The WeWork “Acquisition” (with Dan Primack)

It’s an IPO, it’s a bailout, it’s an... acquisition? We’re joined by the one and only Dan Primack from Axios to recount the epic saga of the We Company in all its tragic glory. How did this business somehow go from chopping up commercial real estate to elevating global consciousness to rewarding its ousted CEO with a $1.7B “platinum parachute”, all while the company can’t afford severance for thousands of soon-to-be laid-off employees? Where did it all go wrong? And most importantly, who gets the Gulfstream G650?? Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  No, yeah, well, we'll cut this part out. We have a woodpecker happening. Woodpecker situation. This is a first on acquired. Dan's gonna take care of it.

• 0:08David Rosenthal?

  I love it.

• 0:23Ben Gilbert?

  Welcome to season five, episode six of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert and I'm the co-founder of Pioneer Square Labs, a startup studio and early-stage venture fund in Seattle.

• 0:36David Rosenthal?

  I'm David Rosenthal and I am a general partner at Wave Capital, an early-stage venture firm focused on marketplaces based in San Francisco.

• 0:44Ben Gilbert?

  And we are your hosts. Today, we tell an episode that in our initial season five planning calendar, we had as an IPO episode. And then that was pitifully canceled and we were just going to tell the crazy story of the antics that got it here. But now it's shaping up to be a tried and true acquisition episode for us. So here on this episode, we will dive into the existential question of if we work, a once $47 billion company can be saved by SoftBank's effective acquisition of the company. And we are going to try to accomplish two goals. First, to dive into the history of this company from the very beginning. And second, to try and see the core economic forest through the undergoverned trees and understand precisely the position that the business is in today.

• 1:26David Rosenthal?

  Listeners, Dan's face staring all of this is priceless. If only we were a video podcast.

• 1:32Ben Gilbert?

  Which brings me to the only appropriate way that we know how to tell this story is with the expert help of Axios's Dan Primack, who has been meticulously and astutely covering this company for several years. Welcome to Acquired, Dan. Thanks for having me. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF. Then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 2:05David Rosenthal?

  Yep, your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 2:26Ben Gilbert?

  Right, and that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap, and the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 2:48David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 3:06Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you.

• 3:34Speaker 02

  And now, on to WeWork.

• 3:36David Rosenthal?

  All right, on to WeWork. Man, we were thinking about how to frame this and talking with Dan a little bit before, and you know, I think what we decided to go with, which is true, is like, this is a tragedy. This is like a Greek tragedy.

• 3:48Speaker 02

  Particularly for thousands of people who, you know, by the time people listen to this, might have lost their job. I mean, within hours of when we're taping this, or a day within when we're taping this?

• 3:55David Rosenthal?

  Yeah, it's like, you know, I don't know, the Peloponnesian War or something. Like, the outcome is predetermined, and the actors are just caught up in forces beyond themselves.

• 4:03Speaker 02

  Minus one actor who gets a lot of money. And I guess gets an island in the Peloponnesian?

• 4:07David Rosenthal?

  Yeah, right.

• 4:08Ben Gilbert?

  Those grandchildren, I'm sure.

• 4:09David Rosenthal?

  Which Greek mythological character is Adam Newman?

• 4:14Speaker 02

  Was there a Greek mythological character who just got to walk away with all the riches and leave all the responsibility behind? I don't remember that. There was usually a moral in the stories, wasn't there?

• 4:23Ben Gilbert?

  Listeners, we sit here on Thursday, October 24th in the morning, 10 a.m. Eastern Time, so you get a sense of where we are in this currently developing tragedy.

• 4:31David Rosenthal?

  Yeah, indeed. Well, all right, let's dive into Act One, The Rise of WeWork. And to talk about WeWork, you obviously have to talk about the protagonist, question mark, of this, Adam Newman. Who is Adam Newman?

• 4:44Speaker 02

  Self-styled hero.

• 4:45David Rosenthal?

  Self-styled hero. So Adam, as many folks probably know, he was born in Israel. He's Israeli. His parents were both doctors. His parents divorced when he was seven, and he ended up living in 13 places over the next 15 years, which is actually like pretty crazy. And probably a lot of that goes into the ethos behind WeWork, including in the US. He spent a few years living in the US, then came back to Israel, and he spent a number of years living on a kibbutz in Israel, which is like a rural sort of communistic farm. He was dyslexic, I presume is dyslexic, but nonetheless, quite smart. He tested into the Israeli Navy Academy, Naval Academy, growing up, became an officer,

• 5:26David Rosenthal?

  and he served in a kind of elite unit in the Israeli Navy for five years. After that, he moves back to the US, to New York, to live with his little sister, Adi, who was actually Miss Teen Israel.

• 5:38Ben Gilbert?

  No way.

• 5:39David Rosenthal?

  Yeah, totally. And she was a model in New York. And Adam, I guess, had always wanted to come back to the US and to New York. They lived together in the city, and he went to business school at Baruch College. And his goal was getting out of the army, just like many folks in Israel, wanted to become an entrepreneur, wanted to start a company. And so I think this was probably while he was in business school or shortly afterwards, he has his first great startup idea, perhaps inspired by his fashion model sister, collapsible women's heels.

• 6:11Speaker 02

  Yeah, I forgot about that.

• 6:12David Rosenthal?

  Yeah, pretty amazing. I actually couldn't find the name of the company, Dan. Do you remember?

• 6:16Speaker 02

  Oh, God, I don't remember it. No, and it's killing me now. No, but that's exactly what it was.

• 6:20David Rosenthal?

  Yeah, it was. I mean, like... Amazing. That unfortunately didn't work for reasons that are lost to history. But undaunted, Adam goes on and he starts his next company. The next company is called Crawler's with a K.

• 6:37David Rosenthal?

  Crawler's, this is true. Now, remember, Adam, I mean, folks, listeners probably have some image of Adam right now. He actually does have five children now.

• 6:44Speaker 02

  Yep.

• 6:45David Rosenthal?

  At the time, he had no children and Crawler's was a baby clothing company. And the unique insight innovation that they had, this is maybe going to pressage we work here, is they had the technological advance of built in knee pads in pants. So that as your children were crawling around on the floor, they wouldn't. Or falling on the floor. This sounds like a. Speak to this, like this is a real problem.

• 7:07Ben Gilbert?

  This sounds like a Kramer thing.

• 7:09Speaker 02

  But it's also, it's a little bit New York. Like you think of the era, both of those, like collapsible heels, you know, baby clothes. Like you think of New York in that time from an entrepreneurial sense. It wasn't, you know, there was all this complaint, you know, there's not much tech, quote unquote, tech coming out of New York. But a lot, whether, whether you want to call it fashion apparel, consumer, consumer products. I mean, that's also the Warby Parker era, et cetera.

• 7:26David Rosenthal?

  Totally.

• 7:27Speaker 02

  What was being made.

• 7:27David Rosenthal?

  We should, we should set the timeframe here. This is mid 2000s when all this is going on. So just pre financial crash. And yeah, tech in New York was like, there was Union Square Ventures there, but.

• 7:38Speaker 02

  There was media, media tech, ad tech, media and ad tech.

• 7:41Ben Gilbert?

  Had done well or was, was rising.

• 7:43Speaker 02

  Was, I mean, I guess was Foursquare around yet? Probably. But it got so much publicity in part because it was one of those earlier, maybe it wasn't around yet, one of those early New York companies, New York tech companies.

• 7:52David Rosenthal?

  Maybe Etsy was, but like, these were not, people weren't building like real tech companies in New York. Well, this, we will continue on that theme.

• 8:01Speaker 02

  Whether we work his or not, yeah.

• 8:02David Rosenthal?

  Yeah. So it's right around this time, while Adam is trying to make Crawler's work, that he goes to a party and he went to lots of parties. In fact, he goes to a party at his own apartment. And as we're doing the research here, Dan, I don't know if you saw this or remember this. I guess Adam had a habit, this must've been summertime of in the parties that he would throw in his apartment. He would just walk around without a shirt on.

• 8:26Speaker 02

  That I don't know, although there's a photo of him from like two weeks ago, walking down New York street without his shoes on, which is insane in Manhattan, but was, yes.

• 8:33David Rosenthal?

  No shirt, no shoes.

• 8:34Ben Gilbert?

  It was like within two hours of the, the board asking him as CEO.

• 8:37Speaker 02

  It's possible they took his shoes. We don't know.

• 8:41David Rosenthal?

  So Adam is shirtless at this party and a guest, a friend of a friend, shows up and meets, meets Adam in the elevator going up to the apartment. And that man's name is Miguel McKelvey. Now, Adam, I don't think we've mentioned yet, is six foot five. Miguel is six foot eight. So maybe they were like the only people who could see each other in the elevator. And Miguel had a similarly interesting background. So he grew up not in Israel, not on a kibbutz, but in Oregon, on a hippie commune.

• 9:11Ben Gilbert?

  Wait, both WeWork founders have their origin stories from commune?

• 9:15Speaker 02

  And it absolutely, when we get further along, absolutely makes sense when you think about what WeWork tried to become.

• 9:21David Rosenthal?

  Yeah.

• 9:21Ben Gilbert?

  Wow.

• 9:21David Rosenthal?

  Yeah. So Miguel was born to, to a single mother, lived in this collective of five single mothers and their children. He had four sisters, who are not biological sisters, but this commune was 10 people, five mothers, five children. Later, there was a little brother that came into the picture about 10 years later. But that was, that was how he grew up in this collectivist rural commune outside of Eugene, Oregon. He ends up, he was very smart though, is very smart, goes to Colorado College for university, spends a couple of years there, then ends up transferring back home to the University of Oregon, which is in Eugene. He does two things there. One, he plays basketball.

• 10:00Ben Gilbert?

  He's 6'8". You can't wait.

• 10:01David Rosenthal?

  And Oregon is like a pretty good basketball team.

• 10:02Ben Gilbert?

  Oh, yeah.

• 10:03David Rosenthal?

  Like, he was like legit. And two, he studies architecture and he gets his architecture degree. So this is all starting to come together here. And it's going to come together even more. He graduates and in true, you know, sort of free spirit fashion, he moves to Tokyo after graduation. And because he has a friend over there, he's like, hey, you should just come like hang out in Tokyo. So he goes, remember SoftBank is going to enter the picture here, you know, in a little bit. And in Tokyo, he starts his first company, a company called English Baby, which amazingly still exists today. We'll link to this in the show notes.

• 10:38Ben Gilbert?

  No way.

• 10:39Speaker 02

  Did it merge with Crawler's? No.

• 10:41David Rosenthal?

  No, no, no.

• 10:42Speaker 02

  No.

• 10:43David Rosenthal?

  So Miguel was a co-founder, he was not the CEO. The company ended up moving, spent a couple of years in Tokyo, ended up moving back to Portland, Oregon. So it's still based in Portland. And English Baby is best described as like MySpace plus Duolingo. So this is again, like early to mid 2000s.

• 10:59Ben Gilbert?

  Good idea.

• 11:00David Rosenthal?

  Yeah, it's probably not a bad idea. I think they were inspired by like, do you guys remember growing up? Like this concept of you'd be like, your schools would help you become pen pals with like students in foreign countries? I think that's what kind of inspired that. They wanted to do that on the internet. So like learn, help foreign students learn English, you know, with friends in other countries. Yeah. So the tagline, which is still there on the website today, the motto of the company is learn English, find friends. It's cool.

• 11:30David Rosenthal?

  Kind of amazing. So after that, Miguel works on that for a couple of years. And then he's like, you know, I have this architecture degree. I should use it. I also, he's also kind of always had this dream. He talks about this. He was on How I Built This podcast. He always had this dream to kind of move to New York. So he just picks up, moves to New York and he joins a small architecture firm in Dumbo in Brooklyn. And this is, there were two architects there and he was working as a draftsman for these two architects. And they had one major contract, which was the build out of the American Apparel retail stores all across the country. So Miguel gets drafted in as a draftsman. Basically this was when the era of American Apparel, they're just rolling out in a huge way, kind of like WeWork would, all across the country, open up all these stores,

• 12:14David Rosenthal?

  all with the same aesthetic that would come to sort of inspire WeWork here.

• 12:18Ben Gilbert?

  To bring it full circle, just before flying out to do this episode, I walked past the empty space in Seattle, where the American Apparel store used to be and was more recently filled by Glossier's pop-up, which is just like, to bring it the most full circle.

• 12:31David Rosenthal?

  Oh my God. Are you implying there might be some empty WeWork spaces soon?

• 12:35Speaker 02

  Yeah, I don't know.

• 12:38David Rosenthal?

  So it is this man that walks into the elevator and meets Adam at this party in, this probably would have been like 2007, maybe early 2008 in New York. And they get to talking at the party and Adam, it turns out, is looking for office space for his burgeoning, hyper-growth company crawlers and is talking to Miguel. And Miguel's like, oh yeah, like I'm an architect, like I like, you know, I'm into, I'm doing all this commercial space. And Adam wants to-

• 13:06Speaker 02

  If you can wait eight years, my company, the company I'm working for is going to collapse. There'll be storefronts everywhere.

