Episode 943: Unicorn Cowboy : Planet Money The risk-addicted investor who made WeWork possible and changed the way startups work. | Subscribe to our weekly newsletter here.
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Episode 943: Unicorn Cowboy

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Episode 943: Unicorn Cowboy

Episode 943: Unicorn Cowboy

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UNIDENTIFIED NPR REPORTER, BYLINE: This is PLANET MONEY from NPR.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED PERSON #1: How many cities are you in?

ADAM NEUMANN: Seventy-five cities, 25 countries, 45 different languages, 250,000 members and counting.

JACOB GOLDSTEIN, HOST:

This is Adam Neumann, the founder of WeWork. He's speaking here in January of last year at a Conference of Mayors. At the time, WeWork was worth more than $20 billion, an extraordinary amount of money for an 8-year-old company that had never made a profit and was in the business of renting out office space by the month. But Neumann never really talked about WeWork as a company that rented out office space. Here's what he told the mayors.

(SOUNDBITE OF ARCHIVED RECORDING)

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.

GOLDSTEIN: This is the way Neumann talked about WeWork and WeWork talked about itself - not as a company that rented out office space but as something much bigger. WeWork kept opening more offices in more cities and kept losing money, and investors kept giving the company more money at higher and higher valuations.

By the beginning of this year, WeWork was worth almost $50 billion because it wasn't just an office company. It was a technology company that was going to figure out how to profit from offices and apartments and schools and city hall and basically everything.

MATT LEVINE: WeWork was like, we're going to be a universal - I don't know what the word is - universal place company.

GOLDSTEIN: Matt Levine used to be an investment banker. Now he writes for Bloomberg Opinion. My favorite of his recent headlines - "It's Not You, It's We."

LEVINE: Anywhere there's a place, WeWork is going to be taking money out of it. That's why they could raise money at a $47 billion valuation - because they weren't like an office landlord company. They were this, like, everywhere, all-encompassing master of space.

GOLDSTEIN: At least that was the story WeWork told up until this summer, until, to put a finer point on it, just after 7 a.m. Eastern time on August 14. WeWork was preparing to sell stock to the public for the first time, to have an IPO. And they published a document for prospective investors. The document is called an S-1.

LEVINE: There's a really quite extraordinary turning point. Like, everything was one way. And then the S-1 hits and, immediately, everything is the opposite way in, like, shockingly rapid fashion.

GOLDSTEIN: That whole story that WeWork had used for years to raise more than $10 billion from some of the richest, most experienced tech investors in the world, the story that made it the most highly valued startup in America...

LEVINE: That collapsed instantly - instantly.

(SOUNDBITE OF MICAL TEJA WILLIAMS AND TY NOAM FRANKEL SONG, "4U")

GOLDSTEIN: How did WeWork raise so much money? How did it go so bad so quickly? And what does it all tell us about the way money works in the world today?

(SOUNDBITE OF MICAL TEJA WILLIAMS AND TY NOAM FRANKEL SONG, "4U")

GOLDSTEIN: Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein. The story of WeWork's long rise and almost instant fall largely goes back to one guy - not Adam Neumann, not even anybody at WeWork. It's a guy named Masayoshi Son. Today on the show, WeWork and Masayoshi Son, the man who, as much as anyone, is behind the story of WeWork and, really, the story of the crazy megaunicorn Cambrian explosion we've been living through for the past few years.

(SOUNDBITE OF MICAL TEJA WILLIAMS AND TY NOAM FRANKEL SONG, "4U")

GOLDSTEIN: The man behind the man behind WeWork is Masayoshi Son. He's 62 years old. He's the second-richest man in Japan. And he really was the reason that WeWork was able to become what it became. He was the reason they could raise so much money so quickly.

And it's not just WeWork. In just the past couple years, Son has completely changed the way startups all around the world get funded. He's changed the way businesses can grow and what they need to do to get money. And the story of how Son got here explains a lot about who he is and why he's changing the world the way he is. So, you know, come for the WeWork - we'll get back to that later - stay for the Masayoshi Son backstory.

Son grew up in Japan. He came to the U.S. for college in the late '70s, went to Berkeley. And he studied a lot, but he also wanted to make some money on the side. So he started asking his friends, what is a job that I can do five minutes a day and make $10,000 a month?

(SOUNDBITE OF ARCHIVED RECORDING)

MASAYOSHI SON: My friends said, you're crazy. It's impossible. Nothing like that. Do you want to sell drugs?

(LAUGHTER)

SON: Of course, no. No, I don't want to do that.

