WeWork's 'bad boy; founder Adam Neumann's second act

Two weeks ago, Andreesen Horowitz, the largest venture capital firm in the world with US$30 billion assets under management, agreed to invest US$350 million in Flow — its largest single investment in a start-up ever. Andreesen, also known as A16z, boasts of funding companies like Meta Platforms (Facebook) and Airbnb at their start-up stage. Its investment instantly made Neumann’s new venture a unicorn, or a private VC-backed firm valued at more than US$1 billion.

If reports that Andreesen now values the firm — in which Neumann only injected US$325 million of real estate — at around US$ 1.5 billion are true, the WeWork founder is sitting on a paper profit of US$850 million less than three years after WeWork’s initial IPO was pulled. In other words, 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.

Disrupting offices

Here is what WeWork was all about and how Flow is different in some ways but similar in others. What Neumann did when 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.

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Before Neumann began disrupting office space, real estate firms investing in office space were mainly focused on wooing 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.

WeWork knew it could arbitrage long-term leases by dividing up the space and leasing it out 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.

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WeWork’s problem was that it overexpanded at the peak of the market and got too much space on long-term leases just as demand for short-term leases at a big premium was starting to decline.

The difference with Flow is that it 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 and fancy coffee machines or leaving warm muffins and croissants at residents’ doors 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 around the world is different from sticking a label across apartment blocks around the world. True, hospitality giants like Ritz-Carlton and Four Seasons have high-end branded apartments in dozens of cities. But that is different from putting a logo on second-tier apartment blocks in Fort Lauderdale and Nashville or, for that matter, Shenzen, Adelaide, Johor Bahru or Calcutta.

Also, housing is 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 do not move a lot from city to city or country to country.

Yet with the “work from anywhere” concept 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, or even overseas. That means that the key to capturing housing demand would be differentiation — such as through a trusted brand. It does not have to be a high-end residence brand as Ritz-Carlton or Four Seasons, but consistency of experience would make it a differentiated offering. McDonald’s or Starbucks are not your Ritz-Carlton but the quality of their food and beverages stay consistent across all their outlets. Neumann believes he can do to housing what he did to shared office space by adding services, consistency of experience and building a brand.

Few players are more ready to leap into branded housing for the mass affluent market than Airbnb, which leases homes for short-term stay. It has a strong brand. It knows about leasing. But it is also an asset-light business that does not own building but offers an increasing array of services. Unlike Flow, Airbnb might not want to buy apartment blocks. Last year, Walt Disney Co’s CEO Bob Chapek talked about branded homes. People are living longer, and older or retired people have more money than another demographics in the US, so the assumption is that Disney will most likely target them.

Why housing, and why now? The value of the US housing market has more than doubled to over US$43 trillion over the past decade despite the rising interest rates in recent months, which has drastically hit new home sales although with little impact yet on prices. Last year, housing prices in the US rose a whopping 17% from the previous year. Prices are up 11% so far this year and despite plummeting transactions and rising mortgage rates, they are likely to stabilise close to current levels over the next few months.

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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.

Déjà vu all over again?

Neumann has actually tried something like Flow before. In the heyday of WeWork, he launched WeLive, which was all about communal living — like college dorms for grownups. (There was also WeGrow, a kindergarten run by his wife Rebekah.) WeLive had acquired two locations — in Manhattan, New York; and Crystal City in northern Virginia. When WeWork collapsed, WeLive properties were sold. But the concept lives on. There is still 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, while sharing 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.

Some months ago, I wrote about iBuying and PropTech, and about Zillow Group, OpenDoor and Redfin in my columns. WeWork tried to position itself as a tech company to get an outsized tech valuation by describing itself as a “community-driven, experience-centric service with the latest technology”. With Flow, Neumann wants to go to customers directly, skipping the middleman of brokers and property managers and taking a big chunk of the revenue they generate.

Going with Flow

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. A core competence of start-up entrepreneurs is storytelling and their ability to sell anything, even ice cream to the Eskimos.

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 (PE) players dominate the segment. Blackstone, one of the largest PE firms, last year paid US$6 billion for Home Partners of America.

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 a ton of capital that has been raised by venture capitalists during the Covid tech boom that needs to be deployed. Most start-ups fail.

Yet start-up founders have an entrepreneurial streak in them which makes serial entrepreneurs. Young founders who fail usually dust themselves off and start again rather than getting a job in a large company and rising through the ranks. Investors want to back a failed entrepreneur because he has learnt something from his mistakes rather than backing another firsttime start-up founder who might make similar mistakes without the benefit of hindsight.

Steve Jobs built Apple from his parent’s garage, listed the world’s first personal computer company on Nasdaq and was eventually ousted because he did not know how to manage a fast-growing listed company. Fast-forward 12 years to 1997, Jobs returned triumphantly when NeXT, his second venture which made operating software was acquired by Apple. Within 11 years, he had turned a company that was just weeks away from bankruptcy into one of the world’s most valuable firms.

Neumann is not 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 and business writer based in North America