• 13:10David Rosenthal?

  Everywhere.

• 13:11Speaker 02

  Everywhere.

• 13:13David Rosenthal?

  And so Miguel's like, dude, don't go, don't go looking for office space in Manhattan. Like that's stupid. Come to Dumbo. Rents are cheap here. It's super awesome. It's really hip. You're going to like it a lot more. So he convinces Adam to move into the same building that his architecture firm is in Dumbo. And this is 2008. The financial crisis is happening. Rents are super cheap. There's, you know, blood on the proverbial blood on the streets in New York. I was there. We all remember this. Real estate is plummeting and these two entrepreneurial guys, they kind of cook up this idea. They're like, there's some empty floors in this building that we're in here in Dumbo. What if we convince the landlord to let us take over one of these floors? And then we can stuff some more people into it and like make the arbitrage on the rent.

• 13:57David Rosenthal?

  And they decide this is a good idea, these two new fast friends. And so they do it. They convince the landlord. It's like, well, I can't move this floor anyway. They give it to them and the idea is this is going to become like Airbnb for office space. And maybe the better analogy though is there's a Forbes article a couple of years later in the early days of WeWork. And they say, sort of like Airbnb, but maybe a better analogy is like an airline operator. Cause really what they're trying to do- Let's take a physical asset and squeeze as many people into it, just like coach on an airplane. And it turned out, I think the financial dynamics of this business look a lot more like an airplane operator than they do like Airbnb. But anyway, it's actually a great idea. Like, very quickly, the space gets filled up. They list it on Craigslist.

• 14:42David Rosenthal?

  And they're like, hey, we've got desks here. They decide to call it Green Desk. They think like, this is going to be eco-friendly. That's what's going to appeal to these types of folks that are like, you know, new age entrepreneurs, they care about the environment. They start marketing-

• 14:57Ben Gilbert?

  Didn't they only like stock environmental products? So it's like all seventh generation, sort of like CPG stuff throughout the-

• 15:03David Rosenthal?

  I think they might have. They used only recycled desks. And then the kicker is, I'm sure this was probably fake, but they were like, we are powered only by wind power.

• 15:12Speaker 02

  In Dumbo, in a converted building in Dumbo? They changed their own grid?

• 15:18David Rosenthal?

  Hey, they're entrepreneurs. They're entrepreneurs.

• 15:21Ben Gilbert?

  Throw a windmill on top of the building.

• 15:23David Rosenthal?

  Yeah. So-

• 15:25Speaker 02

  I'm sorry, I'm just, I'm trying to think of Brooklyn. And I'm trying to identify my mind, the first windmill I've seen there. And I'm still trying. So-

• 15:32David Rosenthal?

  It was the Dutch, you know, they put the windmills in the, in New York when they, when they settled it. So, like I said, though, it works great. Like, there are all these people that are getting displaced from their traditional New York finance, you know, media, what have you, jobs. And they're either starting businesses, or they're freelancing, and they're looking for stuff like this. And so the Craigslist postings that they're making are just getting all this demand. And within, I believe, within a month, they have the space like, pretty much booked up. Then they start taking some more floors in the building. The landlord owns a few other buildings nearby. They start doing this in the other buildings, and it really works.

• 16:08Ben Gilbert?

  Wait, so this is Green Desk, not-

• 16:10David Rosenthal?

  This is not WeWork.

• 16:11Ben Gilbert?

  Did something bad happen at Green Desk, or they just morphed?

• 16:12David Rosenthal?

  No, something great happens to Green Desk, which is, two years later, the landlord says, man, this is like becoming a big part of my business. And he, unclear to me if he offered to buy, or they offered to sell to him, but they buy, the landlord buys Green Desk from Adam and Miguel for $3 million, which is pretty great. So this is 2010.

• 16:34Ben Gilbert?

  They raised no investment?

• 16:35David Rosenthal?

  They, I believe, raised no investment. Now, they had a third partner who was a guy, I believe, named Gil, who Miguel had worked with at the architecture firm. And I believe Gil, at this point, just takes the money and moves back to Israel. He was Israeli. But Adam and Miguel, they make like a pretty bold decision. And this is 2010. Remember this, like, they just made probably at least a million dollars each. They could be living large in New York at this point in time.

• 17:00Ben Gilbert?

  In Dumbo, at least.

• 17:01David Rosenthal?

  In Dumbo, at least. And man, to invest in Dumbo real estate in 2010, like, you would have made a killing. But they say, no, we're gonna double down. We think that, we've learned a couple of things from Green Desk. We think that this product has some form of product-market fit. Let's take this across the water into Manhattan. And so they go, they decide to restart the company, and they want to go do this same concept in Manhattan. But they've learned, one of the key things they learned is that actually this eco-friendliness thing, like, it sounds good, but that's not why people showed up. People showed up because what they were really doing was they were selling a culture. They were selling a workspace feel,

• 17:43David Rosenthal?

  design, culture. And I think this is totally true. Like, Dan, I don't know if you'd agree or not.

• 17:48Speaker 02

  I think, you know, I mean, I think they were selling, you know, if you think about freelancers back then, or people trying to start, they were selling the coffee shop, is what they were selling, without having to go and buy coffee. And there was actually a desk. That's what they were selling. Because that's where you would go. And probably with worse Wi-Fi at the time. So.

• 18:02David Rosenthal?

  Yeah. Well, I think Regis and IWG is going to come up in a minute. But again, this is not a super new idea. The idea of-

• 18:08Speaker 02

  No, it's not. Look, in 19, I'm gonna really date myself now. In 19, like, 94, in Cambridge, Massachusetts, in Kendall Square, where MIT is, I was working on a startup newspaper at the time, and we rented an office. And the big thing that that had was it had a common receptionist and a mailbox. That was huge, right? We could get mail to us, and somebody would pick up the phone and would direct it to us. So, I mean, that was very much the early version. But that general idea, and there was a bunch of different, basically, conference rooms, and every company had one.

• 18:37David Rosenthal?

  Yeah, but I bet, though, it probably didn't feel, it felt probably kind of pretty crappy.

• 18:42Speaker 02

  Yeah, it did. No, it felt like basically we were in a very large cubicle with a better with a window.

• 18:47David Rosenthal?

  Yeah.

• 18:48Ben Gilbert?

  So this is an age old business, this subdividing real estate, basically leasing, taking on a long term liability where you rent out space for some low price because you're taking it in bulk. You subdivide it up and then you rent it for a higher price in a

• 19:00Speaker 02

  And in this, and in this case, for what WeWork would become and have some common shared services, which is, you know, the, you know, particularly if you're a two person company, you don't want to have to deal with somebody answering the phone or how do we get, you know, broadband do we have to hire somebody to take the trash and all and get, make sure the coffee machine is filled every morning?

• 19:16David Rosenthal?

  Yep. Yep. And I think just to hit on this one more time, because I think this actually is a big difference from WeWork and everything else. What they did is they did that and they made it feel like you were like at a real place, not like you were at some budget low rent.

• 19:30Speaker 02

  It's like English baby, right? It's cool. Yeah, that's what it was.

• 19:33David Rosenthal?

  Yeah, it was cool. It was cool.

• 19:34Ben Gilbert?

  And there's multiple interviews with early WeWork members that said, yeah, I was working on a startup. It wasn't going well, but like my parents could still come to the office and they felt like I was doing something real, like I was a success. Like there was, you know, I was in a place, oh my gosh, look at all these great desks and computers and a receptionist.

• 19:50David Rosenthal?

  There's this energy here.

• 19:52Ben Gilbert?

  Yeah, ostensibly something was working.

• 19:54David Rosenthal?

  Ostensibly, yes. Ostensibly. So, and I think at this point in time, something really was working. People wanted this. So they had to come up with a new name. So Dan, I think you know, the story of

• 20:03Speaker 02

  I've heard rumors of the story. Adam's never said it directly to me.

• 20:07Speaker 02

  The rumors are that Adam was partaking in some stuff he would later partake in on planes and that is when the name came up.

• 20:14Speaker 02

  This time on a couch as opposed to an airplane seat.

• 20:16David Rosenthal?

  Well, maybe he was on a couch on his private jet.

• 20:19Speaker 02

  That's possible. That's fair. That's totally fair.

• 20:21David Rosenthal?

  We're referring to, um, you know, the, the reporting that came out in the last couple of months that Adam apparently smoked marijuana.

• 20:28Ben Gilbert?

  Which shocked shareholders.

• 20:30David Rosenthal?

  Shocked, shocked shareholders.

• 20:31Speaker 02

  Because apparently his major investors had never met him.

• 20:36David Rosenthal?

  Anyway, so they, they needed, they obviously needed a name to replace Green Desk and they come up with WeWork. So this is like kind of an amazing entrepreneurial story, what happens next. So they start shopping for real estate in Manhattan, a lease that they can take out on, they're looking for a whole building that they want to do this, they want to go big. But even with the two-ish million that they have between them, that's not really enough to get, even in 2010, a lease on a whole building. And they want to be in like real hip part of town, they want to be in Soho, they want to be downtown. So they're going around, they're like going to all of these, I don't even know how it works when a building's up for lease, it's like sort of an auction or like whatever it is.

• 21:16Speaker 02

  I have no idea.

• 21:16Ben Gilbert?

  It's, it's market by market. I know in New York, it's like one of the craziest ways. You know, in New York, when you're looking for an apartment, you hire a real estate agent. Like that's how nutso the real estate market there. So I'm sure there's extra complications when you're looking to lease a whole building.

• 21:30David Rosenthal?

  A whole building, yeah. So while they're at a few of these, whatever they were, there were like moments where lots of people who are interested in buildings would all be in the room at the same time. So they're at one of these and they meet a Brooklyn-based real estate developer named Joel Schreiber. And he takes a shine to these guys. He's like an established, pretty big time real estate developer. And they know they need some more capital. And so they kind of throw out something to him and say, hey, we need some funding for what we're doing. You think this is a good idea. How about you invest at a $45 million valuation? And he says, sure, I'll buy a third of the company.

• 22:09Speaker 02

  Which by the way, just, I mean, again, go back nine years, I mean, when we, you know, nothing that's under a billion dollars, anyone pays attention to. That was a, for a startup that didn't exist, that was an enormous amount.

• 22:18David Rosenthal?

  That's an enormous amount today.

• 22:20Speaker 02

  Huge valuation at that. It is, it is. But even then, I mean, just so absurd.

• 22:24Ben Gilbert?

  This, this is the-

• 22:25David Rosenthal?

  Audacious.

• 22:25Speaker 02

  Yeah, audacious, fair.

• 22:26Ben Gilbert?

  But this is the very first example of Adam looking around, like if this were a tech company, then what they would have gone and done is raised $500,000 on a $4 million pre-money valuation. What Adam did was say, oh, no, no, this is not that. Like, and also we're not going to approach a traditional tech VC type person. So you pitch something unfamiliar, that's completely different to someone that's not playing the same game as everyone else. And you get a non-tech investor in a non-tech business at a non-tech valuation and boom. Very first time this playbook has been run.

• 22:57David Rosenthal?

  $15 million in the bank. And so they take out a lease for a whole building in Soho. They start doing the renovation. So there's the lease, but then they have to renovate this and turn it into

• 23:09Ben Gilbert?

  We should be clear why it kind of makes sense that that you should feel like your $15 million is safe here. Normally, when you're investing in a tech company, you're buying like laptops and then you're paying salaries. And in this scenario, you're getting something of value, this longish term lease. So that like, at least if the business goes kaput, then this major investor owns a third of a valuable lease.

• 23:30David Rosenthal?

  Yep. And presumably you could repurpose that building and rent it out for

• 23:34Ben Gilbert?

  Yep.

• 23:34David Rosenthal?

  Other things.

• 23:35Speaker 02

  Which of course, by the way, as we go on, is in theory, the, the, the concept in part behind WeWork's kind of massive valuation, which, which makes what's just happened that much more.

• 23:44David Rosenthal?

  Much more nutty. So they start renovating this building floor by floor, doing the, and, and I believe this, we'll see if we can find some pictures. WeWork as we know it today, like this was it, like they, the, all the aesthetic, the glass walls, the communal spaces. Like they had this nailed kind of from their green desk days from the beginning. So they start doing.

• 24:05Speaker 02

  Plus beer taps. That was very important. That like, like in the early days, when you hear about a WeWork, that was the first thing you hear. They have beer taps in the office.

• 24:12David Rosenthal?

  Yeah.

• 24:14Speaker 02

  IWG does not have beer taps.

• 24:15Ben Gilbert?

  It's like the lowest cogs. It's the, the highest delta between value and perceived value that you could imagine. Or I guess between cost and perceived value.

• 24:24David Rosenthal?

  So as they're finishing each floor in this building, within one quarter of each floor coming online, they're at a hundred percent occupancy. So they're like, oh man, this, this is working. They start running the same playbook on other buildings in New York. And Adam has a, has a great quote on this. He says, during economic crises, there were these empty buildings and these people freelancing or starting companies. I knew there was a way to match the two. If he had stopped there, that is like a brilliant entrepreneurial insight. He has one more sentence, though. What separates us, though, is community. So even back then, even in, you know, 2010.