GOLDSTEIN: We weren't able to get an interview with Masayoshi Son. This is an interview he did on Bloomberg TV in 2017.

(SOUNDBITE OF ARCHIVED RECORDING)

SON: So I said, OK, what is the best, most efficient use of my time? It's invention. It's invention.

GOLDSTEIN: He decides he's going to devote five minutes a day to coming up with an invention that he can sell to someone.

(SOUNDBITE OF ARCHIVED RECORDING)

SON: So I set the alarm clock five minutes, and tick, tick, tick. Come, invention, come.

(LAUGHTER)

SON: Come. So I did that.

GOLDSTEIN: And it worked. Son invented an electronic translation device, little handheld computer. You type in a word in one language, tells you the word in another language. He sold his idea to a big tech company for about a million dollars, took the money, went back to Japan and started a company called SoftBank.

SoftBank sort of did one thing after another - sold software, started making investments in other tech companies. And when the dot-com boom came in the late '90s, those investments suddenly made Son super rich.

(SOUNDBITE OF ARCHIVED RECORDING)

SON: Actually, my personal net was increasing $10 billion per week. For three days, I became richer than Bill Gates.

GOLDSTEIN: For three days, he says, he was the richest man in the world. And then the bubble popped.

(SOUNDBITE OF ARCHIVED RECORDING)

SON: Six months after that, our share price went down 99%. So we almost went bankrupt.

GOLDSTEIN: Son has just personally lost $70 billion, which may be more money than anyone has ever personally lost in the history of the world. What does he do? He starts borrowing money so he can make more bets on technology companies.

ARASH MASSOUDI: I don't know how else to tell you this, but he's completely risk-addicted.

GOLDSTEIN: Arash Massoudi's an editor at the Financial Times. He's covered Son for years.

MASSOUDI: He's a risk-addicted deal-maker who loves technology and sees as his kind of singular goal to bet on technology companies.

GOLDSTEIN: A few years later, Son borrows a ton of money so SoftBank can buy a company that provides cell service in Japan - super risky, unclear if he'll be able to pay back the debt. Then he goes to California and meets with Steve Jobs. Apple has just released the iPod, and Son tells Jobs, look; someday, you are going to invent some kind of iPod-cellphone hybrid.

MASSOUDI: And Steve Jobs kind of chuckles and says, well, hey, why do you think that? And he says, you know, all I need you to do is promise me when this comes out that I will be the exclusive provider of this in Japan.

GOLDSTEIN: A few years later, the iPhone comes out and Masayoshi Son gets to sell every iPhone in Japan. But he does not now think, oh, great; I made it. Remember; he's a risk-addicted deal-maker. He needs to get more money. He needs it. He needs to make even bigger bets. So he decides to raise a venture capital fund, a big pool of money to go out and invest in startups.

Until this time, a big venture capital fund would be, like, a billion dollars, a few billion dollars. But Son decides he's going to need a bigger fund, so he goes where the money is, Saudi Arabia. And he eventually gets a meeting with Prince Mohammed bin Salman. The interviewer at Bloomberg asked him about that meeting.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED INTERVIEWER: As I understand the story, you went in, and in one hour, you convinced him to invest $45 billion.

SON: No, no. It's not true.

UNIDENTIFIED INTERVIEWER: OK.

SON: Forty-five minutes, $45 billion.

(LAUGHTER)

UNIDENTIFIED INTERVIEWER: OK, sorry. OK, I apologize. In other words, if you had had...

SON: One minute - $1 billion per minute.

GOLDSTEIN: With the Saudi money and some money from Abu Dhabi and the SoftBank money, Masayoshi Son launches this new fund in 2017. It's called the Vision Fund, and it is a $100 billion fund. It's so much bigger than traditional venture capital funds that it's not just different in degree, it's different in kind. The Vision Fund changes what it means to start a tech business and try and make it grow.

Can you just say your name and your job?

PATRICIA NAKACHE: Yes. My name is Patricia Nakache, and I'm a general partner at Trinity Ventures, which is an early-stage venture capital firm.

GOLDSTEIN: To explain how the Vision Fund is having this big effect in the world, Nakache told me a story about her experience with a company called Wag.

NAKACHE: Wag is a - it's a dog walking service. It's an on-demand dog walking service kind of like Uber. It's like Uber for dog walkers.

GOLDSTEIN: Uber, but for dog walking, yes. In 2017, the year the Vision Fund launched, Nakache and her firm considered investing $10 million in Wag. She talked to the company. She studied the business, and she found that the business was growing. They had customers. But there was this one thing.

NAKACHE: It wasn't clear that customers were becoming repeat buyers. It wasn't clear that it was going to work long-term for a large number of people.

