Speaker 1: This year, with much fanfare, some of the biggest startups
Speaker 1: in history have gone public, companies like Uber, Lift Slack.
Speaker 1: It was the big moment they were waiting for, But
Speaker 1: over the last few months, things haven't quite gone the
Speaker 1: way they hoped they would. Slack shares are sinking in
Speaker 1: the after hours, down more than those shares are falling
Speaker 1: this morning again. After that rocky, now another unicorn is
Speaker 1: preparing to go public, and if the last few weeks
Speaker 1: are any indication, it could end up being the rockiest
Speaker 1: I p O of all of them. Today in the show,
Speaker 1: you'll be hearing from our startups reporter Ellen Hewitt, well
Speaker 1: trace we Works meteoric rise to a forty seven billion
Speaker 1: dollar company and the chaos of the last few weeks
Speaker 1: as it scrambled to keep its I p O alive,
Speaker 1: with its controversial CEO now stepping down, Can we Work
Speaker 1: still pull it off? You're listening to Decrypted, stay with us, So, Ellen,
Speaker 1: I want to start today's episode at the very beginning,
Speaker 1: tell us about we Works founder Adam Newman. Adam Newman
Speaker 1: is forty years old and he was born in Israel
Speaker 1: and grew up in various parts of the country, including
Speaker 1: for a period of time on a kubboots, which he
Speaker 1: likes to reference a lot because the company that he
Speaker 1: ended up founding, we Work, is all about community togetherness.
Speaker 1: The metaphor is almost two on the news. And of course,
Speaker 1: his co founder, Miguel Mcalvey, also lived on a commune
Speaker 1: in Oregon when he was a kid, says, as you
Speaker 1: might know, is sort of an Israeli commune, and so
Speaker 1: they like to emphasize their communal backgrounds when they talk
Speaker 1: about the origin story of We Work, which is all
Speaker 1: about sharing and doing things together sort of. It's also
Speaker 1: about real estate. M he served in the really Navy
Speaker 1: and then came to the US and attended college in
Speaker 1: New York and was sort of a entrepreneur type person.
Speaker 1: Is a big dreamer, very visionary type of person who
Speaker 1: sees an idea and thinks, of course I can do that,
Speaker 1: and and did and attempted to do several different businesses
Speaker 1: before he started We Work, including most famously people liked
Speaker 1: Reference one, in which he had a company that sold
Speaker 1: baby clothes with kneepads for babies that crawl, and he
Speaker 1: also had a company that made high heel shoes. He
Speaker 1: was a little all over the place. He likes to
Speaker 1: tell a story about how by the time I was
Speaker 1: twenty five years after I arrived to New York City,
Speaker 1: I was thirty pounds lighter than today. I was smoking
Speaker 1: a pack of cigarettes a day. My hands were shaking violently,
Speaker 1: and I was confused and lost than he met his
Speaker 1: now wife, Rebecca Paltrow Newman, who you might guess from
Speaker 1: her name is actually related to Griddeth Paltrow, with actress
Speaker 1: their cousins. Rebecca went on the first state with me
Speaker 1: and within five minutes. Now I say five minutes to
Speaker 1: be nice, but it truly took ten seconds. She looked
Speaker 1: me straight and died and she said, you my friends
Speaker 1: are full of And she told him that he should
Speaker 1: kind of get his life in order. She told him,
Speaker 1: you're ambitious, you're smart, but this isn't working. There are
Speaker 1: some things that you need to get in line. This
Speaker 1: is after college. Yeah, this is after college. And yeah.
Speaker 1: The starting of we Work was something that came about
Speaker 1: when Adam and mcguel were working in an office space
Speaker 1: that was maybe under rented on. Landlord was having trouble
Speaker 1: filling it, and they suggested to the landlord, why don't
Speaker 1: you parcel up this space into smaller pieces and we
Speaker 1: can rent out just like smaller entrepreneurs or small businesses,
Speaker 1: and sort of this idea of co working, like why
Speaker 1: don't we bring in a lot of different tenants into
Speaker 1: this one space. And they did that for a while
Speaker 1: and it was called Green Desk. And then my understanding
Speaker 1: is that Adam and Miguel sold that business to the
Speaker 1: landlord of that property and then went often started what
Speaker 1: would become we Work. They had this idea of making
Speaker 1: the we vision much bigger than just renting office space.