• 25:02Speaker 02

  I'm going to defend him on that for a quick second, which is, and we talked about this, like, go back to the green desk days and to your friend who said, oh, you know, my parents came in and it looked like something was happening. Like, these freelancers, they weren't necessarily working with each other per se on the same project. But again, working next to someone, it's the difference between working alone in like, you know, you could rent out a one office, office, I guess, somewhere, right? And you're alone completely with the door shut. There's people around, there's an energy that makes you work more. It's the same reason why there's like, even today, questions about is it better for people to be in an office compared to, you know, all working remotely all the time?

• 25:32David Rosenthal?

  Yep, yep. Yeah, again, he's not wrong, but it is a.

• 25:35Speaker 02

  But it does lead to some problems.

• 25:36David Rosenthal?

  He's not 100% right either. So 2011, this is actually really interesting. I was surprised by this. The next year in 2011, PepsiCo takes out a bunch of desks in that first Soho WeWork and starts putting some of their remote New York City-based employees in the WeWork.

• 25:55Ben Gilbert?

  I thought that was a much newer phenomenon, WeWork's business model.

• 25:57David Rosenthal?

  I thought so too, but it was actually from the very beginning. That big corporate clients were also saw the appeal of this. The next year, in July 2012, this catches the attention of a number of venture capital firms, including storied venture capital firm Benchmark, Benchmark Capital. And in the summer of 2012, they lead a $17 million Series A in WeWork at a $97 million post-money valuation. So a nice step up from like the original seed round, which was crazy to begin with. And again, back in 2012, you know, a Series A at $100 million post, like, that's a significantly higher valuation than Benchmark gave to Uber in Uber's Series A. Kind of crazy.

• 26:38Ben Gilbert?

  And in Forbes, Bruce Dunleavy gives a nice quote where he flew out to New York to see what was going on. He said, "It reminded me a lot of eBay when I first met them in 1997. There was something going on at both that you couldn't quite put your finger on." And I think this is an early precursor to a lot of WeWork, which is there's something valuable here, you can't quite put your finger on it, and thus it's hard to value. And that sort of gets taken advantage of over time.

• 27:04David Rosenthal?

  Now, all that said, like, everything up until this point, Dan can feel free to disagree. It all makes pretty much sense.

• 27:12Speaker 02

  No, I don't disagree. I think it did. Yeah, I think it does. Yeah, absolutely.

• 27:15David Rosenthal?

  Even this seemingly crazy investment by Benchmark, as we stand today, like, that's a great investment. And there was like, yes, there was like, is this a tech company? Is there, is this just a real estate company?

• 27:25Speaker 02

  It is, but we will come back to this Benchmark investment and the subsequent investments that in the background is that was going on. You know, you talk about the valuation, the part that didn't get reported at the time, none of us ever see is the actual governance terms that are sitting behind that valuation.

• 27:39David Rosenthal?

  Yeah.

• 27:39Ben Gilbert?

  Is, do you know if that was happening at the Series A already?

• 27:42Speaker 02

  Well, had, I don't know for sure, but I don't, I believe Newman, I mean, Adam Newman, even at the time of IPO, owned a remarkable amount of this company. For example, compare Travis Kalanick was, I think, owned like 6% of Uber when he got booted, around 6%.

• 27:54David Rosenthal?

  Yeah.

• 27:55Speaker 02

  Adam owned a third of the company.

• 27:56David Rosenthal?

  Yeah.

• 27:56Speaker 02

  So, I mean, he still, I mean, after all the SoftBank money, et cetera, so he controlled this thing, even in that early, those early days.

• 28:04David Rosenthal?

  Well, and it's interesting, you know, Adam, of course, had Miguel as his co-founder. I believe, well, now it's now obfuscated because they have their shares in an LLC, but I believe Adam always had a greater economic percentage of the company than Miguel. If you remember back to Uber and Travis, Travis was not the founder of Uber.

• 28:21Speaker 02

  No.

• 28:21David Rosenthal?

  It was Garrett Camp. Travis was sort of-

• 28:24Speaker 02

  But Adam had a bigger piece than Garrett had of Uber. I mean, going forward.

• 28:27David Rosenthal?

  Interesting. Yeah. Well, well, because Garrett and then Travis ended up splitting, and but like, there was some delusional, like Travis didn't start in the same way as like, I am solo founder of this company.

• 28:36Speaker 02

  No, again, I mean, and we'll get into this, but I didn't, control was important to Adam. And in every way, control really mattered.

• 28:43David Rosenthal?

  Yeah, yeah. So after that investment, things continued to work while they're opening lots of locations in New York. I think it was right around then that I remember the Seattle WeWork opening.

• 28:54Ben Gilbert?

  Yep.

• 28:54David Rosenthal?

  Where we were, Ben and I were there at the time, they were opening, there was definitely in San Francisco, a number of cities around the country. Expansion keeps continuing. They start to attract the interest of the financial community. So they raise, I believe, three more rounds over the coming years, led by investment banks, by Jefferies and JP Morgan, chief among them, but also from Goldman Sachs. And they start pumping quite a lot of money into the company on short order. And so by 2014, the company now is valued at $1.5 billion and is kind of quite large at this point.

• 29:35Ben Gilbert?

  Yeah. And how much do you think had to do with the fact that they were New York based and not San Francisco based at this point?

• 29:42Speaker 02

  I would think, oh, you mean in terms of the leads. I think two things, New York based, but also think about that. They are still basically a real estate company. Or if you are, if you are Goldman Sachs, if you're Jefferies, if you're JP Morgan, you have giant real estate investments. You have whole teams that are dedicated. They know that, you know, some sort of app or some sort of, you know, machine learning, something, something. They've got to put a lot of faith that the founder knows what they're doing. With this, they felt they knew what they were doing. This is them. This is real estate and it's on their block.

• 30:09David Rosenthal?

  Yeah. Well, that's, that's actually true. And I believe by 2014, WeWork had become the single largest lesser of new available commercial square footage in New York City. Like anybody, like, think about like, all of the real estate investment and property developers in New York. WeWork was the largest. So of course they were attracting attention to these folks.

• 30:30Speaker 02

  And it goes, and it goes back to what you said earlier, you know, remember also what they are investing in. You know, and an app company can disappear just like that, right? There's a scandal or it doesn't work. There's no product market fit. Worst thing that happens here is you end up with a shell company that's got, as you said, all the real estate, commercial real estate in New York City. That's the worst case scenario. There are, you know, that, that's pretty safe as venture capital investments.

• 30:52David Rosenthal?

  Right. Goldman, JP Morgan, they're going to be super happy to take over those leases if something goes sideways here.

• 30:57Ben Gilbert?

  And let's think about how you, how you might make that investment and arrive at a $1.5 billion valuation at this point. Is someone doing a discounted cash flow? Like, is, is someone actually saying, well, if they continue growing at this rate for X years and we're looking at our net operating margin and that we think that there's some chance to generate a billion and a half in cash flows?

• 31:18Speaker 02

  My guess, I don't want to say I guess. I would hope so. I have so little faith that people do that or really do that and don't just come up. There is a big part of me that believes, and you guys can feel free to disagree, that people come up with a valuation and then they back their math into that valuation. If the first one doesn't work, they'll come up with another way to make the calculation. But look, but there, there was some reasonableness to it, right? Because you think about WeWork, the, the issue is always, they had to spend a lot of money upfront. Their upfront capital costs, A, to, to lease the buildings, but also to Do the renovation, right? It costs money to, because they were doing full, almost demo inside of these things, almost down to, you know, the equivalent of studs. And then rebuilding them inside. That costs a lot of money. And if you've got a 20 year lease, you are theoretically, you're gonna, you know, depending on the building,

• 31:59Speaker 02

  you'll get to break even at year three or year four at 70, 80% occupancy. And that's when you're really in the money. So that's how you're, you're planning it.

• 32:06David Rosenthal?

  Yeah. You know, and it's interesting. I hadn't quite thought about this till now as we've been going through it. I think you could argue, Dan, that like the valuations for the tech venture capital community look a lot like what you said. But I can imagine, you know, Goldman, JP Morgan, they don't do this. They were looking at the value of this real estate. And I strongly suspect, having friends that were at some of these places on real estate investing teams at the time, they probably had big theses about like those years, call it 2010 to 2014, were years to go big on investing in commercial real estate in major metropolitan areas.

• 32:42Speaker 02

  The counter argument would have been, even at the time would have been, okay, we're, we're in an economic recovery at the time, arguably boom by 2014, 15. Okay. So you're right. So the floor, you know, floor 30 on Sixth Avenue, that's, there's got a, it's got an intrinsic value to it. But WeWork has decided that they are going to rent it out to short termers for the most part. Yeah, maybe some Pepsi's, but short termers. And they're going to spend a fortune renovating it when it was already an office building, right?

• 33:05David Rosenthal?

  Yeah.

• 33:05Speaker 02

  Generally, most of them, maybe not the one in Soho, but most of them were probably already office buildings. Could we have done better just calling Pepsi, calling somebody else, splitting the floor in half and basically keeping the infrastructure exactly the same, maybe with new coat of paint?

• 33:15David Rosenthal?

  Yeah. Maybe they could have. So the net of all this is in June 2015, WeWork makes a really key hire. They hire a man named Artie Minson, who was the CFO of Time Warner Cable. Now, if you think about the cable business, uh, this is the, not the content business. This is the, literally the pipes, the distribution of cable to people's homes.

• 33:37Speaker 02

  Which is why he was perfect for this.

• 33:39David Rosenthal?

  Exactly. It's a cash flow business.

• 33:40Speaker 02

  Cash flow business, but the same thing, right? A huge upfront infrastructure spend and you will get your money, basically recurring revenue year after, it'll take a while to get your, your nut back. But then eventually it's a lot of money down the road and it's recurring.

• 33:52David Rosenthal?

  I mean, I remember.

• 33:53Speaker 02

  And limited supply also. I mean, you think about cable, there's in New York, as everyone knows, when, you know, when Time Warner decides to stop carrying a channel, you're out of luck. Same thing. There's a limited amount of commercial real estate in New York.

• 34:03David Rosenthal?

  Yeah, I remember back in, in the mid 2000s, I was in a media investment banker at UBS in New York, and I remember covering cable companies and the history of cable companies, as we've discussed a little bit on acquired, was like, nobody believed in them during the 80s and 90s, when they were incurring huge losses, doing all this build out of laying the cable, laying the pipes into consumers' homes. But then the switch flipped, exactly like you said, Dan, and then they became cash flow monsters and people loved them. And so I think a lot of this bet here was the same thing was going to happen with WeWork.

• 34:37Speaker 02

  And already said that explicitly over and over again. He felt, he felt they were analogous.

• 34:41Ben Gilbert?

  And that's Ben Thompson's AWS analogy, too, that says, look, there's huge build out costs. It would be strange if this business weren't incurring huge losses right now in this era of rapid expansion of infrastructure. At some point, it should flip.

• 34:54David Rosenthal?

  Yeah, indeed. This, though.

• 34:56Speaker 02

  It did, by the way. It did eventually.

• 34:58Ben Gilbert?

  AWS definitely.

• 34:58Speaker 02

  No, no, and this, WeWork, just in the opposite direction.

• 35:01David Rosenthal?

  Yeah, well, exactly. This is, no, no, no, you're not. This is, a switch does flip at this moment. Unfortunately, the switch that flips, I think, was more in Adam than in the business.

• 35:13Ben Gilbert?

  Yeah. So this, this is the moment where, until this point, the name WeWork is in no way a salied or in no way a head scratcher. It's, it's a really interesting company that seems to have product market fit. That's, of course, growing very fast, but no one's looking at the growth and saying, like, there's something massively awry here.

• 35:31Speaker 02

  Mostly, the only concern, at least I remember hearing at the time, was this argument, and you know, the Pepsi thing's interesting, because the, the enterprise piece of them, in terms of renting to big enterprise companies, wasn't well known, and wasn't even that big within WeWork in terms of its revenue at the time. There was a concern that, wait a minute, they are, they're filling these with all of these startups, these tech startups. If the tech startup bubble bursts.

• 35:53Ben Gilbert?

  Yep.

• 35:53Speaker 02

  And that's on top of a commercial real estate burp. You've got burst rather, you've got a bubble on top of a bubble. And then the whole thing goes to hell very, very quickly.

• 35:59Ben Gilbert?

  That's a great point. Yeah, that was. I distinctly remember having this conversation like late 2014 of, uh, I would be short this company purely because there's going to be a tech bubble that bursts soon, which here we are five years later, and we're all still waiting for it to happen, or maybe it's happening right now. But, but yeah, Dan, that's a great point.

• 36:17David Rosenthal?

  Yeah.

• 36:17Speaker 02

  You're right, but the growth makes sense. And it's the reason they kept raising money at higher valuations. And they kept filling the buildings. I mean, that's important. The buildings kept being full.

