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How WeWork Went from a Gravy Train to a Ponzi Scheme

0 | By Shah Gilani

WeWork was never going to work, at least not as a going concern or as a business model.

That’s because the business model, which looked good to the outside world, was nothing more than a gravy train for the company’s founders, early investors, and some bankers.

As a going concern, which is barely going these days, WeWork’s grow-at-any-cost rise to riches looks more like a Ponzi scheme in hindsight.

If you’re not up on WeWork’s formative years and how it got to the point where it had to be rescued, read Part I of this story right here

This part of the WeWork story is a journey into the underbelly of this rotting whale.

Here’s how much of a gravy train WeWork was, how its Ponzi-like growth collapsed in on itself, and what it says about venture capital funds and Wall Street…

WeWork Once Had Billions, But Then Nothing for Just One Reason

After attracting billions of dollars from venture capital funds, the last $2 billion coming from SoftBank’s Vision Fund last January which drove the theoretical valuation of WeWork to $47 billion, by the way based on a totally flawed and suspect valuation methodology (read about that here…), the company was ready to be sold to public suckers.

Thus, it was on its way to its greatly anticipated IPO.

WeWork’s bankers, led by JPMorgan Chase, pushed the company’s valuation to be above $60 billion to would-be investors at Wall Street dog and pony shows set up around the country.

The pitch focused on the company’s growth and how its latest valuation, based on private money coming in from SoftBank’s $100 billion Vision Fund, was undervaluing the company.

That’s why a $60 billion valuation in its IPO would be just another steppingstone in the soaring valuation of the sharing economy magic monster.

But the bucks stopped there. Investors balked at the company’s S1 filing and ran for the hills.

IPO expectations were ratcheted down to maybe a $47 billion valuation, then $35 billion, then $20 billion, and then nothing.

No one was lining up to buy any part of WeWork.

What Happened Next Was Ugly

The company’s founder Adam Neumann was ousted by the board, which he had the right to fire, but didn’t because he knew that he was toast and the Ponzi scheme had been uncovered.

Now that more details have come out, we know SoftBank rescued WeWork, not JPMorgan Chase.

The rescue includes buying $1 billion worth of founder Adam Neumann’s stock, giving him a $500 million credit line, and paying him a $185 million “consulting fee.” He gets to keep some equity and retains a seat at the board as an observer.

Some investors and some employees got to sell some of their shares to SoftBank who ponied up $3 billion there.

WeWork got a $5 billion loan and Softbank put up another $1.5 billion right away that was scheduled to be invested next year.

SoftBank and its Vision Fund are now into WeWork for close to $15 billion and counting, because they’re going to need a lot more money to stay alive.

For their efforts and cash, SoftBank and Vision together own about three quarters of WeWork.

Too bad its valuation based on the latest rescue is only $8 billion now.

It serves SoftBank and Masayoshi Son, SoftBank’s founder Chairman and CEO and Vision Fund’s CEO. They pumped up the company’s value looking to exit after the IPO sucked in enough fools who might chase the stock up to a much higher valuation where early investors would exit.

They created a too-big-to-fail unicorn and are now paying the price for Ponziing it up.

JPMorgan Was in on the Gravy Train All Along

After leading a consortium of banks that gave Neumann a $500 million line of credit, which he drew down to the tune of almost $400 million and lending him another $97 million out of other lending JPM product pools, including mortgage money, the too-big-to-fail bank wanted its money back.

Neumann being ousted as Chairman and CEO put him in technical default of his loans and JPM gave him 45 days to restructure them or they’d take his collateral and properties.

That’s why SoftBank had to give Neumann a $500 credit line on top of the $1 billion they paid him for his stock.

JPM was in the running with SoftBank to provide a rescue. They lost out but didn’t.

The bank’s idea of a rescue was to raise $5 billion in unsecured payment in kind (which means instead of getting interest when its due, investors could get more stock instead) junk bonds with a coupon of 15%.

No wonder WeWork took the SoftBank deal.

But don’t cry for JPM, they got a $50 million fee for just arranging the rescue package.

WeWork may not survive after all this.

What will survive is this way of doing business.

The game of financing start-ups will survive because there’s so much money in the game.

The way venture capital funds mock-up valuations will survive because it’s how they win the game.

The way banks and Wall Street fee everyone for anything they can in the game will survive, because they lead everyone to the exit doors when they can.

Overvalued companies with questionable futures coming out in public markets will survive, because there are easily duped investors out there waiting to be fleeced.

The whole game will survive because it is a survival game meant to be played over and over.

So, ask yourself, was the WeWork game a gravy train or a Ponzi Scheme, or both?

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Sincerely,

Shah

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