Venture capital and the WeWork con job
By Mark Hurst • December 3, 2020

I love movies about con jobs. Dirty Rotten Scoundrels. Ocean's Eleven. The Sting. There's something satisfying about watching con men prepare the perfect deception, mapping out how they're going to ransack the vault, defraud the heiress, take the money and run.

It's fun to watch fraud when it's on-screen, safely distanced from us in a fictional story. But things change when the fraud is actually happening, when real lives are upended. In those moments, it's not entertaining at all, but it's even more important to pay attention.

This is one of those moments.

Charles Duhigg's recent piece in the New Yorker, How Venture Capitalists Are Deforming Capitalism, tells the story of WeWork. The highlights are well known: the heavily funded startup opened hundreds of coworking spaces around the world, growing quickly toward an IPO, until it just - vanished. Thousands of WeWork employees were laid off, the charismatic founder was let go, and today the company, while still alive, is just a whiff of what it once was.

While I was familiar with the basic trajectory of WeWork, Duhigg's piece touched on something I hadn't considered, which is the experience of other coworking companies during WeWork's rise. After all, WeWork was hardly unique in offering sliced-up office space for rent. As WeWork was getting started, a renter in some cities would have the choice of several coworking spaces, each with its own amenities and pricing. It was, in other words, a competitive market.

With all of those other coworking spaces available, how did WeWork achieve such a decisive victory? The traditional answer is that, in a competitive market, the best competitor wins. The best service, at the lowest price, inevitably gains the most customers. I've written in my newsletter for over two decades (and in an entire book) that the best customer experience eventually wins in a competitive market. Listening to customers' needs, and continually improving the service over time, naturally makes a product attractive to customers.

That's not what happened with WeWork. Duhigg's piece includes the story of NextSpace, a company that opened several coworking spaces in California in the early 2010s. When WeWork began opening locations nearby, the founder of NextSpace "began slashing NextSpace's prices and adding amenities - free beer; lunchtime classes on accounting, coding, and chakra cleansing - but none of it mattered." WeWork drew customers away with unnaturally low prices - all paid for by investors, as Duhigg explains:

By the end of 2014, WeWork had raised more than half a billion dollars from venture capitalists. Although it was now losing six million dollars a month, it was growing faster than ever before, with plans for sixty locations in more than a dozen cities.

The key to WeWork's success, then, was not a better customer experience but a bigger hoard of venture capital money. NextSpace, despite its best efforts to deliver a good customer experience, was forced to close down. The question remains, though, how WeWork won all the venture capital: if the competition came down to fundraising, what did WeWork do to attract all the investors? Answering that, it turns out, reveals the con job.

WeWork cofounder Adam Neumann was, by all accounts, a magnetic presence on-stage - and in meetings with Silicon Valley venture capitalists. Duhigg reports that VCs were "taken with Neumann," even though they were unsure about WeWork's business model. Neumann gained more and more publicity with messianic pronouncements that his company would "change the world," while rumors spread of drug use and sexual incidents within WeWork headquarters. The more salacious the gossip, the more the VCs wanted to invest. Here's Duhigg again:

Despite the unprofessional atmosphere at WeWork, its valuation was doubling every year. "Everyone wanted in," a venture capitalist told me. "If you could deliver a piece of WeWork to your partners, they'd never fire you."

On the face of it, this seems like a counterproductive strategy for investors. Why would they fund a nut job when there were perfectly good, sober alternatives like NextSpace looking for funding? Were the VCs mesmerized by Neumann? Taken in by his deceitful promises?

Oh, we are so close to the con job right now, but we're not quite there. Just stick with me for a few sentences so I can explain.

The twist is that the VCs didn't get conned by Neumann. Not at all. They were acting in their own narrow self-interest, and they knew exactly what they were doing. The VCs were not just in on the con, they were running it.

What you have to understand about a con job - again, watch the movies I list up top - is that the con artist always knows who the patsy is. As the saying goes, if you look around the poker table and you don't see the patsy, you're the patsy. (The quote has been around for awhile.)