• 36:23David Rosenthal?

  Yeah, they kept being full.

• 36:25Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is, uh, no longer the hard part.

• 36:39David Rosenthal?

  Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 36:53Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

• 37:03David Rosenthal?

  Yep. AI control tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

• 37:20Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 37:36David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 37:53Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 38:02David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. So Adam, at this point, he's very wealthy on paper, but as they keep raising money, he starts doing, it's unclear exactly the method by which he did this, but he starts taking quite a bit of money off the table. Some definitely from selling his own shares. We won't know.

• 38:33Speaker 02

  And they were all, they were employee tenders. I mean, he, I'm told at least that every time, there's some debt stuff too with JP Morgan, but in general, every time he sold shares, it was part of an employee tender. He was selling at the same price they were, but he had a lot more stock.

• 38:45David Rosenthal?

  Well, I was gonna say, yeah, then the, what we do know is that by the time we get to now, he has, I believe it's a $500 million loan facility personally from JP Morgan, backed by his WeWork shares. So which is effectively a way to be selling without actually selling your shares along the way. $500 million, that's a lot of money.

• 39:07Speaker 02

  Man's got a lot of houses. He's got like 10 homes or something like that?

• 39:11David Rosenthal?

  So he starts doing two things.

• 39:12Speaker 02

  What? That's two for each of his children. That's not bad.

• 39:14David Rosenthal?

  Well, he does have five children.

• 39:17Speaker 02

  Well, look, I agree. If I had five children, I too would have 10 houses. So I don't begrudge that at all.

• 39:22David Rosenthal?

  But, but yeah, he starts buying residential property. He owns four multimillion, we're talking like 10 plus million dollar properties in the New York area alone. Dan, I think you're right. 10 residential properties around the world.

• 39:37Speaker 02

  I believe so, yeah.

• 39:38David Rosenthal?

  10 are in that ballpark.

• 39:39Ben Gilbert?

  Well, he also sees, gosh, there's these companies like WeWork that will pay a bunch of money to me if I own a building to lease it from me. So I gotta figure out a way to get into this building ownership business.

• 39:50David Rosenthal?

  The other thing, and the other more problematic thing that he starts doing is he uses, starts using this money to invest in commercial real estate. And this is a huge conflict of interest because.

• 40:01Speaker 02

  I mean, and it is, it's an obvious conflict of interest. His argument was always, and I remember hearing about this and actually asking about this, this is before I joined Axios, is if, when we brought him and his wife Rebecca to, to a Fortune conference in Aspen, I remember asking about this. His basic argument was, we were having a hard time. So I almost think he did some of the commercial real estate earlier because at least his argument was, we were having a hard time at points convincing landlords to let us in because they viewed us as this venture backed startup. Oh, we're going to sign a 20 year lease, but where are you really going to be in five years? Or you're not, you're going to be gone. But if I buy the building or I have a piece of the building, well, we'll lease to WeWork because I have faith in it. So I'm solving that. I'm solving for that problem. But you're right. Obvious conflict of interest.

• 40:42David Rosenthal?

  Right. Well, I mean, that logic may make sense.

• 40:46Speaker 02

  If you had an independent board of directors, which had oversight, would be able to manage and silence.

• 40:50David Rosenthal?

  Yeah. And that logic might make sense, but then the obvious answer is start investing, have WeWork start buying the buildings, not Adam personally.

• 40:59Speaker 02

  Which is what they ultimately get to, but not, right?

• 41:01David Rosenthal?

  Yeah, not Adam personally, and then leasing the buildings back to WeWork that he's profiting on. The other thing, I mean, this is just standard, like ridiculous startup stuff. They, which is sad to say at this point, but they ran out all of Universal Studios one day and they get the chain smokers to perform and they start doing this thing called WeWork Summer Camp.

• 41:20Ben Gilbert?

  Yeah. It actually started at Rebecca's family's property, I think in upstate New York, somewhere like, I don't think it's the Catskills, but somewhere sort of like that looks a lot like that. There's a, there's a few really great pieces reporting on this, but it's like 150 acres of land. Her family, I think, is independently wealthy. Actually, her cousin is Gwyneth Paltrow.

• 41:41Speaker 02

  Yes. Yeah.

• 41:42David Rosenthal?

  Yeah.

• 41:42Speaker 02

  You know, again, this is one of those things that sounds so stupid and is. I remember the first time I called, I think it was, I had talked to like who was running PR for WeWork at the time and I called and I get a text back saying, sorry, I'm at camp right now. And to which I say to a colleague of mine, I say, he, because it was like June, maybe. I said to a colleague, I think he's bringing his kid to camp. And she responds, he doesn't have a kid. Said, but he says he's at camp. She said, oh, he's at WeWork camp. And that began a whole conversation. What the hell are you talking about? But I will say, like, look at Google. Google still does this. Like, so if things are going well, no one cares. And when things go badly, this looks just awful.

• 42:17Ben Gilbert?

  So when you have a monopoly in an 85% gross margin business, you can do shit like this.

• 42:22Speaker 02

  You can. By the way, as I said, I came from Fortune magazine. The old stories for Fortune from before my time were when they had a blowout, the Fortune 500 issue was, you know, the kind of the Vogue issue, right? It was massive. And I guess maybe like 10 years before I'd gotten there, they had a blowout issue and they brought the entire staff from, you know, most junior to the most senior, everybody to Hawaii for a week. So, I mean, that in retrospect was really dumb, but you know, at the time you do.

• 42:42David Rosenthal?

  You know, great. Like, you know, exactly.

• 42:45Ben Gilbert?

  But here we are in a, I don't know, 10 to 20% gross margin business that's purely right now, like all the Cash in the bank is investor dollars. None of it is profit dollars.

• 42:53Speaker 02

  Correct, correct.

• 42:54Ben Gilbert?

  You know.

• 42:55David Rosenthal?

  Yeah, so the peak of this period of the company is 2016. They raised just under half a billion dollars from two Chinese entities that valued the company at $16 billion. And that was, I think that was the first time they crossed the $10 billion valuation threshold. And now they're among the top like three most valuable startups in the world, to quote unquote startups. And

• 43:25Ben Gilbert?

  But WeWork.

• 43:26David Rosenthal?

  WeWork, Uber, Airbnb.

• 43:28Ben Gilbert?

  Airbnb.

• 43:28Speaker 02

  And then you can take some of the Chinese ones, but at least for the US, yeah.

• 43:31David Rosenthal?

  Yeah, for the, at least for the US. And I think that was 2016. That was before, I think, people really.

• 43:35Speaker 02

  Maybe Dropbox at that point was already there, but close, maybe not quite.

• 43:38Ben Gilbert?

  It was like in the five-ish, because it went IPO'd around 10.

• 43:41David Rosenthal?

  Yeah.

• 43:42Speaker 02

  Yeah, but Uber, Airbnb and them, that, those were the three.

• 43:43David Rosenthal?

  Well, and, and I think actually a lot of the Chinese companies hadn't even been started in 2016 yet.

• 43:48Speaker 02

  Some of them, that's fair.

• 43:49David Rosenthal?

  Yeah, like Pinduoduo, I think was started in like 2017. Like, it's crazy. So, uh, so yeah.

• 43:55Ben Gilbert?

  So benchmarks two for three in these, uh, these three big $10 billion plus companies.

• 43:58David Rosenthal?

  Well, plus there's, Snapchat was kind of up on its, you know, rise at that point. So yeah, everybody's sitting pretty. Enter SoftBank and it's a one of a kind founder, Masayoshi Son.

• 44:11Ben Gilbert?

  Listeners, if you don't hear the Imperial March playing, know that it's because I checked with Disney and we did not get the copyright authorization to put that behind this section.

• 44:20David Rosenthal?

  So we've talked a lot about SoftBank on this show, including doing a whole episode on the Vision Fund. We're now in early 2017. SoftBank has just raised the Vision Fund. And we're going to talk a lot about their motivations and everything that happened here along the way. But one thing I think to really keep in mind, like, they have $100 billion to put to work.

• 44:40Speaker 02

  Theoretically.

• 44:41David Rosenthal?

  Theoretically. And their goal that they're clear about is they want to deploy this capital in less than five years. How do you deploy $100 billion, which as we've talked about, is the largest fund of any type in any asset class ever raised in history? How do you do that? Let alone in tech companies, you need to find some companies that can absorb massive chunks of capital. So they start looking around and they say, where can we put this money? Uber is obviously one example that they put quite a lot of number of those billions into. But here's this interesting company called WeWork. It's already one of the highest valued startups in the world. And they have this interesting capital dynamic. They're

• 45:25David Rosenthal?

  very capital intensive. They scale with capital. They take on these long-term leases.

• 45:31Speaker 02

  And they want to move into Asia.

• 45:32David Rosenthal?

  And they want to move into Asia. Exactly. This feels like the perfect fit. We could really put a lot of billions to work in this company. And then, you know, get through our deployment phase and fund one and just like, you know, any good fund manager, then go raise our next fund.

• 45:49Ben Gilbert?

  Yeah. Now, David, is this is SoftBank Vision Fund's mission to invest in technology companies? How does that start to factor into the picture?

• 45:58Speaker 02

  By this point, WeWork believes it's a technology company. I mean, the one thing you didn't say, I thought you were going when you talked about that inflection point was it's starting to be honest, the AWS example is pretty good, right? It is starting to add lot or believes it's starting to add lots of services on top of the real estate, right? So beyond the beer taps and the decor, it's trying to add all these services and some of those are

• 46:18Ben Gilbert?

  Social network for members.

• 46:19Speaker 02

  All that stuff eventually at elementary school. But nonetheless, that's the idea. And I think that's part of it. But it's also if you're Masa, you're SoftBank looks at what they believe are transformational shifts in how people either live or work, right? So they invest in Slack, for example, right? That's a they think that's a fundamental change in how people work from collaboration. In this case, they think this is a fundamental change in how people work from a physical location standpoint. So this works for that from a thematic standpoint.

• 46:45Ben Gilbert?

  Thematically, but economically, this doesn't have the high fixed cost, low variable cost component that a true sort of pure technology business would have.

• 46:54Speaker 02

  No.

• 46:55David Rosenthal?

  Not at all, but I think is to underscore again, as we said, it has this other extremely attractive element to SoftBank, different than, you know, SoftBank invested in Slack, right? How much money could they put into Slack? They couldn't put that much money in.

• 47:08Speaker 02

  And Uber, Uber, they could only plug a ton in because it was in crisis. You know, it was in a management crisis. They took advantage of the situation. And even if you look at Vision Fund, they had put a ton of that was, was money that they'd already invested in ARM.

• 47:18David Rosenthal?

  In ARM, yeah.

• 47:19Speaker 02

  That they basically just transferred over to take a big chunk. If you're doing privately held companies, as you say, it is hard. It was the big question when they raised, how are you going to deploy this in any reasonable way?

• 47:28David Rosenthal?

  Yeah. And so here's this like perfect vehicle. So this is amazing. Dan, you may know more details on, on this, on how this happens. But the SoftBank team is scouring the world, looking for companies like this. WeWork is top of the list. So they set up a, you know, sort of like final diligence meeting where Masa is going to come over to New York to WeWork headquarters. They have two hours booked with Adam, going to see the whole space, going to spend a lot of time with Adam. And as the story goes, uh, the time when Masa is supposed to show up arrives, Adam's all like, you know, ready. He's activated the space as he says that he does. And Masa's nowhere to be found. Time goes by, waiting, like an hour goes by.

• 48:14David Rosenthal?

  Finally, Masa shows up and he says, I'm really sorry, I only have 12 minutes. And so they do a quick walkthrough in the space and then he says to Adam, I gotta get in a car to the airport. You can get in the car with me if you want. We can talk about this. Adam gets in the car with him. Masa pulls out his iPad, as the story goes, draws up with his like finger on the iPad, a sketch of like the terms of a deal, the terms being that SoftBank would invest an initial $4 billion in total.

• 48:43Speaker 02

  Out of Vision Fund.

• 48:44David Rosenthal?

  Out of the Vision Fund.

• 48:46Ben Gilbert?

  And that's $1 billion for international expansion into entities outside the US.

• 48:51David Rosenthal?

  Subsidiaries in Asia, yep.

• 48:51Ben Gilbert?

  1.3 billion of primary capital into the company and 1.7 billion in secondary to basically buy shares from existing shareholders. No new cash.

• 49:02David Rosenthal?

  Including? Adam.

• 49:04Ben Gilbert?

  Including Adam.

• 49:05David Rosenthal?

  They sketch this on the iPad in the car. Masa signs his name to it. Adam signs his name to it. And then, of course, like the team.

• 49:13Speaker 02

  And it's important, just for those who don't understand, Vision Fund, to get an investment from Vision Fund, at least one, I think it's like over a hundred million dollars. You do need Masa's approval and that can't be via phone. It's got to be an in-person meeting. This isn't a normal venture fund where one partner meets with this, or maybe two partners meet with the CEO and then they bring it back to the partners and they discuss it and they have an investment committee to vote. No, if you want this, Adam had to meet with Masa. This has been true for anyone who's raised money from them.

