Lessons from a Billion-Dollar Blunder (#004)

Richard Hadler here from Founders Capital

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Lessons from a Billion-Dollar Blunder

Do you recall when the image of an entrepreneur was a frugal workaholic labouring in a garage? Then came the “founder”, personified by Adam Neumann of WeWork, a firm that subleased offices but posed as a tech giant. More of an emperor than an entrepreneur, Neumann intended to not just start a business, but also “elevate the world’s consciousness”.

A few Founders Capital members were early WeWork employees. They have copious stories about how Mr. Neumann relentlessly pursued limitless funds, defied norms, and incurred losses as rapidly as he increased revenues. A true legend!

Like many other charismatic founders, Neumann stumbled over his billion-dollar ego. In September 2019, he was removed as chief executive of WeWork’s parent company by his own board, including his investors at SoftBank. Days earlier, the company’s IPO was postponed due to weak demand for its shares and alleged illegal activities.

Predictably, Adam was replaced.

Fast forward four years and multiple attempts to revive the famous brand, and sadly no one has managed to stem the bleeding.

In such situations, focus often shifts back to memories of the founders' arrogance. Their rise and fall create fascinating stories. However, the venture-capital industry also plays a part in creating these legends. Some prominent names, like SoftBank, have been inflating valuations of companies like WeWork to absurd levels for years. In their rush to fund the biggest deals, they've indulged founders’ excesses, rather than offering prudent supervision. Fortunately, exposure to the stock market is beginning to instil sense in Silicon Valley’s investors.

Startups need scale to become global champions.

Thanks to the internet, ideas spread swiftly. Network effects indicate that a service improves as more people use it. The fastest-growing firms, like WeWork and Uber, attempt to disrupt entire industries by raising fortunes to acquire users. However, when venture capitalists compete to write daily cheques of $100m+, it can inflate a founder’s ego, leading to potential conflicts of interest and accentuate poor habits.

When WeWork tried to proceed with an IPO, it ignored the stock market's unspoken agreement: investors provide capital in return for influence. Neumann attempted to maintain complete control by owning shares with ten times the voting rights of other shareholders. Investors resisted this, and SoftBank lost faith in Neumann.

This saga significantly impacted fundraising, governance, and the broader economy over four years ago now. Startups with no clear path to profitability have subsequently found it much harder to secure cash. The balance of power swung from the founders to investors, lowering the tolerance for super voting shares and crony boards.