owner of Uber. It was Garrett Camp.

Dan: But Adam had a bigger piece than Garrett had of Uber, I mean going forward.

David: Interesting. Garrett and Travis ended up splitting, but Travis didn’t start in the same way as like, “I am solo founder of this company.”

Dan: No. Again, we’ll get into this, but control was important to Adam. In every way, control really mattered.

David: After that investment, things continued to work while they’re opening lots of new locations in New York. I think it was right around then that I remember the Seattle WeWork opening, Ben and I were there at the time. There was definitely in San Francisco, a number of cities around the country. Expansion keeps continuing. They start to attract the interest of the financial community so there is, I believe, three more rounds over the coming years led by investment banks by Jefferies and JP Morgan, chief among them, but also from Goldman Sachs, and they start pumping quite a lot of money into the company on short order. By 2014, the company now is valued at $1.5 billion and is quite large at this point.

Ben: How much do you think had to do with the fact that they were New York-based and not San Francisco-based at this point?

Dan: You mean in terms of the lead? I think two things, New York-based, but also think about that. They are still basically a real estate company. If you are Goldman Sachs, if you’re Jefferies, if you’re JP Morgan, you have giant real estate investments, you have whole teams that are dedicated. Some sort of app or some sort of machine learning something-something, they’ve got to put a lot of faith that the founder knows what they’re doing but this, they felt they knew what they were doing. This is them. This is real estate that’s on their block.

David: That’s actually true. I believe by 2014, WeWork had become the single largest lessor of new available commercial square footage in New York City. Think about all of the real estate investment and property developers in New York. WeWork was the largest so of course, they were attracting attention of these folks.

Dan: It goes back to what you said earlier. Remember also what they are investing in. An app company can disappear just like that. There is a scandal or it doesn’t work, there is no product market fit. Worst thing that happens here is you end up with a shell company that’s got, as you said, all the commercial real estate in New York City. That’s the worst case scenario. That’s pretty safe as venture capital investment.

David: Goldman, JP Morgan, they’re going to be so happy to take over these leases if something goes sideways here.

Ben: Let’s think about how you might make that investment arrive at a $1.5 billion valuation at this point. Is someone doing a discounted cash flow? Is someone actually saying, “Well, if they continue growing at this rate for X years and we’re looking at our net operating margin, we think there are some chances to generate a billion-and-a-half in cash flows.”

Dan: I don’t want to say that I guess, I would hope so. I have so little faith that people do that or really do that. There is a big part of me that believes, and you guys can feel free to disagree, that people come up with a valuation and then they back their math into that valuation. If the first one doesn’t work, they will come up with another way to make the calculation.

But there is some reasonableness to it because you think about if you think about WeWork, the issue was always they had to spend a lot of money upfront. Their upfront capital cost to lease the buildings but also to do the renovation. It costs money because they were doing full almost demo inside of these things, almost down to the equivalent of studs and then rebuilding them inside. That costs a lot of money. If you got 20 at least, theoretically, depending on the building, you’ll get to break even at year three or year four or at 70%–80% occupancy. That’s when you’re really in the money. That’s how you’re planning it.

David: You know it’s interesting. I haven’t thought about this until now, as we’ve been going through it. I think you could argue then that the valuations for the tech venture capital community look a lot like what you said, but I can imagine Goldman, JP Morgan, they don’t do this. They were looking at the value of this real estate and I strongly suspect, having friends that were at some of these places on real estate investing teams at the time, they probably had big thesis about those years, call it 2010–2014, were years to go big on investing in commercial real estate in major metropolitan area.

Dan: The counter argument, even at the time, would have been we’re in economic recovery at the time, arguably boom by 2014–2015. Okay, so you’re right. The floor 30 on 6th Avenue, it’s got an intrinsic value to it, but WeWork has decided that they are going to rent it out to short-termers and they were going to spend a fortune renovating it when it was already an office building, generally, most of them, maybe not the one in SoHo, but most of them were probably already office buildings. Could we have done better just calling PepsiCo and somebody else splitting the floor in half and basically keeping the infrastructure exactly the same, maybe with a new coat of paint?

David: The net of all this is in June 2015, WeWork makes a really key hire. They hire a man named Artie Minson, who was the CFO of Time Warner Cable. Now, if you think about the cable business, this is not the content business, this is literally the pipes, the distribution of cable.

Dan: Which is why he was perfect for this.

David: Exactly. It’s a cash flow business.

Dan: Cash flow business but the same thing. A huge upfront infrastructure spend and you will get your money, basically recurring revenue year after year. It will take a while to get that back but then eventually, it’s a lot of money down the road and it’s recurring. And limited supply also. If you think about cable, in New York everyone knows when Time-Warner decided to stop carrying a channel, you’re out of luck. Same thing. There is a limited amount of commercial real estate in New York.

David: I remember back in the mid-2000s, I was a media investment banker at UBS in New York. I remember covering cable companies and the history of cable companies, as we’ve discussed a little bit on Acquired, was like nobody believed in them during the 80s and 90s when they were incurring huge losses doing all this build out of laying the cable, laying the pipes into consumer’s homes, but then the switch flipped, exactly like you said, Dan, and then they became cash flow monsters and people love them. So, I think a lot of this bad here was the same thing that’s going to happen in WeWork.

Dan: And Artie already said that explicitly over and over again. He felt they were analogous.

Ben: That’s Ben Thompson’s AWS analogy too that says, “Look, there’s huge build out cost. It would be strange if this business weren’t incurring huge losses right now in this era of rapid expansion of infrastructure. At some point, it should flip.”

David: Yeah, indeed.

Dan: It did, by the way. It did eventually.

Ben: AWS? Definitely.

David: WeWork just in the opposite direction.

Dan: Exactly.

David: Sorry to get ahead of ourselves.

Dan: No, no, no. You’re not. A switch does flip at this moment. Unfortunately, the switch that flipped, I think, was more in Adam than in the business.

Ben: This is the moment where until this point, the name WeWork is in no way solid or in no way a head scratcher. It’s a really interesting company that seems to have product market fit that’s of course, growing very fast, but no one is looking at the growth and saying things like, “There is something massively [...] here.”

Dan: Mostly. The only concern, as at least I remember hearing at the time, was this argument. The Pepsi thing is interesting because the enterprise piece of them in terms of rent and big enterprise companies wasn’t well-known. It wasn’t even that big within WeWork in terms of its revenue at the time. There was a concern that wait a minute, they’re filling this with all these startups, these tech startups. If the tech startup bubble burst, and that’s on top of a commercial real estate burst, you’ve got a bubble on top of a bubble, and then the whole thing goes to hell very, very quickly.

Ben: That’s a great point. I distinctly remember having this conversation late 2014. I would be sure of this company purely because there is going to be a tech bubble that burst soon, which here we are five years later and we’re all still waiting for it to happen or maybe it’s happening right now, but Dan has a great point.

Dan: You’re right, but the growth makes sense. It’s the reason I kept raising money higher valuation. They kept filling the buildings. That’s important. The buildings are kept being full.

David: Yeah, they kept being full. Adam, at this point, is very wealthy on paper, but as they keep raising money, it’s unclear exactly the method by which he did this. He starts taking quite a bit of money off the table. Some definitely from selling his own shares, we won’t know.

