[In]Securities Guest Blog: WeWork Works It Out by Aegis Frumento Esq

December 5, 2019

WeWork Works It Out

When Lockheed's famed Skunk Works was secretly building the U-2 and SR-71 spy planes, lead engineer Kelly Johnson famously coined the acronym KISS -- for "Keep it simple stupid." Johnson believed that in order for his aircraft to truly fulfill their mission, they had to be built with the expectation that parts and systems would break and fail. Faced with that given, Johnson created designs that allowed most mechanics to use regular tools to undertake the most daunting repairs. Accordingly, the KISS principle stands for the proposition that a given system will perform at its optimal level if things are kept simple.

The KISS principle had no greater advocate in the financial world than Peter Lynch. Lynch is one of our pioneer mutual fund managers. From 1977 to 1990, he built Fidelity's Magellan Fund from assets of $18 million to over $14 billion, averaging a 29% annual return for over a decade. The fund had to shut out new investors from 1998 to 2008, because it got so big it couldn't invest without affecting the market. That's an object lesson for anyone who still believes that bigger is always better.

Lynch's core investment philosophy wasn't quant -- he once said all you needed to be a good investor was middle-school arithmetic -- but rather the simple adage to "Buy What You Know." "Never invest in any idea," he said, "that you can't illustrate with a crayon."  Or, in an only slightly more sophisticated version:

If you're prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth-grader could understand, and quickly enough so the fifth-grader won't get bored.

Okay let's give that a try: Our business is to get people to pay us for letting them hang out in a friendly common room to do stuff like gossip with neighbors, down coffee and doughnuts, play video games and surf the net. And also, sometimes, do meetings, emails and telephone calls, and stare at spreadsheets as if they were chicken entrails -- you know, the mindless stuff that passes for "work" these days.

A fifth-grader would sure understand that. He would call it "recess."

And yet, that is the fundamental business of WeWork. WeWork was highly touted as one of 2019's unicorns, one of those magical $1 billion-plus valued companies that would soon go public and make its owners filthy rich. WeWork was supposed to have gone public by now, but it never did. Instead, its IPO was withdrawn, its financial statements restated, its CEO fired, and it just announced plans to lay off anywhere from 2000 to 4000 employees. It's all neatly summarized here: https://www.businessinsider.com/wework-ipo-fiasco-adam-neumann-explained-events-timeline-2019-9. Where WeWork will end up is anyone's guess.

The conventional wisdom -- that which passes for wisdom these days -- is that WeWork just expanded too fast. Buying into the "Field of Dreams" theory of business development, WeWork acquired too much real estate in too many expensive markets too quickly. But why was that a mistake? After all, if your business is to provide space, then you should have space, no?

No, because although WeWork built it, paying customers didn't come. WeWork overestimated how attractive its business model would be. It's a classic example of the entrepreneur so enamored of his own brilliant idea that he doesn't ask seriously enough whether anyone else cares. J.R.R. Tolkien thought it a vice to "love too much the work of your own hands." A mentor of mine once accused an adversary of "liking too much the smell of his own shit." Highbrow or low, they both describe an insidious form of confirmation bias that afflicts us all if we're not careful, if we don't work to overcome it. WeWork fundamentally misunderstood what real work is and how real people work.

WeWork's website shows just how confused about work the place is. "We wanted to build a community," it proclaims. "A place you join as an individual ‘me', but where you become part of a greater ‘we'." Okaaay. . . . WeWork says it provides "Enclosed spaces for teams of one to 100." See https://www.wework.com/. I understand a team of 100. In the Roman army, it would have been called a century, led by a centurion. But a team of one is not a team unless you suffer from multiple personality disorder. WeWork thus caters to everyone from the potential Son of Sam to the wannabe Caesar. But neither of those describes a real team. Real teams, at least those you'd expect to be working together in an "enclosed space" -- like an army platoon or a Seal Team -- is usually maxes out at about 16 members. Sports teams in action are smaller still.

But WeWork's confusion over team sizes is not the guts of its problem. When I look at all the pictures in the WeWork website I don't see any real work being done. What I see is socializing and the constant potential for socializing. You know how I can tell? There's no mess. I once apologized to a client, a senior investment banker at a major firm, for the messiness of my office. He told me to stop: "Mess is a sign of work," he said. He was right. Mess is a sign of any kind of real work from which real things emerge, whether in a kitchen, a workshop, or an office.

WeWork represents the pit of a fad that began in the 90s and hasn't yet worked its way out of our collective system. That fad is the open office. Research published in the past year has pretty much confirmed what we all suspected, that open offices suck. See  https://www.inc.com/suzanne-lucas/if-you-want-people-to-collaborate-get-rid-of-this-office-plan.html; and https://digest.bps.org.uk/2018/07/05/open-plan-offices-drive-down-face-to-face-interactions-and-increase-use-of-email/. People need their privacy. They don't want to be working in a fishbowl. They don't want to be subject to interruptions. They don't want the peer pressure of socializing with their neighbors. Serious people who do serious work need to be alone.  https://www.entrepreneur.com/article/325959.

WeWork took the idea of the open office one step further by incorporating into its plan the "hot desk." A hot desk is a desk that is available, prewired and ready for action, to whoever happens to come along. Even worse than the incarcerating cubicle, the hot desk belongs to no-one. The late humorist Russell Baker once wrote that because he ate lunch at his desk, it began to think of itself as a dining table and refused to work. Were we to anthropomorphize the hot desk, what kind of slut must it think itself to be?

The whole idea of WeWork, then, is based on a flawed concept of what we really need when we need to work. I think we always knew that the entire open office concept was a scam. Employees don't like it and it is not productive. "And that leaves companies with only one justification for moving to an open plan office: less floor space, and therefore a lower rent." https://www.inc.com/geoffrey-james/its-official-open-plan-offices-are-now-dumbest-management-fad-of-all-time.html.

And only the lure of lazy real estate profits explains why Japan's Softbank has about $10 billion at stake in WeWork. So much that it didn't blink at giving its founder Adam Neumann $1.7 billion to leave the company. Newmann's shenanigans -- other than touting an idea whose time had gone -- included getting high on the company jet, and downing tequila shots after announcing a layoff. His whole business strategy and management persona seems to have been concocted at one of those promiscuous hot desks, where no mess can be kept. I guess he carried it all with him, dropping bits of it here and there along the way.

All this reminds me of something else Peter Lynch said. "Go for a business that any idiot can run -- because sooner or later, any idiot is going to run it." And sometimes sooner rather than later. My only quibble is that Lynch didn't extend the "idiot" concept to investors, unless he just took that for granted. Can WeWork and Softbank still work something out of this fracas? Maybe they can, or maybe they can't. Either way, we won't have to work too hard to learn some important lessons. As that other wise man Yogi Berra once said, "You can observe a lot by just watching."

Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.