• 49:36David Rosenthal?

  Yeah, lots of friends who.

• 49:37Ben Gilbert?

  What, a hundred companies now, a hundred investments?

• 49:40Speaker 02

  I'm not sure what, I'm not sure what the number is, although Vision Fund one is basically full in terms of new companies.

• 49:45David Rosenthal?

  Yeah. I have friends who've gone through this, like where the SoftBank investment team will, you know, work on a deal together and then it's like, okay, well, we're going to fly you over to Tokyo or wherever in the world.

• 49:55Speaker 02

  Yeah, the fact that Masa came to New York was a big, or was going to be in New York was a big deal because you're right, usually you have to get on a plane.

• 50:00David Rosenthal?

  Usually you go to Tokyo. Yeah. So it's done. So now, all of a sudden, they valued the company at $20 billion, which was, you know, was already valued at 16, but this was $4 billion of capital. That was a step order of new capital coming in and 1.7 of that going to existing shareholders, which, again, we don't know the details, but imagine a lot of that was to Adam.

• 50:24Ben Gilbert?

  Yeah.

• 50:25Speaker 02

  And also notable time, they get two board members too. It's important. They, they put two people on the board of directors at this moment.

• 50:30Ben Gilbert?

  Which, that had to be stomach churning for Adam, who's obsessed with control.

• 50:34Speaker 02

  Well, I, as we will learn later, he had two people on the board of directors, but, you know, they have as much control over financial decisions there as my kid does in my house, right? Like they, she can ask for things and complain about things, but in the end, I get to decide what we buy and what we don't buy.

• 50:48Ben Gilbert?

  Dan, do you know, so famously now, Adam has a 20 votes for every one share in the company that he has. Do you know if he got this as part of the deal?

• 50:57Speaker 02

  I do not know.

• 50:58David Rosenthal?

  At some point along the way, I mean, I have to, again, we can't go back. We don't have the documents to sort of forensically examine what the.

• 51:06Speaker 02

  But luckily, there will probably be class action lawsuits at some point, so we will get these documents. It's just a question of time.

• 51:11David Rosenthal?

  But what the governance was at various points along the way, I can say with 100% confidence, there's no way that, going back to like the original benchmark investment, that the voting structure was, was like this.

• 51:25Speaker 02

  I don't know that that's true necessarily. I mean, think of Benchmark and it's not just Benchmark, but all of them were so bent over backwards for any, for, you know, I mean, go back to the Zuckerberg thing, right? Like, think of Zuckerberg, he turns down a billion dollars from Yahoo when the entire board, including his investors, wanted him to take the deal. He was able to do that. And, and as you know, I mean, after that, so many other founders of quote hot startups were able to get similar terms, whether it was 20 to one or not. I have no doubt that after the Benchmark deal and the B and the C rounds, Adam could ultimately, whatever he had, it was more than the rest of the board combined.

• 52:01David Rosenthal?

  Yeah.

• 52:02Ben Gilbert?

  What is really interesting here is the, the SoftBank dynamic that comes into play with boards, because they're basically the only entity that is going to do the things that they're going to do because they so aggressively want to put this capital to work. So they basically arm Adam to go back to the board, holding a piece of paper that says, I'm going to get literally billions in, in investment dollars. And the terms can kind of be as Adam friendly as they want. You can look, you look at the rest of the board, the board's not going to say, no, we don't want $2 billion here to what, $2.3 billion of new capital coming into the company. Like, almost any terms, they're going to be happy with that, especially because what SoftBank does is they say, also, if you don't take it, we're going to find someone who competes against you who will.

• 52:45Speaker 02

  And also with SoftBank, they and Adam are peas in a pod in this, right? Adam, Adam is a grow, grow, grow, grow person. And that is what SoftBank's model has been really with most of its companies that the vision funds invested in, right? You know, think of DoorDash, think of Uber. It has been this idea that if you buy, no matter what the industry is, if you buy market share, you can suffer the losses, we will make money eventually. And so in the case of WeWork, that is, new markets, new cities, new buildings, buy, buy, buy, and here's your checkbook, we're going to do this. And that's exactly what Adam wants to do.

• 53:16David Rosenthal?

  Yeah, yeah. I mean, there's a famous story also of they have a closing dinner for the investment in Tokyo after it happens. And supposedly Masa asks Adam and Miguel,

• 53:30David Rosenthal?

  who would win, a sort of rhetorical question, who would win in a fight? Who wins in a fight? The crazy guy or the smart guy? And Adam answers right off the bat, the crazy guy. And Masa says, yes, the problem is you're not crazy enough.

• 53:45David Rosenthal?

  So he's, you know, Dan, we talked about this in the prep for this. Masa in a lot of ways is feeding Adam's instincts here.

• 53:51Speaker 02

  Absolutely. I mean, enabled, he's an enabler, but, but beyond that, he's more than that. He's an enabler who's also like pushing him from behind. I mean, the, as I said, they, they were perfect for each other in the sense of they both wanted the same thing. And, and, you know, leaving the money out of it, Masa, you know, when you hear a founder saying, you know, I want this investor because they see the same vision I see. Masa was that guy.

• 54:14David Rosenthal?

  Yeah. Yeah.

• 54:15Ben Gilbert?

  So this is the pivotal moment where if you accept this term sheet as the board, this is the last opportunity that you have to exert any measure of control. This is basically, you're faced with this, it's almost a Kobayashi Maru. On, on one side here, you cannot take $2.7 billion of fresh capital on a company that needs a crap ton of capital. On the other side, you can accept your fate that what all then happens in the next two and a half years, something along those lines, you're, you're, you're letting happen. It's not going to necessarily play out exactly like it did, but you're basically saying, this is the SoftBank and Adam show. We're about to do a bunch of crazy stuff.

• 54:53Speaker 02

  We, what we, another thing we do not know is, you know, you talk about that tender. Did Benchmark take money off the table in that deal? They might have. They did an Uber from SoftBank. So like, you might also be saying, well, okay, we're getting our principal back plus, you know, 3X our principal. So we're already in the money. Worst thing that happens is we're 3X in the money or 5X or whatever the hell the number is. So, you know, go for it.

• 55:13David Rosenthal?

  And then.

• 55:13Speaker 02

  You make, make us, you know, make us the next Google, make us the next Facebook.

• 55:15David Rosenthal?

  Yeah. Yeah. Get the, exactly. Like you're at the, you're at the casino at this point, you know, you've gotten 3X your money back. Let it all ride, you know, like.

• 55:24Ben Gilbert?

  So those are the incentives. So we've talked about the board, the investors, we've talked about Adam is looking for this partner in crime and SoftBank is looking to go put billions and billions of dollars into something. Because boy, are those management fees sweet when they have these huge funds and they can actually put it to work.

• 55:38David Rosenthal?

  Yeah. It's also crazy too. I mean, Let's just think about this for a minute. This was like mid 2017. That was two years ago. Like, this was very recent.

• 55:49Ben Gilbert?

  It feels five years ago.

• 55:50David Rosenthal?

  It feels 10 years ago. So much has changed. So they take this money, they turn around right away and they buy the Lord & Taylor Building on Fifth Avenue in New York for $850 million. Which, you know, I don't know, I'm not a real estate investor. I don't know how to judge like whether that was a good investment or not. But now all of a sudden, you're now in a new league of capital deployment here.

• 56:11Speaker 02

  And this is for their, I mean, it's partially, they'll use some floor. We were, this is because they feel they need new headquarters because they have physically grown out of theirs and they're out of space. And I will say, from being in their headquarters even a few months before all hell broke loose this year, it was crowded. Like, it was legitimately crowded. They hired a lot of people.

• 56:27David Rosenthal?

  Yeah, I mean, they had 15,000 employees. Until this week.

• 56:32Speaker 02

  Now that Lord & Taylor store is going to look like an American Apparel store, the one you passed by. It's going to look very similar.

• 56:37David Rosenthal?

  Oh, man, how history repeats itself. They also, at this point, purchased the infamous Gulfstream G650 private jet purchased by the company for Adam's use for $60 million. Right around the same time, Adam and his wife Rebecca, who at this point has been rewritten into history as a co-founder of the company, as best as we could tell in our research, she and Adam were together when they started the company, but was not actually like.

• 57:04Speaker 02

  It's a fascinating thing, too, because usually co-founders get written out of stories, not written in. Like, you know, Silicon Valley is littered with people who legitimately co-founded companies who don't get to be part of those narratives. And in this case.

• 57:14Ben Gilbert?

  In the, in the sort of like sci-fi world, this is referred to as a retcon, a retroactive conversion. You sort of retcon that person into that role.

• 57:24David Rosenthal?

  Again, we don't know for sure, but, so anyway, they, the two of them decide right around the same time that, going back to the Green Desk environmental roots of the company, they really should ban meat from, it would have such an environmental impact if they banned meat.

• 57:39Ben Gilbert?

  Yeah.

• 57:40David Rosenthal?

  WeWorks.

• 57:40Speaker 02

  And I have heard a backstory of this. And again, I'm not gonna, I'm not gonna claim that this is completely true. But the back, a story I heard when this decision came up, or when Adam proposed this decision, was that internally, they said, no, like, his people internally said, for example, we have salespeople who go and try to sell things to potential customers, or maybe meet with landlords. Are they not, and they're gonna pick up the tab, right? You know, I'm a salesperson. If the person I'm with gets a burger, can they not buy it? And because Adam had actually basically said, no, no company money will be spent on meat. Well, that is a problem. And so people raised all these legitimate concerns. But this goes to the government, later to the governance, this wasn't a board issue, but raised all these legitimate concerns. And he sat there, he took them all in, and just got up and said,

• 58:22Speaker 02

  yeah, we're gonna ban meat, and walked out, and then announced it before they like, and just announced it. And that was that. And that's how these things worked.

• 58:29Ben Gilbert?

  Yeah.

• 58:29David Rosenthal?

  At the same time that he's flying around on a private jet, which has terrible environmental impact.

• 58:33Ben Gilbert?

  Cover your ears and ignore the cognitive dissonance.

• 58:36David Rosenthal?

  Nothing wrong with banning meat, but like, in theory, but.

• 58:40Speaker 02

  But it's part, but it's part of this idea, that WeWork, you know, what was that line? You said, the community line, right? I mean, Adam, and I believe this was sincere. He believed WeWork was more than a coworking space. You know, anytime, if you've ever been in a WeWork, and you get in the elevator to go up to whatever the floor is, there's a schedule of events. These events have nothing to do with, quote, businesses. It is, it is farmers markets. It is, you know, it is yoga. It's stuff like that. He legitimately believed that. And he also believed that that was a way to keep customers, that when you, okay, maybe now my three person company now is a 20 person company, we should maybe have our own space. But man, we like it here.

• 59:16David Rosenthal?

  Yeah, yeah, totally. Again, not wrong. It just got so perverted over time. The, so, fast forward to this year, and, you know, the probably, I think in many ways, once this came out in the IPO filing, this was the straw that sort of broke the camel's back. We've talked about everything that's happened up until now. In January of 2019. WeWork changes its name to the We Company. And in doing so, WeWork did not have the trademark for the name, the We Company. Who had that trademark?

• 59:58David Rosenthal?

  Adam had that trademark via an entity he controlled called We Holdings, I believe. And so WeWork, at Adam's direction, licensed that name from his own company for $5.9 million. And again, I'm just sort of speechless here.

• 1:00:17Speaker 02

  And the defense of Adam Newman in this, and which I'm not going to make, by the way, because I said this was horrible, but the argument was that this was a tax issue, was that Adam had created it, it had a value. And if he simply gave it, it's kind of like you can't just give your friend a brand new car. You just can't do it. There's a tax liability with that, that if he had simply given it to the company. Now, this is also a person who did have a $500 million loan from JP Morgan. This is someone who had taken hundreds of millions of dollars. He could have sucked up the taxes. And again, even if it's one of those things that the board at the time was willing to do, how nobody was able to flag it and convince everybody internally before it became publicly disclosed is a just endless mystery.

• 1:00:58David Rosenthal?

  Yeah, like how this would look.

• 1:00:59Speaker 02

  Yeah. Even if there is, it's one of those things that even if you could make a valid on paper argument for it, the optics are so god awful, you don't do it.

• 1:01:09David Rosenthal?

  Yeah.

• 1:01:10Ben Gilbert?

  David, I have a name thing I got to talk to you about after this.

• 1:01:14David Rosenthal?

  We're changing the name. We're going to be the acquired company. No, Acquired Media LLC is a great name. Right around the same time, news comes out, remember SoftBank and their motivations? They want to dump a lot of money in here. So now we're in the beginning of 2019. We're two years into the Vision Fund.

• 1:01:30Ben Gilbert?

  I can't believe that was this year.

• 1:01:33Speaker 02

  That's when the news comes out. The discussion between SoftBank and Adam or WeWorkers are going on in late 2018. And Adam does think he has a deal.