Dan: They were employee tenders. I’m told, at least, that there is some debt stuff too at JP Morgan, but in general, every time he sold shares, it was part of an employee tender. He was selling at the same price as they were but just he just had a lot more stock.

David: What we do know is that by the time we get to now, he has, I believe, it’s a $500 million loan facility personally from JP Morgan backed by his WeWork shares, which is effectively a way to be selling without actually selling your shares.

Ben: $500 million, that’s a lot of money.

Dan: The man’s got a lot of houses. He has like 10 homes or something like that.

David: He starts doing two things.

Dan: What? That’s two for each of his children. That’s not bad.

David: He does have five children.

Dan: I agree. If I have five children, I too would have 10 houses.

David: But yeah, he starts buying residential property. He owns four $10+ million properties in the New York area alone. Dan, I think you’re right, 10 residential properties around the world.

Dan: I believe so, yeah.

David: Ten or in that ballpark.

Ben: He also sees these companies like WeWork that will pay a bunch of money to me if I own a building, to lease it from me. I got to figure out a way to get into this building ownership business.

David: The other more problematic things that he starts doing is he starts using his money to invest in commercial real estate and this is a huge conflict of interest.

Dan: It’s an obvious conflict of interest. I remember hearing about this and actually asking him about this—this is before I joined Axios—when we brought him and his wife, Rebekah, to a Fortune Conference in Aspen, I remember asking about this. I almost think he did some of the commercial real estate earlier because at least his argument was, “We were having a hard time, at points, convincing landlords to let us in because they viewed us as this venture backed startup like ‘Oh, we’re going to sign a 20-year lease,’ but where are you really going to be in five years? You’re going to be gone. But if I buy the building or if I had a piece of the building, well we’ll lease to WeWork because I have faith in it so I’m solving for that problem.” But you’re right. Obvious conflict of interest, which in theory, if you had an independent board of directors, which had oversight, will be able to manage inside.

David: That logic might make sense but then, the obvious answer is have WeWork start buying buildings, not Adam personally.

Dan: Which is what they ultimately get to.

David: Yeah, not Adam personally, but then leasing the buildings back to WeWork that he’s profiting on. The other thing, this is just standard ridiculous startup stuff, which is sad to say at this point, but they rent out all of Universal Studios one day and they get The Chainsmokers to perform and they start doing this thing called WeWork Summer Camp.

Ben: It actually started at Rebekah’s family’s property, I think, in Upstate New York. I don’t think it’s the Catskill but somewhere that looks a lot like that. There are a few really great pieces reporting on this but it’s like 150 acres of land. Her family, I think, is independently wealthy. Actuall, her cousin is Gwyneth Paltrow.

Dan: Again, this is one of the things that sounds so stupid. I remember the first time I talked to who is running PR for WeWork at the time. I called and I get a text back saying, “Sorry, I’m at Camp right now,” to which I say to a colleague of mine, because it was like June maybe. I said to a colleague, “I think he’s bringing his kid to camp.” She responds, “He doesn’t have a kid.” I said, “But he says he’s at camp.” She said, “Oh, he’s at WeWork camp.” That began a whole conversation. “What the hell are you talking about?” Look at Google. Google still does this. If things are going well and no one cares and when things go badly, this looks just awful.

Ben: When you have a monopoly in an 85% gross margin business, you can do shit like this.

Dan: You can. By the way, as I said, I came from Fortune magazine, the old stories from Fortune from before my time when they had a blowout and the Fortune 500 issue was the Vogue issue. It was massive. I guess maybe like 10 years before I had gotten there, they had a blowout issue and they brought the entire staff, from the most junior to most senior, everybody, to Hawaii for a week. That, in retrospect, was really dumb, but at the time, you do.

David: Exactly.

Ben: But here we are in a, I don’t know, 10%–20% gross margin business that’s purely, right now, all the cash in the bank is investor dollars, none of it is profit dollars.

David: Correct. The peak of this period of the company is 2016. They raise just under half a billion dollars from two Chinese entities that value the company at $16 billion. I think that was the first time it crossed the $10 billion valuation threshold. Now, they’re among the top three most valuable “startups” in the world.

Ben: WeWork, Uber…

David: WeWork, Uber, Airbnb.

Ben: Airbnb.

Dan: [...] on the Chinese ones but at least for the US.

David: Yeah, at least for the US. I think that was 2016.

Dan: Maybe Dropbox at that point was already there, but close, maybe not quite.

Ben: It was like in the five-ish because [...] IPO around 10.

Dan: Uber, Airbnb, and them. Those were the three.

David: I think a lot of the Chinese companies haven’t even been started in 2016 yet. [...], I think, was started in 2017. It’s crazy.

Ben: Benchmark is two for three in these three big $10+ billion companies.

David: Snapchat was up on its rise at that point. So yeah, everybody’s sitting pretty. It’s after this that a familiar character enters the picture. SoftBank and its one of a kind founder, Masayoshi Son.

Ben: Listeners, if you don’t hear The Imperial March playing, now that it’s because I checked with Disney and we did not get the copyright authorization to put that behind this section.

David: We talked about SoftBank a lot on this show, including doing a whole episode on the Vision Fund. We’re now in early 2017, SoftBank has just raised the Vision Fund and we’re going to talk a lot about their motivations and everything that happened here along the way. One thing, I think, to really keep in mind, they have $100 billion to put to work.

Dan: Theoretically.

David: Theoretically. Their goal that they’re clear about is they want to deploy this capital in less than five years. How do you deploy $100 billion, which as we’ve talked about, is the largest fund in any asset class ever raised in history. How do you do that, let alone in tech companies? You need to find some companies that can absorb massive chunks of capital. They start looking around and they say, “Where can we put this money?”

Uber is obviously one example that they put quite a lot of number of those billions into. But here’s this interesting company called WeWork. It’s already one of the highest valued startups in the world and they have this interesting capital dynamic. They’re very capital intensive. They scale with capital. They take on these long-term leases.

Dan: And they want to move into Asia.

David: And they want to move into Asia. Exactly. This feels like a perfect fit. We could really put a lot of billions to work in this company and then, get through our deployment phase in Fund 1 and just like any good fund manager, then go raise our next fund.

Ben: Now, David, is SoftBank Vision Fund’s mission to invest in technology companies? How does that start a factor in the picture?

Dan: By this point, WeWork believes it’s a technology company. The one thing you didn’t say—I thought you were going to when you talked about the inflection point—was, to be honest, the AWS example is pretty good, it believes it’s starting to add lots of services on top of the real estate. Beyond the beer taps and the decor, it’s trying to add all of these services. Some of those are—

Ben: Social network for members.

Dan: All that stuff, eventually preschool or elementary school. Nonetheless, that’s the idea. I think that’s part of it but it’s also if you’re Masa, SoftBank looks at what they believe are transformational shift in how people either live or work. They invest in Slack, for example. They think that’s a fundamental change in how people work from collaboration. In this case, they think this is a fundamental change in how people work from a physical location standpoint. This works for that from a thematics standpoint.

Ben: Thematically, but economically, this doesn’t have the high fixed cost, low variable cost component that a true, pure technology business would have.

Dan: No.

