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Edward Nevraumont
WeWork’s IPO Didn’t Work
I recently wrote about Juul’s terrible, horrible, no good, very bad week. The vaping company might have won the contest for “worst corporate crisis” this month, but WeWork came very, very close to claiming that crown. From CNBC:
WeWork has announced it will withdraw its S-1 filing as it seeks to postpone its highly anticipated initial public offering.
The embattled office-sharing start-up formally announced its intent to go public on Aug. 14, revealing massive losses and a confusing corporate structure. Since then, the IPO for WeWork’s parent company, The We Co., has been hanging in the balance, as it delayed its investor roadshow amid weak demand and a dwindling IPO valuation. WeWork co-founder Adam Neumann announced he would step down as CEO and give up some of his voting power on Sept. 24.
During WeWork’s last private round of funding, the company’s valuation hovered around $47 billion. That aspirational figure turned out to be way, waaaaay off.
You probably know what happened next:
Valuation estimates plummeted, dropping all the way down to $10 billion — less than the $12.5 billion the company has raised to date.
The IPO was pulled from the market “for the time being.”
Founder Adam Neumann resigned as CEO (Neumann actually voted in support of the board’s motion that he should be “let go”).
On a lighter note, this viral tweet provided a great metaphor for WeWork’s recent woes:
I’m not planning to rehash the millions of words that have been written about WeWork’s streak of imprudent decisions. Instead, I want to talk about “vision.”
Two Types of Leadership
A friend of mine is a partner at a private equity firm. We were chatting about his office’s process for evaluating portfolio companies, and he described two sets of skills they look for in CEOs:
“Analytical leadership” — the ability to set the right strategy for the business. Analytical leaders can provide insightful solutions to the big problems facing a company.
“Visionary leadership” — the ability to inspire the organization. Visionary leaders can motivate thousands of employees to put in the daily effort needed to grow the company.
An effective “analytical leader” will create followership among a small group of smart and competent people who can direct the organization. A successful “visionary leader” will create followership among the other ten thousand employees.
Private equity firms tend to value analytical leadership more than visionary leadership, largely because their offices employ logic-based perspectives on decision making. If a private equity investor stepped into a CEO role, they would (in most cases) exhibit a greater affinity for analytical leadership than visionary leadership.
But both types of leadership are important when you are running a business. Analytical leadership succeeds when the CEO assembles a small team of rock stars. For a company to truly thrive, though, someone needs to inspire a LOT of people to enthusiastically work toward a common goal.
Adam Neumann demonstrated incredible prowess as a visionary leader, but WeWork lacked a commensurate source of analytical leadership. Sometimes leather jackets and surfboards just aren’t enough.
The Value of Vision
Most corporate executives only have time to regularly connect with a limited number of employees. Big companies, therefore, require visionary leaders to inspire and motivate their entire workforce — from executives down to entry-level positions.
But small companies need vision for a different reason. As I explained in “Marketing to Employees”:
Startups can rarely pay the salaries of Google or Facebook or Amazon. What CAN help startups attract talent? A “mission-driven” culture that allows employees to not only earn a living, but also work toward supporting their beliefs. Notice how few businesses seem to just “sell stuff” anymore; instead, they’ve realized the importance of turning their e-commerce businesses into “missions.” Casper doesn’t sell mattresses — they improve our sleep so we can live “fuller, more adventurous lives.” Airbnb doesn’t rent houses — they provide “a home where you belong.”
Every company is on a mission. Not because customers care, but because without a mission, the only way to get an employee to work for you is by paying them more money than their next best alternative.
Suppose you run a business that buys customer traffic for $1 and sells it for $2. That seems like a fine model for generating some reasonable profits, but it also sounds like boring, repetitive work. As such, you might struggle to recruit smart people to work there, UNLESS…you pay them more money than other companies in your area or industry.
Without a vision, your company will attract mercenaries — the type of employees who are ready to leave whenever another company offers a better salary. Once your company heads down that path, it’s very hard to shift directions. Plus, think about the impact of a company’s workplace reputation during the recruitment process: who wants to enlist in an army full of mercenaries?
