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You might have heard of Adam Neumann, the grifter mastermind behind WeWork, a failing real estate company that claims to be worth many billions. Neumann, like Mark Zuckerberg or Travis Kalanick, Uber’s founder, is another offspring of Silicon Valley’s slash and destroy culture, reaping great wealth off a startup that was either actively corrosive or merely unnecessary.
After a disastrous public offering that forced Neumann out, WeWork, which rents office spaces from landlords and refurbishes them as tony workspaces for customers, announced this week it would lay off 2,400 employees. The cuts represent 19% of its workforce. Neumann, the former CEO, was set to walk away with a $1.7bn golden parachute, selling off up to $970m in company stock, netting $185m in nebulous consulting fees and a $500m credit line to cover personal debts. Backlash from WeWork’s beleaguered employees may trim the deal – Softbank, the Japanese conglomerate that has been propping WeWork up with investment cash, could cut some of Neumann’s benefits.
But either way, he will exit the company he built a very wealthy millionaire or technical billionaire. He will never want for anything again. The same can’t be said for the 2,400 about to be unemployed.
The WeWork story is now a disturbingly familiar one, in an era when the economics of major startups can seem as surreal and ludicrous as whatever happens in the White House. Capitalism has always been a deeply flawed way of arranging a society, but big business, until around the 21st century, was at least bound by a few basic laws of monetary gravity. You were successful when you produced more revenue than the cost of running the business. You expanded when your profit margins increased.
All the titans of the 20th century functioned this way because what alternative was there? Ford or US Steel or IBM could not just lose money and indefinitely survive. Their stock would plummet. Headquarters and factories would shutter. In a few years, the corporations would disappear.
You are worth the appeal of your idea to a bunch of rich people and companies who will keep giving you money in the hope that one day a fiction will be made real
Enter Silicon Valley. While a few of the tech behemoths, like Amazon, Facebook and Google, do indeed turn profits, many others don’t come close. In the startup world, the logic is inverted, the math alchemic. You are worth the appeal of your idea to a bunch of rich people and companies who will keep giving you money in the hope that one day a fiction will be made real. You can keep losing money at spectacular rates as long as you, like a junkie after the next quick fix, keep expanding, at whatever maniacal clip the market justifies.
WeWork is a junior cousin of Uber, another tech giant that has barely made a cent in profit. Uber is far more nefarious, driving down the wages of drivers and clogging city streets with unsustainable levels of traffic. It’s an unregulated cab company helmed by vulture capitalists. WeWork is comparatively benign: a lousy real estate company, conceived by Neuman, that tricked a lot of people into thinking it was something more.
Thanks to SoftBank, the conglomerate that keeps pumping it with money, WeWork was initially valued at $47bn, a nonsensical figure for a company that has always lost money. Profit-making real estate firms worth far less – think of your average big city developer – rightfully grumbled. How can they be worth a fraction of WeWork when they make money? WeWork’s initial public offering showed it burned through billions a year, racking up huge losses as it continued to rent out office space in just about every city imaginable.
The business model, if it can be called that, is vulnerable to economic downturns, since WeWork is locked into long-term leases with its landlords. Tenants of WeWork can more easily walk away if business goes sour. But WeWork can’t exit a 10-year lease from an office building if a space suddenly goes vacant.
The stock market listing has been shelved until the end of 2019. The valuation, down to $10bn, could sink even lower. WeWork can contract to save money. In time, as a far smaller company, it could even attempt to turn a profit. Neumann, a very rich man, will be long gone by then, grateful to have lived at a time when the rules of politics and money made little sense at all.
Ross Barkan is a writer and journalist in New York City