David: Not at all, but to underscore again, as we said, it has this other extremely attractive element to SoftBank. SoftBank invested in Slack. How much money could they put into Slack? They couldn’t put that much money in.

Dan: In Uber, they could only plug a ton in because it was in crisis. It’s a management crisis. They took advantage of the situation. Even if you look at Vision Fund, a ton of that was money that they had already invested in Arm that they basically just transferred over to take a big chunk. If you do it privately, [...] as you say, it is hard. It was the big question they raised. How are you going to deploy this in a reasonable way?

David: Yeah, so here is this perfect vehicle. This is amazing. Dan, you may know more details on how this happens but the SoftBank team is scouring the world looking for companies like this. WeWork is top of the list. They set up sort of like a final diligence meeting where Masa is going to come over to New York to WeWork headquarters. They have two hours booked with Adam. Going to see the whole space, going to spend a lot of time with Adam.

As the story goes, the time when Masa is supposed to show up arrives, Adam is all ready, he’s activated the space, as he says that he does, and Masa is nowhere to be found. Time goes by. Waiting. An hour goes by. Finally, Masa shows up and he says, “I’m really sorry. I only have 12 minutes.” They do a quick walkthrough on his space and then he says to Adam, “I got to to get in the car to the airport. You can get in the car with me, if you want, we can talk about this.” Adam gets in the car with him. Masa pulls out his iPad, as the story goes, draws up with his finger on the iPad a sketch of the terms of a deal. The terms being SoftBank would invest an initial $4 billion in total.

Dan: Out of the Vision Fund.

David: Out of the Vision Fund.

Ben: And that’s $1 billion for international expansion into entities outside the US.

David: Subsidiaries in Asia, yup.

Ben: $1.3 billion of primary capital into the company and $1.7 billion in secondary to basically buy shares from existing shareholders. No new cash.

David: Including Adam.

Ben: Including Adam.

David: This sketch on the iPad in the car, Masa signs his name to it. Adam signs his name to it.

Dan: It’s important, just for those who don’t understand Vision Fund, to get an investment from Vision Fund, at least one, I think, is like over $100 million, you do need Masa’s approval and that can’t be via phone. It’s got to be an in-person meeting. This isn’t a normal venture fund where one or maybe two partners meet with the CEO and then they bring it back to the partners, they discuss it, and they have the investment committee to vote. No. If you want this, Adam had to meet with Masa. This has been true for anyone who’s raised money from them.

Ben: Wow. And it’s what? 100 companies now? 100 investments?

Dan: I’m not sure. I’m not sure what the numbers are although Vision Fund 1 is basically full in terms of new companies.

David: I have friends who have gone through this where the SoftBank investment team will work on a deal together and then, “Okay, well, we’re going to fly you over to Tokyo,” or wherever in the world Masa is.

Dan: Yeah, the fact that Masa came to New York or was going to be in New York was a big deal because usually, you have to get on a plane and go.

David: Usually, you go to Tokyo. It’s done. They valued the company at $20 billion. It was already valued at $16 billion. This was $4 billion of capital. That was a step order of new capital coming in and $1.7 billion of that going to existing shareholders, which again, we don’t know the details, but I imagine a lot of that was to Adam.

Dan: Also, notable time they get to board member too. It’s important. They put two people on the board of directors at this moment.

Ben: To which that had to be stomach-turning for Adam who’s obsessed with control.

Dan: As we will learn later, he has two people on the board of directors, but they have as much control over financial decisions there as my kid does in my house. She can ask for things and complain about things but in the end, I get to decide what we buy and what we don’t buy.

Ben: Famously now, Adam has 20 votes for every 1 share in the company that he has. Do you know if he got this as part of the deal?

Dan: I do not know.

David: Again, we don’t have the document to sort of forensically examine what the—

Ben: But luckily, there will probably be class action lawsuits at some point, so we will get these documents. It’s just a question of time.

David: But what the governance was at various points along the way, I can say with 100% confidence, there is no way, going back to the original Benchmark investment, that the voting structure was like this.

Dan: I don’t that that’s true necessarily. It’s not just Benchmark. All of them were so bent over backwards. Go back to the Zuckerberg thing. Think of Zuckerberg. He turns down $1 billion from Yahoo when the entire board, including his investors, wanted him to take the deal. He was able to do that. After that, so many other founders of “hot startups” were able to get so much whether it was 20:1 or not. I have no doubt that after the Benchmark deal in the B and the C rounds, Adam, whatever he had, it was more than the rest of the board combined.

Ben: What is really interesting here is the SoftBank dynamic that comes into play with boards because they’re basically the only entity that is going to do the things that they’re going to do because they so aggressively want to put this capital to work. So, they basically arm Adam to go back to the board holding a piece of paper that says, “I’m going to get literally billions in investment dollars.” The terms can be as Adam-friendly as they want. You can look at the rest of the board. The board is not going to say, “No, we don’t want $2.3 billion of new capital coming into the company.” Almost any terms, they’re going to be happy with that, especially because what SoftBank does is they say, “Also, if you don’t take it, we’re going to find someone who competes against you who will.”

Dan: Also, with SoftBank, they and Adam are peas in a pod in this. Adam is a grow, grow, grow person and that is what SoftBank’s model has been really with most of its companies that had Vision Funds invested in. Think of DoorDash, think of Uber. It has been that no matter what the industry is, if you buy market share, you can suffer the losses, we will make money eventually. In the case of WeWork, that is new markets, new cities, buildings, buy, buy, buy, and here’s your checkbook, we’re going to do this. That’s exactly what Adam wants to do.

David: Yeah. There is a famous story also. They have a closing dinner for the investment in Tokyo after it happens and supposedly Masa asks Adam and Miguel who would win in a fight? Who wins in a fight? The crazy guy or the smart guy? Adam answers right off the bat, “The crazy guy.” Masa says, “Yes. The problem is you’re not crazy enough.” Dan, we talked about this as a prep for this. Masa, in a lot of ways, is feeding Adam’s instincts here.

Dan: Absolutely. He’s an enabler. But more than that, he’s an enabler who’s also pushing him from behind. As you said, they were perfect for each other in the sense of they both wanted the same thing. Leaving the money out of it, when you hear a founder saying, “I want this investor because they see the same vision I see,” Masa was that guy.

Ben: So this is the pivotal moment where if you accept this term sheet as the board, this is the last opportunity that you have to exert any measure of control. It’s almost like Kobayashi Maru. On one side, you can not take $2.7 billion of fresh capital in a company that needs a crap ton of capital. On the other side, you can accept your fate that what all then happens in the next 2½ years, something along those lines, you’re letting happen. It’s not going to necessarily play out exactly like it did, but you’re basically saying, “This is the SoftBank and Adam show. We’re about to do a bunch of crazy stuff.”

Dan: They were also getting paid up. Another thing we do not know is you talk about that tender, did Benchmark take money off the table in that deal? They might have. They did in Uber from SoftBank. You might also be saying, “Well, okay, we’re getting our principal back plus 3X our principal.” We’re already in the money. Worst thing that happens is worth 3X in the money, or 5X, or whatever the hell number is so go for it. Make us the next Google. Make us the next Facebook.

David: Exactly. You’re at the casino at this point. You’ve gotten 3X your money back. Let it all ride.

