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.
Now, on the eve of WeWork's impending administration, you have to wonder if this saga ever actually significantly impacted the venture landscape enough.
Right now, it's more clear than ever before that the public markets are rewarding firms that generate cash or profits and shunning those that don’t.
However, why do some venture capitalists still present themselves as infallible judges of value?
This discrepancy might be rooted in the nature of venture capital itself. Venture capitalists operate in the realm of the unproven and the not-yet-profitable. They take considerable bets on risky propositions, providing fuel for innovation. Their role is to back the next big idea that could disrupt markets and change the world. In this high-stakes game, successes are massive, but failures are also expected.
The WeWork saga was a harsh reminder of the risks involved in venture investing. Yet, some venture capitalists still seem to believe they can predict the future with absolute accuracy. This mindset can lead to inflated valuations, unchecked founder behavior, and a lack of proper governance, all factors contributing to WeWork's downfall.
This doesn't mean that the venture capital model is inherently flawed. It suggests a need for more thorough due diligence, improved governance structures, and a focus on sustainable growth over rapid scaling at any cost.
In the end, whether the WeWork saga significantly impacted the venture landscape depends on who you ask. Some argue it did, pointing to a renewed focus on governance, profitability, and risk management in the venture capital sector. Others believe the changes are superficial, and the underlying issues persist.
What's clear is that the lessons from WeWork's saga remain as pertinent as ever. The venture capital industry still has a lot of progress to make, it must strive to balance fostering innovation with ensuring responsible investment practices. The future of many promising startups, and indeed the broader economy, depend on it.
In conclusion, the WeWork saga serves as a strong reminder for both entrepreneurs and venture capitalists that both parties have a duty of care for each other to prosper. It emphasises the importance of good governance, sustainable growth, and measured risk-taking in the startup ecosystem. While the pursuit of innovation remains critical, it should not come at the expense of sound business practice. I believe it’s fundamental for both founders and investors to learn from these past mistakes and ensure a more balanced, responsible approach to building and funding the next generation of disruptive companies.
Until next week!
Cheers,
Rich & the Founders Capital team
