March 23, 2023

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America is ready to give failed entrepreneurs, even those who crashed spectacularly like Neumann, another go. (Photo by Bloomberg)
REMEMBER WeWork? The shared office start-up once valued at US$47 billion saw its public listing spectacularly collapse in late 2019 after attempting an initial public offering with a US$75 billion valuation. In April last year, just 18 months after the initial listing was abruptly pulled, WeWork merged with a blank-cheque special purpose acquisition company (or SPAC) at a more modest US$9 billion valuation. Even that merger turned out to be a gross overvaluation. The stock is down over 60% since and WeWork now has a market value of just US$3.5 billion (RM15.7 billion).
And what of its tall, fast-talking, charismatic, debonair, bad boy founder Adam Neumann? Well, he is back with a new real estate venture. His new firm, Flow, is a branded property management firm for apartments. After the spectacular implosion of WeWork’s IPO, Neumann bought more than 3,000 units in Miami and Fort Lauderdale in Florida; Atlanta, Georgia and in Nashville, Tennessee for over US$325 million. Flow basically offers services for housing communities that are fairly similar to what WeWork was providing for shared offices.
Two weeks ago, Andreessen Horowitz, the largest venture capital (VC) firm in the world with US$30 billion in assets under management, agreed to invest US$350 million in Flow — its largest single investment in a start-up ever. Andreessen, also known as A16z, boasts of having funded companies such as Facebook Inc and Airbnb Inc at their start-up stage. Its latest investment instantly made Neumann’s new venture a unicorn, or a private VC-backed firm with a valuation of more than US$1 billion.
If reports that Andreesen now values the firm, into which Neumann only injected US$325 million of real estate, at around US$1.5 billion are true, then the WeWork founder is sitting on a paper profit of US$850 million less than three years after the workspace sharing firm’s initial IPO was pulled. Put it another way, Neumann who walked away with a net worth of US$1.3 billion after the collapse of the IPO has since added another US$850 million to his net worth with Flow.
Here is what WeWork was all about and how Flow is different in some ways but similar in others. Basically, what Neumann was able to do when he was creating WeWork was to take an office real estate company with low margins and sell it as a tech company to investors. That enabled him to get outrageous valuations that in turn helped him raise nearly US$10 billion from VCs, which he then splurged to build a brand. Yet, in the end, it was destined to fail because it was just a low-margin real estate firm, not a software company with 85% gross margins.
Before Neumann began disrupting the office space, real estate firms investing in office space were mainly focused on luring and retaining high quality tenants who could keep paying them through market cycles so that they could service the huge loans they had taken to build or buy the buildings that they were leasing. For its part, WeWork promised to make office space cool by repurposing surplus space and leasing it to small tenants like start-ups who just wanted short-term month-to-month leases but could not afford to rent in quality buildings in core downtown areas where landlords only wanted top-tier tenants who were willing to lease whole floors of offices.
WeWork knew it could arbitrage long-term leases by dividing up the space and leasing it to start-ups or smaller companies for the short term at a nice premium. The model was great in a booming market when tech companies and start-ups were flush with cash from VC firms and willing to splurge on office space. WeWork’s problem was that it overexpanded at the peak of the market, got too much space on long-term leases just as demand from start-ups or smaller firms for short-term leases at a big premium was starting to decline.
The difference with Flow is that Neumann’s new housing firm actually owns the apartment blocks rather than just having long-term office leases that it then has to sublease for shorter periods. Success will depend on whether Flow can do the exact opposite of what WeWork did. It needs to buy cheap apartments and then rent them for a year or more and charge a premium for all sorts of services, like free WiFi or fancy coffee machines, or leave warm muffins and croissants at your door in the morning. At Starbucks, you are paying a premium for the coffee because of the experience, the ambience and the brand.
Nobody has tried branding apartments on a mass scale in the US on a national level. Creating a portfolio of high-end shared workspaces in key cities globally is different from sticking a label across apartment blocks around the world. True, hospitality giants such as Ritz-Carlton and Four Seasons have high-end branded apartments in a couple of dozen cities. But that’s different from putting your logo on second-tier apartment blocks in Fort Lauderdale and Nashville or, for that matter, Shenzen, Adelaide, Johor Baru or Calcutta. The other thing is that housing is basically a local business and, as such, scaling a branded housing business nationally in the US is far more difficult than scaling a shared office space business like WeWork globally. While businesses have national, regional and global footprints, most people don’t move a lot from city to city or country to country.