Ben: Those are the incentives. We’ve talked about the board and the investors. We’ve talked about Adam is looking for this partner in crime and SoftBank is looking to go put billions and billions of dollars into something because boy are those management fees sweet when they have these huge funds and they can actually put it to work.

David: It’s also crazy, too. Let’s just think about this for a minute. This was mid 2017. That was two years ago. This was very recent.

Ben: It feels five years ago.

David: It feels 10 years ago. So much has changed. They take this money. They turnaround right away and they buy the Lord & Taylor building on 5th Avenue in New York for $850 million, which I don’t know, I’m not a real estate investor, I don’t know how to judge, whether that was a good investment or not but all of a sudden, you’re now in a new league of capital deployment here.

Dan: And it’s partially they’ll use some floors. This is because they feel they need a new headquarters because they have physically grown out of there and they’re out of space. I will say, from being in their headquarters even a few months before all hell broke loose this year, it was crowded. It was legitimately crowded. They hired a lot of people.

David: They had 15,000 employees until this week.

Dan: That Lord & Taylor store is going to look like an American Apparel store. The one you passed by. It’s going to look very similar.

David: Oh man, how history repeats itself. They also, at this point, purchased the infamous Gulfstream G650 private jet purchased by the company for Adam’s use for $60 million. Right around the same time, Adam and his wife Rebekah, who at this point has been written into history as a co-founder of the company, as best as we could tell in our research, she and Adam were together when they started the company but was not actually [...].

Dan: It’s a fascinating thing, too, because usually, co founders get written out of stories, not written in. Silicon Valley is littered with people who legitimately co-found the companies who don’t get to be part of those narratives.

Ben: In the sci-fi world, this is referred to as a RetCon (Retroactive Conversion). They RetCon that person into that role.

David: Again, we don’t know for sure. Anyway, the two of them decided right around the same time, going back to the Greendesk environmental roots of the company, they really should ban meat. It would have such an environmental impact if they ban meat from WeWork.

Dan: I have heard the backstory of this. Again, I’m not going to claim that this is completely true but a story I heard when this decision came up or when Adam proposed this decision was that internally, they said no. His people internally said, “For example, we have sales people who go and try to sell things to potential customers and meet with landlords, and they’re going to pick up tab, right? I’m a salesperson. If the person I’m with gets a burger, can they not buy it?” because Adam basically said no. No company money will be spent on meat.

That is a problem. People raised all of these legitimate concerns, but this goes later to the governance as well. The board raised all of these legitimate issues and he sat there, he took them all in, and just got up and said, “Yeah, we’re going to ban meat.” And then, announced it and that was that. That’s how these things work.

David: Nothing wrong with banning meat in theory, but…

Dan: But it’s part of this idea that WeWork, what was that line you said, the community line. I believe this was sincere. He believed WeWork was more than a coworking space. Anytime, if you’ve been in WeWork and you get on the elevator to go up to whatever floor, there is a schedule of events. These events have nothing to do with “business [...].” It is farmer’s markets, it is yoga, it’s stuff like that. He legitimately believed that and he also believed that that was a way to keep customers. Okay, maybe now, my three-person company now is at 20% company, we should maybe have our own space but man, we like it here.

David: Totally. Again, not wrong. It just got so perverted over time. Fast forward to this year. I think in many ways once this came out in the IPO, filing this was the straw that broke the camel’s back. We’ve talked about everything that’s happened up until now. In January of 2019, WeWork changes its name to The We Company. In doing so, WeWork did not have the trademark for the name, The We Company. Who had that trademark? Adam had that trademark via an entity he controlled called We Holdings, I believe. WeWork, at Adam’s direction, licensed that name from his own company for $5.9 million. Again, I’m just speechless here.

Dan: And the defense of Adam Neumann in this—I’m not going to make, by the way, because as I said, this is horrible—the argument was that this was a tax issue. That Adam had created it, it had a value, and if he simply gave it, it’s like you can’t just give your friend a brand new car. You just can’t do it. There’s a tax liability with that, that if you’d simply given it to the company.

Now, this is a person who did also have a $500 million loan from JPMorgan. As someone who had taken hundreds of millions of dollars, he could have sucked up the taxes. Again, even if it’s one of those things that the board at the time was willing to do, how nobody was able to flag it and convince everybody internally before it became publicly disclosed is just endless—

David: Yeah, like how this would look.

Dan: Yeah. It’s one of those things that even if you could make a valid on-paper argument for it, the optics are so God-awful, you don’t do it.

David: Yeah.

Ben: David, I have a name thing again to talk to you about after this.

David: We’re changing the name. We’re going to be The Acquired Company. No. Acquired Media LLC is a great name. Right around the same time, news comes out. Remember SoftBank and their motivations? They want to dump a lot of money in here. Now, we’re in the beginning of 2019. We’re two years into the Vision Fund.

Ben: I can’t believe that was this year.

Dan: That’s when the news comes out. The discussion between SoftBank and Adam or at WeWork are going on late in 2018, and Adam thinks he has a deal.

David: One of the things we wanted to do on the episode is to talk about why is SoftBank doing what they’re doing throughout all this. We are now two years into the Vision Fund. They’ve deployed a lot of it, but they’re thinking about and talking publicly about Vision Fund II and trying to start fundraising for that.

Ben: People are still shaking off the shock that Vision Fund I happened, like this notion of, “Oh, we’re about to do it again? $100 billion again?”

David: Yeah. So now, speaking as a fund manager, like any fund manager, it’s in your fund documents that you cannot go raise a successor fund until typically you are at least ⅔, if not more, deployed and reserved of your initial funds. I don’t know exactly how much capital they’ve deployed out of Vision Fund I at this point, but they’re like, “We want to raise fund, too. We got to deploy Fund I.” News comes out that they’re talking about, like you said, Dan, Adam thinks there’s a deal for SoftBank and the Vision Fund to invest $16 billion more in WeWork.

Dan: And, by the way, this is the first time the issue of control comes up. The news stories that come up with it, that SoftBank would basically buy a majority stake in the company, which even I don’t think was ever explicitly said. The assumption is, if you own most of the company, you get to make most of the rules.

Ben: Which we thought until yesterday.

Dan: Which we thought until yesterday. But Adam apparently, at least from what I’m told, was never going to give up control and this becomes an issue of, “You might own 52% but I still have control.” I don’t think that was the breaking point of that deal, but that was something I always heard from Adam’s people internally at WeWork was, that he always felt the reporting on that was wrong because “he was never, ever going to give up control in the SoftBank deal.”

David: Interesting.

Ben: Because it was not Adam that blew up that deal.

Dan: No.

David: It was SoftBank’s LPs, at least according to their report.

Ben: David, walk us through this. I thought venture capital was a blind pool.

Dan: Not in vision. It’s actually funny. Saudi Arabia doesn’t have a veto. They can’t kill a deal. But Saudi Arabia—you probably know this better than me—I think they’re 30% or 40% of the fund. They can say you can’t use our money for this. For over anything a certain amount, they have the right to basically say, “You go do the deal, but we’re carved out of this one.”

David: Yeah, interesting. Which is not typical in a venture fund agreement.

Dan: No, but a $40 billion commitment isn’t typical to a venture fund agreement, either, so you should get a little bit of extra say.

