Discover more from Margins by Ranjan Roy and Can Duruk
WeWork and the 2010s
Fruit Water and Financial Arbitrage
Ranjan here, talking about how WeWork represents this business cycle better than any other company.
Shortly after diving into startupland in early 2013, my cofounder and I decided we couldn't do the coffee shop thing anymore, just as the coworking concept started taking off. We went to a couple of different places, and all of them had these almost comical "interviews" where they wanted to make sure you were "good for the community". The nicest place, by far, was a place called WeWork at 175 Varick St and we moved into that location.
image via Fast Company
I've long prided myself on making pretty good bets on businesses, especially technology companies. I’ve rarely angel invested (public market tech is so much cleaner!) but I love debating the financial possibilities of early-stage tech startups. I got WeWork completely wrong. Sitting at one of their first locations, I never imagined it would turn into the global behemoth it has become.
We started out in a space called WeWorkLabs. As a perfect time capsule for the go-go Twenty-Teens, it was one of those ill-defined "incubator" spaces. Certainly not an equity-based accelerator, but there were "benefits" like VC's coming in for office hours, and law firms and banks pitching their new startup services. Having come from a trading floor, and then a newsroom, I’ve only worked in open-plan offices, so I liked the space.
That’s Ted Kramer of Six4Three fame. He was our community manager!
It was a good group of people. My cofounder and I were on the older side, and there were moments where I certainly felt like Dan Lyons, but people definitely socialized. In fact, socializing was core to the experience, and the first time I encountered Adam Neumann was when he came in to pitch us on (I think the 2nd) WeWork Summer Camp.
Regarding Adam Neumann, the guy had charisma. He told a small group of us that he was going to turn this simple summer weekend getaway into the next Woodstock. And like any great entrepreneur, he did manage to turn these insane dreams into some semblance of a reality.
THE FRUIT WATER
One thing I'll never forget was the Fruit Water.
Adam would regularly walk around the floor with some older investor-types in suits. He’d show off the crowd of young people clanking away at keyboards as a revolution in the way people will work, and then guide the Suits to this tank of water that had fruit cut up into it every day. They would stand in a circle, drinking fruit water, as he regaled them with visions of a work culture revolution. This whole ‘elevating consciousness’ stuff didn’t come out of nowhere.
The fruit water thing evidently became a core part of the entire WeWork culture.
The earliest tweet I found in 2013:
In 2019, they have internal Slack channels dedicated to showcasing the fruit water (some impressive images in the thread):
When WeWork opened a much larger location at 222 Broadway, we moved there along and stayed almost 2 years. The frequency of old-guys-in-thick-pinstripe-suit visits dramatically intensified, and there was one time I remember, sitting on some weird ball-like seat, looking up and Eliot Spitzer just kind of staring at our row with a big smile.
The world of working was changing, and WeWork was where it was happening. People wanted to buy in.
WHAT I GOT WRONG
Part of why we write The Margins is to force ourselves to put long-itching thoughts to paper. Looking back, I probably ascribe a bitterness from the failure of our startup to my time at WeWork. The weirdest part of the entire experience was that the locations were so nice, they provided you an unfounded sense of accomplishment and legitimacy. Your startup could be floundering, but when potential clients, investors, or even your parents, came to visit, everyone assumed "you must be doing something right" and you carried on. For this faux-fulfillment, the price of admission was relatively cheap (~$350 a desk at the time).
What I never understood at the time was, that was the product. That was the entire pitch. While we all snicker at the language in WeWork's S-1, they, in fact, delivered on filling a very human need.
You'd be in a large room with a number of meandering startups, and WeWork would throw a big party at HQ for major new expansion of their own. We'd all celebrate it as though it was our success. The Summer Camp turned into the massive event Neumann promised (captured in the thread below), and provided thousands of WeWork tenants an experience they couldn't find anywhere else.
SIGN OF THE TIMES
When the story is written, the We Company will be THE company that captured everything about this decade's business cycle.
They were selling lifestyle and self-betterment as a product before the Equinoxes and Soulcycles started down that path. Before our gyms, and lunches, and clothes, and beds, and everything we bought became more about fulfilling a need for identity, rather than the product itself, WeWork was selling us desks by telling us to "Do What You Love". They extend the definition of tech company more aggressively than most.
WeWork also perfectly captures the zeitgeist for how they've managed to do this, almost inventing the art of millennial double-speak. They perfected the delivery of high-minded, burning man-esque self-actualization language while operating with a cold-blooded ruthlessness that would make Henry Ford blush.
So many of their questionable business practices echo the afflictions of the 2010s. There are the contractor, not employee, issues. There are the founder control corporate governance issues. There's the self-dealing. There are the questionable acquisitions. There are so many issues I hope you spend time devouring every WeWork S-1 analysis you can find.
But I want to stick to the core business model.
