In 2008, Jeremy Neuner and Ryan Coonerty, two city-hall employees in Santa Cruz, California, decided to open a co-working space. They leased a cavernous building a few steps from a surf shop and a sex-toy boutique, and equipped it with desks, power strips, fast Wi-Fi, and a deluxe coffee-maker. Neuner and Coonerty named their company NextSpace Coworking.
Neuner, who had attended Harvard’s Kennedy School after serving in the Navy, was looking to be part of a movement. “We really believed that this would be a totally new way of working,” he told me. NextSpace provided a refuge for local freelancers desperate for office camaraderie, and within six months the company was turning a small profit. Soon, NextSpace opened locations in San Francisco, Los Angeles, and San Jose. Neuner and Coonerty also started looking for venture capital. They had raised some money from family and friends, but, as Neuner put it to me, “V.C. funding is the stamp of approval.” He noted, “In every startup story, the V.C.s supercharge everything. They’re the fairy godmothers of success.”
In 2012, Neuner went to a co-working-industry conference, in Austin, Texas, to appear on a panel and try to meet investors. One of the conference’s other speakers was Adam Neumann, a six-foot-five Israeli with flowing black hair, who wore designer jeans and a dark blazer—fancy dress amid the crowd’s T-shirts. Neumann told the audience that he ran a company in New York, named WeWork, that was “the world’s first physical social network.” His self-assuredness was mesmerizing. “We’re planning to be all over the country very, very soon,” he said. Although WeWork was just two years old, and Neumann was only thirty-two, the company already controlled more than three hundred thousand square feet of office space; he declared that WeWork would soon have ten thousand clients. “Our company is about we and about collaboration,” Neumann proclaimed. “Together, we can build a community that can change the world.”
When Jeremy Neuner began having meetings with venture capitalists, he said, “their first question was ‘How do you compete with WeWork? Why should we invest with you instead of them?’ ” WeWork was reportedly losing millions of dollars each month, but it was expanding to new locations at a feverish pace. Neumann’s promises to V.C.s were so wildly optimistic, bordering on ridiculous, that Neuner was convinced WeWork had to be a scam. “They were saying they would become the biggest office-space provider in the world,” Neuner recalled. “What do I say to compete with that? Do I tell V.C.s, ‘You know, WeWork must be lying, so you should accept my smaller returns instead’? No one wanted to hear that. All the V.C.s couldn’t wait to drink the Kool-Aid.”
A real-estate agent informed Neuner that WeWork had opened a location in San Francisco, just a few blocks from NextSpace, and was charging cheaper rates. As NextSpace grew, eventually opening a fifth California location, WeWork opened competing offices alongside each one of its facilities, never more than a few blocks away. Invariably, WeWork charged tenants slightly less.
Neuner began hearing similar stories from other co-working entrepreneurs: WeWork came to town, opened near an existing co-working office, and undercut the competitor on price. Sometimes WeWork promised tenants a moving bonus if they terminated an existing lease; in other instances, the company obtained client directories from competitors’ Web sites and offered everyone on the lists three months of free rent. Jerome Chang, the owner of Blankspaces, in Los Angeles, told me, “My average rate was five hundred and fifty dollars per desk per month, and I was just scraping by. Then WeWork arrived, and I had to drop it to four hundred and fifty, and then three hundred and fifty. It eviscerated my business.” Rebecca Brian Pan, who founded a co-working company named Covo, said, “No one could make money at these prices. But they kept lowering them so that they were cheaper than everyone else. It was like they had a bottomless bank account that made it impossible for anyone else to survive.”
Neuner began slashing NextSpace’s prices and adding amenities—free beer; lunchtime classes on accounting, coding, and chakra cleansing—but none of it mattered. WeWork’s prices were too low. 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.
Meanwhile, one of Silicon Valley’s most prominent investors, Bruce Dunlevie, of the venture-capital firm Benchmark, had joined WeWork’s board of directors. Benchmark, founded in 1995 in Menlo Park, had funded such Silicon Valley startups as eBay, Twitter, and Instagram. Dunlevie admitted to a partner that he wasn’t certain how WeWork would ever become profitable, but he was taken with Neumann. Dunlevie said to the partner, “Let’s give him some money, and he’ll figure it out.” Around this time, Benchmark made its first investment in WeWork—seventeen million dollars.
Venture capitalists began telling Jeremy Neuner that making piddly investments in his company wasn’t worth their time; moreover, if they funded NextSpace, they might be excluded from buying into WeWork someday. To Neuner, this seemed nuts. He was building a solid business, but the V.C.s wanted fantasy. “All we needed was five million dollars a year in revenues, and we would have made money for everyone,” he told me. “That’s enough to earn a living and buy a house and put your kids through school. But no one wanted something that just made a healthy living. They all wanted to find the next Zuckerberg.” Neuner was frustrated, but he wasn’t surprised. He knew that American history was filled with entrepreneurs like P. T. Barnum, Walt Disney, and Charles Ponzi, self-promoters whose audaciousness created new industries and vast riches—and who, occasionally, ended up in jail. What Neuner hadn’t realized was that some venture capitalists had become co-conspirators with such hype artists, handing them millions of dollars and encouraging their worst tendencies, in the hope that one lucky wager would more than offset many bad bets.