Tech and investment circles were ablaze when the bombshell news dropped on August 15th, that the eccentric ex-WeWork CEO Adam Neumann had just raised $350 million from top VC firm Andreessen Horowitz (also called, a16z), for his yet-to-launch start-up, Flow.
Although the company details are sparse, Neumann has reportedly purchased approximately 3,000 properties in Miami, Fort Lauderdale, Nashville and Atlanta, and it seems that Flow is aiming to tackle America’s housing crisis with a branded product with consistent service and community features (sound familiar?).
Notably, this investment, which values Flow at over $1 billion, is the largest individual check a16z has ever written in a round of funding to a company. And, many are wondering…“wtf”?
Let’s Take a Trip Down Memory Lane
At one point, WeWork was valued at $47 billion. But after a failed IPO along with systemic demonstrations of mismanagement, inappropriate behavior and financial manipulation (recall the tales of Neumann drinking tequila and smoking copious amounts of marijuana on his private jet and the creative financial accounting scandals), the valuation plummeted.
In 2017, the charismatic Neumann spent 12 minutes walking Masayoshi Son of SoftBank around WeWork’s headquarters, prompting an investment of $4.4 billion. But in the wake of WeWork’s near collapse, Son admitted, “I made a wrong decision…I didn’t look at WeWork right.”
Neumann was eventually ousted from leadership in 2019, but walked away with $800 million as a consolation for giving up control of his company. Today, WeWork has a market value of about $4 billion, less than 10% of its peak valuation.
At this point, we’ve gotta ask. Are we in a deja vu moment..or the twilight zone??
Here’s Three Reasons Why This Deal Doesn’t Make Sense
First, Flow is Not an Original Concept. Neumann Borrowed It.
Hello Alfred or Alfred, is a resident-first, tech-enabled, property management solution, founded by two female founders – Marcela Sapone and Jessica Beck in 2014. They provide owners and operators transparency into their property metrics, resident satisfaction, and staffing efficiency, offering predictive insights about overall property health. For their residents, Alfred offers marketplace services, exclusive brand partnerships, plus virtual & in-person programming that increase a sense of community and belonging.
Alfred has raised approximately $144 million to date (according to Crunchbase), and one of their largest investors is none other than Adam Neumann, who invested $30 million into the company back in October 2020.
Forbes reported on the striking similarities between Alfred and Flow, but explained that according to inside sources, “this isn’t a typical investor relationship. Neumann distanced himself from Alfred after he no longer would have a way to gain full control of his portfolio company, and then launched a startup that appears to compete with its product.”
Forbes also reports that, “before Neumann began distancing himself from Alfred, he started getting involved with Carson Living, a small startup that provides similar services to Alfred. And in 2021, Neumann quietly acquired the start-up, and Carson’s founder now works on Flow’s products”.
On the podcast This Week in Start-ups, angel investor Jason Calicanis explained the Flow fundraise, stating “[Neumann is] a madman…he’s audacious…and you’re looking for an audacious person to build a $100 million-dollar company. We don’t have enough of those people.” And this just isn’t true. The existence of Alfred proves this statement false.
Of course, any free market society demands competition to fuel innovation, but the narrative really shouldn’t be – Neumann is a visionary founder who is creating this original concept to design the future of living, and that’s why he’s worth a billion dollars. Because the reality looks more like he is repackaging someone else’s business.
Second, Inflated Valuations are Bad for the Venture Ecosystem.
Venture funds and media outlets have reported that the venture market is slowing down, valuations are coming down, and founders should start getting sober about fundraising expectations. According to Yahoo Finance, “venture capital deal activity has cooled off as the technology sector faces a downturn brought on by rising interest rates and profitability concerns.”
In the words of Fat Joe, yesterday’s price is not today’s price!
Deena Shakir, a partner at Lux Capital, a billion-dollar fund that does both early stage and growth stage investing, explained at the Collision Tech Conference in late June:
“We’ve been telling our companies to be buckling up and getting prepared for the winter, or the storm…to make sure that they are keeping a close eye on burn, that they’re thinking long term and have plenty of reserves, that it is unlikely that the trend, you know, that may have seemed normal for the last couple of years of raising every three to four months at a 3 to 4x valuation is…going to be the case in the near term– and perhaps not even the case in the long term. So thinking long term about the sort of ability to survive first and then thrive.”
Flow has no revenue. Flow is not operational. And yet, Flow has received $350 million, at a billion-dollar valuation. The whole thing sends a mixed message to the market and with such distortions in valuation for private companies, two things happen.
First, it makes it difficult for investors and founders to come to a deal, because the delta between expectations and reality is too great. For example, I had a founder looking for fundraising support, citing a recently funded pre-revenue start-up, which raised $5 million at a $100 million valuation, as justification for her valuation.
