To We or Not to We

“If you bring us in for 10 locations, we will create 200,000 jobs over the next 10 years. And it can go bigger and bigger, we won’t just bring you jobs, we’ll bring a place to live, we’ll bring education, and this is important, we’ll bring corporate America.” Adam Newman, the co-founder of WeWork, charismatically portrayed his business at the US Conference of Mayors, not as a company that rents out office space, but as an idea that far surpasses the concrete and steel beams on which it is built. Starry-eyed and swimming in cash, investors doted on Newman as he sold them a $50 billion dream.

That dream turned nightmare is now valued at only around $12 billion. The story of WeWork’s rapid growth and even faster decline does not start with Adam Newman, rather it begins in a college dorm room in the late 1970s with a man by the name of Masayoshi Son. Originally from southern Japan, Son moved to the U.S. at 16 and later attended UC Berkeley. 

In an interview with Bloomberg TV, Son spoke about his lofty aspirations to become a millionaire in college. He said he began asking his friends what he could do to make $10,000 a month with only five minutes a day. “My friends said you are crazy it is impossible there is nothing like that. Do you want to sell drugs? So, I said, ‘No no, I don’t want to do that.’ So, what is the most efficient use of my time? It’s [an] invention. So, I set [an] alarm clock [for] 5 minutes. Tick tick tick, come! Invention, come!” And come it did. Son invented a handheld translation computer with the help of his professors and eventually sold it for $1.7 million to Sharp Corporation. 

With this newfound sum of cash, Son headed back to Japan and founded a company called Softbank. Originally, Softbank sold software but became famous for its early investments in technology. When the dot-com boom hit in the late 1990s, Softbank’s investments paid off in spades. “My personal net worth was increasing $10 billion per week… For 3 days I became richer than Bill Gates. 6 months after that our share price went down 99%. So, we almost went bankrupt,” Son remarked about his early business career.

After losing around $70 billion and the status of the richest man in the world, Son attempted a comeback through a series of high-risk investments in technology. Through talks with Steve Jobs, he was able to become the sole distributor of iPhones in Japan. Son was then able to pair this licensing deal with his high-risk investments in the Japanese cell phone market to once again become a player in the global economy. 

Being the risk addicted investor he was, Son raised a venture capital fund to invest in technology startups that are deemed to possess high growth potential. In order to raise money, he traveled to Saudi Arabia and eventually met with the Crown Prince, Muhammed Bin Salman. In an interview with Bloomberg, David Rubenstein said, “You went in, and in one hour you convinced him [Prince Muhammed] to invest $45 billion.” Son quickly corrected, “No, no, it’s not true. 45 minutes, $45 billion. 1 billion dollars per minute.” 

In 2017, with money from Prince Muhammed, Apple, Qualcomm, Larry Ellison, and Softbank, Son created a $100 billion venture capital fund known as the Vision Fund.

Big venture capital funds at the time managed one to a few billion dollars, and a fund of this magnitude was an anomaly. In fact, in 2018 all US venture capital funds combined raised $55.5 billion which is nearly half of the $100 billion Vision Fund. With this monetary advantage, the vision fund began investing in technology companies at times 30-fold of what a typical venture capital fund would invest. Although it may seem like Son was throwing money into the wind, there was actually a legitimate strategy being implemented. By investing large sums of cash, these companies would gain an advantage against competition. There would be a greater ability to hire better workers, to operate for longer at a greater loss than competing companies which would not be able to contend simply due to a relative lack of resources. The advent of the Vision Fund spurred other investors to adopt this aggressive strategy on a global scale in fear of losing on investments they already had. 

In response to the competition among investors, competition among start-ups began as to which company could grow the fastest and the biggest with the most amount of money. Son would offer companies more than they could have ever hoped for, and all they had to do was have some unhinged and intrepid plan to explode in size in as little time as possible.

Son’s ideal candidate for this new form of investing was none other than Adam Newman. Within just a few months after the creation of the Vision Fund, Son began investing in WeWork, with investments totaling $10.65 billion. Nearly all the money WeWork raised was from the Vision Fund.

WeWork is just one of the many technology start-up companies that were being handed absurd amounts of money. This large influx of cash within the past 3 years has altered the power balance between companies and investors. Historically, it was generally understood that those who had money were also those who had power. Investors could go to companies and not only ask for equity, but also for control. Present-day, investors are competing among themselves to invest in companies that can demand less equity, but more importantly most or full control. Adam Newman raised enough money to achieve a nearly $50 billion evaluation while retaining nearly entire control of the company. Many scholars and economists speculate that the devaluation of WeWork from $47 billion to estimates ranging from $12 billion to as little as $3 billion will mark a shift of power away from startups back to investors.

Whether the Vision Fund will make money on WeWork is unclear, but it is likely to make money overall. Masayoshi Son is not waiting around to find out. After dumping $80 billion of the $100 billion in less than three years of operation, SoftBank announced a Vision Fund 2 in July that will be even larger than the first. 

Photo Caption: The rapid expansion of WeWork offices mirrors the mass influx of capital into the global economy.
Photo Credit: Pixabay