• 1:01:40David Rosenthal?

  Yeah. Well, and again, so like, let's think, one of the things I wanted to, we wanted to do on this episode is talk about, why is SoftBank doing what they're doing throughout all this? Okay, so we're now two years into the Vision Fund. They've deployed a lot of it, but they're thinking about and talking publicly about Vision Fund 2 and trying to start fundraising for that.

• 1:01:58Ben Gilbert?

  People are still like shaking off the shock that Vision Fund 1 happened. Like this notion that, oh, we're about to go do it again, 100 billion again.

• 1:02:06David Rosenthal?

  Yeah, yeah. So now. Speaking as a fund manager, like any fund manager, you can't, it is in your fund documents that you cannot go raise a successor fund until typically you are at least two thirds, if not more, deployed and reserved of your initial fund. So they're now sitting here and I don't, I don't know exactly how much capital they had deployed out of Vision Fund One at this point, but they're like, we want to raise Fund Two, we got to deploy Fund One. So news comes out that they're talking about, and like you said, Dan, Adam thinks there's a deal for SoftBank and the Vision Fund to invest 16 billion more in WeWork.

• 1:02:43Speaker 02

  And by the way, this is the first time the issue of control comes up because the story, the news stories that come up were that SoftBank would basically buy a majority stake in the company, which even though I don't think it was ever explicitly said, the assumption is if you own most of the company, you get to make most of the rules.

• 1:02:56Ben Gilbert?

  Which we thought until yesterday.

• 1:02:57Speaker 02

  Which we thought until yesterday. But Adam, apparently, at least from what I'm told, was never going to give up control. And that, this becomes this issue of you might own 52%, but I still have control. And that, I don't think that was the breaking point of that deal, but that was always something I always heard from Adam's people internally at WeWork was that he always felt the reporting on that was wrong because, quote, "he was never, ever going to give up control in a SoftBank deal."

• 1:03:19David Rosenthal?

  Ah, interesting, interesting.

• 1:03:21Ben Gilbert?

  Yeah, because it was not Adam that blew up that deal.

• 1:03:23Speaker 02

  No.

• 1:03:24David Rosenthal?

  No, it was SoftBank's LPs. So at least according to the reporting.

• 1:03:28Ben Gilbert?

  David, walk us through this. I thought venture capital was a blind pool.

• 1:03:32Speaker 02

  Not in Vision. Saudi Arabia has, it's actually funny, Saudi Arabia doesn't have a veto. They can't kill a deal. But Saudi Arabia, which, and I'm going to, you probably know this better than me, I think they're like 30 or 40% of the fund. They can say, you can't use our money for this. And they are, for anything over a certain amount, they are, they have a right to basically say, you go do the deal, but we're carved out of this one. And

• 1:03:52David Rosenthal?

  Yeah, interesting. Which is not typical in a venture fund agreement.

• 1:03:55Speaker 02

  But a $40 billion commitment isn't typical in a venture fund agreement either. So you should get a little bit of extra say, shouldn't you?

• 1:04:01David Rosenthal?

  There's a lot of things that are not typical about the Vision Fund. But Regardless of whatever control they had, they had the ultimate hammer, which LPs always have, which is like, we're evaluating you about whether we're going to do Fund II or not. And I have to believe that that was ultimately the leverage they had and why SoftBank backed out of the deal was they're like, oh, shoot, actually, if we do this, it's going to jeopardize.

• 1:04:26Speaker 02

  There's also tense relationships at this point. Remember when you're thinking, now, this is a little bit after, but in October of 2018, we're talking December, January. In October of 2013 is when the Jamal Khashoggi gets killed.

• 1:04:37Ben Gilbert?

  2018.

• 1:04:37Speaker 02

  2018, sorry, I apologize. Masa decides he's not going to go to their big conference. He's actually going to show up in Saudi Arabia and meet behind the closed doors, but he's not going to sit on stage. So things are tense.

• 1:04:47Ben Gilbert?

  This is Davos in the desert.

• 1:04:49Speaker 02

  Davos in the desert.

• 1:04:49Ben Gilbert?

  Which is happening very shortly.

• 1:04:51Speaker 02

  Happening this coming Tuesday. Masa is speaking this year.

• 1:04:54David Rosenthal?

  Ah, wow.

• 1:04:55Speaker 02

  Someone needs to raise a fund.

• 1:04:57Ben Gilbert?

  Man, that just shows, it's all written out right there. I mean, not to, no, I'll make a value judgment on the show. Like, that's a horrible thing to go after the events that transpired and represent your organization there and participate. Clearly, clearly, desperately needs to raise a fund.

• 1:05:17Speaker 02

  Absolutely. Yeah.

• 1:05:18David Rosenthal?

  Yeah. So, uh, the deal falls apart. SoftBank does end up investing corporate, I believe, not the Vision Fund, $2 billion in WeWork at this point in time. Because WeWork needs the cash. They've been grow, grow, grow. They bought the Lord and Taylor building for 850 million.

• 1:05:35Speaker 02

  And they've been making decisions, because remember, the bigger deal fell apart really at the last minute, as far as WeWork was concerned. They were making, and think about the time again, end of year, Q4, that's when you're making all your plans for the next year. They expected to have the money. They were, I don't know whether they were officially signing lease or not, but they certainly had the engine running.

• 1:05:51David Rosenthal?

  Yeah, totally.

• 1:05:52Ben Gilbert?

  And to explain the SoftBank Corp. thing, this is SoftBank, the gigantic telecom that's been around for 30, 40 years, that came before the Vision Fund. This is off their balance sheet rather than.

• 1:06:04Speaker 02

  And a balance sheet that SoftBank Corp. expects to grow in 2019 because they've agreed to sell Sprint. A deal that's still not closed.

• 1:06:11David Rosenthal?

  Interesting. Yes, yes.

• 1:06:13Ben Gilbert?

  Wow. We did the T-Mobile Sprint episode so long ago, I forgot that it hasn't closed yet.

• 1:06:16Speaker 02

  Has not closed. Still being, still in court.

• 1:06:18David Rosenthal?

  Yeah, still, uh, antitrust regulations, but I believe they just got approval.

• 1:06:21Speaker 02

  They got, they got through antitrust, but about a dozen state attorney generals are suing to block it. So we will see.

• 1:06:26David Rosenthal?

  We'll see. Wow. So, okay, so now, now WeWork needs a plan B. They need capital to fund this plan and probably a lot of these lease commitments are in place already. So what's, what's the, at this point, I want to raise a point here that we want to talk more about. There is essentially only one buyer of WeWork shares at this point, and that's SoftBank. Like, at these

• 1:06:51Speaker 02

  Or the public market, or the public market.

• 1:06:53David Rosenthal?

  Well, the belief is, or the public market. Turns out the public market was not a buyer. But, but, so they're looking around for all time. There's no other private investment firm or entity that WeWork could go to for financing at this point in time.

• 1:07:06Ben Gilbert?

  Some might call this a price discovery problem.

• 1:07:08David Rosenthal?

  Yeah, indeed. So the only alternative is, well, public markets. Let's tap the public markets. So in April of 2019, just like three months after this deal falls apart, they file confidentially with the SEC to go public. It gets reported that this is happening.

• 1:07:24Speaker 02

  They filed technically in December, technically filed confidentially. They, they thought, they did it. What was the, they gave an explanation, which I didn't think made a lot of sense, but they did, because why else would they have done it? Something about the timing in the year. But yeah, they filed officially confidentially in December. It got reported several months later.

• 1:07:39Ben Gilbert?

  Is that like, help us understand that timeline versus a normal IPO timeline. Was this rushed?

• 1:07:45Speaker 02

  No, that makes sense. If you were to file confidentially in December, they, they knew, kind of similar to how Uber knew or Lyft knew, that this was, that this company was relatively unusual and that the SEC was going to have more questions than it would have, you know, for a run of the mill company. So you file in December with the idea, first idea, maybe we'll go public in late spring, but we'll probably go public in September. We are working on this big SoftBank deal, so we don't have to, but we'll have this in our back pocket. You do it in December. No one's paying attention until January anyway. Go through a bunch of revisions. You don't want to go public in the middle of the summer. You'll come out right when Q3 happens. You'll be out, you'll be out the door.

• 1:08:18David Rosenthal?

  And indeed, that was what they tried to do.

• 1:08:20Speaker 02

  Yes.

• 1:08:20David Rosenthal?

  So August comes around of this year, just two short months ago, and they filed the public version of the S1, which means like, the train has left the station. Like, once the public version of the S1 comes out, the process is going.

• 1:08:35Speaker 02

  Yeah, should be six weeks and then you're up, you're public.

• 1:08:37David Rosenthal?

  Should be six weeks and you're public. And all hell breaks loose. I mean, Dan, you were more than anyone on top of this.

• 1:08:44Speaker 02

  It's one of the most remarkable S1s that's ever been written and not just because, look, let's, let's start with the obvious, right? There was huge revenue growth. You know, the, the, the base, if, if you only read like to the, whatever it is, like the eighth page where you see kind of the top line financials, even though the losses were massive, which wasn't a secret. Cause remember WeWork had been kind of like Uber done, even though they were private, had been disclosing financials for a while for two reasons. One, because they wanted people probably not to be shocked by the S1 eventually. And two, they had done a bond offering, a public bond offering about a year and a half earlier. So they had public disclosure requirements anyway. So the top line, look, revenue growth was huge and it was billions of dollars of revenue. This wasn't a small thing. Losses were huge, billion dollars of losses. Uh, but then you had to keep reading. And to be honest, these things are like a hundred pages long.

• 1:09:25Ben Gilbert?

  And this, this I think is the longest I've ever read. It was like multiple hundreds of pages.

• 1:09:29Speaker 02

  It was very long and lots of reporters kept going to different sections and finding things that were shocking and surprising. And you kept looking at and going, no, that can't be right. And you would have, we had conversations like, it says this, but it doesn't really, right? Like what am I, cause these are written by lawyers and bankers. What does it really mean?

• 1:09:45Ben Gilbert?

  Right.

• 1:09:45Speaker 02

  And good Lord. And also partially because, you know, you talked at one point about, you know, Adam has some real estate. WeWork has, is this series of LLCs. Every building is its own LLC. So it's incredibly, even, even if everything's on the up and up and there's, it's an extraordinarily complex organization structurally and all that comes out in the S1.

• 1:10:04Ben Gilbert?

  Yeah. Even without, I mean, there's, I think it's page, I'm going to lose it, but the first 20 pages here, there's their org structure. Here it is, page 16 of the We Company that owns the We Company MC LLC that has the We Company Partnership and then the WeWork Companies LLC and then the, all the countries. And like, this is before you get to buildings.

• 1:10:23Speaker 02

  Yeah. And remember they'd also, they'd raised or still are, maybe not now, they'd been raising a massive fund. You know, you talked about, oh, you know, WeWork should have bought the buildings. Well, they were doing that. They were, they were raising a massive fund, which Adam was going to have a stake in, but just like everybody else at WeWork would. And that was going to go by buildings. And that was again, that's another separate entity, which is then leasing out and all that. But yeah, look, we learn a lot of stuff. This is where we learn about the trademarks. This is where we learn about the extraordinary amount of control he had, even to the Point where if something were to happen to Adam, like he were to die, the board doesn't get to replace him. His wife Rebecca gets to decide the succession plan.

• 1:10:56David Rosenthal?

  And if she dies too, then their children.

• 1:10:57Speaker 02

  Absolutely. We, we learned that they are also going to give away an enormous amount of money in charity after this IPO. I think he's committing to a bill and Adam has, I will say, Adam has given a lot of money in charity over the years out of some of that money. He hasn't put it all into houses and Gulfstreams, uh, but I think they commit that they're going to give a billion dollars over 10 years after the IPO away from proceeds.

• 1:11:15Ben Gilbert?

  It's fascinating. There's actually in this document, a section that says charitable commitments of our co-founders and other senior leaders. That is very atypical.

• 1:11:22Speaker 02

  It's very typical. And by the, if, if this had become official, if this IPO gone forward, he would have, I think, been legally obligated to do so. I mean, he was, he was all, this wasn't the giving pledge, which is signing something that Warren Buffett gave you. And you know, if you don't do it, what's going to happen to you? This had the force of law behind it in theory.

• 1:11:37David Rosenthal?

  Yeah. Or at least the force of the SEC branch.

• 1:11:40Speaker 02

  Okay. So much, much weaker law. It is sort of law.

• 1:11:44Ben Gilbert?

  It's not the DOJ, but it's something.

• 1:11:46Speaker 02

  Exactly. Yeah.

• 1:11:47Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired. Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:12:00David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:12:17Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:12:32David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:12:56Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:13:15David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:13:45Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you. So let's talk about what we don't learn in this document. So what I was really trying, when we were talking about doing this episode, in my head, I'm like, okay, I want to tell people what the macro story is here. And then the question in my mind was, is this actually a good business at steady state? If we work stops expanding? So I'm scrolling and scrolling and scrolling and hundreds of pages.

• 1:14:30Ben Gilbert?