David: There are a lot of things that are not typical about the Vision Fund. But regardless of whatever control they had, they had the ultimate hammer which LPs always have, which is always like, “We’re evaluating you about whether we’re going to do Fund II or not.” I have to believe that that was ultimately the leverage they had and why SoftBank backed out of the deal was like, “Oh, shoot. Actually, if we do this, it’s going to jeopardize [...].”

Dan: There’s also tense relationships at this point. Remember when you’re thinking that. Now, this is a little bit after, but in October of 2018—we’re talking December-January—Jamal Khashoggi gets killed. Masa decides he’s not going to go to their big conference. He’s actually going to show up in Saudi Arabia and meet behind closed doors, but he’s not gonna sit on stage. So, things were tense.

Ben: This is Davos in the Desert?

Dan: Davos in the Desert, correct.

Ben: Which is happening very shortly.

Dan: Happening this coming Tuesday. Masa is speaking this year. Someone needs to raise a fund.

Ben: It’s all written out right there. I mean, no. If I make a value judgement on the show, that’s a horrible thing to go after the events that transpired and represent the organization there and participate clearly desperately needs to raise a fund.

Dan: Absolutely, yup.

David: Yeah. So, the deal falls apart. SoftBank does end up investing corporate, I believe, not the Vision Fund, $2 billion in WeWork at this point in time. WeWork needs the cash. They’ve been grow-grow-grow, they bought the Lord & Taylor building for $850 million.

Dan: And they’ve been making decisions. Remember, the bigger deal fell apart really at the last minute as far as WeWork was concerned. Think about the timing. Again, end of year Q4. That’s when you’re making all your plans for the next year. They expected to have the money. I don’t know whether they’re officially signing lease or not, but certainly had the engine running.

David: Yeah, totally.

Ben: And to explain the SoftBank Corp thing, this is SoftBank, the gigantic telecom that’s been around for 30–40 years. Before the Vision Fund, this is off their balance sheet.

Dan: And a balance that SoftBank Corp expects to grow in 2019 because they’ve agreed to sell Sprint, ideally as the month closed.

David: Interesting.

Ben: Wow. We did the T-Mobile Sprint episode so long ago, I forgot that it hasn’t closed yet.

Dan: Has not closed. Still in court.

David: Yeah, still antitrust regulation.

Dan: Not about antitrust. They got through antitrust, but about a dozen state attorney generals are suing the block, so we will see.

David: Now, WeWork needs a plan B. They need capital to fund this plan and probably a lot of these lease commitments are in place already. I want to raise a point here that we want to talk more about. There is essentially only one buyer of WeWork shares at this point and that’s SoftBank.

Dan: Or the public market.

David: The belief is or the public market, the public market is not a buyer. But they’re looking around probably. There’s no other private investment firm or entity that WeWork could go to for financing at this point in time.

Ben: Some might call this a price discovery problem.

David: Indeed. This only alternative is public market. Let’s tap the public markets. In April of 2019, just three months after this deal falls apart, the file confidentially with the SEC to go public. It gets reported that this is happening.

Dan: They file technically in December. They gave an explanation which I didn’t think made a lot of sense, but they did because why else would they have done it. Something about the timing and the year. They file officially confidentially in December. It got reported several months later.

Ben: Help us understand that timeline versus a normal IPO timeline. Was this rushed?

Dan: No. That makes sense if you were to file confidentially in December. They knew, similar to how Uber knew or Lyft knew that this company was relatively unusual and the SEC was going to have more questions than it would have for a run-of-the-mill company. We file in December, first idea maybe we’ll go public in late spring or we’ll probably go public in September. We are working on this big SoftBank deal so we don’t have to, but we’ll have this in our back pocket. We do it in December. No one is paying attention until January, anyway. Go through a bunch of revisions. You don’t want to go public in the middle of summer. You’ll come out right. When Q3 happens, you’ll be out the door.

David: And indeed, that was what they’re trying to do. August comes around this year, just two short months ago, and they filed the public version of the S-1, which means the train has left the station. Once the public version of the S-1 comes out, the process is going.

Dan: Yeah. It should be six weeks and then you’re public.

David: It should be six week and you’re public. And all hell breaks loose. Dan, you were, more than anyone, on top of this.

Dan: It’s one of the most remarkable S-1s that’s ever been written. Let’s start with the obvious. There was huge revenue growth. If you only read to the whatever it is, like the 8th page where you see the top line financials, even though the losses were massive, which wasn’t a secret. Remember, WeWork had been kind of like what Uber done. Even though they were private, had been disclosing financials for a while for two reasons: (1) Because they wanted people probably not to be shocked by the S-1 eventually, and (2) they had done a public bond offering about a year-and-a-half earlier. They had public disclosure requirements, anyway.

So top line, look. Revenue growth was huge and it was billions of dollars in revenue. This wasn’t a small thing. Losses were huge. Billions of dollars of losses. But then, you had to keep reading and to be honest, these things were like 100 pages long.

Ben: And this, I think, is the longest I’ve ever read. It was multiple hundreds of pages.

Dan: It was very long and lots of reporters kept going different sections and finding things that were shocking and surprising. You kept looking at and going, “No. That can’t be right.” We had conversations like, “It says this, but it doesn’t really, right? These were written by lawyers and bankers. What does it really mean?”

Also, partially because you talked at one point, Adam has some real estate. WeWork has these series of LLCs. Every building is its own LLC. Even if everything is on the up-and-up, it’s an extraordinarily complex organization, structurally, and all that comes out of the S-1.

Ben: I think it’s the first 20 pages here, there’s that org structure. Here it is, page 16 of The We Company that owns The We Company MCLLC, that has The We Company partnership, and then the WeWork Company LLC, and then all the countries. This is before you get to buildings.

Dan: Yeah, and remember, they were also—are still are, maybe not now—been raising a massive fund. You talked about WeWork should have bought the buildings. They were doing that. They were raising a massive fund, which Adam was going to have a stake in, but just like everybody else at WeWork would, and that was going to go buy buildings now as, again, another separate entity, which is then leasing out and all that.

We learn a lot of stuff. This is where we learned about the trademark. This is where we learned about the extraordinary amount of control he had, even to the point where if something were to happen to Adam, like he were to die, the board doesn’t get to replace him. His wife, Rebecca, gets to decide the succession plan.

David: If she dies, too, then their children…

Dan: Absolutely. We learned that they are also going to give away an enormous amount of money to charity after this IPO. I will say, Adam has given a lot of money to charity over the years out of sum of that money. He hasn’t put it all into houses and gulf streams, but I think they commit that they’re going to give $1 billion over 10 years after the IPO way from proceeds.

Ben: Which is fascinating. There’s actually, in this document, a section that says, “Charitable commitments of our co-founders and our senior leaders.” That is very atypical.

Dan: It’s very atypical. If this had become official, if this IPO had gone forward, he would have been legally obligated to do so. This wasn’t the giving pledge which is signing something that Warren Buffett gave you and if you don’t do it, what’s going to happen to you? This had the force of the law behind it, in theory.

David: Yeah, or at least the force of the SEC [...].

Dan: A much weaker law. [...].