I mentioned that the price of admission for superficial legitimacy was very reasonable. I was always intrigued as to how they managed to deliver a very high-quality product at such a low cost, until I read this Nitasha Tiku 2015 piece in Buzzfeed. The article was a revelation. I know it’s bizarre to ascribe a strong emotional value to a 4600 word financial pitch deck breakdown, but you have to remember, in 2015, startup skepticism was a lonely endeavor. You were kind of an asshole if you questioned anything startup. Meanwhile, I was sitting at WeWork, dumbfounded about their skyrocketing valuation, with nary a receptive ear.
I know regular readers might be getting annoyed at me ascribing everything from the past decade as some example of financial arbitrage, but this is one of the best examples.
Instead of owning real estate, WeWork signed inordinately long-term leases with landlords. As part of those deals, they would receive huge concessions up front, like free rent for the first year, or the landlord investing into property upgrades. By drastically lowering their short-term expenses, it allowed them to significantly discount memberships to boost sales.
Matching long-term liabilities against short-term revenue generation is pretty much the definition of financial engineering. In a way, it’s what every pension fund does. The difference is, it’s their core business. WeWork’s core is purportedly selling desks (or elevating consciousness). Scott Galloway perfectly described this art of duration matching.
But the weird thing about the arbitrage is, usually these things end up incredibly profitable. That is not at all what happened here. First, from the 2015 Buzzfeed piece:
WeWork expected operating profit of $4.2 million from revenue of $74.6 million by the end of 2014. By 2018, the company predicted operating profit of $941.6 million on revenue of $2.86 billion:
With the passage of time, we have the privilege of seeing WeWork’s arbitrage only ended up in increasing losses:
We generated $1.54 billion in revenue in the first six months of 2019 and posted a net loss of $689.7 million
It's so perfect. Wrap a large-scale, real-estate arbitrage play up into an identity-driven "tech company". Convince the world that you are revolutionizing the way "we" work and live, while performing a routine of Simone Biles-level financial gymnastics. Cash in. Sell out. Bro down.
Perhaps, their greatest achievement to date has been managing to maintain their cool-kid vibes, while levering up the final laps in their race to an IPO with SoftBank money.
The entire $11.5 billion in funding has certainly seen its share of drama, but after the killing of Jamal Khashoggi, there was a brief minute where we all questioned the ethics of companies that take Vision Fund money due to its heavy Saudi connections. Yet, WeWork managed to triple down on Softbank money while continuing to sell self-improvement.
That collective cognitive dissonance towards capital is what captures this era better than anything else. We might cancel our Equinox memberships because of a Hamptons fundraiser, but it’s not out of bounds to sell hippie dreams while taking dictator cash. You can equal WeWork’s propensity for financial gymnastics with your own mental gymnastics, dreaming of a Free & Easy life where you Do What You Love, all the while propping up an illiberal regime. It doesn’t get more 2019 than that.
You could time-travel Travis Kalanick back to the 1920s and he'd still make sense. Ruthless business practices are time immemorial, but adding in a layer of Tony Robbins-esque self-betterment is something unique to our time.
Adam Neumann could only be of the 2010s.
This April 2019 interview with Masayoshi Son is something you should watch from start to finish. But there is one part, beginning at 21:30, I could never get out of my head.
When asked about WeWork just being a real estate, company Masa Son says the following, and mind you, he invested nearly $12 billion into this company, and this is the story he’s telling:
And-- with the power of AI-- can recommend, "Hey, by the way, you have-- if you're looking for design of the package, there's another member in the WeWork office next building. And you may want to have a meeting-- at the next beer party on Friday night." So that kind of recommendation can be done. Like-- Amazon is giving you recommendation, next product to do as shopping, with your shopping history-- and with your interest-- it gives the recommendation with the power of AI. So if the recommendation of the product can be done with the power of AI, the recommendation of meeting the other people within the-- WeWork membership can be done. So it will be much more productive, much more enjoyable. So even the beer party become more productive and fun.
READING TIME CAPSULE
To give some historical perspective, I went through my Instapaper archive to find some of the good stuff over the years:
Inside The Phenomenal Rise Of WeWork - 11/5/14
A very early, flattering Forbes piece
The Workers Behind WeWork - 7/2/15
The Awl (RIP) on the labor issues
Fast Company with a flattering profile that gave us this legendary image
The NYTimes on the Lord & Taylor building acquisition, along with a look at how working culture has genuinely changed
Sriracha Is for Closers - 1/16/18
A great Esquire piece profiling some absurd characters working out of WeWorks
WeWork Accounts for Consciousness - 4/27/18
Matt Levine doing what he does best - he also covers the now legendary Community-Adjusted EBITDA
WeWork owes $18 Billion in Leases? - 4/28/18
Someone on Medium digging into the WeWork financials
Crying in the WeWork Bathroom - 5/24/18
A dark, funny look at being new to NYC and working out of a WeWork
The WSJ breaking a genuinely shocking corporate governance issue
CB Insights doing what they do best
The WSJ on the acquisitions. The acquisitions are positively bonkers.
NY Mag with a very long piece on their entire history