  You can't actually ascertain, hey, of the cohort of your buildings that are at scale, what are the gross margins? What are the unit economics? They keep saying we have really strong unit economics. And then the only financials they give are this massively blended one that is a very, very basic P and L that shows the business, including all of the expansion. So really difficult to tease out what losses are actually incurred at maturity. They have this silly graph that has no Y-axis with like this curve that basically shows, hey, the buildings are break even after six months, but like not much more detail than that.

• 1:15:07David Rosenthal?

  No, and you would have thought they maybe would have, by the time they filed the S1, learned the lesson from Uber, which had a similar problem, which is, you know, every, look, every single company I think I've ever talked to tells me that even though they're losing a lot of money, their unit economics are fantastic.

• 1:15:22Speaker 02

  I'm waiting for someone to say, well, your economics are kind of mediocre. No, your economics are always great. But you're right. And that was an issue with Uber.

• 1:15:28David Rosenthal?

  Guess what? They don't tell investors that either.

• 1:15:29Speaker 02

  But when you looked inside Uber's documents, you could not figure out how much, what were the economics per ride, particularly for Uber Eats, per delivery. You couldn't figure out any of that. I think that has been an ongoing problem for them. And WeWork was the same way, right? You and you should have been able to, because WeWork had been saying things over the years like, again, like Uber in mature, for them, mature markets where they'd been X number of years or had X number of buildings. We were building profitable, even understood there's, there's overhead, there is marketing. But you couldn't even figure out that in that building in Soho that they'd been in for four years, take out all the overhead, is the building profitable? No fricking idea.

• 1:16:07David Rosenthal?

  No idea.

• 1:16:08Speaker 02

  Which is a problem because if the argument was Artie Minson's argument, like with a cable company, eventually you could figure that out. Was the, you know, was deciding to lay pipe in Seattle, did that make money in the end? After a certain amount of time, you should be able to say yes or no. In this case, they didn't. It wasn't even that they couldn't, they didn't. And the backstory that you keep hearing, and part of this is probably self-serving about bankers and board, is that these things were indeed raised, not by the SEC, but these things were raised by bankers and boards. And just like with Adam and the meat thing, he basically waved his hand and said, don't worry about it. This is how we're doing it.

• 1:16:43David Rosenthal?

  Wow. So needless to say, potential public market investors react terribly to this, as does the media and everybody.

• 1:16:52David Rosenthal?

  First problem is the governance, as you keep saying, Dan. So September 13th, WeWork announces is changing the corporate governance and Adam is still going to have the super voting shares, right?

• 1:17:04Speaker 02

  But they're going to be weaker. I think it was supposed to go down to three to one, if I'm correct.

• 1:17:07Ben Gilbert?

  It was 20 and then 10.

• 1:17:09Speaker 02

  20 and then 10 and then three, right? So it was going to load, the succession thing was going to change. The board was going to be able to determine who was his replacement, was there one? And they were allowed to fire him, which was important. And by the way, that's unusual. Because again, think of Facebook, board can't fire Zuckerberg. I don't think Alphabet, they can fire Larry Page. That was interesting that the board now, even though they didn't have the votes, the one thing they could vote on would be to fire Adam Newman.

• 1:17:31David Rosenthal?

  Now, this was, Dan, correct me if I'm wrong, this was an announcement. This was not an actual change. These were things that were going to happen upon the IPO.

• 1:17:39Speaker 02

  Uh, it's yes and no. And that's where things get very tricky because as we know, they do fire Adam Newman. So they clearly got the ability to do so, or maybe they just persuaded him he had to step away. Uh, either way, we, we being you, me, the media, ever, everyone is under the impression at that moment that these changes have been made. It is codified, it's talked about in an SEC document. And again, it comes this question of, okay, is this something you've done? Or is this something that is effective as of the issuance, the, the actual, you know, shares being off or being issued? That remains unclear.

• 1:18:12David Rosenthal?

  Because I believe when we get to the end of this in just a sec, Adam still has the 20 to 1.

• 1:18:17Speaker 02

  If not 20, he has at least 10. I believe he still has 10. He still controls the votes as of, well, as of two days ago.

• 1:18:23David Rosenthal?

  Yeah. So then September 24th, Adam is out as CEO. The board is replaced.

• 1:18:29Speaker 02

  He remains chairman. He becomes chairman.

• 1:18:31David Rosenthal?

  Yeah. Executive chairman. Even that wasn't enough to get the IPO back on track. They announce after that, they're pulling the IPO.

• 1:18:40Speaker 02

  Well, let, let's just go back quickly because this is important. This is where SoftBank plays. Even before Adam gets fired, there start to be reports over a weekend that SoftBank is pushing to have the IPO postponed. Now, remember, Adam wants this thing to go forward. To be honest, the board wants this to go forward as well. And obviously the bankers want this to go forward. It's an interesting leak. It's an interesting leak and SoftBank will not cop to it. But if you go to who had incentive to leak this, because this is a really damaging thing to leak. This isn't just like, oh, you know, maybe earnings projections. This is really damaging. This is saying in perspective investors, this thing shouldn't happen. That's a real freaking problem. And, and, and by the way, the biggest investor who's got two people on the board, they should know this company well, doesn't want it to happen. So SoftBank is clearly, somebody at SoftBank is leaking this. And then there's the question of why? Why would SoftBank be torpedoing its own portfolio company?

• 1:19:25Speaker 02

  And the best explanation I've come up with, or at least the one that everybody affiliated with WeWork, those who support Adam, those who don't, uh, everybody seems to believe is that SoftBank, this goes back to Vision Fund, which is, if this goes public and it goes public, say at a valuation, uh, I'm going to make this number up now of 15 billion. Cause now they were getting investor feedback. This thing's not going at 49. It's probably not going at 20. Down to 20, down to 15. If it goes public at 15. SoftBank then is obligated to revalue its existing shares in WeWork. And what does that do? It means when you're going to the Saudis or to Apple or whoever else, our IRR on our existing fund has gotten a lot lower because as you said earlier, this is one of the biggest investments there.

• 1:20:05Speaker 02

  It is, it has a significant, any valuation change has a significant change to SoftBank. And remember, SoftBank had previously marked it up to 49 billion. It had done an insider deal, it marked up on its own. So the, the reduction would have been massive.

• 1:20:19David Rosenthal?

  Yeah, it would have cratered.

• 1:20:21Ben Gilbert?

  They've got, they've got seven, eight billion in because they, they continue to put in more convertible notes too.

• 1:20:25Speaker 02

  There's a lot of money in, but again, just, yeah. And the value of it just would have been, they had marked it up themselves. If they had just kept it at cost, things would have maybe been a little bit better. But yeah, it leaks, it leaks out and it becomes a cavalcade. And eventually Adam leaves, but because then there was, again, there was first talk, SoftBank wants the IPO not to happen. Then SoftBank thinks Adam Newman should leave. Well, Adam's not leaking that. There's no reason for anybody else to be. SoftBank's leaking that.

• 1:20:50David Rosenthal?

  Yeah, wow. So the net of all of this is that.

• 1:20:55Speaker 02

  I should say for the record, SoftBank says they didn't leak it.

• 1:20:58David Rosenthal?

  There we, there we have it. We don't know who did, somebody did. The net of all of this is that the company is now running really, really on fumes.

• 1:21:07Speaker 02

  Shockingly low on cash because they, remember how much money they were planning to get? They are looking to bring in $3 billion via the IPO. And then they had also agreed JP Morgan had arranged a massive $6 billion debt package, which was concurrent to the IPO. So WeWork in, in whatever it is in August, looks at its balance sheet and says, we're running really low on cash, but come end of September, we're going to have $9 billion. And they had banked that in their brains and in their models. And at that point, if you've got $9 billion coming in September, spend. And by the way, really spend because wouldn't it be great if we go public after Labor Day? Then five weeks later, we can come out with Q3 financials, which show massive growth. And so let's goose the growth now.

• 1:21:44David Rosenthal?

  Yeah, yeah.

• 1:21:45Ben Gilbert?

  So I think, Dan, you had reported something's got to happen by Thanksgiving because they're going to hit zero.

• 1:21:51Speaker 02

  I overstated it. I, I, I heard by Thanksgiving, but apparently they would have been out of cash by the end of next week. Although it is unclear how much of that's related to severance, et cetera. They were going to have to pay to these thousands of people they're laying off. But yeah, they, they were, they were almost out of money. They need money.

• 1:22:05David Rosenthal?

  So yesterday, as we sit here.

• 1:22:09David Rosenthal?

  The outcome of this is announced. SoftBank is acquiring the company.

• 1:22:13Speaker 02

  Without acquiring.

• 1:22:14David Rosenthal?

  Without actually.

• 1:22:15Speaker 02

  No one can explain to me still, including SoftBank. No one can explain.

• 1:22:18Ben Gilbert?

  So let's walk through what that package looks like. So SoftBank is going to, well, first of all, to get Adam to step aside from the board position, they are paying him 175.

• 1:22:30Speaker 02

  185 million.

• 1:22:31Ben Gilbert?

  185 million dollar consulting fee.

• 1:22:33Speaker 02

  A quote consulting fee, which gives them three things. Adam gives up his super voting shares. Adam steps down as executive chairman, and those are the two official things. The unofficial thing is he votes for the deal. There's a, there's an alternative package, and there's questions about how real it was, but there's an alternative package led by JP Morgan. It includes things like Starwood, Barry Sternlicht, who's a, you know, a serious real estate investor. There's an alternative package. There are people on the board who prefer that package because they think it leads to IPO quicker. But Adam, again, didn't give up the voting control. So Adam gets to decide, and he takes 185 million dollar bribe, which his people say is in the best interest of the company, of the employees, because there's a tender offer as a piece of this, which we discussed. But yeah, they pay him off. And by the way, what a remarkable thing to learn. If you are an activist investor like Elliot, who spends all this time, for example, with AT&T,

• 1:23:18Speaker 02

  like working with small shareholders and stuff to convince the board to maybe vote. I wonder if Paul Singer has ever thought, what if I just gave the independent directors 10 million dollars each? Wouldn't that be faster, easier, and buy their votes? It's unclear at this moment if that's illegal, because to be honest, from what I can tell, and so long as you can have a defensible fiduciary argument in this.

• 1:23:37David Rosenthal?

  Yeah, he's going to be a consultant to the company. They're going to ask his advice.

• 1:23:40Speaker 02

  Then WeWork, is this legal? And they said, we can't tell. And then said, because no one really considered this, right? Like, I don't know, like, and the way he said it to me was, he said, we also don't have anything in there. What happens if we learn that, like, WeWork can actually work well on Mars? It's not in the documents. We didn't think about it.

• 1:23:57David Rosenthal?

  I think the only guaranteed outcome here is that. The SEC is going to have lots of job openings and guaranteed like employment, you know, for, for a number of years, at least the New York office of the SEC.

• 1:24:10Speaker 02

  There's going to be a lot of unemployed WeWork people to go there.

• 1:24:12Ben Gilbert?

  Let's go through the rest of the package because in addition to that $185 million consulting agreement, they are doing a tender offer of $3 billion. So to Adam and anybody else at the company.

• 1:24:23Speaker 02

  And investors at $19.19 a share, which goes back from a valuation perspective, years, you know, four years, three years.

• 1:24:30Ben Gilbert?

  Right. So that's, it's looking like about a billion of that will buy Adam's shares.

• 1:24:34Speaker 02

  Up to a billion. He doesn't necessarily have to sell it all. It's hard to imagine he won't, but in theory he doesn't have to.

• 1:24:39Ben Gilbert?

  So interestingly, you pointed on that 1919 number. That, that strike price, if you go back to the last time that the stock was valued around there, you brought this up earlier, was around 2014, which was around the time when WeWork had about 1,000 employees. So 14,000 of the 15,000 employees have been issued stock options that are underwater.

• 1:25:04Speaker 02

  It's what we think. I mean, as we discussed before the show, there's a, I mean, valuation stuff, there's a 409A valuation, which is what shares are really valued at. And that's different than the official price. So it's possible there's another thousand that, but even, even, even if you're slightly in the money, there are taxes on top of this. You weren't expecting this. So a lot of people might not have exercised options. And if you deal with this stuff, you realize that if you haven't exercised your options, you're actually paying a higher tax rate than people who did a year ago. And, and I have been told there's certain people who got actual stock grants, which is different than options, just were handed stock basically free in lieu of cash. I doubt that was very much if that existed, those people are in the money. But look, no, most people who've joined WeWork in the last couple of years, who a couple of months ago, honestly, might've been taking out mortgages, might've been taking out loans.

• 1:25:48Speaker 02

  Why wouldn't you, right? You've got a $49 billion company. Any bank would loan against that. Or at least loan something against that. And they are, they are two things. They, they get nothing out of that financially and thousands of them are literally going to be out of work. Yeah. So they, they don't get nothing for their stock and they don't even have paychecks. They'll get some severance, but not much.

• 1:26:06Ben Gilbert?