And that means, friends, that if you've read this far about the WeWork con job, and you don't know who the patsy was... well... you've looked around the poker table. I shouldn't have to tell you who the patsy is.

It's you.

Now it's time for the reveal, when the movie plays all the flashbacks, step by step, showing how the robbery went down. I'll be the narrator talking you through each step. Here we go:

• A few years ago, Silicon Valley VCs started putting money into WeWork. The founder was constantly spouting moronic platitudes and promising world domination: good signs for the kind of con job the VCs like to run.

• As they increased their funding to WeWork, three things occurred, all benefiting the VCs: the competition died off, the founder amped up his New Age rantings, and best of all, other VCs got wind of the scheme.

• The more fraudulent WeWork looked, the crazier Neumann acted, the more VCs rewarded him with even more money. All in service of pumping up the value, as fast as possible, before the dump.

• Once the VCs had all piled in with their money, it was time to make the escape. This is the part of the Ponzi scheme where timing is so important: you have to exit the stage while someone else is handed the bag.

• Just before the valuation hit its peak, the last group of investors finally made it in: mutual funds. To Silicon Valley VCs, mutual fund managers are the pathetic schlemiels who handle dumb, non-innovative, non-Silicon Valley money. You know, like the retirement savings of millions of Americans. And this, finally, was the cash hoard in the vault that was going to be robbed.

• As soon as WeWork was shown to be a fraud - with Adam Neumann depicted in the press as a fool, a self-obsessed huckster - the Ponzi scheme was up, and the robbery took place. First, thousands of WeWork employees were laid off. Expendable cannon fodder, their casting-off was announced as good for "restoring fiscal discipline" or some such. At the same moment, the mutual funds lost hundreds of millions of dollars. The VCs, having left the vault, counted their millions and relaxed. No one would ever question them, since Adam Neumann was held up publicly as the villain. And besides: who would want to question the pure innovation, the economic miracle, that is Silicon Valley?

I wish I could say that there's a happy ending, but so far, there's not. We live in a society that has been robbed - actually, that is being robbed. The WeWork debacle is just a snapshot, just one case study that I offer as an example. Our vaults are being picked clean by thieves who promise "innovation" and deliver what - what do we see in the WeWork wreckage? Unemployment, declining competition, and more and more inequality. Silicon Valley VCs, having made a fortune from a series of these con jobs - an entire system built around the con - have no incentive to change their ways. Duhigg's article quotes Stanford professor Steve Blank:

I've watched the industry become a money-hungry mob. V.C.s today aren't interested in the public good. They're not interested in anything except optimizing their own profits and chasing the herd, and so they waste billions of dollars that could have gone to innovation that actually helps people.

The con artists in Silicon Valley have robbed all of us. Including me. "Innovation that actually helps people" is essentially the vision I started Creative Good with, over 20 years ago, hoping to help teams listen better to their customers. As the Silicon Valley VCs have risen, running their grift to destroy the competitive market, my premise that "the best customer experience eventually wins" looks ever more out-of-date. The best thing I can do in response, I guess, is to at least make sure you know how the con job works.

We could change things, if enough of us refuse to be robbed again.

Next steps

If you'd like to join my efforts to create a better future for the tech industry, here are a few ways you can help:

• If you run a team that's trying to create a good customer experience, reach out if I can help as an advisor on product and customer matters. I know there are still a few good teams out there, not funded or owned by Big Tech, trying to walk a better path.

• If you want to directly support my efforts, chip in over at Good Reports, my new review site for online tools. (If you missed it, the launch announcement tells the back story.)

• Listen to my podcast of Techtonic, where I interview people who are also trying to figure out how to live with technology. More info over at

Good Reports updates

Two recent updates:

New page: Best VPN, showing my picks for virtual private networks, and some additional resources to look into.

• Updated Best web browser with more on Mozilla's partnership with Big Tech.

• Updated the list of Best videoconference services, especially important now that we've learned that Zoom lied, for years, about end-to-end encryption. (Silicon Valley VCs strike again.)

Until next time,

- Mark Hurst
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