In 2008, Jeremy Newer and Ryan Kunatti, two young men from Santa Cruz, California, decided to establish a shared office space. They rented a building, decorated it, put on their desks, patch panels, and provided fast wireless networks and coffee machines. They named their company "NextSpace Coworking".
"We really believe that this will become a new way of working," Newer said. NextSpace does provide a workplace for local freelancers who are eager for an office atmosphere. In just six months, NextSpace has made a small profit. Soon, NextSpace opened new office space in San Francisco, Los Angeles and San Jose. Newer and Kunatti also began to look for venture capital. Newer said, "Financing represents the recognition of the market for you."
In 2012, Newer attended an industry conference in the field of shared office, trying to get to know some investors. One of the speakers of the conference happened to be Adam Neumann. Neumann said that he runs a company called WeWork in New York, which is "the first entity social network in the world". The confident Neumann also said, "We will expand to the whole country very quickly." Although WeWork was only two years old at that time and Neumann was only 32 years old, the company has managed more than 300000 square feet of office space; Neumann also said that the number of WeWork customers will soon exceed 10000. "We will work together to create a community that can change the world."
Newer recalled that when he met with VCs, their first question was always "How do you plan to compete with WeWork? Why should we invest in you instead of WeWork?" Although it was reported that WeWork lost millions of dollars every month, the company expanded aggressively. The promise made by Neumann to VC is extremely optimistic and absurd, so that Newer firmly believes that WeWork is a fraud. "How can I answer that? Should I say, 'WeWork is lying, you should invest in us'? Nobody wants to hear that. All venture capitalists want a piece of WeWork."
Gradually, Newer heard that in San Francisco, near NextSpace, WeWork opened a new shared office space, which was cheaper to charge. Other entrepreneurs of shared office space also have similar experiences: WeWork sets up a site near the local existing shared office space every time it goes, and then attacks competitors with low prices. Sometimes, WeWork also tells tenants that if they terminate signing a contract with another home, they can get a relocation discount; What's more, WeWork will obtain the customer list from the competitor's website, and then provide the customers on the list with a three-month rent free period.
Newa had to slash prices and provide more office benefits, but to no avail. The price of WeWork is too low. By the end of 2014, WeWork had raised more than 500 million dollars. Even though WeWork lost $6 million a month, its growth rate only increased.
At the same time, Bruce Dunleavy of Benchmark, a well-known investor in Silicon Valley, joined the board of WeWork. Deng Levi once confessed to a partner that he did not know how WeWork could make a profit, but he said Cigna Iman. "We just have to give him the money, and he will find a way."
At this time, VC told Newer that investing in his company was a waste of time; And if they invest in NextSpace, they may miss the opportunity to invest in WeWork in the future. However, Newer found all this unreasonable. He started his business with his feet on the ground, but VCs only wanted to hear heroic words. "We can let everyone make money, then buy a house, provide children with school and live a decent life." Newer said, "But nobody cares about that. Everyone wants to invest in the next Zuckerberg." Although disappointed, Newer is not surprised. However, what Newer did not expect was that some venture capitalists colluded with these hype masters, gave them money to encourage their wild talk, and hoped that some lucky gamblers could earn their money at once.
In 2017, Newer came across a Forbes magazine in the bookstore. The cover character was Adam Neumann. According to the report, Neumann met with Sun Zhengyi, the founder of Softbank. Sun Zhengyi was full of praise for WeWork's headquarters. After the visit, he immediately initialed a temporary contract, promising to invest $4.4 billion in WeWork. Neumann said that this investment is not about our financial performance, but "our vitality and spirit".
The article also wrote that several months later, Neumann went to Tokyo in person to celebrate cooperation with Sun Zhengyi. During the dinner, Sun Zhengyi asked Neumann, "Who will win the competition between the wise and the crazy?"
"Madman," answered Neumann.
"Yes," said Sun Zhengyi, "but you are not crazy enough."
Mercenary venture capital
At first, venture capitalists were still full of lofty sense of mission. They are not speculators, but midwives of innovation. The first venture capital company aims to find and support start-ups with the best ideas, and provide entrepreneurs with the required funds and strategic advice. The success of Genentech, who helped invent synthetic insulin, was largely under the guidance of Tom Perkins, a venture capitalist. Perkins' company Kleiner Perkins once invested 100000 dollars in Genentech. Perkins asked to join Genentech's board of directors. Then he would spend the whole afternoon every week checking the expense report in the office of the startup company to teach novice executives a lesson. In the following years, Cappen Huaying Investment has supported Amazon 、 Google , Shengyang Computer, Compaq and other technology companies.
