Just this week, I came across an intriguing startup investment opportunity. A Philadelphia-based company was offering shared office space for physicians and related medical practices. Doctors — especially those just starting their practices — are often forced to accept expensive and long-term leases. It’s a real problem that needs fixing.
Then I remembered WeWork — the shared offices startup. And the huge IPO that was planned. It was set to generate enormous profits in 2019 for VC investors and the company’s rock star founder, Adam Neumann.
But the IPO never happened. The company’s future and survivability is now in doubt. And Neumann’s reputation is shot. His many excesses, bad behavior and mismanagement of a once high-flying startup has made him persona non grata with the VC crowd.
But Neumann wasn’t the only villain in WeWork’s demise. VCs were complicit in WeWork’s rise and fall. They poured hundreds of millions of dollars into the company — funding outrageously excessive behavior while looking the other way.
It’s easy to say in hindsight that they should have known better. After all, WeWork never came close to making money. The more it spent, the more it lost. But this isn’t so unusual for startups. One startup strategy is to achieve hyper growth as fast as possible. To grow now and conquer markets before other companies smell the opportunity — and worry about profits later.
This strategy depends on a high level of responsible execution. And that often comes down to the founder. VCs loved Neumann a little too much. In an early assessment of the startup’s prospects, Benchmark wasn’t entirely convinced that the model would work. But it liked Neumann. “Let’s give him some money, and he’ll figure it out,” a partner advised. So Benchmark wrote its first check to WeWork — worth $17 million.
The head of Softbank’s $100 billion investment fund, Masayoshi Son, gave WeWork $4.4 billion after a mere twelve-minute tour of its headquarters. Neumann later explained that it was based “on our energy and spirituality.”
VCs take their relationships with founders seriously. In traditional startup investing, the impression a founder makes is often a major deciding factor in whether to fund a company or not. The founders that impress with knowledge or charisma have a huge leg up on attracting VC money. Neumann thought and talked big. He told investors he was going to conquer the world. And they believed him.
Attracting VC money was never a problem for WeWork — because Neumann was convincing. And the company used its huge mountain of money to expand into one city after another, first in the U.S. and then in dozens of other countries. But that huge capital cushion did more than enable growth. It also covered up huge dysfunctions.
VC investors were both victims and perpetrators of one of the most spectacular failures Silicon Valley has ever seen. But I’m not a VC investor. I’m a proud member of the growing crowdfunding community. Yet — like VC investors — I also place a great deal of weight on the quality of a startup’s leadership team. And I always begin with the founders.
If I don’t like a startup’s founder, I don’t invest. And I don’t recommend that others invest. I believe a startup without an exceptional founder can’t be expected to achieve exceptional results.
Neumann would have gotten my attention… probably my serious attention. But he would not have been able to seduce crowdfunders (including me) into investing with the same outsized success he had with VC investors. Consider…
- VC investors are like movie studios. They need hugely successful investments for their business model to work — it’s just a numbers game. Huge funds need huge windfalls. Crowdfunders, obviously, would welcome huge returns too. But they don’t need startups to become multi-billion dollar companies in order to become wealthy. For VCs, unicorns are a “must-have” — which is why Neumann portrayed WeWork as a world conqueror. For crowdfunders, it’s a “nice to have.” Crowdfunders would have been a much tougher crowd for Neumann to seduce.
- For better or for worse (and I think it’s for the better), crowdfunders don’t get the up-close-and-personal contact with founders that VC investors get. Founders communicate with crowdfunders via presentation decks, written Q&As and brief videos. Crowdfunders’ digital interactions with founders ultimately serve them well by forcing founders to rely on more than just charisma.
- Real talk matters more than big talk with crowdfunders. Founders with big personalities still need to know their stuff. Crowdfunders ask them questions ranging from friendly to probing, from obvious to outside-the-box. And founders are expected to answer all of them — while displaying a mastery of their industry, company and growth strategy. That’s what excites crowdfunders the most. I don’t think Neumann would have been up for that challenge.
Let’s be clear. The last thing I want to do is demonize daring, audaciously optimistic and big-thinking founders. But these founders must also demonstrate a seriousness of vision and purpose. If Neumann once had that, he lost it along the way. And sitting on a mountain of cash probably had something to do with that.
Crowdfunding — for the most part — avoids these pitfalls. With a more responsible founder, WeWork might have turned into a great company. VCs created Adam Neumann, the monster founder, because they were dazzled by him. The crowdfunding community would have exposed his weaknesses much more quickly. It would have been a much different story — or very possibly no story at all.
I’m still evaluating that Philly-based startup I mentioned earlier. And I’m glad I’ve got the strengths of crowdfunding on my side as I do it.
Source: Early Investing