Speaker 1: But they did start with the vision for we Work,
Speaker 1: which is taking out less, cutting them up into smaller
Speaker 1: parts of an office, maybe a desk here or there,
Speaker 1: or like five desks in a small office, and then
Speaker 1: renting them out to freelancers, startups, entrepreneurs, people who need
Speaker 1: flexible access to space. We Work was founded in so
Speaker 1: I think it spends the first few years kind of
Speaker 1: getting ramped up, and in twelve they had seven locations.
Speaker 1: The valuation was reported at maybe a hundred millions, so
Speaker 1: the next year evaluation of maybe around four. And then
Speaker 1: by they started having international locations, so they opened in London.
Speaker 1: They had twenty three locations at end of the year,
Speaker 1: they became a unicorn. First off, how have you how
Speaker 1: does this work? Have you been able to build a
Speaker 1: five billion dollar company in four years? They raised money
Speaker 1: at a five billion dollar valuation. It's phenomenal and it's
Speaker 1: a great concept, and it's continuing to explode. So starting
Speaker 1: to put them in the ranks of some of the
Speaker 1: biggest startups coming out of I won't say Silicon Valley
Speaker 1: because they were New York based company, but out of
Speaker 1: the sort of startups boom that was happening in this
Speaker 1: period of time. Then in things start to get much
Speaker 1: more heated. They get a big investment from soft Bank.
Speaker 1: And soft Bank is a Japanese conglomerate that over the
Speaker 1: last few years has made a ton of very large
Speaker 1: investments in Silicon Valley, has kind of inflated valuations and
Speaker 1: funding ground sizes in a way that even a casual
Speaker 1: observer might have started to notice. And soft Bank comes
Speaker 1: in and invests four point four billion dollars in we
Speaker 1: work Um and sets the postmoney valuation at about twenty
Speaker 1: billion dollars. Okay, so we get in eighteen we Works
Speaker 1: worth about twenty billion dollars, making it one of the
Speaker 1: biggest startups in the world. It's flying high. What happens next?
Speaker 1: So at the end of the start being stories about
Speaker 1: a potential majority takeover of we Work from soft Bank.
Speaker 1: So there's soft Bank is apparently floating this plan to
Speaker 1: invest something like sixteen billion dollars in we Work, which
Speaker 1: would give SoftBank a majority stake in the company, which
Speaker 1: is kind of unprecedented. That's not usually how venture investing works,
Speaker 1: and the deals discussed. This is happening sort of around
Speaker 1: Christmas time. And to underscore just how big of a deal,
Speaker 1: sixteen billion dollars is, I mean, that would make it
Speaker 1: one of the largest investments ever made in a private company. Yeah,
Speaker 1: it's huge, one for the record books. But as the
Speaker 1: discussions keep going on, soft Bank changes its mind. The
Speaker 1: Japanese conglomerate announced Monday it's investing and additional two billion
Speaker 1: dollars in the coworking startup, a step back from sixteen
Speaker 1: billion dollar investment that would have given soft Bank and
Speaker 1: controlling steak over. What ended up being announced was Softing
Speaker 1: had invested two billion dollars in we Work and the
Speaker 1: new valuation was around forty seven billion dollars, which, to
Speaker 1: be clear, would be a huge investment for almost any
Speaker 1: other company. For we Work, given that there had been
Speaker 1: done these other stories about how big the investment could
Speaker 1: have been, people generally saw it as soft bank scaling
Speaker 1: back it's commitment to the company. This is kind of
Speaker 1: like the first crack that appears and we works fundraising machine.
Speaker 1: It is a pretty public setback, whereas is at least
Speaker 1: interpreted by the public as a pretty serious setback for
Speaker 1: their fundraising. So then in late April they announced we
Speaker 1: filed confidentially, which means that they're at least starting the
Speaker 1: process of going public. So that that really sets us
Speaker 1: into gear as reporters covering all the steps towards becoming
Speaker 1: a public company. And that and one of the biggest
Speaker 1: days for a company in the lead up to an
Speaker 1: I p O is the day when that filing with
Speaker 1: the SEC becomes public. We've been expecting this, but it's
Speaker 1: the big day. It's the big day. It's finally coming
Speaker 1: out there. This is called the S one, So the
Speaker 1: document is called the S one. The day that it
Speaker 1: becomes public is sometimes called the S one. Flip um.
