Ben Kepes: WeWork and the hype around disruption

Adam Neumann's ambition led to big promises and even bigger disappointments. Photo / Getty Images

Sitting at home in the midst of a Level 4 lockdown recently, I pondered just how much modern life gets disrupted by external factors. The Covid-19 pandemic has disrupted so many things: our ability to travel at will, global supply chains, our preconceptions of what is normal. It's also seemingly disrupted some peoples' common sense as conspiracy theories (Bill Gates! 5G! Gene editing!) weirdly gain traction.

In this context, disruption frankly sucks. It takes our comfortable known quantity of a world and shakes it up. It makes us feel, at some level, discombobulated, in case the world wasn't changing fast enough as it is.

Disruption is, of course, a term used extensively in another context, that is entrepreneurship. Pretty much every founder, CEO or backer of a high-growth enterprise will quickly talk about just how much their initiative is disrupting an "old world" industry.

I've been thinking about this form of disruption recently as I've been reading the excellent book; The Cult of We: WeWork and the Great Start-Up Delusion. The book was written by two journalists, Eliot Brown and Maureen Farrell, who had covered WeWork's meteoric rise to fame over the preceding few years.

For those who haven't come across WeWork, the company had a business model whereby they would lease office space, renovate it and then sub-let it to businesses - freelancers, designers and the like. The theory went that WeWork could achieve high densities, and thereby make a margin on top of what they were paying for the main lease.

All this makes sense and is, after all, nothing new. There are many companies that follow this business model, generally, they call themselves serviced office companies, neatly describing exactly what it is that they do. They're solid, if unexciting enterprises and when run by people who understand their fundamentals, they can be good little earners.

WeWork, however, was founded by someone who was very ambitious, charismatic and seemingly unconstrained by either truth or ethics. Adam Neumann, an Israeli immigrant to the US, spun a yarn that got investors frothing at the promise.

You see, according to Neumann's pitch, WeWork wasn't a real estate company, rather it was a software company with a stated aim (modesty not being one of his faults) of raising the world's consciousness. As a software company, a different set of rules apply. Some of those rules have a basis in logic. Once a piece of software is built, selling it, again and again, costs little. So scaling of software companies is much better economics than, say, scaling a real estate company.

Some of the rules around software company investing however have little basis in logic. Like the fact that a company with no revenue and little in the way of product can be "worth" tens of millions of dollars. Or that a company with an idea and some designs can be worth more than a huge, profitable and global enterprise. That's the aspect of the software industry that has people talking about hype and bubbles.

It was this second, less logically-based attribute that Neumann leveraged. Armed with his own charisma, some tall tales about how WeWork was a software company, and faith that investors would be so excited by the word "disruption" that they wouldn't question core fundamentals, Neumann went out to raise money. And raise money he did - billions of dollars flowed into the company. A significant proportion of those billions went to fund a lavish and excessive lifestyle for Neumann and his wife (a fascinating story - for that detail you'll have to read the book).

Suffice it to say, WeWork's valuation got stratospheric, at one point coming close to fifty billion dollars, this despite the fact that it was losing billions of dollars and that growth, the very metric that those investors were excited about, was only growing their losses.

Without giving too much away, the only thing WeWork disrupted was itself. When the reality of the situation became too obvious to ignore, the investors ran, Neumann was ousted and all that "value" evaporated. A cautionary tale around disruption, and something to bear in mind.

- Ben Kepes is a Christchurch-based investor and entrepreneur.