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How SoftBank and WeWork Played Silicon Valley and Wall Street
In June 2017, Adam Neumann, the founder and CEO of WeWork, stood in cap and gown before the graduating class of Baruch College. More than a decade earlier, he said, he had dropped out of Baruch, realizing he had wasted several semesters partying and chasing girls, and decided to do business. Now, he was finally receiving his diploma, and had some advice to dispense to classmates — “my blueprint” for success.
The secret, he said, was to pursue “a meaningful life.” Growing up in Israel watching American television, Neumann said, he had divined all the wrong lessons. He had made heroes of pop culture figures who were “materialistic, superficial, and egocentrical… I didn’t understand what truly mattered.” But if you had purpose, devised a business model that made sense, and treated employees well, he said, “I guarantee you profits will come.”
Only, for Neumann, profits didn’t come. Neither, it appears from recent accounts of his lifestyle, would he truly shake his childhood admiration for those film idols. Instead, today, ousted from control of his company, Neumann finds himself at the center of a tale of vanity-laden excess and rocket-fueled valuations at the apex of Silicon Valley, all of it cocooned in normalcy by a celebrity-hungry investor community.
The unraveling of Neumann’s world is attracting much attention, but he is part of a larger universe of Daredevil Unicorns, a rarefied subset of multibillion-dollar tech companies that share the attributes of enormous valuation and unapologetically outlaw founders. Until a week or so ago, these were desirable qualities. Now, we appear to be watching the passing of their time, at least as we and they have known it.
On Wednesday, the CEO of Juul, Kevin Burns, was ousted, amid a maelstrom of public opprobrium over the vaping deaths of 12 people and the illness of at least 805 more. Shares of Uber — already down about 25% since its IPO in May — have plunged another 5% over the last week. And in one-two news yesterday, Peloton, the seller of $2,245 exercise bikes, saw its stock plummet 11.1% in its IPO debut; Endeavor Group, an $8 billion unicorn, canceled its plans to go public entirely.
Meanwhile, the archetypal Daredevils, most prominently Facebook founder Mark Zuckerberg, are navigating a new landscape on both sides of the Atlantic, threatened with regulation, fines, and a breakup. Daredevils are left defending each other: On Tuesday, German prosecutors charged senior Volkswagen (VW) leaders for complicity in the “dieselgate” scandal, the installation of defeat devices in their cars to fool emission sensors. In response, Elon Musk, CEO of Tesla, tweeted, “Herbert Diess is doing more than any big carmaker to go electric. The good of the world should come first. For what it’s worth, he has my support.”
“Very often we have a fetishization of leadership,” Robbie Stamp, CEO of Bioss, a U.K. consultancy, told me. “We drink the Kool-Aid of the priest king, the shaman who will lead the way.”
As of August, there were at least 390 unicorns around the world, according to CB Insights — private companies valued at a minimum of $1 billion. The most valuable is China’s ByteDance, valued at $75 billion and operator of the enormously popular platform TikTok. After that come some of the Daredevils — Didi Chuxing, the Chinese ride-hailing company ($56 billion); Juul ($50 billion); WeWork ($47 billion); and Airbnb ($29 billion).
It’s popular to climb into the minds of VCs and imagine envy, angst, and humiliation, sometimes at the same time, amid all that money pouring into the Daredevils. And that certainly was the case from the 1990s through a little more than half of the current decade. But VCs have largely made themselves scarce in the most recent rounds of Daredevil investment — for fund raises by Uber (before its IPO), WeWork, and Juul, for instance.
At least some of that absence has been because the traditional VCs simply could not afford the valuations. It has also seemed to flag the presence of froth. Yet where some have seen froth others have beheld opportunity. In the place of the VCs have been hedge funds, sovereign wealth funds from the Middle East and elsewhere, and supersize investment funds.
The latter is epitomized by SoftBank, the Japanese VC firm founded by Masayoshi Son, a famously preternatural big spender. A lot of people who watch startups say he is more responsible than most for both the high valuations and the failure to rein in Daredevil founders such as WeWork’s Neumann, who, among other things, is accused of self-dealing.
In an age where technology moves extremely fast, impressions of individuals can change extremely fast, too.
But blame is widely held for the founders’ bad behavior. As for the high valuations, there actually is something to the finger-pointing at SoftBank. Son, for instance, invested in WeWork at a valuation of $47 billion, more than double its prior value, for a 29% stake in the company. Among the best-known Son anecdotes is how in 1996 he all but forced $100 million on a young Jerry Yang for a stake in Yahoo when it had only a little more than a dozen employees. This deliberate thrusting of high sums into companies provides them a cushion — both financial and psychological — against any disapproval of founder eccentricities.