Yet, with “work from anywhere” taking root in the aftermath of the pandemic, flexibility is likely to be a much more important element in the future of housing. Clearly, people will be moving more within the country or region they live in and indeed even overseas. That means the key to a portion of the housing market would be differentiation. One way to differentiate yourself is through a trusted brand. It doesn’t have to be a high-end residence branded as Ritz-Carlton or Four Seasons, but consistency of experience would make it a differentiated offering. McDonalds or Starbucks are not Ritz-Carlton but when you enter one of their outlets, you know it will offer a consistent quality of burger, fried chicken or coffee. Neumann believes he can also do to housing what he did to shared office space by adding services, giving consistency of experience and building a brand.
Who besides Flow can do branded apartments? If anyone might be ready to leap into branded housing for the mass-affluent market, it is Airbnb, which leases homes for short-term stay. It has a strong brand, knows about leasing and is also an asset-light business that doesn’t own buildings but offers an increasing array of services. There is also Walt Disney Inc. About a year ago, Disney’s CEO Bob Chapek talked about branded homes. Analysts had wondered aloud where Disney would build those homes and who they would be targeted at. People are living longer, and older or retired people have more money than other demographics in the US so the assumption is that Disney will possibly target them.
Why housing? Why now? The value of the US housing market has more than doubled to in excess of US$43 trillion (RM193 trillion) over the past decade despite interest rates rising in recent months, which has drastically hit new-home sales though has had little impact yet on prices. Last year, housing prices in the US rose a whopping 17%. They are up 11% so far this year and despite plummeting transactions and rising mortgage rates, it is likely housing prices in the US will stabilise at close to current levels over the next few months. As housing prices have surged over the past two years and mortgage rates have risen this year, more Americans are turning to renting. That creates a demand for multi-family rental housing or apartments.
To be sure, Neumann has actually tried something like Flow before. In WeWork’s heyday, he launched WeLive, which was all about communal living, or more like college dorms for grown-ups. WeLive had acquired two locations — in Manhattan, New York and Crystal City in northern Virginia. When WeWork collapsed, the WeLive properties were sold. But the concept lives on. There is actually a WeLive on 110 Wall Street, a stone’s throw from the New York Stock Exchange, where you can rent a small, furnished one-bedroom unit for around US$4,000. Oh, by the way, you would have to share the living rooms, kitchens and even bathrooms in the building. Utilities and WiFi are included as part of the rent, as are other amenities such as house cleaning services and catered parties.
You might recall I wrote about iBuying and proptech in my column about Zillow Group, OpenDoor and Redfin some months ago. WeWork tried to position itself as a tech company to get an outsized tech valuation by calling itself a “community-driven, experience-centric service with the latest technology”. With Flow, Neumann wants to go to customers directly and cut out the middlemen and brokers as well as property managers so he can take a big chunk of the revenue they generate.
Why would anyone back a failed entrepreneur like Neumann who has a penchant for taking drugs, jet-setting around the globe, self-dealing by selling his personal assets to his firm and splurging other people’s money on rowdy parties and offsite meetings? For one thing, years before the pandemic, he reimagined the office as the living room, and now everyone is working from their living rooms. That should count as visionary. For another, Neumann is a master promoter. The core competence of start-up founders is storytelling and their ability to sell unsellable ideas.
Neumann has also raised money for carbon emission tracking on the blockchain. Since the WeWork IPO was pulled in 2019, he has dabbled in the crypto space. Forbes reported recently that Flow was looking at introducing digital wallets to store cryptos. Whether these would be bundled in with branded housing is still unclear.
One key objective of Flow is to help renters earn equity in their temporary homes. Yet, rent-to-own models have been around for decades. The problem is they are often seen as a better deal for the landlord than the tenants. Private equity giants dominate the segment. Blackstone Inc, one of the largest private equity firms, last year paid US$6 billion for Home Partners of America Inc.
America’s readiness to give failed entrepreneurs, even those who fail spectacularly like Neumann, another go sets itself apart from Europe or Asia. There is also a ton of capital that has been raised by venture capitalists during the Covid-19 tech boom that needs to be deployed. Most start-ups fail, yet start-up founders have an entrepreneurial streak that makes them serial entrepreneurs. Young founders who fail try to dust themselves off and start again rather than get a job in a large company and rise again through the ranks. Investors want to back a failed entrepreneur because he has learnt something from his mistakes rather than backing another first-time start-up founder who might make similar mistakes because he or she doesn’t have the benefit of hindsight.
Steve Jobs built Apple in his parent’s garage, listed the world’s first personal computer company on Nasdaq and was eventually ousted because he wasn’t a good corporate leader. Fast forward 12 years to 1997, Jobs returned triumphantly when NeXT Inc, his second venture which made operating software, was acquired by Apple. Within 11 years, he had turned the company that was just weeks away from bankruptcy into the world’s most valuable firm.
Yet, Neumann is no Jobs and Flow is nothing like Apple. Still, taking on the challenge of disrupting rental housing is nothing if not audacious. Whatever happens, Neumann’s second act will be far more scrutinised than his first.
Assif Shameen is a technology writer based in North America
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