Second, inflated valuations too early in the life cycle, can lead to “down rounds,” later-on, severely diluting early investors. For example, in March, grocery delivery company Instacart slashed its own valuation by roughly 40% in acknowledgment of the slowing momentum in the delivery space. And in July, Klarna announced it was considering dramatically cutting its valuation from $45.6 billion to $6.7 billion for its latest $800 million funding round.
Ultimately, even if a pre-launch, pre-revenue start-up could justify a billion-dollar valuation, it certainly wouldn’t be a real-estate focused, property-management-type company. Been there and done that. Just ask Masayoshi Son.
Third, Marc Andreessen Doesn’t Really Care about Affordable Housing
Marc Andreessen, shared news of the Flow deal on the a16z blog, explaining:
“Our nation has a housing crisis. The demographic trends driving America’s housing market are impossible to ignore: our country is creating households faster than we’re building houses. Structural shortages in available homes for sale push housing prices higher, while young people are staying single for longer and increasingly concentrating in highly desirable urban centers.”
“Shelter is one of our most basic needs. In a world where limited access to home ownership continues to be a driving force behind inequality and anxiety, giving renters a sense of security, community, and genuine ownership has transformative power for our society. When you care for people at their home and provide them with a sense of physical and financial security, you empower them to do more and build things. Solving this problem is key to increasing opportunity for everyone.”
And, back in April of 2020, he published an essay on the a16z blog titled “It’s Time to Build,” where he lamented “crazily skyrocketing housing prices in places like San Francisco, making it nearly impossible for regular people to move in and take the jobs of the future.”
But, unfortunately, the rhetoric and the reality don’t match up.
This summer, Andreessen and his wife Laura urged local officials in his own town of Atherton (a wealthy suburb of San Francisco), not to build affordable housing for fear it would devalue their own property. They submitted public comments to the Atherton Town Council denouncing a plan to green-light the construction of around 130 multifamily properties in the area, according to The Atlantic.
Subject line: “IMMENSELY AGAINST multifamily development!” the email from the Andreessens to the council read.
“I am writing this letter to communicate our IMMENSE objection to the creation of multifamily overlay zones in Atherton…Please IMMEDIATELY REMOVE all multifamily overlay zoning projects from the Housing Element which will be submitted to the state in July,” the couple wrote.
“They will MASSIVELY decrease our home values, the quality of life of ourselves and our neighbors and IMMENSELY increase the noise pollution and traffic.”
For context, the planning department proposed to modestly increase the zoned capacity of Atherton, legalizing the construction of smaller, multifamily properties in a few places—just a little more than 130 units total by 2031.
At best, Andreessen supports housing reform in a qualified, “not in my backyard”, sort of way. And at worst, he doesn’t care at all – and is paying public lip-service in complete contradiction to his personal beliefs. Either way, there’s a disconnect in philosophy that feels inauthentic, and undermines the sheer magnitude of the $350 million investment.
Here’s One Reason Why All of The Logic Above Doesn’t Matter.
Logic and reason aside, when it comes to investing, there’s always a trump card, familiarity bias. According to Psychology Today, familiarity bias is like being at a party where it’s easier to chat with friends than mingle with strangers — but it can lead to sub-optimal diversification as investors stick to familiar ‘go to’ assets, rather than exploring the full universe of options.
And when we talk about sub-optimal diversification – it is not just about industry or asset class, this also applies to the demographic profile of founders we back (hence, why women and people of color are less frequently selected as investment targets).
In the ‘90s, two psychology researchers Chip Heath and Amos Tversky showed in a series of experiments that when people are faced with a choice between two gambles, they will pick the one that is more familiar to them. In fact, they will sometimes pick the more familiar gamble even if the odds of winning are lower!
Adam Neumann and WeWork are both house-hold names – they are familiar. And perhaps even more importantly, a16z recently led a $70 million investment in another start-up co-founded by Neumann called Flowcarbon (building an on-chain carbon credit tokenization platform that allows all market participants equal access, where anyone can come to the platform and tokenize their certified off-chain carbon credits, unlocking an economic flywheel for sustainability). Early-stage investing is all about the team, and in this case, the famed venture fund has decided they like Neumann’s flow (pun intended).
Andreessen acknowledges Neumann’s mis-steps, but says that he is worth a second shot, explaining “it’s often under-appreciated that only one person has fundamentally redesigned the office experience and led a paradigm-changing global company in the process: Adam Neumann. For Adam, the successes and lessons are plenty and we are excited to go on this journey with him and his colleagues building the future of living.”
Admittedly, a16z, along with many other venture funds, are sitting on a ton of “dry powder”, which makes trigger fingers happy. But in this recessionary market, there are simply better bets to make. At the end of the day, only time will tell as to whether Flow will fly.