Ben: So, let’s talk about what we don’t learn in this document. When we were talking about doing this episode, I’m my head I’m like, “Okay, I want to tell people what the macro story is here,” and then the question in my mind was, is this actually a good business at steady state if we were to stop expanding?

I’m scrolling and scrolling hundreds of pages. You can’t actually ascertain, “Hey, of the cohort of your buildings that are at scale, what are the gross margins? What are the unit economics?” They keep saying, “We have really strong unit economics,” and then the only financials they give are these massively blended ones, that is, a very, very basic P&L that shows the business, including all of the expansion.

It’s really difficult to tease out what losses are from marketing versus what losses are actually incurred at maturity. They have this silly graph that has no Y axis with this curve that basically show, “Hey the buildings are break-even after six months,” but not much more detail than that.

Dan: No, and then you would have thought by the time they file this one, learned a lesson from Uber, which had a similar problem. Look. Every single company I think I ever talked to tells me that even though they’re losing a lot of money, their unit economics are fantastic. I waited for someone to say, “Well, you know economics are kind of mediocre.” No. You know economics are always great. But you’re right and that was an issue with Uber.

David: They don’t tell investors [...] there.

Dan: No, but when you look inside Uber’s darkness, you could not figure out what were the [...] per ride, particularly for Uber Eats per deliver. You couldn’t figure out any of that. I think that has been an on-going problem for them. WeWork was the same way and WeWork should have been able to because WeWork have been saying things over the years, again like Uber in mature markets where they have been X number of years or had X number of buildings, we were building profitable.

Understood there’s overhead, there’s marketing, but you couldn’t even figure out that in that building in SoHo that they’ve been for four years, take out all the overhead, is the building profitable? No freaking idea, which is a problem because if the argument was Artie Minson’s argument, with a cable company eventually you can figure that out. Was deciding to lay pipe in Seattle, did that make money in the end? After a certain amount of time they should be able to say yes or no. In this case they didn’t. It wasn’t even that they couldn’t. They didn’t.

The backstory you keep hearing and part of this is probably self-serving about bankers and board, is that these things were indeed raised. Not by the SEC, but these things were raised by bankers and boards. Just like Adam and the meat thing, he basically waved his hand and said, “Don’t worry about it. This is how we’re doing it.”

David: Wow. Needless to say, potential public market investors react terribly to this, as does the media and everybody. First problem is the governance, as you keep saying, Dan. So, September 13, WeWork announces it’s changing the corporate governance. Adam is still going to have the super voting shares…

Dan: But they’re going to be weaker. I think it was supposed to go down to 3:1 if I’m correct.

Ben: There’s 20, then 10, and then 3.

Dan: Right. He was going to allow the succession thing, he’s going to change the board, he’s going to determine who his replacement was, and they were allowed to fire him, which was important. By the way, that’s unusual because again, think of Facebook. Board can’t fire Zuckerberg. I don’t think in Alphabet they can fire Larry Page. That was interesting that the board now, even though they didn’t have the votes, the one thing they could vote on would be to fire Adam Neumann.

David: Now, this was—Dan, correct me if I’m wrong—an announcement. This was not an actual change. These were things that were going to happen upon the IPO.

Dan: It’s yes and no. That’s where things get very tricky because as we know, they do fire Adam Neumann. They clearly got the ability to do so or maybe they just persuaded him that he had to step away. Either way, we—being you, me, the media, everyone—were under the impression at that moment that these changes have been made. It is codified, it’s talked about in an SEC document. Again, it comes this question of, “Okay, is this something you’ve done or is this something that is that is effective as of the issuance of the actual shares being issued?” That remains unclear.

David: Because I believe when we get to the end of this in just a sec, Adam still has the 20:1…

Dan: If not 20, he has at least 10. I believe he still has 10. He still controls the votes as of two days ago.

David: Yeah. So, September 24th, Adam is out as CEO.

Dan: He remains chairman. He already becomes chairman.

David: Yeah, executive chairman. Even that wasn’t enough to get the IPO back on track. They announce after that, they’re pulling the IPO.

Dan: Let’s just go back quickly because this is important. This is where SoftBank plays even before Adam gets fired. There starts to be reports over a weekend that SoftBank is pushing to have the IPO postponed. Now remember, Adam wants this thing to go forward. To be honest, the board wants this to go forward as well. Obviously, the bankers wants this to go forward.

Ben: It’s an interesting leak.

Dan: It’s an interesting leak and SoftBank will not cop to it, but if you go to who had incentive to leak this, this is a really damaging thing to leak. This isn’t just like, “Oh, you know. Maybe earnings projection will…” This is really damaging. This is saying to prospective investors, “This thing shouldn’t happen.” That’s a real freaking problem. By the way, the biggest investor who’s got two people on the board—they should know this company well—doesn’t want it to happen. Somebody at SoftBank is leaking this.

Then, there is the question of why. Why would SoftBank be torpedoing its own portfolio company? The best explanation I’ve come up with or at least the one that everybody affiliated with WeWork, those who support Adam, those who don’t, everybody seems to believe is this goes back to Vision Fund, which is if this goes public and it goes public, say, at evaluation—I’m going to make this number up now—of $15 billion. Because now, they were getting investor feedback and this thing’s not going to $49 billion, it’s not going to $20 billion.

Ben: Down to $20 billion, down to $15 billion.

Dan: If it goes public at $15 billion, SoftBank then is obligated to revalue its existing shares in WeWork. What does that do? It means that when you’re going to the Saudis, or to Apple, or to whoever else, our IRR on our existing fund has gotten a lot lower because you said earlier, this is one of the biggest investments there. Any valuation change has a significant change to SoftBank. Remember, SoftBank has previously marked it up to $49 billion. Had it done an insider deal, it marked up on its own, so the reduction would have been massive.

David: Yeah, they would have cratered.

Dan: Absolutely.

Ben: They’ve got $78 billion in because they continued to put in more convertible notes, too.

Dan: There’s a lot of money in and again, they have marked it up themselves. If they have just kept things at cost, things would have maybe been a little bit better. But yeah, it leaks out, it becomes a cavalcade, and eventually, Adam leaves.

Again, there were first talks. SoftBank wants the IPO not to happen, then SoftBank thinks Adam Neumann should leave. Well, Adam’s not leaking that. There’s no reason for anybody else to be. SoftBank’s leaking that. I should say for the record SoftBank says they didn’t leak it.

David: There we have it. We don’t know who did, somebody did. The end of all of this is that the company is now running really on fumes.

Dan: Shockingly low on cash. Remember how much money they were planning to get? They were looking to bring in $3 billion with the IPO and then they also agreed, JPMorgan had arranged a massive $6 billion debt package which was concurrent to the IPO.

WeWork, in whatever it is, in August looks at its balance sheet and says, “We running really low on cash.” But come the end of September, we’re going to have $9 billion and they have banked that in their brains and in their models. At that point, they got $9 billion coming in September. Spend and, by the way, really spend because wouldn’t it be great if we go public in right after Labor Day? Then five weeks later, we can come out with Q3 financials would show massive growth, so let’s goose the growth now.

Ben: I think, Dan, you had reported something’s got to happen by Thanksgiving because they’re going to hit…

Dan: And I overstated it. I heard by thanksgiving, but apparently, they would have been out of cash by the end of next week, although it is unclear how much of that is related to severance, et cetera. They were going to have to pay to these thousands of people they’re laying off. But yeah, they were almost out of money. They need money.