GOLDSTEIN: For that business to take off, lots of people have to hire Wag to walk their dog several times a week forever, more or less.

NAKACHE: Exactly, exactly. And, by the way, I'm not saying that we concluded it wasn't going to work. I'm saying it was just early.

GOLDSTEIN: It seemed too early, so Nakache passed. And then one day a few months later, she learned that SoftBank's Vision Fund had invested in Wag. They didn't invest 10 million or 20 million or 50 million. How much did they invest?

NAKACHE: Three hundred million.

GOLDSTEIN: (Laughter) Can we just savor the idea of a $300 million investment in a dog walking company?

NAKACHE: (Laughter) Yeah, right? So that's a $300 million investment, which is almost the size of our entire fund - three-quarters of our entire fund.

GOLDSTEIN: It would be like if you bet your whole fund on a dog walking company.

NAKACHE: But think about it this way. That is 0.3% of SoftBank's fund - of the Vision Fund.

GOLDSTEIN: And Nakache says, sure, it's easy to mock a $300 million investment in a dog walking company. But, you know, Americans spend more than $70 billion a year on their pets. Lots of services like dog walking are growing really quickly. Wag could, in fact, become a giant company someday.

The point of the Wag story is not to mock it. It's to think about what it means to have a venture capital fund come in and invest 30 times as much as a fund would typically invest. Parachuting in with this absurd amount of money - this was not lighting money on fire. It was Masayoshi Son's strategy. There was a logic to it.

NAKACHE: The notion was, hey, let's take the average venture capital financing, and let's increase it dramatically, and we're going to give the companies we invest in an unfair advantage.

GOLDSTEIN: Because you could hire more or smarter engineers. You could sell your product cheaper at a bigger loss. And so basically, if you're competing against a few other companies to do some new thing, you can just use the money to smoke them, basically.

NAKACHE: Right. Leave them in the dust.

GOLDSTEIN: Well, when you put it that way, the Vision Fund sounds like a good idea.

NAKACHE: (Laughter) Right, right.

GOLDSTEIN: In fact, giving startups massive amounts of money so they could just spend and grow like crazy seemed like such a good idea that once the Vision Fund started making these massive bets, other investors started to follow. You know, they didn't want the companies they'd already invested in to get smoked by some Vision Fund-financed rival. So giving startups giant amounts of money just became a thing in the world. A few months after Wag got 300 million, another on-demand dog walking service raised $155 million.

We don't know yet how this strategy is going to play out - if it's going to work, if it's going to be profitable. But there is now this arms race of, like, what startup can spend the most money most quickly to just grow like crazy at any cost? Masayoshi Son starts meeting with founders. And if they're trying to raise, you know, $50 million, he'll ask them, OK, what would you do if I gave you $200 million? And they have to be ready with some audacious, absurd answer for how big their company can get and how fast.

(SOUNDBITE OF ARCHIVED RECORDING)

SON: The next revolution is going to be the we revolution.

GOLDSTEIN: Son's dream come true was basically someone just like Adam Neumann, the founder of WeWork. This is Neumann speaking at a college graduation in 2017. We could not get him to speak with us for the show.

(SOUNDBITE OF ARCHIVED RECORDING)

NEUMANN: And the we revolution is going to be led by the we generation. We are we. And if we work together, we cannot be stopped, or else divided we fall.

(SOUNDBITE OF EDMUNDO DELGADO SONG, "WHO AM I THE GREATEST")

GOLDSTEIN: In August of 2017, just a few months after the Vision Fund launched, SoftBank and the Vision Fund invested $4.4 billion in WeWork. Over the next year and a half, they put in more than 6 billion additional dollars, almost 11 billion in total. Almost all of the money WeWork raised came from SoftBank and the Vision Fund.

And the years when this is happening - 2017, 2018 into this year, 2019 - these are the years when private investing in startups all over is just going absolutely bananas. There is all this money - hundreds of billions of dollars - pouring in from Masayoshi Son and all the other venture capitalists who are chasing him. And this huge wave of cash is, I think, one of the defining economic features of this moment we're living in right now. It's one of the reasons interest rates are so low. It's one of the reasons companies have been able to stay private while raising tens of billions of dollars. And maybe most interestingly, it has changed the power dynamic between company founders and the investors who give them money. And this change is a big deal.

LEVINE: It used to be that the people who had the money were the important ones.

GOLDSTEIN: This is Matt Levine again.

It used to be that if you had money, you could go to startups and say, I'll give you this money, but only if you give me a stake in the company and some control over the company. But recently, partly because of this gusher of money, that's changed.

