ADAM NEUMANN IN DEFENSE OF
result of some kind of nefarious heist, this fraud happens to have the least-sympathetic group of victims ever assembled. Neumann’s main victims are the egocentric Japanese billionaire who enabled the whole charade and the sovereign wealth funds of a couple of countries with questionable international reputations. WeWork’s employees are often portrayed as victims... After all, they didn’t make off with a $1.7 billion golden parachute. They got nothing. But, to quote Bloomberg’s Matt Levine: They worked at a money furnace that lost almost $2 billion a year and destroyed $40 billion in market value in a few months, why should they get equity upside? Meanwhile, Masa’s SoftBank and Vision Fund have paid nearly $20 billion in cash to own 80% of WeWork, which is now valued somewhere between $5 billion and $8 billion. That’s a truly horrendous return on investment. Masa’s investors are down at least 70% so far. So where does this leave us? For investors, there are three key lessons... First, you should always keep an eye on who controls a company’s voting rights... especially when investing in startups. If you’re mad that Neumann got $1.7 billion for selling his voting rights, blame the investors who allowed him to accumulate those voting rights in the first place . Any investor – especially Masa – could have pushed back
on Neumann’s controlling shares before they ponied up cash to invest. They didn’t, and they paid dearly for that error. Neumann set up a ridiculously aggressive ownership structure that no sane person should ever have agreed to. Yet early investors agreed to it anyway. The public markets, as it turns out, did not agree to the terms. So the early investors had to pay him off to remove the terms. Is that fraud? Of course not. It’s greedy negotiating on one end, and incompetent deal-making on the other. Before investing in a business, make sure you understand who really controls it. The next lesson is great news... Sometimes the market can recognize junk when it sees it. As recently as April, the WeWork IPO was a foregone conclusion. Plenty of shaky businesses had already gone public. There was no reason to doubt that the market would suddenly reject the madness. The only question was how much money the offering would raise. And we’ve learned that the market is indeed capable of rejecting valuation fallacies . Everyone was shocked... This is a huge win for passive investors. Long- time market followers and bankers are noting that, for the first time ever, the market’s gatekeepers have said “no” to an IPO that stood to generate hundreds of millions in fees for investment bankers. The final lesson is more controversial. We
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December 2019
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