  Really sad. The last component of this deal is a $500 million loan to Adam. I'm sorry, there's a couple more parts of this deal. The $500 million loan to Adam personally from SoftBank Corp. Off of their freaking balance sheet.

• 1:26:20Speaker 02

  Which he will use to basically repay his loans to JP Morgan.

• 1:26:23Ben Gilbert?

  And then a $1.5 billion investment at a share price of around $11. So somehow there are two different. And that values the company at $8 billion, I believe.

• 1:26:37Speaker 02

  I think in the end, money's a little bit over 10, I believe. But again, it is so convoluted, no one really quite knows. And I think at this point, you could say that the old valuation models that we use for most of these companies, right? It's valued, this is Series A, valued, I think is all just out the frigging window at this point.

• 1:26:51Ben Gilbert?

  So this gets to the market discovery or the price discovery problem that I alluded to earlier. When you have only one party who can buy and the leverage keeps swinging all over the place, they just keep valuing it up, down, up, down, all these different places depending on this specific moment in time. WeWork shares. Yeah, there's no way to ascertain what the price should be because there's only one party that can and is willing to and keeps buying. Yeah. It's wild.

• 1:27:15Speaker 02

  And then the final piece, because we kept saying that they've bought the company, except they say they didn't. They have a majority stake in the company, but they claim they will not control the votes on the board. And the way they say they get to that is they are going to significantly expand the board. But when you ask them, okay, what's the size of the board? And then most importantly, who's going to appoint those new board members? There are no answers. When you ask WeWork, internal official spokesperson for WeWork internal, you ask her that. She said, she said to me yesterday, she said, call SoftBank. I said, why would I call SoftBank if SoftBank's not the one who's controlling this? Call SoftBank. When you call SoftBank, we haven't either, I don't know if it was, we haven't determined or no comment. But I mean, look, they're, for whatever reason, they're claiming they're not controlling this.

• 1:27:58Speaker 02

  They're in charge. They should be. They own most of the company. They own most of the shares. And whether or not most of those board members are salaried SoftBank employees or not. They're going to be beholden to SoftBank or in some way related.

• 1:28:10David Rosenthal?

  Okay, so this is the last piece, which conveniently is acquisition category on this show. Why is SoftBank doing this? Here's my thoughts. There are, I think there are two reasons. One, I can't remember where I read, but I didn't come up with this idea is CFIUS, the Committee on Foreign Investment in the US. SoftBank is of course a foreign entity. They're a Japanese company. Now they would be buying control of a US company. They've had issues with CFIUS in the past. So this just like short circuits that. That could be a risk to the deal. Say, oh, we don't actually own it. So we don't have to go through CFIUS.

• 1:28:41Speaker 02

  I don't think that covers because even a minority stake, for example, they had to go through CFIUS for their Uber deal.

• 1:28:45David Rosenthal?

  Yeah, yeah. So yeah, I don't think that's the real reason. I think the real reason is I don't think they want to, pure speculation, I don't think SoftBank wants to consolidate WeWork's financials on their balance sheet. No way. Because now remember, the balance sheet of this company is enormous liabilities of all these leases. SoftBank has a lot of debt that they have taken out at the corporate entity. Remember they're a telecom provider. They have debt. That debt is basically junk bond rated status.

• 1:29:12Speaker 02

  They're one of the most highly leveraged companies that exists. Look at it. They would make a private equity person blush.

• 1:29:17David Rosenthal?

  Exactly. And so now if they all of a sudden consolidate this balance sheet, jack up the liabilities on the balance sheet, that's going to torpedo their debt ratings at the corporate level. That's going to increase their cost of capital hugely. That's terrible for the company. So I think they're doing all these gymnastics to, A, to avoid that happening, but then B, why do all these gymnastics? Then you get back to the Vision Fund and at this point, I don't even think it's about raising Vision Fund 2. I think it's about just trying to salvage Vision Fund 1. They can't let WeWork go to zero because the alternative here is WeWork dies. Which it would have if they didn't invest. Yeah, WeWork is going to die, as you said, in like a month. The JP Morgan thing outstanding.

• 1:29:53Speaker 02

  Would have, would have. I mean, look, the thing that's interesting, there's a bunch of, I mean, this is still a real business, right? This isn't, you know, I've seen, oh, this is the next Theranos. No, Theranos had a product that didn't work. This has a product that works. It's still, you know, like go to any city. There are people who walked, went to work this morning at WeWork and not who worked for WeWork. Lots of them. They have real buildings. Those buildings still exist, all that stuff. There will still be thousands of employees left even after the massive layoffs. Obviously, certain facilities will close that are under Forming, obviously, expansion slows down, but it is a real business. I will say that Masa, the word SoftBank isn't arbitrary, right? Soft is the software piece, right? I believe I'm a tech visionary, but the bank part is important, too. He is a financier. So the stuff you said about, you know,

• 1:30:34Speaker 02

  balance sheet, that's all real. I will say that I will bet that SoftBank still believes, long term, there can be a business here. The one thing about Masayoshi Son is that I've always found fascinating is he made an enormous amount of money in the dot com boom. Huge money. In fact, I saw him sitting next to Bill Gates at one point, and he said to Bill Gates, he said, at one point, he said, in the late 90s, "I was richer than you." He said, "Two weeks later, I was broke." And that's true. And what happens to most people who went through that, the dot com boom, Marc Andreessen always talks about how people who went through that are too risk averse. That's true, usually. You are, because you were so scarred by it. Masa went the other way. Masa decided to take all that risk again, and he caught the Alibaba train, and he did great with it.

• 1:31:16Speaker 02

  But like, and then he decided to go over the top. That's why he's so unusual. And I would say with this, he might look at it and say, "Things are really bad right now, but there is a business. I still believe in the thesis of the business. Maybe the management got away from us. If I can get in what I believe is relatively cheap and control this thing, maybe we can make a go of this."

• 1:31:35David Rosenthal?

  So here's my attempt to put a bow on the whole thing, which is, you know, we talked about this in the Vision Fund episode. This is the largest fund of any type, any asset class raised ever, masquerading as a venture capital fund. Well, wait, that doesn't make sense. Venture capital funds shouldn't be bigger than private equity funds. Is this an unmasking of the Vision Fund for what it is, is a private equity fund?

• 1:31:54Ben Gilbert?

  And when you look at this, gosh, they just made a $1.5 billion equity purchase that now has them owning a majority of the company. Oh, and they levered $5 billion of debt on top of it? Wait a minute, I've seen this playbook before.

• 1:32:08Speaker 02

  And they paid a CEO to go away, which is a very private equity leverage buyout thing to do.

• 1:32:12David Rosenthal?

  Totally. So now, all of a sudden, like, Yes, you've now taken out the timeframe of which they're going to realize returns on this asset. But if they can turn this around, turn it into, you know, what it does still have the potential to be, not the same kind of business everyone thought it was, but a good business and a big one.

• 1:32:29Ben Gilbert?

  Yep.

• 1:32:29David Rosenthal?

  With real estate assets all around the world. Well, now maybe they just saved the vision fund.

• 1:32:34Speaker 02

  I mean, I will say, I will say though, there is an ongoing question of why they didn't let JP Morgan do the bailout. Like, I almost get the sense that JP Morgan looked at this and said, with SoftBank's deal, all right, if you want this problem, your problem, take it. Like, I, it was almost like a hot potato. I don't quite understand why SoftBank was willing to catch that. Well, because again, JP Morgan was going to, now, you could argue it would have been too much debt and the company would have sunk under the debt. You could make that argument. But it was money. It was money. It was, it was, it was lifeline. It was runway.

• 1:33:02Ben Gilbert?

  This brings us to what we normally call what would have happened otherwise. This episode, I'm going to call the Bizarro world WeWork. We've got this comp. It's IWG. Last year, they did 3.3 billion in revenue. This business ends up looking a lot like WeWork at maturity. That was profitable, 200 million in operating profit. Their market cap is about 4.6 billion. So we're getting close to the neighborhood of where, you know, you're basically buying a business that looks like IWG. You run that for a while, it's going to be, you know, profitable for you. So, look.

• 1:33:33David Rosenthal?

  Hey, great private equity pickup.

• 1:33:34Ben Gilbert?

  Exactly, exactly, exactly. All right, well, let's bring this home. So, WeWork is in a place now where they have 6.5 billion in the company, some debt, some equity. We sit here today, we will see if that is enough to have them figure it out over the next year. Maybe IPO at some point. We don't know what the future will hold. What we're going to grade here today is SoftBank's pseudo-acquisition here of WeWork.

• 1:33:59Speaker 02

  Woo.

• 1:34:01Speaker 02

  I'm going to give them a B minus. The, the, the low part is for why exactly, again, I think they should have let JP Morgan probably take it. But man, they were creative. Like you deserve something for like, you might've gotten to the wrong answer, but you got there in a fascinating way.

• 1:34:16David Rosenthal?

  You really can't knock the hustle here.

• 1:34:18Speaker 02

  No. And by the way, remember, they wanted control of this company a year ago. They got it, even though they didn't officially get it.

• 1:34:25David Rosenthal?

  They got it for a lot less money, too.

• 1:34:27Ben Gilbert?

  So SoftBank Corp. has put in the $2 billion from earlier this year, and now another 1.5 billion in equity capital. So the corporation themselves, outside of-

• 1:34:37Speaker 02

  Well, plus the 3 billion tender, that's equity. They're buying it from shareholders, but that's new equity they're buying.

• 1:34:41Ben Gilbert?

  Yep, good point. So they've spent, what's that, $6.5 billion to own a majority of this company. Now, the Vision Fund poured $8 billion in, and the business isn't even worth the combined amount of that. But if you look at what SoftBank did, they made a bunch of management fees off the Vision Fund and paid $6.5 billion to own an asset that's probably worth about $6.5 billion.

• 1:35:07Speaker 02

  I'll give the one counter, so maybe I would give a lower grade would be, it's unclear who runs this. They've spent a lot of money without having a CEO. There are, there's these co-CEOs who are there, Sebastian Gunnarham and Arty Minson, who we talked about earlier. It remains unclear if they are staying or not. Maybe they're getting a good deal of cash to stick around. That's unclear. They've put Marcelo Clora, the CEO of Sprint, in as executive chairman, which is mind-numbingly strange, mainly because Masa said, well, we're going to, originally, we're going to bring Marcelo in so we can figure out what's really happening inside the company. Again, you had two directors. What, where, what were they doing? And why do they still have jobs if they couldn't figure those basics out? But like, but Marcelo is a telecom guy.

• 1:35:49Speaker 02

  There, do they believe these two are the right horses or not? That's unclear. It's a lot of money to spend without knowing who's really going to be running it in six months.

• 1:35:59Ben Gilbert?

  I'm in for your B-, David, where are you?

• 1:36:02David Rosenthal?

  It's so hard to conflate, I think, just like this story has illustrated, all of these series of decisions along the way by everybody involved, many of whom were like, many of which decisions were terrible decisions. I think it's why, like in the beginning, we framed this as like, this is a tragedy. Like, this is the sum of the system that has created this. So now if we're to grade specifically this decision by SoftBank,

• 1:36:29David Rosenthal?

  I think there's-

• 1:36:32Speaker 02

  If you're on the fence, take employee sentiment into it. They have to own this thing and they have some very angry people working there right now.

• 1:36:38David Rosenthal?

  Yeah. So I, yeah, I think I'm in for the B minus for slightly different reasons, which is the reason it's that high is this is a save. Like, because this was going to go to zero. If, maybe the JP Morgan thing would have happened, maybe it wouldn't. So it's saved, but on the other hand, there's a very strong case to be made that this is throwing good money after bad. So, you know, and that's, that's never a good position to be in. So yeah, B minus, there we are. We'll check in in a year or so.

• 1:37:08Ben Gilbert?

  I'm sure we will. Well, if the cash lasts that long. Listeners, thank you for going on this journey with us. Dan, where can listeners find you?

• 1:37:17Speaker 02

  Oh, at Axios.com. I can get my daily Prorata newsletter at signup.axios.com or just type Axios Prorata into your podcast thing because we've got a daily podcast as well.

• 1:37:27Ben Gilbert?

  And I will say, Prorata is excellent. Like, much of the details that we've gotten over the last few years about this company have been that that Prorata is the first thing that I read when I wake up in the morning. So thank you for, for doing that.

• 1:37:40Speaker 02

  Appreciate it. It's the first thing I write when I wake up in the morning.

• 1:37:44Ben Gilbert?

  Awesome.

• 1:37:46David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:37:52Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:38:03David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy. Your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:38:23Ben Gilbert?

  This is where StatsSig comes in. It brings experimentation, feature flags and product analytics into one unified system. So teams can ship safely, test rigorously and directly link what they changed to how users actually behaved.

• 1:38:36David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:38:47Ben Gilbert?

  Well, listeners, if you want to hear more acquired, feel free to subscribe from wherever you are listening to this one. And if you're looking for another episode to listen to, we did a SoftBank Vision Fund episode earlier this year, last year, something like that. Search SoftBank in your acquired feed. With that, listeners, we will see you next time.