If your company wants missionaries instead of mercenaries, you need a vision.
When you are launching a company that’s still in the phase of selling “all sizzle and no steak” — you need a vision. Even when you are developing the global reach of a company with thousands of employees — you need a vision. People in corporate America understand the need for visionary leadership (which explains why there are so many books on the topic).
But with visionary leadership — like any other corporate ideal — it’s easy to go too far (see: Adam Neumann’s penchant for hosting liquor-fuelled summer festivals for employees).
Free vs. Free
When translating English into French, the word “free” can communicate two distinct ideas: “gratis” and “libre.” Gratis means “without charge”: your fries come “gratis” with the purchase of a burger. Libre, in contrast, means “with little or no restriction”: you are “libre” to pursue your life’s passions. In English, we use the same word for both meanings, leading to the occasional confusion. Software programmer and activist Richard Stallman resolved the ambiguities around “free” open source software by famously quipping, “This is a matter of freedom, not price, so think of “free speech,” not “free beer.””
I believe similar confusion exists with the concept of corporate “vision.”
As I wrote in a previous paragraph, “vision” can evoke the idea of a leader who creates a shared sense of meaning and purpose. An inspirational vision for a company can motivate employees to contribute their best effort (and to work for less money than the mercenaries next door).
A different use of the word “vision” describes the process of chasing a very big opportunity. For example, a company might possess a vision to conquer a specific market, earning a billion-dollar valuation along the way.
Despite the distinctness of “inspirational leadership” and “aspirational goal,” these ideas are regularly conflated into our understanding of corporate “vision.” This confusion applies to the way we describe both companies (like Uber) as well as founders (like Adam Neumann).
Without question, Neumann communicated a bold vision for WeWork; their IPO filing stated their plan to “elevate the world's consciousness.” On a nuts-and-bolts level, WeWork secured real estate on long-term leases, reorganized the properties into smaller footprints, and then rented spaces to other companies (they were essentially “buying floorspace” for $1 and selling it for $2). In the bigger picture, though, Neumann’s “vision” for WeWork involved transforming not only the way that people worked, but also where and how they lived. Consider Neumann’s comments during a speech at the US Conference of Mayors annual winter meeting in 2018:
NEUMANN: If you bring us in for 10 locations, we will create 200,000 jobs over the next 10 years. And it can go bigger and bigger. And we won't just bring you jobs; we'll bring a place to live. We'll bring education. And this is important. We'll bring corporate America. We will redesign their space, build it, deploy our technology, which is called WeOS and took a long time to create, and then put our community…
UNIDENTIFIED PERSON #2: Will you do that for a city hall?
NEUMANN: I would love to do it for a city hall.
In other words, WeWork’s target market was not limited to companies looking for short-term office space. WeWork imagined reshaping entire cities in their image.
I once attended a private event where Jeff Blackburn, head of business development at Amazon, spoke about the decision-making process for buying early-stage companies. Blackburn argued that the most important factor was not the quality of the product or the talent on the team — it was the size of the potential market. The best product with the best team will never succeed if the size of their prize is small.
What’s an example of a grand vision? Believing that your town car service will grow larger than all the taxi companies in the world, AND that your model will fundamentally change how people view vehicles, by reducing car ownership and putting parking lots out of business, AND eventually controlling all modes of urban transportation, including cycling , scooters, public transport, helicopters, and even flying cars.
A few years ago, I judged a “startup competition.” Over the span of one weekend, teams developed plans to conceive an idea and launch a business. I was really impressed with the originality of the winning team: they created a platform that facilitated the collective purchase of big wedding gifts. One member of the team decided to expand on the idea and start a real company. Alas, she immediately encountered a problem — an inability to secure funding.
Why couldn’t an award-winning idea attract funding in the real world? At the time, the most successful wedding-related company was The Knot, and its valuation was “only” about $400 million. Venture capitalists looked at her idea and said, “even if you build the most successful wedding company of all time, you still won’t be a billion-dollar company.” Moral of the story: no matter how good the product and the team, the market was just too small. She didn’t demonstrate enough vision.
