What's up guys and welcome to wall street millennial today we're doing a video on the epic rise and fall of wework wework was a startup that promised to change the way people work and live from 2015 to 2018. Venture capitalists in silicon valley thought that wework was the next big thing and gave billions of dollars of funding to the company softbank, which is one of the most widely respected tech investors in the world put more than 10 billion dollars into wework, valuing its equity at 47 billion, however, at its core wework wasn't a tech company at all. It was a highly leveraged real estate company, with an unsustainable cash burning business model founder and ceo adam newman raised billions of dollars from venture capitalists by feeding them a grand vision about how wework would change the world. In reality, he used wework's balance sheet as his personal piggy bank driving it to near insolvency.

Venture capitalists are supposed to be some of the most sophisticated investors out there, but they are surprisingly vulnerable to fall for fraudulent or over-hyped companies, whether it's over-hyped companies like wework or outright scams like theranos vc investors have lost tens of billions of dollars over the years. Investing in companies that had clear red flags early on in this video we'll go over what wework does how it was able to achieve a 47 billion valuation and how it all came crumbling down. At the end, this video topic was chosen by our channel members channel members, get access to our non-time sensitive videos one day in advance and get to vote on some of our video topics in 2010, adam newman, co-founded wework, with their first location in new york, wework's Business model involves renting out office, space remodeling, the interior and subleasing it out to companies that want office space. They targeted early stage tech startups to be tenants startups generally, don't have the capital or credit to sign a lease from a conventional commercial landlord.

Instead of having cubicles or rigid office spaces, wework properties had open environments that allowed for informal communication and discussion. This is exactly the type of environment that startups thrive in the idea of renting out office. Space and subleasing it for a high price is not new. The swiss-based iwg group has been practicing this business model for decades.

The subleasing business model is highly risky. You have to sign a long-term rental contract with the building owner. These contracts are often multi-year in duration. You then rent out the space to start-ups on a monthly basis for a higher monthly rent.

If you can keep the space fully rented, you can keep the difference as profit. However, if economic conditions worsen the startups you rent may go bankrupt or reduce their headcount. When this happens, they will cancel their short-term lease and your revenue will dry up. However, the long-term contract you sign with the property owner still requires you to pay the rent.

This puts the sub-leasing company in a very dire situation because their revenue dries up, but they are still liable to pay the cost of the building. This very issue drove iwg group to the brink of bankruptcy during the 2008 financial crisis, adam newman needed a way to differentiate rework from traditional sub-basing companies like iwg to raise serious money from venture capitalists. He needed to paint a grander vision. Wework wasn't just a subleasing business: it was a technology-powered, flexible workspace company that planned to revolutionize the way people work and live.

We would put technology in their office spaces, so they could call themselves a technology company instead of a real estate company. They put sensors throughout the office spaces to track how many people were in each space managers could track how many workers were in each space at any. Given time of the day, this could potentially be used for tracking efficiency and understanding how employees use the office venture capital investors salivated at the opportunity to invest in this new innovative office space startup by 2018. They had raised billions of dollars in private funding, including three billion dollars from the japanese tech conglomerate soft main their valuation reached a peak of 47 billion dollars.

They used this money to expand rapidly, opening new locations all over the world by the end of 2018. They had locations in every continent, except for africa. Newman also had ambitions to expand beyond just office space. He launched we live, which offers flexible, short-term leases to residential tenants.

They even started a preschool business with regrow a private school for children, ages, 3 through 12. adam appointed his wife rebecca newman. To be ceo of this new venture, everything was looking good for wework and the company started planning for an ipo in 2019. However, when they filed their financials with their ipo prospectus, some serious red flags surfaced all companies pursuing an ipo must file a prospectus.

The prospectus includes all the material information about the company and the ipo that investor needs in order to make an investment decision. Typically, it will include a description of the company's business and strategy disclosure of historical financials, as well as corporate governance issues. Their aggressive global expansion over the previous few years allowed them to show impressive revenue growth. Any business can grow their revenue if you give them enough capital to invest with.

The question is whether they can turn this growth into real profitability. As it turns out, we work with burning cash at an alarming rate. By 2019, they were losing 219 thousand dollars every hour of every day. The reason they filed for an ipo is because they are running out of cash and needed to raise capital quickly.

It costs a lot of money to build and operate a wework. Despite all the technology that they put into their spaces, such as the motion, sensors, tenants pretty much viewed it as a regular office and weren't willing to pay that much for it. They now had hundreds of locations around the world, but as the business grew, the losses just became larger and larger. The 2019 ipo prospectus also raised some serious red flags about how adam newman was running the business before the ipo wework rebranded, changing his corporate name to the wii company.

