WeWork Is Lesson in How Not to Run a Startup

But while interest rates remain low, don’t expect the flow of money to stop, investors say

Adam Neumann, CEO of WeWork, speaks at an event in New York, May 15, 2017.
\ Eduardo Munoz/ REUTERS

The implosion of office space company WeWork last week is being digested as a lesson for Silicon Valley startups – in what not to do.

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WeWork’s parent The We Company filed to withdraw its initial public offering, a week after the SoftBank-backed startup ousted founder Adam Neumann as its chief executive officer and as its potential IPO valuation dropped as low as $10 billion, from $47 billion in January.

The consensus among venture capital investors at the TechCrunch Disrupt conference and elsewhere was that unlimited power and money were not good for building companies. Some of the problems were blamed on Japan’s SoftBank Group, a backer of WeWork that has become one of the most powerful tech investors globally. SoftBank declined to comment on the criticism.

“If a founder is not being responsible – and you know we are fiduciaries at the end of the day to all common shareholders, including employees – we have to do the right thing,” said Neeraj Agrawal, general partner of Battery Ventures.

He spoke during a TechCrunch session and later told Reuters that founders’ power has grown as money has poured into the tech world.

While interest rates remain low, don’t expect the flow of money to stop, said David Golden, managing partner at Revolution Ventures. He noted that big checks from investors could inflate values, making it more difficult to raise funds later – another issue highlighted by WeWork’s recent valuation struggles.

Big SoftBank investments sometimes unnerve investors, Golden said. “We call the other early stage investors and say, ‘Hey, congratulations, you just got a great markup in that deal. You look really smart.’ And to a fault they would say, ‘We’re screwed because no one’s going to buy this company now the price has been set too high.’”

Ned Desmond, the chief operating officer of tech media, data and events company TechCrunch, said competition among big name venture capitalists was fiercer than ever to get into some of the early-stage companies at the conference.

And at the conference, the general mood among the startups was upbeat. Garry Drummond, the CEO of 802 Secure, who was showing off his cybersecurity hardware on the floor, said he was raising up to $8 million in a series A round and that the WeWork debacle was not having any impact.

“Nobody’s saying no to us,” he said.

But the wealth of funding has a third problem, also seen in WeWork, of undermining spending discipline.

“Without that capital you are forced to be a little more disciplined on where you get bang for the buck,” said Sameet Mehta, managing partner at Granite Hill Capital Partners.

We Company, in fact, is slashing spending and divesting secondary businesses as it tries to win back investors’ confidence following its botched attempt to go public.

“I wish they weren’t writing quite such big checks,” said Megan Quinn, general Partner of Spark Capital, about SoftBank during a session at TechCrunch. “It does feel like a lot of companies have raised more capital than they really know what to do with responsibly.”