So it is that, for many, the market’s dramatic punishment of the Daredevils has come suddenly. But the cracks in the edifice have been visible for anyone to see, not the least in videos searchable on YouTube. Take an appearance by Son, on October 11, 2017, in an interview series hosted by David Rubenstein, the billionaire co-founder of the Carlyle Group.
In the video, Rubenstein questions Son about how he managed to raise his almost $100 billion Vision Fund, which Son has splashed around Silicon Valley. Rubenstein zeroes in on a 2016 meeting between Son and Saudi Arabian royal heir apparent Mohammed bin Salman in Tokyo. In just 45 minutes, Son says, he persuaded MBS, as he is known, to pump in $45 billion, a figure with which Rubenstein — himself no slouch when it comes to large numbers — is obviously impressed. “One billion dollars per minute,” Son says, with a bit of quiet braggadocio.
How, Rubenstein wants to know. Son responds that he told MBS he wanted to earn him $1 trillion. That “woke him up,” Son says. He went on, “You invest $100 billion in my fund,” he told MBS, “and I will give you a trillion dollars.”
The undertone is an atmosphere of casual trafficking in what, in ordinary Big Investment, is unheard of sums. When you witness Son able to wrest $45 billion with the same effort as a salesperson at a boutique sells a new outfit or two, one can better understand how startups like WeWork and Uber, led by charismatic leaders of their own with no shortage of confidence, have managed to command similar valuations.
In response, some of the bigger Silicon Valley funds have begun building up their own war chests; some of the Valley’s leading lights have quit and spun off their own large funds, too — all to compete with Son.
But in an age where technology moves extremely fast, impressions of individuals can change extremely fast, too. Son has been on the receiving end.
“The perceptions of SoftBank in the last three to six months have changed from, ‘It is the one you want if you are a founder; it sits on the throne, and if you get it to do your round, you got it made,’ to, ‘Does SoftBank really know what it’s doing? Or are they causing the mispricing problems?’” Erik Gordon, a professor at the University of Michigan’s Ross School of Business, told me: “People are wondering whether SoftBank has been in the forefront of creating this valuation and governance problem.”
With Neumann, the Baruch commencement video is exceedingly telling by way of exposing an apparent extraordinary lack of self-awareness, and begging the question of why, as far as we know, no one with money on the line saw it as a disqualifying red flag.
In the video, made just two years ago, Neumann speaks of scorning materialism and egocentrism. But he and his wife Rebekah along with their five children live in five houses. He spent $60 million last year on a Gulfstream jet, drives a $100,000 Maybach, and luxuriated in an office spa with an ice bath, the Wall Street Journal has reported.
Neumann tells his classmates of a business he formed in the pre-WeWork days called Krawlers. The main product was infant pajamas with padded knees to protect them as they crawled. He worked at it for five years. But it was a “tremendous failure,” he said — he was selling $2 million a year in pajamas at the peak, but burning through $3 million.
Last year, WeWork lost more than $1.6 billion. In 2017, it was $890 million, and the prior year $429 million. The losses continue this year — for the first two quarters, WeWork’s operating losses were $1.37 billion.
Documents released by WeWork ahead of the IPO revealed other troubling data about both the company and Neumann’s lifestyle. On Tuesday, Neumann, reportedly under tremendous pressure from his old friend Masayoshi Son, stepped down as CEO.
“The recent performance of unicorns that went into the glare of the public market raises questions whether private investors have gotten valuations completely wrong,” said Gordon.
A number of observers blame not only investors like Son, but investment banks like JPMorgan, Goldman Sachs, and Morgan Stanley, the latter for stroking Neumann’s ego with forecasts of a $100 billion IPO valuation.
The same might be said of the other Daredevils. I saw this game in Russia years ago, involving the same banks and others: lined up, smiles of fellowship and admiration on their faces in pursuit of the riches in fees that could be bestowed only by Vladimir Putin, the deals often corrupt and sometimes involving the validation of theft. Banking, at this level, is a dirty game.
Ultimately, everyone is responsible — the Daredevils themselves, but also the investors, and the banks. “Everybody is driving at some monopolistic, crush-the-opposition, win-the space outcome, knowing how Darwinian it is,” says Stamp. “We’re all looking for our payday. You don’t have to look much further than incentives.”