Speaker 1: I kind of really early for it. And and yeah,
Speaker 1: as soon as the document is out there. People are
Speaker 1: immediately combing through it looking for all sorts of information,
Speaker 1: and this is like hundreds of pages long. The S
Speaker 1: one showed that revenues were growing, but that losses grow
Speaker 1: basically as quickly as that, and in the year of
Speaker 1: the company had a close to two billion dollars in revenue,
Speaker 1: but also close to billion dollars in losses um, which
Speaker 1: means that they're losing a lot um compared to the
Speaker 1: amount of money they're bringing in. That's a lot of money, right,
Speaker 1: That's a lot of money, even for Silicon Valley start up. Yeah,
Speaker 1: I think even even my Silicon Valley standards. That's a
Speaker 1: very high rate of growth and very high rate of losses.
Speaker 1: And there was a pretty stunning disclosure in the S
Speaker 1: one documents too. Yeah. The related Party transaction section is
Speaker 1: where they discussed potential conflicts of interest, and there was
Speaker 1: a lot of stuff in there, including this one detail
Speaker 1: that a few people noticed about how Adam Newman had
Speaker 1: owned the trademark rights to the word we and had
Speaker 1: sold them to we Work, which had recently rebranded as
Speaker 1: the We Company UH and had accepted six million dollars
Speaker 1: in exchange um. And that was pretty shocking to a
Speaker 1: lot of people. Yeah, I mean I was shocked when
Speaker 1: I read about it. It feels really improper. Yeah, you know,
Speaker 1: it's a small amount of money compared to you know,
Speaker 1: the billions of dollars that we talked about related to
Speaker 1: WE work. But I think the ethos behind it just
Speaker 1: didn't sit right with people when they read about it.
Speaker 1: And there were a few other disclosures too, and the prospectives. Yeah,
Speaker 1: certainly some stuff that raised eyebrows. For example, the amount
Speaker 1: of control that Adam Newman has over the company made
Speaker 1: it such that even the board couldn't remove him if
Speaker 1: they wanted, And if he became incapacitated or no longer
Speaker 1: able to serve as CEO, his wife, who is also
Speaker 1: a co founder but who is not part of the board,
Speaker 1: would play a major role in picking his successor, which
Speaker 1: is pretty uncommon. Usually that's a role for the board
Speaker 1: of directors. So there were a lot of stuff that
Speaker 1: people looked at and just thought like, this isn't how
Speaker 1: most public companies are set up to be run or
Speaker 1: to be governed. Okay, So at this point in late August,
Speaker 1: investors are starting to have some pretty serious doubts about
Speaker 1: we Work the company, and also some serious doubts about
Speaker 1: its CEO. Adam Newman walk us through the next few weeks.
Speaker 1: Then we're starting to get closer to the date when
Speaker 1: it's expected that the company might start the road show,
Speaker 1: which is the process for going around and getting investors
Speaker 1: to here a formal pitch about the company and maybe
Speaker 1: make some commitments to how much they might buy at
Speaker 1: the I p O. So this is Adam Newman flying
Speaker 1: around the world talking to some of the world's biggest investors.