After Perkins, the venture capital industry has doubled, and the greed and cynicism of the whole industry are also growing. Today, dozens of large venture capital companies control the entire industry. Although VCs always boast of their mission to pursue radical business ideas, they seem to be hyping the trend of Silicon Valley - and their management and supervision are also increasingly diluted, making their investment more like a gambling transaction. Steve Blank, an entrepreneur who currently teaches at Stanford Engineering School, said: "I see that the whole industry is becoming more and more like a mercenary mob. Now venture capitalists don't care about the public interest at all. They are only interested in improving their own profits and chasing the wind, and they don't care about anything else. They waste billions of dollars, which could have been used to develop innovation that can really help people."
This kind of team work style of self service has made a number of venture capitalists. In January 2020, the American Venture Capital Association called the past decade a "record decade" of "rapid growth". During this period, the members of the Association injected nearly 800 billion dollars into entrepreneurial companies, "injecting vitality into tomorrow's economy".
In recent decades, the stakes of venture capital have become bigger and bigger. A well-known venture capitalist said: "To be honest, there is no sense in investing less than 30 million or 40 million dollars. No matter how much money you invest, due diligence, board meeting time, etc., the workload is the same."
Critics of the venture capital industry found that recently, venture capital began to invest heavily in a very suspicious startup. Theranos, a blood testing company, obtained an investment of 700 million dollars before it was exposed as a fraud. Juicero, who sold the so-called juice machine with Wi Fi function, raised more than 100 million dollars, and even Google participated in the investment, but it only lasted for four years.
Gradually, the VC industry became more and more obsessed with creating "unicorns": start-ups with a valuation of more than $1 billion. It is true that some unicorns have achieved lasting success, but more unicorns - including Uber, data mining giant Palantir and scandal ridden software company Zenefits, etc. - seem to have never had a practical plan to achieve profitability. Martin Kenny, a professor at the University of California, Davis, said that thanks to the generosity of venture capital, "money losing enterprises can survive for a longer time and hit existing enterprises in the market." Under the traditional capital model, the most effective and capable companies will succeed; Under the new capital model, the company with more financing is the winner. Such companies tend to "destroy economic value" - that is, destroy real competitors and create "revolutions that are not conducive to society".
Many venture capitalists said that they had no choice but to inject capital into start-ups. In order to make Silicon Valley startups become real unicorns, they can only sweep away competitors and become market leading brands. Jeff Hausenbold, executive partner of Softbank, said: "Less than a year after Uber was founded, more than 300 imitators have emerged in the market. The only way to protect your company is to accelerate its development through financing." Venture capitalists also said that, more importantly, large venture capital companies are all looking at the same transaction and trying to persuade the same favored entrepreneur to accept their investment. In order to win the hearts of entrepreneurs, VCs can only respond to their requests.
Especially in Silicon Valley, founders usually prefer venture capitalists who promise not to intervene or ask too many questions. As a result, VCs abandoned Perkins' practice and began to publicize that they were "friendly to founders", were not interested in such things as spending an afternoon in the company office every week, and would not question the decision-making power of young CEOs. Josh Lerner, a professor at Harvard Business School, said: "It seems to be a matter of course to promise to keep the founders."
The venture capitalists of Tom Perkins' era were proud to establish good governance and pay close attention to the company; Today's venture capitalists are more inclined to encourage the founders to go wild. Sun Zhengyi, the Softbank helmsman who decided to invest $4.4 billion in WeWork in less than 20 minutes, is the best embodiment of this style. In 2016, he began to build a $100 billion vision fund. A former Softbank executive said: "Sun Zhengyi decided to inject a dose of cocaine into the blood of a young company. You find an entrepreneur and tell him, 'Either accept the $1 billion investment I gave you right away, or I will give it to your competitors, and you will exit in dismay.'" The former Softbank executive then added: "Venture capital is more and more like buying lottery tickets. Sun Zhengyi may not be a particularly thoughtful person, but he has one advantage: he is committed to buying more lottery tickets than anyone else."
