The Cult of We - when founders flounder!

The laws of the financial world are different from the physical world. You can have prolonged periods of time, when sanity takes a back seat and excesses happen.

August 20, 2021 1:27 IST | India Infoline News Service
I just finished reading a fascinating book - The Cult of We, by Eliot Brown and Maureen Farrell, which captures the fast growth and even faster implosion of We Work and its founder, Adam Neumann. Even with the advantage of hindsight, I find it difficult to comprehend how smart and experienced people could not foresee the imminent disaster. How does one handle the cult of super smart, visionary leader who is supposed to deliver? What to do when the vision becomes myopic? Who will shout that the emperor has no clothes before the train wreck? And remember, all this happened in USA and in Silicon Valley where due diligence and corporate governance is the norm.

My takeways from the book:

FOMO is universal and cuts across all categories of investors. To the ignoramus – FOMO is Fear of Missing Out. Next time, so called pundits on business channels talk about retail investors driving up stock markets because of FOMO, ignore them. FOMO is omnipresent because it is linked to Greed, which is the most basic of human emotions. If the high priests of investing like T Rowe Price and Fidelity start investing in startups, then your respect for Warren Buffet rises. Warren Buffet is the only investor I have read about, who resisted all temptations to invest in technology stocks when the world was changing in the late 90s in the internet boom.

Corporate Governance is a function of your seat on the table. The board of We Work ignored all blatant conflicts and empowered one person because he was driving valuations up. All of them had a payout linked to valuations. When the valuation bubble burst, they acted but by then it was too late. Conflict of interest was overlooked by the board because of the larger than life persona of the CEO. Imagine! The CEO was buying office property in personal name and renting to We Work. None raised a red flag. Similarly, purchase of corporate jet when the company was burning cash got clearance. After running the company to ground, Neumann walked away a billionaire.

The role of a celebrity CEO in corporate success is known but what happens when the CEO goes off balance. There were hardly any whistles blown when CEOs indulge in inappropriate behavior. To be fair to Neumann, he was brazen. He smoked weed, had tequila shots at his work place and in one instance, threw liquor bottles in office and broke panes. He even carried a stash of contraband in We Work’s corporate jet from USA to Israel. No one complained because everybody was in the gravy train together. This is why in ancient times, kings had court jesters or high priests to show them the mirror.

Comparison trap affects everyone. The CEO of Regus, which is one of the world’s  largest operator of business centers and office space is not able to handle the fact that We Work is valued so richly. Neumann is constantly comparing himself to other wealthy and visionary Silicon Valley CEOs. The big daddy of all banks, JP Morgan is comparing itself to Goldman Sachs and wants a piece of the tech action, and so on. And this comparison clouds their overall judgment of propriety. 

Is Capital an effective moat? The Softbank school of investing believes in over-capitalizing the company so that none dares to compete and gain rapid market share or dominates the market. Capital inflows compensate for negative operating cash outflows. We Work collapsed when Softbank tap shut. And Softbank tap shut because Saudi sovereign funds did not subscribe to the former’s Vision Fund. For an entrepreneur to build a business model based on infinite capital inflows is risky.

The laws of the financial world are different from the physical world. You can have prolonged periods of time, when sanity takes a back seat and excesses happen. We saw the story unfold during the last days of the previous century when Internet phenomenon hit the world. Boom and busts happen but their timing is unknown. We have been taught that stock market prices are a slave to earnings but this is true over long periods of time. In short term, anything can happen depending on factors beyond anybody’s control or imagination. What will prick the bubble is known with hindsight. As someone told me years ago, enjoy the bull market till it lasts and never forget that a bear market is around the corner.

The book can be summarized in these lines – Society is easily wooed by a charismatic leader with a grand sounding vision. It’s hard to resist an optimist who promises a lucrative future- a messiah for profits lying just over the next horizon (pg 392).

PS – If you  like such books, read The Smartest Guys on the Room, which recounts the spectacular collapse of Enron, another visionary company.

The author of this article is Mr. R Venkataraman, Chairman, IIFL Securities Ltd

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