Having Vision AND Vision
I have drawn a distinction between “vision as creating a shared sense of purpose” and “vision as chasing a big opportunity.” To really highlight the difference between the two concepts, let’s consider companies that display one type but not the other.
In 1999, shoe company Zappos was launched with a vision to provide outstanding customer service. The company’s positive outlook not only earned them favorable media coverage, but also allowed them to attract employees at below market rates. Remember when Zappos famously offered employees 3 months of salary to quit — only 14% actually left. Zappos exemplified the first meaning of vision — inspiring employees — but did not demonstrate a vision for large-scale opportunities. Zappos aspired to sell shoes in the United States (an $80 billion market); they didn’t try to leverage their reputation as a customer-centric company in order to own a piece of all transactions on the internet. The company name Zappos was derived from the Spanish word “zapatos,” meaning shoes. Amazon, in contrast, named itself after a river known for its immense size, power, and variety.
Zappos possessed the first kind of vision, but not the second. Juul was the opposite. They focused on a lofty goal: replacing traditional tobacco cigarettes with vaporizers, around the entire world (a $900 billion market). Building a company to a trillion dollars in sales is about as audacious a goal as you can imagine. Of course, Juul faced questions about the ethical implications of that goal, which will almost certainly hurt their ability to recruit top employees. Juul had the second vision, but was missing the first.
In an ideal world, a company could pursue both types of visions. An ambitious business strategy can inspire employees to commit their energy to the company. Likewise, for a company with an “ethical” mandate, growing the business can provide more opportunities to positively impact the world.
Alliances and Investors
For a variety of historic reasons, America’s political system operates with a two-party system, resulting in alliances between some discordant demographic groups. In recent years, the Republicans have built a base of social conservatives, economic protectionists, and military neocons. The Democrats have drawn support from labor groups, neoliberals, and social activists. In other countries — Italy, India, and Israel, for example — factions with specific viewpoints usually create their own political parties (leading to coalition governments and/or legislative breakdowns).
Companies in their growth stage need to behave like political groups in Italy, India, or Israel — target the niche community that supports your unique perspectives. If you are raising $10 million, you only need to find one venture firm or angel investor that believes in your business.
When you decide to become a publicly traded company, the strategy of capturing support changes. Instead of targeting a small circle, your company needs to appeal to a broad range of investors, many of whom will espouse contradictory opinions — the investment equivalent of US-style political parties.
What happened to WeWork? Why was their IPO such a dismal failure?
In 2017, something disrupted the traditional pattern for tech investment — the launch of Softbank’s Vision Fund. For tech companies looking to raise $10 million, there were countless investment firms or angel investors to approach. With Softbank, there was suddenly an option for securing $5+ billion from a single decision-maker: Masayoshi Son.
When Adam Neumann launched WeWork, he secured funding from Benchmark Capital and Legendary Holdings. Later on, Neumann persuaded Masayoshi Son to invest massive sums — $12 billion — in WeWork. In these rounds of negotiations, Neumann’s “visionary leadership” was all the evidence that investors needed to see. Neumann was pursuing a big opportunity and he was inspiring thousands of employees to join him for the adventure.
So…what changed? When WeWork prepared for its IPO, the company needed to impress not only Masayoshi Son, but also institutional investors. As I wrote earlier, private equity firms tend to value “analytical leadership.” A thorough investigation of WeWork’s financial records and organizational structure raised (many!) red flags among potential investors — problems that couldn’t be camouflaged by charming speeches, motivational mantras, or music festivals.
Sometimes to be successful you need a well-rounded vision — in every sense of the word.
Keep it simple,
Edward
If you enjoyed this article, I invite you to subscribe to Marketing BS — the weekly newsletters feature bonus content, including follow-ups from the previous week, commentary on topical marketing news, and information about unlisted career opportunities.
Edward Nevraumont is a Senior Advisor with Warburg Pincus. The former CMO of General Assembly and A Place for Mom, Edward previously worked at Expedia and McKinsey & Company. For more information, including details about his latest book, check out Marketing BS.