David: So, yesterday as we sit here, the outcome of this is announced. SoftBank is acquiring the company.

Dan: Without acquiring [...] which no one can explain to me still, including SoftBank. No one can explain to me.

Ben: Let’s walk through what that package looks like. SoftBank is going to, first of all, get Adam to step aside from the board position. They are paying him $185 million consulting fee.

Dan: A “consulting fee” which gives them three things. Adam gives up his super voting shares, Adam steps down as executive chairman, and those are the two official things. The unofficial thing is he votes for the deal. There’s an alternative package and there’s question about how real it was. There’s an alternative package led by JPMorgan and it includes things like Starwood, [...], serious real estate investor. There’s an alternative package. There are people on the board who prefer that package because they think it leads to IPO quicker.

Adam again didn’t give up the voting control. So, Adam gets to decide and he takes $185 million bribe, which his people say is in the best interest of the employees because there’s a tender offer of a piece of this which we discuss. But yeah, they pay him off.

By the way, what a remarkable thing to learn. If you are an activist investor like Elliot, who spends all this time, for example at AT&T, working with small shareholders and stuff to convince the board to maybe vote, I wonder if Paul Singer has ever thought, “What if I just gave the independent directors $10 million each? Wouldn’t that be faster, easier, and buy their votes?” It’s unclear at this moment if that’s illegal because, to be honest, from what I can tell, so long as you can have a defensible fiduciary argument in this, he’s going to be a consultant to the company.

David: They’re going to ask his advice.

Dan: I asked him about WeWork, “Is this legal?” and they said, “We can’t tell,” because no one really considered this. They way he said it to me was, “We also don’t have anything in there. What happens if we learn that WeWork can actually work well on Mars? It’s not in the documents. We didn’t think about it.”

David: I think the only guaranteed outcome here is that the SEC is going to have lots of job openings and guaranteed employment for a number of years, at least the New York office of the SEC.

Dan: There’s going to be a lot of WeWork people to go.

Ben: Let’s go through the rest of the package. In addition to that $185 million consulting agreement, they are doing a tender offer of $3 billion to Adam and anybody else in the company.

Dan: And investors at $19.19 a share, which goes back from a valuation perspective, four years, three years.

Ben: Right. It’s looking like about $1 billion of that will buy Adam’s shares.

David: Up to $1 billion. He doesn’t necessarily have to sell it all. It’s hard to imagine he won’t, but in theory he doesn’t have to.

Ben: So, interestingly you pointed on that $19.19 number. That strike price, if you go back to the last time that the stock was valued around there, you brought this up earlier it was around $20.14, which was around the time when WeWork had about 1000 employees, so 14,000 of the 15,000 employees have been issued stock options that are underwater.

David: It’s what we think. As we discussed before the show, there’s a 409A Valuation, which is what shares are really valued at and that’s different than the official price. So, it’s possible that there’s another 1000 in it. Even if you’re slightly in the money, there are taxes on top of this. You weren’t expecting this, so a lot of people might not have exercised options. If you deal with this stuff, you realize that if you haven’t exercised your options, you’re actually paying a higher tax rate than people did who did a year ago.

I have been told that there were certain people who got actual stock grants, which is different than options, just were handed stock basically free in lieu of cash. I doubt that was very much. If that existed, those people in the money. Look. No. Most people who’ve joined WeWork in the last couple of years, who, a couple of months ago honestly might have been taking our mortgages, might have been taking our loans. Why wouldn’t you? You got a $49 billion company. Any bank would loan against that, or at least loan something against that.

There are two things. They get nothing out of that financially and thousands of them are literally going to be out of work. They get nothing for their stock and they don’t even have paychecks. They’ll get some severance, but not much.

Ben: There’s a couple of more points to this deal. The $5 million loan to Adam personally from SoftBank Corp off of their freaking balance sheet.

Dan: Which he will use to basically repay his loans to JPMorgan.

Ben: And then a $1.5 billion investment at a share price of around $11.

David: The net value of the company is $8 billion, I believe.

Dan: I think in the end the money is a little bit over $10 billion, I believe. But again, it is so convoluted, no one really quite knows. I think at this point, you could say that the old valuation models that we for most of these companies is value this, it’s a Series A, value this. I think it’s all just out the freaking window at this point.

Ben: This gets to the market discovery or that the price discovery problem I alluded to earlier. When you have only one party who can buy and the leverage keeps swinging all over the place, they just keep valuing it up, down, up, down, all these different places depending on the specific moment in time.

David: There’s no market for WeWork shares.

Ben: Yeah. There’s no way to ascertain what the price should be because there’s only one party that can, is willing to, and keep buying. It’s wild.

Dan: And then the final piece is we kept saying that they bought a company, except they say they didn’t. They have a majority stake in the company, but they claim they will not control the votes on the board. The way they say they get to that is they are going to significantly expand the board. But when you ask them, “Okay, what’s the size of the board? Most importantly, who’s going to appoint those new board members?” there are no answers.

When you ask the internal official spokesperson for WeWork, you ask her that, she said to me yesterday, “Call SoftBank.” I said, “Why would I call SoftBank if SoftBank’s not the one who’s controlling this?” “Call SoftBank.” When you call SoftBank, I don’t know if we haven’t determined or no comment, but for whatever reason they’re claiming they’re not controlling this. They’re in-charge. They should be. They own most of the company, they own most of the shares, and whether or not most of those board members are salaried SoftBank employees or not, they’re going to be beholden to SoftBank or in some way related to them.

David: This is the last piece, which conveniently is acquisition category on this show. Why is SoftBank doing this? Here’s my thoughts. I think there are two reasons. One, I can’t remember where I read, but I think to come up with this idea is CFIUS, the Committee on Foreign Investment in the US. SoftBank is, of course, a foreign entity. They’re a Japanese company. Now, they will be buying control of the US company. They had issues with CFIUS in the past, so this just short-circuits that. That could be a risk to the deal, say, “Oh, we don’t actually own it, so we don’t have to go through CFIUS.”

Dan: I don’t think that covers it, even the minority stake. For example, they had to go through CFIUS for their Uber deal.

David: Yeah. I don’t think that’s the real reason. I think the real reason is—pure speculation—I don’t think SoftBank wants to consolidate WeWork’s financials on their balance sheet. Remember, the balance sheet of this company is enormous liabilities while these leases. SoftBank has a lot of death that they have taken out of the corporate entity. Remember, they’re a telecom provider. They have debt. That debt is basically junk bond rated [...].

Dan: They’re one of the most highly-leveraged companies that exist. If you look at it, they would make a privately equity person blush.

David: Exactly, and now if they almost unconsolidate this balance sheet, jack up the liabilities on the balance sheet, that’s going to torpedo their debt ratings at the corporate level. That’s going to increase their cost in capital hugely. That’s terrible for the company. I think they’re doing all these gymnastics to, (a) avoid that from happening, but then (b) why do all these gymnastics? Then you go back to the Vision Fund.

At this point, I don’t even think it’s about raising Vision Fund, too. I think it’s about just trying to salvage Vision Fund I. They can’t let WeWork go to zero because the alternative here is WeWork is going to die as you said in a month.