Speaker 1: Please please buy some we Work stock when we go public. Yeah,
Speaker 1: this is sort of the like pre sale pitch. But
Speaker 1: this is when the company and the banks have to
Speaker 1: start putting out, you know, a general idea of what
Speaker 1: the valuation of the company might be. And this is
Speaker 1: where things start to get a little complicated. So the
Speaker 1: banks that are leading the i p O are JPMorgan
Speaker 1: and Golden Sacks. And it starts to become clear that
Speaker 1: potential investors in we Work stock are not in agreement
Speaker 1: that the company is valued or should be valued at
Speaker 1: forty seven billion dollars. In fact, they think it should
Speaker 1: be valued a lot less. You know, there were some
Speaker 1: stories that suggested Goldman Sacks had told we work, we
Speaker 1: think you can be valued at sixty five billion dollars,
Speaker 1: And in these later discussions it turns out that, okay, now,
Speaker 1: maybe we're discussing valuations of twenty billion dollars or fifteen
Speaker 1: billion dollars um. In the last few days, I've even
Speaker 1: seen headlines that suggest ten. So all of a sudden,
Speaker 1: things are in flux. We work slash Adam Newman would
Speaker 1: really like to continue with the i p O. Meanwhile,
Speaker 1: banks and other involved parties, for complicated reasons, they are like, look,
Speaker 1: we would rather you not proceed with an IPO if
Speaker 1: if the valuation is going to be so low. So, guys,
Speaker 1: the longer this drags on, the more difficult it will
Speaker 1: be for we work to actually complete and offering, which
Speaker 1: could mean I mean now, and we should note here
Speaker 1: that this is really not how an i p O
Speaker 1: is supposed to go. For a company that was valued
Speaker 1: at forty seven billion in the private markets to then
Speaker 1: try to go public out evaluation, that's you know, one third,
Speaker 1: one four, That is crazy. As you're reporting on this,
Speaker 1: what's going through your head, It's it's kind of shocking.
Speaker 1: I think when you cover a private company you spend
Speaker 1: a lot of time thinking about it, and then as
Speaker 1: it gets close to I p O, all a sudden,
Speaker 1: all these public market investors, public market machinery starts paying
Speaker 1: attention to it. And even though as someone who was
Speaker 1: pretty familiar with we Work, I knew that there was
Speaker 1: a lot of discussion and skepticism about its valuation, it
Speaker 1: was still really surprising to see just how dramatically it
Speaker 1: dropped in this month or so of discussing a potential
Speaker 1: i PO valuation price. And so I was just sort
Speaker 1: of watching it on all unfold, and we're trying to
Speaker 1: stay ahead of the news, and it just seems like
Speaker 1: it's becoming a more and more stressful situation. Internally. You
Speaker 1: have to imagine there's just a lot of tense discussions
Speaker 1: going on inside between different parties about should we move
Speaker 1: forward with this? I mean, why is we Work pushing
Speaker 1: so hard for the i p O when it's getting
Speaker 1: so much pushback. It doesn't seem like that big of
Speaker 1: a deal to wait it out if investors have so
Speaker 1: many concerns. Yeah, So, when we Work talked about the
Speaker 1: I p O, their plan is to raise around three
Speaker 1: billion in cash by selling new shares the market. That's
Speaker 1: what an IPO does. But in this case, it's not
Speaker 1: just the three billion dollars at stake, which they do need.
Speaker 1: It's that they have these agreements with these banks where
Speaker 1: they're going to get access to six billion more of
Speaker 1: UM debt that they could access to help the business run.
Speaker 1: But it's contingent on having a successful IPO, raising three
Speaker 1: billion in IPO and doing it in So there's this
Speaker 1: immense pressure not just for three billion dollars, but for
Speaker 1: a total of more like nine which is more on
Speaker 1: the scale of the amount of money that they need
Speaker 1: to keep the business going. So with a total of
Speaker 1: nine billion dollars at stake, walk us through what WE
Speaker 1: worked does to see if it's I p O. Well,
Speaker 1: it starts by responding to some of the criticisms that
Speaker 1: have come up since the first public S one. So
Speaker 1: for example, Adam Newman agrees to sort of walk back
Speaker 1: this six million that he received in exchange for the
Speaker 1: trademark of WE. So that's a relatively small all concession,
Speaker 1: but a concession nonetheless. Yeah, and they actually continue to
Speaker 1: make more changes. They file another amended S one a
Speaker 1: few weeks later, and that one has more changes this
Speaker 1: time focused on corporate governance. So some of the changes
Speaker 1: include changing the super voting shares from twenty votes per
Speaker 1: share down to a mirror ten, so still super voting,
Speaker 1: but just a little bit less so. And now the
Speaker 1: succession plan for a CEO following Adam no longer includes
Speaker 1: his wife, Rebecca Newman. Now it's going to be picked
Speaker 1: by the board of directors, which is more in line
Speaker 1: with what you'd expect from a public company, and they've
Speaker 1: pledged to add more independent directors to the board, so
Speaker 1: they're trying to balance out his power. So this is
Speaker 1: we Work really doing everything it can to appease investors. Yeah,
Speaker 1: it's trying to make changes to see if it can
Speaker 1: make it work. But ultimately we Work has canceled its
Speaker 1: road show this week and is postponing it's i p
Speaker 1: O here it's a parent company is delaying the offering
Speaker 1: until at least October. They come out with a statement
Speaker 1: saying that the IPO is going to be delayed, although
Speaker 1: they are committed to doing it in calendar year nineteen.
