In earlier blog posts, we have repeatedly told tales of grandiloquent young entrepreneurs and their downfall — Elizabeth Holmes at Theranos (“Elizabeth Holmes: Scamming Silicon Valley), Billy McFarland of Fyre Festival infamy (“Under Fyre”), and Ross Ulbricht, creator of Silk Road (“Silk Road: Paved by Grandiosity”).

Reeves Wiedeman’s book the Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork provides another cautionary tale of a young entrepreneur who flew too fast and too high and met a similar fate.

The story is painfully familiar. Neumann was tall, handsome, and charismatic. With Miguel McKelvey, he founded WeWork, one of many co-working space start-ups getting off the ground around 2010. The difference between WeWork and many of its arguably less successful competitors lay primarily in Neumann’s persuasive abilities and grandiosity.

Over the course of a decade, WeWork went from a small start-up to the leading competitor in its industry, supposedly worth $47 billion not long before an IPO which was highly anticipated, but never happened.

In Neumann’s telling, WeWork was not just a real estate leasing entity, it was “the world’s first physical social network.” It was not just providing a space for entrepreneurs to work, it was facilitating “community.” Neumann referred to tenants as “members.” He continuously spouted high-sounding aspirations. “The future is community.” “The next decade is the ‘We’ decade.” “If we get it right, we have an opportunity to change the world.” “We are here in order to change the world—nothing less than that interests me.” “The influence and impact we are going to have on this earth is going to be so big.” “[Our purpose is t]o raise the world’s consciousness.”

Many of the behavioral influences we constantly talk about at Ethics Unwrapped infected Adam Neumann.

He was plagued by the overconfidence bias. He himself later admitted that he was struggling with his ego as he built the company. “I am WeWork,” he once proclaimed. He called himself “the greatest real estate mind in the world.” “No one says no to me,” he said, emphasizing his negotiating skill.

Consistent with his high opinion of himself, Neumann constantly indulged himself by drinking shots of vodka and smoking pot at work, habitually being late to meetings or missing them altogether, dressing in t-shirts, going barefoot to meetings, and on and on.

The self-serving bias caused Neumann to be blind to the unethical nature of conflicts of interest that he constantly created and then rationalized. He bought property and leased it to WeWork without full disclosure. By 2018, he had been paid more than $12 million in rent and had more than $100 million lined up for future payment. He practiced rampant nepotism, including giving his wife Rebekah Paltrow numerous roles in the company for which she was ill-qualified. As the company moved toward a hoped-for IPO, it was discovered that Neumann had sold more than $700 million in WeWork stock and restructured the firm to lower the tax rate on his stock to below what rank-and-file employees would pay.

Exacerbating the overconfidence and self-serving biases was the fact that although Neumann went through the motions of being highly spiritual, another WeWork executive said that he had “no core value system,” bearing out the prediction of one of Neumann’s high school teachers who said: “Either Adam will end up in jail, or he’ll become a millionaire.”

Like Elizabeth Holmes at Theranos, Neumann had a messianic self-view, valued loyalty above all, avoided public scrutiny, and harbored little self-doubt. In late 2019, the WeWork IPO was called off by the company’s bankers because that event caused the investing world to (a) finally take a realistic look at WeWork’s numbers, (b) stop indulging Neumann’s widely-known childish behavior, and (c) seek to inject a dose of grown-up corporate governance into the company.

Although much of what was going on here has its roots in human psychology, as so much of life does, Wiedeman (along with others such as Charles Duhigg and Matthew Zeitlin) points out that there were also structural factors at play that are rooted in the current unhealthy version of American capitalism.

The short story is that insane amounts of money are controlled by venture capital funds. If they throw enough money at enough start-ups and just one becomes the next Uber or Facebook, they can make obscene amounts of additional money even if most of their bets end very badly. But for a start-up like WeWork to have a chance to become the next Uber, it needs to dominate its marketplace and the way to do that is “blitzscaling”—growing really quickly, regardless of whether you are making money. Investors threw so much money at Neumann that WeWork became easily the largest player in the market even though it had no better chance than any of its competitors to make money. Indeed, in 2018, it lost $1.9 billion dollars on $1.8 billion in revenue and had no clear path toward profitability at the time of its IPO’s demise.

But what do you do when you are a young entrepreneur and investors throw unlimited amounts of money at you and will indulge your every whim because they are afraid that if they try to rein you in, they will get a reputation for not being founder-friendly, which would mean that the creator of the next Facebook or Google might not want to do business with them? If you are Adam Neuman, you take the money and try to find ways to spend it. You open new WeWork spaces around the globe at a dizzying pace that you cannot possibly manage well. You acquire other companies that have nothing to do with WeWork’s core business but that align well with your hobbies and interests (like surfing and vegetarianism). And you dream up many tangentially-related business ideas that mostly do not come to fruition, including: WeKids (day care), WeLearn and WeGrow (schools), WeBike (bicycle valet service), WeEat (food delivery), WeMove and Rise by We (workout gyms), WeWork Studios (making movies to advance Paltrow’s acting career), WeNeighborhoods (bringing community to entire neighborhoods), WeCities (ditto to entire cities), WeMars (bringing community to Mars as soon as Elon Musk can get people there).

In the end, WeWork lost billions of dollars, never built a profitable business model, and failed to create the “community” that it hoped to foster on so many levels. WeWork did, on the other hand, illustrate yet again that the overconfidence and self-serving biases, when supercharged by boundless ambition and nearly unlimited resources, are a very dangerous combination indeed. They caused Adam Neumann to make poor strategic decisions, poor operational decisions, and poor moral decisions as well.

 

Resources

Cara Biasucci & Robert Prentice, Behavioral Ethics in Practice: Why We Sometimes Make the Wrong Decisions (2021).

Charles Duhigg, “How Venture Capitalists Are Deforming Capitalism,” New Yorker, Nov. 23, 2020.

J.C. Pan, “How WeWork Got Away with Spectacular Failure,” The New Republic (book review), Nov. 24, 2020 (book review).

Matthew Zeitlin, “Why WeWork Went Wrong,” The Guardian, Dec. 20, 2019.

Reeves Wiedeman, Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork (2020),

 

Videos

Behavioral Ethics: https://ethicsunwrapped.utexas.edu/glossary/behavioral-ethics.

Overconfidence Bias:  https://ethicsunwrapped.utexas.edu/video/overconfidence-bias.

Self-Serving Bias:  https://ethicsunwrapped.utexas.edu/video/self-serving-bias.