Why do Startups Die? #1 Destructive Corporate Culture – What Does WeWork Teach us?

I’ve come up with a list of reasons that Startups fail (see the list below), and this week we are starting with #1 Destructive Corporate Culture.  And this is timely!  I work with startups on “StartupTherapy™” and (sort of) joke that if you don’t get StartupTherapy, you’re good to need real therapy after the collapse.  I’m only sort of kidding. Corporate culture is created, whether you do it deliberately or thoughtlessly, and once created it can be very difficult to change, particularly if it is destructive or dysfunctional.

I think that recent unicorns have instructive lessons for entrepreneurs.  I’m sure you’ve seen the debacle of WeWork’s proposed IPO pricing, down from the private investment valuation of $47 billion in January 2019 to something below $15 billion expected at IPO.  Even one of their large investors (Softbank) apparently tried to get WeWork to delay the IPO.

It seems that (poor) leadership and culture issues have combined with skepticism about the WeWork business model have proven devastating to their IPO prospects. On 9/13/2019 Jim Cramer of CNBC predicted the IPO would price closer to a $10 billion valuation.  Hardly inspiring!  Given what we’ve seen, I think we need to put at least some of the blame on corporate culture and leadership!

In July the Wall Street Journal reported that The We Company’s CEO, Adam Neumann, had cashed out $700 million through selling stock and borrowing against his holdings, ahead of The We Company’s (WeWork’s) IPO. A clear vote of no-confidence in his own company. There have also been clear cases of what everyone else would call “self dealing” where Neumann leased real estate to WeWork, reportedly receiving million in rents from the company.

Rebekah Paltrow Neumann, Neumann’s wife, is listed in The We Company’s S-1 filing as one of the cofounders of the company. I will note that she has not been touted as a co-founder “all along”, just as Jeff Bezos didn’t seem to acknowledge his (now-ex) wife’s contribution until his bad behavior prompted divorce filings. Paltrow Neumann apparently wasn’t paid as a founder or contributor, according to filings. Perhaps everyone undervalued her contributions.

However, according to Business Insider’s coverage, in 2016 WeWork hemorrhaged money, losing $429 million on $436 million in revenue, followed in 2017 by an annual loss of $890 million on $886 million in revenue. In 2018, they managed to lose $1.6 billion on $1.8 billion in revenue, each year reflecting costs that were nearly double revenue.  The picture improved slightly during the first half of 2019,with a loss of $690 million on $1.5 billion in revenue. Obviously the business model did not inspire confidence, but neither did the corporate culture. And let’s face it, believing that such enormous losses could continue nearly indefinitely is a result of a culture that believes that capital is freely available, almost forever.

For at least these reasons, The We Company pre-IPO has not, well, been working.  By mid-September, the company was amending its filings with a whole set of changes designed to make the company (which apparently really, really needs more cash!) more appealing to the public markets.

Some highlights of the changes and limits on the CEO (and an indictment of the corporate culture):

• Rebekah Paltrow Neumann is now no longer a key part of succession planning if Adam Neumann dies, it is now in the hands of the Board (she used to be part of a 2-3 person selection committee….)
• No other members of the Neumann family can serve on the board (that needed to be made explicit only because it was clear that the CEO was trying to keep control posthumously!)
• Change reduced Adam Neumann’s super-voting stock from 20 votes per share to 10 votes per share (with a downgrade to 1 vote per share if Neumann dies or is incapacitated) – a slap at the trend for founders to keep control, no matter how badly they treated shareholders
• The Board now has the ability to remove Neumann as CEO and choose a successor with an independent director coming soon to a WeWork board near you (which shouldn’t have needed to be said, since this would otherwise be expected)
• Significant promises by Neumann not to sell any stock in the first year after the IPO (challenging to those stock-secured loans!) and in years 2 and 3, no more than 10% of his holdings – although his holdings don’t seem to be publicly disclosed
• Adam Neumann will also transfer profits from the self-dealing real estate transactions back to the company – although the exact details are unclear.
• In addition, he has recently returned to the company a payment worth $5.9 million stock payment for the “We” family of trademarks.  Really?  a $47 billion valuation, an estimated $4.1billion net worth and you need the company you co-founded to give you even more?

Can you see the problem here?  The We Company’s founders created a culture that seems to depend upon entitlement for them, as founders, and particularly for the CEO, as well as nearly untamed costs in the rest of the business.  Let’s face it, when costs are DOUBLE your revenue for years and years, even when you have hundred’s of millions of dollars in revenue, it indicates a culture where costs don’t matter.

Entitlement, scorn for investors, scorn for future public investors, lack of management control, self dealing and just plain hubris seem to be a summary of the corporate culture at The We Company.

Learn the lessons from The We Company and avoid creating a destructive corporate culture form the very earliest days!

Here’s the list of 10

1. Destructive corporate culture

2. Failure of product – market fit

3. Founder issues and conflict

4. Staffing and Team problems – poor hiring choices or inability to prune staff appropriately

5. Can’t raise sufficient capital

6. Run out of cash after raising capital

7. Scaling too soon or improperly

8. Intractable technical problems

9. Poor strategic environment (customers, suppliers etc)

10. Regulatory problems (forseen or unforseen)

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