Dan. The thing that’s interesting is, this is still a real business. I’ve seen the oldest, the next Theranos. No. Theranos didn’t have a product. Didn’t work. This has a product that works. Go to any city. There are people who went to work this morning to WeWork and not who work for WeWork. Lots of them. They have real buildings as buildings still exist, all that stuff. There will still be thousands of employees left even after the massive layoffs. Obviously, certain facilities will close that are underperforming. Obviously, expansion slows down. But it is a real business.

I will say that the word “SoftBank” isn’t arbitrary. “Soft” is the software piece, I believe. I’m a tech visionary. But the “Bank” part is important, too. He is a financier, so the stuff you said about balance sheet, that’s all real. I will bet that SoftBank still believes long-term there can be business here.

The one thing about Masayoshi Son that I’ve always found fascinating is he made an enormous amount of money in the dotcom boom. I saw him sitting next to Bill Gates at one point. He said to Bill Gates, “At one point,” he said, “in the late 90s, I was richer than you.” He said, “Two weeks later, I was broke,” and that’s true. What happens to most people who went through that, the dotcom boom, Andreessen talks about how people who went through that are too risk-averse. That’s true. Usually, you are because you were so scarred by it.

Masa went the other way. Masa decided to take up all that risk again and he caught the Alibaba train and he did great with it. And then he decided to I go over the top. That’s why he’s so unusual and I would say with this, he might look out and say, “Things are really bad right now, but there is a business. I still believe in the thesis of the business. Maybe the management got away from us. If I can get in what I believe is relatively cheap and control this thing, maybe we can make it go with this.

David: Here is my attempt to put a bow on the whole thing. We talked about this in the Vision Fund episode. It was the largest fund of any type, any asset class raised ever masquerading as a venture capital fund. Well, that doesn’t make sense. Venture capital fund should be bigger than private equity funds. Is this an unmasking of the Vision Fund for what it is is a private equity fund.

Ben: And when you look at this, they just made a $1.5 billion equity purchase that now has them owning a majority of the company. Oh, and they’d levered of $5 billion of debt on top of it? Wait a minute. I’ve seen this played before.

Dan: And they paid to see [...] go away, which is a very private equity leverage [...] to do.

David: Totally. So now all of a sudden, you’ve taken out the time frame of which they’re going to realize returns on this asset. But if they can turn this around, turn it into what it does still have to potential to be, not the same business everyone thought it was, but a good business and big one with real estate assets all around the world, well now maybe they just saved the Vision Fund.

Dan: I will say that there is an ongoing question of why they didn’t let JPMorgan do the bailout. I almost get the sense that JPMorgan looked at this and said with SoftBank’s deal, “All right. If you want this problem, your problem. Take it.” It was almost like a hot potato. I don’t quite understand why SoftBank was willing to catch that.

You could argue it would have been too much debt and the company would have sunk under the debt. You could make that argument, but it was money. It was money, it was a lifeline, it was runway.

Ben: This brings us to what we normally call, What Would Have Happened Otherwise. In this episode, I’m going to call it, The Bizarro World WeWork. We’ve got this comp. It’s IWG. Last year they did $3.3 billion in revenue. This business ends up looking a lot like WeWork at maturity that was profitable $200 million in operating profit. Their market cap is about $4.6 billion, so we’re getting close to the neighborhood of where you’re basically buying a business that looks like IWG. You run that for a while, it’s going to be profitable for you.

David: Hey, great private equity pickup.

Ben: Exactly. All right. Let’s bring this home. WeWork is in a place now where they have $6½ billion in the company, some debt, some equity. We sit here today. We will see if that is enough to have them figure it out over the next year. Maybe IPO at some point. We don’t know what the future will hold. What we’re going to grade here today is SoftBank’s pseudo-acquisition here of WeWork.

Dan: I’m going to give them a B minus. The low part is for why exactly. Again, I think they should let JPMorgan take it, but they were creative. You might have gotten the wrong answer but you got there in a fascinating way.

David: You really can’t knock the hustle here.

Dan: No. And by the way, remember they wanted control of this company a year ago. They got it, even though they didn’t officially yet.

David: They got it for a lot less money, too.

Ben: So, SoftBank Corp has put in the $2 billion from earlier this year and now another $1½ billion in equity capital.

David: Plus the $3 billion tender that’s equity. They’re buying from shareholders, but that’s new equity to buy.

Ben: Yup. Good point. They have spent—what’s that—$6½ billion to own the majority of this company. Now, the Vision Fund poured $8 billion and the business isn’t even worth the combined amount of that, but if you at what SoftBank did, they made a bunch of the management fees off the Vision Fund and paid $6½ billion to own an asset that’s probably worth about $6½ billion.

David: One catch maybe I would give a lower grade would be, it’s unclear who runs this. They’ve spent a lot of money without having a CEO. There’s these co-CEOs who are there, Sebastian Gunningham and Artie Minson, who we talked about earlier. It remains unclear whether they are staying or not. Maybe they’re getting good good deal, a cash stickler; that’s unclear.

They’ve put Marcelo Claure, the CEO of Sprint, in as executive chairman, which is mind-numbingly strange mainly because Masa said, “Originally, we’re going to being Marcelo in so we can figure out what’s really happening inside the company.” Again, you had two directors. What were they doing and why do they still have jobs if they couldn’t figure those basics out.

Marcelo is a telecom guy. Do they believe these two are the right horses or not? That’s unclear. It’s a lot of money to spend without knowing who’s really going to be running it in six months.

Ben: I’m in for your B minus. David, where are you?

David: It’s so hard to conflate. I think just like the story has illustrated. all these series of decisions along the way by everybody involved, many of which decisions were terrible decisions, I think it’s why in the beginning we framed this as a tragedy. This is the sum of the system that created this. Now, if we’re to grade specifically this decision by SoftBank, I think there’s…

Dan: If you’re on the fence, take employee sentiment into it because they have to own this thing and they have some very angry people working there right now.

David: Yeah. I’m in for the B minus for slightly different reasons which is the reason it’s that high is this is a save because this was going to zero. Maybe the JPMorgan thing will happen, maybe it wouldn’t so it saved. But on the other hand, there is a very strong case [...] that this is their own good money after bad. That’s never a good position to be in. So, B minus, there we are. We’ll check in in a year or so.

Ben: I’m sure we will, well if the cash last that long.

Listeners, thank you for going on this journey with us. Dan, where can listeners find you?

Dan: At axios.com. You can get my daily Pro Rata newsletter. Sign-up at axios.com or just type Axios Pro Rata into your podcast thing because we got daily podcasts as well.

Ben: And I would say Pro Rata is excellent. Much of the details that we’ve gotten over the last few years about this company have been that. Pro Rata is the first thing that I read when I wake up in the morning, so thank you for doing that. I appreciate it.

Dan: It’s the first thing that I write when I wake up in the morning.

Ben: Awesome. Well, listeners, if you want to hear more Acquired, feel free to subscribe from wherever you are listening to this one. If you’re looking for another episode to listen to, we did a SoftBank Vision Fund episode earlier this year? Last year? Something like that. Search SoftBank in your Acquired feed.

With that, thanks again to Silicon Valley Bank and to you, Dan. And listeners, we will see you next time.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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