Speaker 1: Are reporting suggests that that means it's probably gonna happen
Speaker 1: in mid to late October, and that gets us into
Speaker 1: this past weekend, Yes, a very dramatic weekend. On Sunday,
Speaker 1: there was news that maybe a board meeting this week
Speaker 1: where some directors are expected to encourage Newman to step
Speaker 1: down as CEO and take the position of a non
Speaker 1: executive chairman position. Some of the board members and investors
Speaker 1: and WE Work, we're starting to have discussions about whether
Speaker 1: Adam Newman should step down as CEO. So this is
Speaker 1: a very dramatic change. And what was super interesting about
Speaker 1: it was are reporting and other people's reporting showed that
Speaker 1: among those supporting this plan were members of the board
Speaker 1: from soft Bank and Masochison, the head of soft Bank, Yes,
Speaker 1: someone who has traditionally been a big champion of WE
Speaker 1: Work and of Adam. And then just this morning West
Speaker 1: Coast Time, Tuesday, September reporting that Adam Newman basically is
Speaker 1: expected to step down as We Companies CEO. However, it
Speaker 1: comes out that Newman has decided to step down. I know,
Speaker 1: it was really shocking. I've had a very busy morning,
Speaker 1: and yeah, it seems like there had been a call
Speaker 1: with the board of directors and the executives this morning
Speaker 1: decision was finalized, and the news started to leak out
Speaker 1: that Adam Newman will no longer be CEO. He's going
Speaker 1: to become non executive chairman. The company has picked two
Speaker 1: new co CEOs to take over, and our sources say
Speaker 1: that these are permanent and they're not meant to be
Speaker 1: interim CEOs. They are Artie Manson, who's the CFO, and
Speaker 1: Sebastian Gunningham and other executive. Both of them are WE
Speaker 1: Work senior executives who notably have experience outside of we
Speaker 1: Work at companies like Time Warner, Cable and Amazon, so
Speaker 1: they will be leading the company effective immediately. Um Adam
Speaker 1: Adam's voting shares, which were original twenty to one and
Speaker 1: then We're made ten to one, are now three to
Speaker 1: one votes, so we no longer has a majority voting
Speaker 1: control of the company. His wife, Rebecca Newman, who was
Speaker 1: a co founder and the CEO of the education arm
Speaker 1: of We Work, is leaving the company. She will no
Speaker 1: longer have those titles. There's a lot that's happening, and
Speaker 1: there was even a statement from some of the executives,
Speaker 1: and my favorite line from Adam statement says the scrutiny
Speaker 1: directed towards me has become a significant distraction and I've
Speaker 1: decided that it is in the best interest of the
Speaker 1: company to step down as chief executive. So that's that,
Speaker 1: you know. I was expecting this dramatic showdown where he
Speaker 1: would still try to cling onto power, but it sounds
Speaker 1: like ultimately he decided to not fight the investors. I mean,
Speaker 1: we don't know how dramatic the discussions were behind closed doors,
Speaker 1: but it did happen very quickly. Insiders that I have
Speaker 1: been chatting with this morning trying to get a sense
Speaker 1: of what their thoughts were, have told me, Yeah, they
Speaker 1: they're not surprised that this happened, but they are surpreasent
Speaker 1: how quickly it happened, because there was clearly pressure to
Speaker 1: make a big change. It just usually these things are
Speaker 1: very complicated, so there may be more bumps along the way.