Capital corrupted by greed
With the demise of NextSpace and the expansion of WeWork, a strange phenomenon has emerged: the more rumors about the predatory strategy and abnormal culture of WeWork, the more popular Adam Neumann is among venture capital investors. Although the internal culture of WeWork is chaotic, the valuation of WeWork is doubling every year.
Adam Neumann has founded several companies, including women's shoes company that sells folding high-heeled shoes and Krawlers, which produces baby clothes with knee pads. After these two start-ups failed, Neumann and partner Miguel McKelvey rented an office in Brooklyn, divided it into small spaces, and then packaged themselves as entrepreneurs of shared office space. When potential investors come to visit, Neumann lets employees pretend to be tenants. "He is really crazy, but it is such a madman that you can believe that he can succeed." Another venture capitalist said, "He is the most attractive salesman I have ever seen."
In 2014, Neumann has received a large number of olive branches from the wind. Finally, Neumann declared that he would only cooperate with investors willing to give him a majority of voting rights. Bruce Dunleavy, who is already a member of the board of directors and is now a teacher of Neumann, immediately felt that this unconstrained power was a bad idea. He tried to persuade Neumann to give up his demands. He also urged other directors of WeWork to veto Neumann's request at the board meeting, and quoted Lord Acton as saying: "Power is easy to corrupt, and absolute power will inevitably corrupt."
Neumann said at the meeting that he didn't care what Acton said, and no one else on the board of directors came out to support Dunleavy. Deng Levi could have resigned as a member of WeWork's Board of Directors at this time or publicly objected. He has done this before. But this time, Dunleavy did not resign. One of his colleagues said that resigning "would be the stupidest decision in the world. We made an investment when WeWork was valued at about $80 million, and now WeWork is worth $15 billion. Then should we choose to leave at this time?" Finally, Deng Levi had to follow the crowd of other investors and give Neumann the right to vote.
WeWork has many internal problems. These are also related to Deng Levi and other board members. In the spring of 2018, the Board of Directors learned that a company executive was involved in a sex scandal lawsuit. The Board of Directors also allowed Neumann, who is keen on surfing, to spend 13 million dollars from the funds of WeWork to invest in a company that makes artificial wave pools that has nothing to do with WeWork's business. The Board also approved the sale of shares and loans to Neumann. When Norman's wife Rebecca suddenly announced that meat was not allowed in the company, the board of directors remained silent.
The former senior executive of WeWork said that by 2018, "our job is basically to ensure that Neumann will not do anything stupid or illegal - the board of directors knows that Neumann is the key to financing. As long as the valuation has been rising, they will not risk making Neumann unhappy."
Gradually, although WeWork is still growing rapidly, members of the Board of Directors who were willing to speak publicly for Neumann began to refuse media interviews.
By the beginning of 2019, Neumann would not even attend the board meeting. However, other directors remained indifferent. A professional investor said, "You don't want to get a reputation for being unfriendly to the founder." Most venture capitalists think they can bear it because WeWork is planning to go public. Once listed, shareholders and regulators are bound to restrain Neumann. The directors can sell their shares to cash in, and then say goodbye to WeWork.
The core of IPO is a document called S-1. This document is approved by the Board of Directors and mainly lists the financial details of the company to the SEC and the public. Neumann has added some absurd clauses in the document, such as the right to dismiss and refute any director or employee, and obtain additional shares worth 1.8 billion dollars after listing. Seeing that after the listing, money can be reduced to a minimum and trouble can be eliminated, Deng Levi also signed the S-1 document. However, many senior executives of WeWork worry that the S-1 document may cause trouble after it is published. However, they also chose to remain silent, because "wealth is close at hand," said a former executive, "we all deliberately chose to ignore it, and greed prevailed."
"And more importantly, if the listing is successful and everyone gets rich, everyone in the technology industry and Wall Street will praise Neumann as a genius, and WeWork is the model of American capitalist operation."
To turn over one's face and be merciless
When venture capitalists join the board of directors of a company, they will assume legal obligations, protect all shareholders equally, and must ensure that their interests will not be put above those of others. This obligation is the most critical because directors have the ultimate power over the company's behavior, and fundamentally, they represent everyone who is not invited to the board of directors. If a director finds any clue that may cause damage to even the smallest shareholder, according to the law, the director must tell the truth, even if it is in the director's own economic interest to remain silent.
