WeWork co-founder Adam Neumann is stepping down as CEO of the shared-working-space firm in the face of lukewarm demand, growing investor concerns, a botched IPO and a valuation that has fallen off a cliff.
Board members approved the move Tuesday during a board meeting, a person familiar with the matter told the New York Times. Neumann will become nonexecutive chairman of WeWork’s parent, the We Company. Two current executives, Sebastian Gunningham and Artie Minson, will be named interim co-CEOs, and the company will find a new permanent CEO.
“Our core business is strong and we will be taking clear actions to balance WeWork’s high growth, profitability and unique member experience while also evaluating the optimal timing for an IPO,” Minson and Gunningham said in a board statement Tuesday.
Neumann took every opportunity to profit personally, often, it seemed, at the expense of the company he led, Yahoo Finance reported. He took loans from WeWork, used proceeds to buy properties and leased them back to WeWork. “While the company has also lately worked to mitigate some of the troubles that such self-dealing behavior can create, it is still an extremely distressing activity for a leasing company to engage in.”
The We Company’s recently-released S-1 raised eyebrows on Wall Street over big liabilities and losses the company was taking on.
One deal that raised eyebrows was one of Neumann’s off-brand acquisitions, Conductor — a company known for search engine optimization. “The two businesses might not seem like an obvious fit,” Techcrunch reported in March 2018. However, Conductor co-founder and CEO Seth Besmertnik said that he and Neumann went to college together. They were good friends in college and they were also each other’s customers.
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The $126 million Conductor deal in 2018 included about $98 million in stock and an undisclosed “substantial” earnout, Greg Sterling reported for Search Engine Land. Conductor raised about $60 million.
Neumann bailing out an SEO company could be likened to Elon Musk bailing out Solar City. SolarCity was founded by Musk’s cousins and some Tesla board members at the time, including Musk’s brother, were connected to the company. People thought that was a conflicted transaction.
Known as a charismatic salesman, Neumann was at the helm when WeWork became one of the most valuable startups in the last decade. The company achieved a private valuation of up to $47 billion nine months ago. We Company is considering a valuation as low as $15 billion in its public offering which has been postponed until at least next month.
Critics have described WeWork as overvalued, vulnerable to the next downturn, a “$20 billion house of cards” and a “Ponzi scheme.” Some say it was only in a rising economy that WeWork was able to lock in long-term leases and then re-rent that space to other businesses at a premium.
Here’s how Codenameduchess put it in a Dec. 23, 2017 Medium post: “WeWork takes long-term leases on raw office space, builds out the space into cool, flexible spaces and subleases them to smaller tenants. Essentially their business is borrowing long to lend short with limited liquidity. Other firms that have engaged in similar business models include Long Term Capital Management, AIG, Bear Stearns, and Lehman Brothers. Things didn’t turn out great for them.”
We Company executives and bankers have recently discussed ways to reduce costs, The Information reported. This includes laying off up to 5,000 employees — a third of the workforce, — slowing down expansion and shutting side businesses related to education or housing. The goal is to restore investor confidence as the company looks to save its initial public offering or raise funds privately.
Board directors from Japan’s SoftBank — the company’s biggest investor — and Benchmark doubted Neumann’s ability to make drastic changes, The Information reported.
SoftBank CEO Masayoshi Son gave founders wide leeway in expanding their businesses and looked the other way at excesses until investors in the public markets pushed back, New York Times reported.
Besides Conductor, Neumann made many other acquisitions, Fortune reported. These included Chinese co-working company Naked Hub in 2018, Singapore-based Spacemob in 2017, social group organizer Meetup in 2017, and in 2019, Euclid, mobile access platform Waltz and real estate management platform SpaceIQ.
“Even if we were to set aside the inherent red flags pervading the WeWork business model, however, it is hard to come away with anything but a negative impression of the sprawling co-working and office leasing business,” Yahoo Finance reported. “Indeed, the company’s distressing and pervasive pattern of poor corporate governance makes it an unattractive investment, even if its core business was not so alarming.”
In the board’s statement Tuesday, Neumann said, “While our business has never been stronger, in recent weeks, the scrutiny directed toward me has become a significant distraction, and I have decided that it is in the best interest of the company to step down as chief executive.”
The problem with WeWork’s business model is that it has not been tested during a down market, Codenameduchess wrote in 2017. “I know that people will say ‘Adam and Miguel founded a co-working company prior to WeWork that did very well during the Great Recession!’ Sure, that’s true but the company had one building under management, they now have 170 locations (2017). They have high, long-term fixed costs at those 170 locations that they are going to have to keep filled when the economy eventually experiences a downturn. I have little confidence that they’ll be able to do that. Mr. Neumann seems to agree with me, seeing as how he’s cashed in more than $100 million of WeWork stock.”
There are potential conflicts. It’s for the SEC or investors to decide what’s right or wrong. WeWork raised private money from investors that could still fall under SEC oversight as private securities. When the WeWork CEO bailed out his friend’s company using investors’ money, that was a red flag that people missed.
Jamarlin Martin contributed to this report.