Speaker 1: There may end up being a search for a different CEO.
Speaker 1: We'll just have to keep watching. So what does this
Speaker 1: mean for the I p O. I think it's going
Speaker 1: to affect how quickly they can do it, because it's
Speaker 1: just such a major upheaval. The company has said that
Speaker 1: they will continue evaluating the optimal time for an IPO,
Speaker 1: which I think, if you read between the lines, means
Speaker 1: they want to keep doing it, they just don't want
Speaker 1: to commit yet to when it's going to happen. Um,
Speaker 1: there's still a need for money. The company still has
Speaker 1: to get cash to keep growing. There were there was
Speaker 1: also language some of the press releases, and there's been
Speaker 1: some reporting that suggests that in the coming weeks and
Speaker 1: months there may be some major changes at the company
Speaker 1: in order to cut costs. So you can imagine there's
Speaker 1: an opportunity for layoffs or changes in some of the
Speaker 1: side businesses. You know, apart from we work, which runts
Speaker 1: out office space, in this remain business, they run an
Speaker 1: elementary school, they have a residential business, they own a
Speaker 1: they own meetup dot com, they have a coding school.
Speaker 1: There's a lot of stuff that is pretty ancillary to
Speaker 1: we works business that has been part of their acquisition strategy.
Speaker 1: Those avenues seem like they might be more vulnerable now
Speaker 1: to changes this debacle over the last few weeks, from
Speaker 1: the plunging valuations to the corporate governance issue to the
Speaker 1: CEO drama. I'm sure you're exhausted now, I'm a little tired.
Speaker 1: What do you think will be the lesson that the
Speaker 1: rest of the industry takes from this. I think they're
Speaker 1: going to reevaluate a few things because this whole we
Speaker 1: Work saga has been emblematic of a few trends that
Speaker 1: we've been watching in Silicon Valley for the last year
Speaker 1: or two. First is whether this brash, visionary, take no
Speaker 1: prisoners um the Travis Kellen yeah, whether that style of
Speaker 1: CEO has a long lifetime is able to go from
Speaker 1: the scrap young startup to the public company. I think
Speaker 1: people are questioning whether that's the right and prized attitude
Speaker 1: to have a founder. And then I think we're also
Speaker 1: seeing this big gap between private market valuations and public
Speaker 1: market valuations, and you're seeing how a few investors in
Speaker 1: c a CEO gets to set a private valuation um
Speaker 1: that everyone else disagrees with, that that actually maybe doesn't
Speaker 1: hold water um in a big way. Right. Sometimes I
Speaker 1: think everyone understood there was maybe going to be a
Speaker 1: little bit of difference, but we work, we're talking about
Speaker 1: a major difference and that has had big effects for
Speaker 1: the company. And then last, I think we're going to
Speaker 1: examine the role of soft bank. Soft Bank has sort
Speaker 1: of barged in and become this huge, influential, controversial investor
Speaker 1: in Silicon Valley, and they've come in with this particular
Speaker 1: investing vision, which is to, you know, invest a ton
Speaker 1: of money, try to make one of the companies in
Speaker 1: a particular sector be the richest and therefore the most
Speaker 1: successful one. And we're starting to see that maybe that
Speaker 1: is not the best strategy for venture investing. And when
Speaker 1: we look back at this time in history, I think
Speaker 1: stopping it's gonna be a major part of it. We're
Speaker 1: gonna be examining whether their approach is a good idea,
Speaker 1: Ellen Hewitt, we will continue posting your stories on Bloomberg
Speaker 1: dot com Slash Technology. Where else can our listeners follow
Speaker 1: your reporting. You can find me on Twitter at Ellen Hewitt,
Speaker 1: that's h U E. T Um, and you will occasionally
Speaker 1: see me on Bloomberg t V or on Bloomberg podcasts
Speaker 1: such as this one. Thanks for being on the show today,
Speaker 1: Thanks for having me. M Decrypted is produced by Miyaki
Speaker 1: Ito and Ethan Brooks. Emily Busso and Anne vander May
Speaker 1: are story editors. Francesca Levie is the head of Bloomberg Podcast.
Speaker 1: We'll see you next week.