LEVINE: The people who have money, you know, are now being undercut by, like, Saudi money and Chinese money and SoftBank money - right? - so they don't have the same leverage. So all those factors just point in one way, which is more founder power.

GOLDSTEIN: It used to be that startups competed to get money. Now money is competing to get to the startups. In the case of WeWork, that meant that Adam Neumann could raise $12 billion and still keep almost total control of the company. He could do anything he wanted. And Neumann really seems to have taken advantage of this power. We learned just how much this summer on that day in August when WeWork released that document that changed everything, the S-1. Remember.

LEVINE: Everything was one way, and then the S-1 hits, and, immediately, everything is the opposite way in, like, shockingly rapid fashion.

GOLDSTEIN: The S-1 is a document companies have to file before they have an IPO, before they start selling shares to the public. It's also called a prospectus. WeWork's S-1 is 383 pages long. On the first page, it says in big letters, the We Company - that WeWork was now much bigger than work, so they'd officially changed the name to just We. And then after some fine print, the S-1 begins, (reading) we are a community company committed to maximum global impact. Our mission is to elevate the world's consciousness. And then a few pages later, the numbers start.

One thing that jumped out at people - Adam Neumann had borrowed millions of dollars from WeWork, gone out and bought office buildings and then turned around and then rented those buildings back to WeWork. Maybe the most amazing detail in the S-1 comes on Page 199, where we learn that Adam Neumann trademarked the word we then decided to change his company's name to We and made the company - his company - pay him $5.9 million in stock for the rights to the name We. So that's all in the S-1.

And the way IPOs work is after the S-1 comes out, the company that's going public - in this case, WeWork - hires banks to go around to big investors and pitch them - you know, say, like, here is why you should buy stock in this company's IPO. And over the past few years, no matter how much power a company's founder had or how much money the company was losing, those investors, every time, bought stock in the IPO.

LEVINE: If you're a big investor and you say to the banks underwriting the IPO, I'm not going to buy this because I think this is, like, a ridiculous setup, the banks will say, well, everyone else will buy it. Like, what are you going to do about it? They've bought every other deal. And you say, yeah, you're right. I'll buy it.

GOLDSTEIN: But this time, with WeWork, that didn't happen. The investors were like, no. No, actually, we do not want to buy stock in this company. So WeWork tried to, like, polish itself up. They made Neumann give back the $5.9 million in stock they'd given him for the name We. The bankers started pitching the company to investors at a lower valuation - you know, like, hey, 50% off - bargain price. You want to buy now? And investors still said no. They still didn't want to buy stock in the company.

And then at a board meeting on September 24, Adam Neumann agreed to give up a lot of the control he had over the company, and he agreed to step down as CEO. He more or less fired himself. WeWork gave up on being the everything everywhere company. They said they'd get rid of the preschool and all these other side businesses they had. And this company that was all about burning money to grow as fast as it could said, we are going to slow down. We're going to stop signing new leases.

Even after all that, public investors were not interested. On Monday, September 30, WeWork formally canceled its IPO. Matt Levine says this could be the start of a shift in power away from founders and back toward investors, toward shareholders. Now when the bankers go out to pitch an IPO for some company and you are a potential investor and you say, I mean, I don't know. The company is losing so much money. The founder has so much power. And the bankers are like, sure, but investors always buy deals like this. Now you, the potential investor, you have a comeback.

LEVINE: Now you can be like, no, they don't buy every other deal. I didn't buy WeWork. No one bought WeWork, right? Like, you have, like, a stronger argument. You have a sense of empowerment and momentum, right? Like, you can push back on the stuff you don't like.

GOLDSTEIN: The Vision Fund will probably lose money on its investment in WeWork, but it may turn out to make a profit overall. It's just too soon to know. Masayoshi Son is not waiting around to find out. Earlier this year, he said he is raising a new fund, the Vision Fund 2, that will be even bigger than the Vision Fund.

(SOUNDBITE OF STEPHEN WILLIAM CORNISH AND WIYAALA SONG, "AFRICAN TRAP")

GOLDSTEIN: Email us at planetmoney@npr.org. Find us on Facebook, Twitter, Instagram - @planetmoney. Darian Woods produced today's show. Thanks to Bianca Giacobone for fact-checking. Alex Goldmark is our supervising producer, and Bryant Urstadt edits the show. I'm Jacob Goldstein. This is NPR. Thanks for listening.

(SOUNDBITE OF STEPHEN WILLIAM CORNISH AND WIYAALA SONG, "AFRICAN TRAP")

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