Unpacking Adam Neumann’s Second Act

WeWork was Adam Neumann’s first unicorn. It soared, became a media and investor darling, and attracted a lot of VCs and investors from Benchmark to Goldman Sachs and Softbank. Neumann was able to raise billions of venture capital from the blue bloods of global finance – and mainly because of momentum he was able to generate and seemed to be on his way to a mega-IPO to make everyone rich. He did have his IPO but at a valuation of ~$9 billion compared with the valuation in the final VC round of ~$47 billion. And now WeWork is worth a few million.

During its meteoric rise, WeWork succeeded in making a lot of money for Neumann, although it failed for many of the investors who were left holding the bag. WeWork’s failure is said to have been caused by many factors, including:

· Too much debt, which is used in real estate-based projects with steady cash flows because leverage offers an attractive return for investors.

· The pandemic, which cut revenues because entrepreneurs were reluctant to congregate in common spaces, causing a cash burn of ~$300 million per quarter.

· Questionable management, with many conflicts of interest including self-dealing with Neumann-owned properties ended up being leased by WeWork, and casual investing in unrelated ventures such as self-driving robots.

Now that WeWork has descended into bankruptcy, its valuation is down to a few million. But Neumann has moved on to Flow
FLOW
.

Flow has already raised $350 million from Andreessen Horowitz, a top Silicon Valley firm. Given Neumann’s track record of landing on his feet and organizing to personally benefit regardless of how investors fare, one would assume that he will do well in Flow. But how will Flow and its investors fare?

Here are 4 lessons for entrepreneurs.

#1. Partner with Top 20 financiers.

Flow is attracting the Top 20 VCs like Andreessen Horowitz, just as WeWork did. Neumann recognizes the significance of securing funding from the Top 20 because they earn ~95% of VC profits, and entrepreneurs are willing to offer them better valuations because of their higher credibility, which attracts more resources, and of their potential for fast growth. However, while this elevated WeWork’s status, it did not ensure the company’s success. although Neumann did well, and we can assume that the early investors also did well. Success for the entrepreneur may not always mean success for the venture and its investors.

#2. Know the difference between revolutionary trends and evolutionary trends.

Flow plans to brand apartments, just as WeWork branded incubators. But, from semiconductors to Internet 3.0, VC has mainly done well in the revolutionary tech-based world of emerging industries. PC companies like Microsoft
MSFT
and Dell beat mainframe computer makers using a revolutionary trend. Internet pioneer Amazon.com beat Borders, Barnes & Noble
BKS
, and Sears using a revolutionary trend. This is important because Flow’s strategy of branding apartments is not based on revolutionary technologies. It is purely a marketing ploy. This means that Flow’s direct competitors will not just be new ventures but also existing giants that can easily replicate Flow’s model and muscle in on the branded apartments segment.

#3. The first-mover disadvantage.

Flow seems to be relying on a first-mover strategy of branding apartments, but about 90% of first movers do not dominate and nearly half fail. If Flow’s branding strategy for apartments works, every major landlord will brand their apartments. Flow will not have a long-term edge.

#4. Flow will need hype and a fast exit, for high value.

With no long-term edge, Flow will need a fast exit via an IPO or a high-value strategic sale so Neumann and early investors can exit before valuations fall. Hype can help with the fast exit and high valuation, but the valuation may not be sustainable.

MY TAKE: While Flow may seem like a promising Act 2 for Neumann, challenges exist due to the lack of substantial differentiation, a potential glut that can created by institutional apartment owners quickly branding their own holdings, and the VC need for a swift and high-value exit.

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