February 24, 2024

What was a top venture capital fund thinking after it put $350 million into the latest startup by the disgraced American-Israeli entrepreneur Adam Neumann?
Life usually doesn’t usually offer second chances for people responsible for epic bloopers. Max Pruss never got to pilot another blimp after the Hindenberg went up in flames. Abdel Hakim Amer was given the choice of being tried for treason or committing suicide after Egypt’s defeat in the Six Day War.
It’s otherwise in Silicon Valley, where second chances are the rule. The idea is that high-tech innovation is all about high-stakes risk, and naturally that leads to failure at least as often as it does to success stories like Facebook.
Even so, the news that Adam Neumann this week became the beneficiary of a $350 million investment in a new startup called Flow is stretching the envelope on the second-chance principle to the breaking point. It hasn’t even begun doing business but Flow has already been valued at $1 billion, according to the reports.
It isn’t as if Neumann, the Israeli-American entrepreneur behind the WeWork fiasco, is the recipient of “dumb money” from clueless investors who might be taken in by his legendary persuasive skills and outsize personality. His new backer is the storied Silicon Valley venture-capital firm Andreessen Horowitz, whose past successes include backing Facebook and AirBnB and which boasts $35 billion in assets under management.
Unusually, Andreessen Horowitz took the trouble to explain its decision, which is all about second chances and lessons (hopefully) learned.
“It’s often under-appreciated that only one person has fundamentally redesigned the office experience and led a paradigm-changing global company in the process: Adam Neumann. We understand how difficult it is to build something like this and we love seeing repeat-founders build on past successes by growing from lessons learned. For Adam, the successes and lessons are plenty,” Marc Andreessen, the VC fund’s co-founder and general partner, said in a statement.
Let’s give Neumann at least that much credit: He did conceive of the idea of co-working – office spaces that were as much about renting desks and rooms as they were about creating community. By all accounts, he is a salesman of the first order, with remarkable powers of persuasion to get investors to part with their cash and employees to put in long work days.
What Neumann was not was a businessman who could turn his vision into profitable business.
Time for disruption
We don’t have to accept at face value the reports that emerged during and after WeWork’s failed initial public offering three years ago, like the tales of alcohol-fueled debauchery at “summer camps” for staff, double-dealing (like charging his own company for the use of the world “We”) or dubious forays into education and co-housing.
What is undeniable is that WeWork was bleeding red ink in growing amounts as it expanded and had no model for how to stanch it, much less how to become profitable. In the six months prior to its IPO, WeWork had revenues of $1.54 billion and losses from operations of $1.37 billion, even though it had reached the point where it was already the biggest operator of office space in New York, London and Washington.
WeWork’s model of growth first, profits later wasn’t unusual at the time for high-tech companies. But despite its claims to the contrary (the IPO prospectus referred to “technology” times) and its image of creative destruction, WeWork wasn’t a high-tech startup and should never have been valued at the $47 billion it was for its IPO. It was an innovative business, but it was innovative in real estate terms, which is something entirely different.
One of the beauties of fast-growth tech companies and why they can command such high valuations is their ability to expand quickly without spending a ton of money. Providing services for each new user costs Facebook almost nothing, just as Microsoft’s expenses every time someone buys the rights to Office are almost zero. For them, growth increases profitability. By contrast, every time WeWork expanded, it had to rent more office space, supply more free beer and invest in attractive decorations and facilities.
Today, WeWork remains in business (and even went public last October), shorn of all the grandiosity and frat-house antics of the Neumann era. The company went through a very rough patch during COVID, but it has since rebounded: In the second quarter, the occupancy rate for its offices was 72 percent, the same level as before the pandemic.
Even so, WeWork posted a net loss of $635 million on revenues of $815 million. The shared office space concept is attractive and may even grow with the persistence of remote work in the post-COVID labor market, but it will remain a difficult and low-profit business.
All this has a direct bearing on Flow, Neumann’s new venture, which plans to take the WeWork office concept and apply in the residential real estate market.
As Andreessen explains it, the idea behind Flow is that the housing sector is ripe for that old Silicon Valley cliche “disruption.” Home buyers today have the dismal binary choice of buying an expensive house (if they can find one at all amid the housing shortage) or rent and become part of a soulless community of transient tenants. Remote work is going to make things even worse for them, since people will no longer have the camaraderie they used to enjoy from office life.
This dystopian portrayal of life and work in the post-COVID world seems overstated. Is the rate of depression or suicide higher for renters than homeowners? After all, there are bars, gyms, community activities and friends and family to make up for the loss of office-mates; there’s even Zoom.
But even if it is true that remote work will spur demand for co-living, that doesn’t make Flow any less a real-estate company than WeWork is. Flow will still be a landlord (or more precisely a tenant with sub-tenants, since it is leasing the properties it operates) or a service provider (because according to the few details that have been leaked, Flow will offer its community services to conventional landlords).
Under the circumstances, it is hard to fathom how Flow could be worth $1 billion even before it’s opened its first location. Albeit in a slightly different segment of the real estate market, WeWork after 12 years in business and 777 locations has a market cap of just $3.8 billion.
Perhaps Andreessen Horowitz thinks that Neumann’s visionary genius and/or that what remains of his reputation is worth $1 billion. But in the final analysis Flow will be worth the profits it generates. It’s hard to see where those will come from, certainty at a rate commensurate with the valuation it already enjoys.
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