However, adam newman already owned the copyright to this name through a shell company called we holdings that he also owned. He charged wework 5.9 million or 8.7 million canadian dollars to sell the rights of this name to. We work this type of related party transaction, where the right hand gives, to the left hand, is exactly the type of thing investors look out for when evaluating corporate governance, the 5.9 million dollars in and of itself wasn't huge, as the company was worth 47 billion dollars At the time on paper, but it was a strong signal that adam was willing to do just about anything to line his own pockets, newman, also owned properties that we worked. Rented wework had multiple leases on newman owned properties that would pay newman more than 100 million dollars of rent throughout the lifetime of the leases.

This type of related party transaction is really concerning. As a ceo of wework, adam could have wework signed these leases at above market rents and pocket this money as pure profit. By this point, he owned just a small percentage of wework. This causes a severe incentive compatibility issue when wework enters into an overpriced lease.

Adam only owns a small portion of the company, so only a small portion of the loss is attributable to his ownership stake, however, as the owner of the property on the other side of the transaction newman gets to pocket almost 100 of the overpriced rent, the ones Who end up holding them back from these transactions? Are the venture capitalists whose investments are being squandered by this point? Wework had raised almost 10 billion dollars of capital and already burned through the majority of it. Newman also wasn't shy about spending on travel and entertainment. Wework purchased the gulfstream g650 private jet for more than 65 million dollars. Adam ostensibly used this jet to fly to legitimate business meetings around the world.

In reality, newman used the jet to throw lavish parties which often included recreational substances. After seeing the large losses in mismanagement by newman wall street was not willing to pay the 47 billion valuation for the company in a desperate attempt to save the ipo, they cut the valuation by almost 80 percent, from 47 billion to 10 billion, investors were still reluctant To buy into we work, as there were still serious concerns about corporate governance. You just said you think you you want wework to go away. Is that is that your call here? They should not be going.

I just wanted to go away, i mean i just want. I don't want we work, i mean i don't want we work at any price. I just think that that it's just it's too top of the world ma i mean i just don't want it, and i know i that that sounds like well what a cry baby, but there are certain deals that come and they could just really just take the Air out of any market, we have a helium shortage. That's the only thing.

I know that's really good for this one, it's too late, you can't stuff it all back in the box. With this one i mean no we're trying to change it and just say: hey. You know what we we're awful and we're just going to wait till we're good again. Why do they have to just keep going down downtown when it's like? You know i know, but we don't want to give them money they're just going to screw up the market.

This decrease in valuation forced soft paint to recognize a 9.2 billion write down on their wework stake. This represented almost 90 percent of the 10.3 billion dollars that they put into the company. As the ipo process went on, it became increasingly clear that adam newman would have to step down as ceo under pressure from softbank and other venture capital investors. He finally resigned as ceo in september of 2019., the new interim leadership canceled the ipo and changed their focus on cutting costs and right-sizing the business.

They also announced layoffs of 2 400 employees representing nearly 20 percent of their global workforce in february of 2020 wework appointed sandeep mahrani as a new ceo sandeep is an experienced professional in the real estate industry, most recently serving as ceo of brookfield retail group during the Pandemic, he was also able to make significant progress in turning around the business. In 2020, he reduced their losses by shutting down many of their locations and laying off more staff. In march of 2021, they entered into an agreement to merge with a spec at a valuation of 9 billion. This is a far cry from the 47 billion dollars that they were once valued at in the private markets, but at least the business seems to be on a viable path to survive.

This back trace under the ticker symbol, vow x and has actually received a good reception from investors. The current price of twelve dollars is twenty percent. Above the initial stack price. At the end of the day, we work as a real estate company.

They rent office space and sublease it to tenants, while this may be a viable business under the new leadership, there is no way to ever justify the 47 billion dollar evaluation. They were only able to raise so much money from venture capitalists by painting themselves as an innovative tech company that was going to change the world. Many startups, such as uber and airbnb, looked like gimmicks in the beginning, but they ended up being huge successes, making tens of billions of dollars in gains for the early investors. Many vc investors got fomo and wanted to catch the next big tech unicorn in its early stages, their greed led them to blindly invest in wework at absurd valuations, ignoring the fundamentals of the business and the egregious actions of adam newman.

Individual investors can also learn from the wework fiasco, with the stack boom of 2020 and 2021. There are countless companies promising to be the next tesla, but for every tesla there are a dozen pretenders running a stock promotion and trying to get you to buy into a company likely doomed to fail. Alright guys that wraps it up for this video, if you like this content, make sure to like subscribe and share, don't forget to check out our second channel wsm research, where we post dd on high growth stocks, as always. Thank you guys so much for watching and we'll see you in the next one wall, street millennial signing out.