Why VCs keep investing in Adam Neumann around the world

Few sentences written about America fall short of F. Scott Fitzgerald’s famous line: “There is no second act in American life.”

In fact, Americans love second chances, and nowhere is that more true than in Silicon Valley.

So it wasn’t a complete shock when earlier this week venture capital firm Andreessen Horowitz announced in an open letter from the firm’s co-founder Marc Andreessen that it would be invested $350 million in Flow, new real estate company focused on renting apartments founded by Adam Neumann, the entrepreneur whose tumultuous tenure at WeWork (the company he co-founded and then failed) has already been the subject of books, documentaries and a Hulu miniseries starring Jared Leto.

In fact, the biggest surprise may have been that it took anyone this long.

It must sound absurd. WeWork’s value went from $47 billion to less than $6 billion on Neumann’s watch. And he was fired from the company’s board after his reckless expansion plans and strange management practices caused the firm to lose more than $1 billion a year.

It’s not a record you’d think would make someone worthy of Andreessen Horowitz’s biggest investment. And while Andreessen’s letter contains a lot of lofty rhetoric about the company reinventing the residential rental market, Flow sounds mostly like a WeWork-style landlord — which doesn’t exactly inspire confidence that it will be a wildly profitable business.

Then again, unlike WeWork, this time Neumann is putting up real assets, in the form of thousands of apartments, as part of the deal.

So why is anyone betting on Neumann again? Because as it turns out, when it comes to raising money from VCs, the fact that you founded a company that ends up being worth billions matters more than the fact that you destroyed a lot of value to get there. In fact, Travis Kalanick, the co-founder of Uber, has also grown hundreds of millions earlier this year for his startup CloudKitchens, though he also left the company in disgrace.

VC preference for entrepreneurs with prior experience is long-standing and deep-seated. For example, 2007 study found that compared to nascent entrepreneurs, those who had previously founded venture capital-backed companies were able to raise venture capital earlier in the process and that, in general, serial founders raised more venture capital overall.

2013 study of unicorns (startups valued at more than one billion dollars) by venture capitalist Eileen Lee found that 80% had at least one co-founder who had previously founded a company.

And according to 2019 survey by Rajarishi Nahata of Baruch College, previous founders get much better terms in their VC deals (retain more board control, have to give up less equity) and get earlier access to capital than early stage entrepreneurs – even when the founders’ earlier ventures had failed. Perhaps even more strikingly, previous founders were able to raise more money earlier and on better terms than startups, even though the operating results of serial entrepreneurs’ companies were on average worse.

Why is that? Repeat founders will likely benefit from having raised money before, not only in the sense that they have connections and existing networks, but also in that they have experience working with venture capitalists.

For budding entrepreneurs, this creates a version of the eternal catch 22 of not being able to get a job without experience and not being able to get experience without a job. So it makes sense that black and female entrepreneurs—who have a harder time even getting their foot in the door—were vocal in their frustration at Neumann getting another pile of money.

Still, venture capitalists tend to bet more on the rider than the horse, and can always be convinced that even serial entrepreneurs who have failed have at least learned important lessons from the experience. (in his letter explaining the investment in Flow, Andreessen made exactly this argument, writing: “[W]I love seeing repeat founders build on past successes by growing from lessons learned.”)

Paradoxically—given the huge amount of investor capital Neumann evaporated into WeWork—it’s hard to say he was a failure from the perspective of his original investors.

Benchmark Capital, the venture capital firm that was WeWork’s first major investor, put money into the company at a $100 million valuation, meaning it likely received a return on its investment of somewhere between 30 and 60 times (depending on what endpoint you want to select).

Neumann destroyed tons of value at WeWork, but the value he destroyed was for investors who poured money into the company at vastly inflated valuations (most notably Softbank). And unlike Theranos (a company associated in the public mind with WeWork), which was a scam through and through, WeWork turned out to be a real company that is currently worth about $4 billion.

It might seem incredible—and infuriating—that someone could go from the epitome of a cautionary tale to a billion-dollar valuation overnight. But this is a country that made a man who bankrupted numerous companies, the star of a TV show for his supposed business acumen, and then put him in the White House.

Of course, Adam Neumann got a second chance. But other deserving founders are still waiting for their first shot.

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