However, it is quite complicated to prove that a director violates this legal obligation. Although this standard can be strictly implemented in listed companies, private companies are another scenario. In a private company, the board members usually include the company's founders, venture capitalists and founder's friends. As the venture capital industry becomes more and more centralized, the trend of holding together becomes more and more obvious. Nowadays, most venture capital transactions have been "syndicated", or it has always been the big companies that get a piece of the pie. This "alliance" atmosphere encourages venture capital to keep silent when dealing with unethical behaviors.
On August 14, 2019, WeWork's S-1 document was officially released. A former company executive said: "The Neumann couple feel that they have finally announced their vision to the world. The S-1 document is their great masterpiece." However, stock analysts, journalists and investors were not satisfied with the document. Nori Liaz, a professor of Harvard Business School, said that the document exposed WeWork's "complex corporate structure, continuous losses, a large number of conflicts and non-existent corporate governance". In addition, Liaz said that the S-1 document did not provide many traditional financial details. She said that her intuition told her that the S-1 document was "misleading and may be a fraud".
Two days before WeWork prepared for the roadshow, someone heard that some scandals of Neumann were about to be exposed by the media. The Board of Directors held an emergency meeting and decided to postpone the IPO. However, until this time, no director was willing to confront Neumann head-on, and even told Neumann that he would support him. But WeWork executives can't sit still. They contacted the Board of Directors and asked them to admit that Neumann was a burden. If Neumann continues to be the CEO, the company will not be listed. Neumann has become a stumbling block in everyone's financial path.
Once VCs realize that their interests are at stake, they will act faster than anyone else. JPMorgan Chase Jamie Dimon said to Neumann, "For the sake of the company, you'd better resign. If you agree, we won't treat you badly." Before long, Dunleavy also told Neumann that he would destroy the company. If he doesn't resign, he will go bankrupt. Dunleavy also accused Neumann of being despicable, threatening to break his arm if he did not resign.
On September 24, Neumann resigned. Two WeWork executives took over as interim CEO; Within a few days, they dismissed more than a dozen of Neumann's confidants. The former WeWork executive said: "When Neumann wasted the company's funds, the board of directors kept silent. Now, when Neumann threatened their interests, they immediately turned their backs."
At this time, the board of directors could have taken over the restructuring of the company. But they didn't. Instead, the Board of Directors asked Sun Zhengyi to accept WeWork. According to the transaction, Benchmark can get about $300 million in revenue, and Neumann can also get $725 million. A person familiar with Dunleavy and Benchmark said that the company's investment was still safe in the end.
Only WeWork employees and a few other investors suffered.
VCs still have money
When COVID-19 spreads all over the world, WeWork's business model becomes vulnerable. Since the beginning of the year, WeWork has laid off thousands of employees. However, WeWork said that the company is expected to be profitable in 2021. Analysts also believe that the company is expected to succeed in the long run. However, in many ways, WeWork is still in a mess, with members of the board of directors facing each other in court. If WeWork succeeds, the reason for its success will probably be similar to the reason for its rapid growth before: it has inexhaustible venture capital.
However, venture capitalists said that WeWork's farce cast a shadow on the shared office space industry. Steve Klaus, a famous venture capitalist, said: "The failure of Theranos has destroyed the blood testing entrepreneurship field. It is almost impossible for companies with good ideas in the industry to raise funds." Although WeWork failed not because of fraud but because of poor management, it also made investors feel apprehensive about other shared office space entrepreneurs. At the beginning of March, Nikola, a truck startup, was forced to sell itself to competitors. Nikola's president said that the collapse of WeWork scared away potential investors. "There are many excellent entrepreneurs, but they all said that after WeWork, financing becomes more difficult. WeWork destroys more than just the shared office space. "
For decades, venture capitalists have successfully shaped themselves into a Bole. however The example of WeWork makes people no longer believe that VC can find a balance between greed and innovation. On the contrary, venture capital seems to increasingly reflect the modern capitalism's disregard for profit, preferring crafty middlemen and boasters rather than rewarding diligent employees and creative businessmen.
Jeremy Newer, the co-founder of NextSpace, said: "The fault is not in Neumann. Everyone knows that what he sells seems beautiful but can't be realized. He never conceals his unrealistic optimism and never pretends to be rational and down-to-earth. In the entrepreneurial circle, we are not short of creative entrepreneurs, but gradually, you will see that they are encouraged by venture capital to accept a large amount of investment, and then make the wrong choice to pursue growth at any cost. Then, 'bang' - it's over. Finally, you begin to understand that no matter what happens, VCs still have money. "
