Why VCs keep investing in the Adam Neumanns of the world

Few sentences written about America have been less on the mark than F. Scott Fitzgerald’s famous line: “There are no second acts in American lives.”

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

So it wasn’t entirely a shock when earlier this week venture capital firm Andreessen Horowitz announced in an open letter from firm cofounder Marc Andreessen that it would be investing $350 million in Flow, a new real estate company focused on apartment rentals founded by Adam Neumann—the entrepreneur whose tumultuous tenure at WeWork (the company he cofounded and then ran into the ground) has already become the subject of books, documentaries, and a Hulu miniseries starring Jared Leto.

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

That probably sounds absurd. WeWork’s value went from $47 billion to less than $6 billion on Neumann’s watch. And he was fired by the company’s board after his reckless expansion plans and bizarre management practices left the firm losing more than $1 billion a year.

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

On the other hand, unlike with WeWork, this time Neumann is putting up actual assets, in the form of thousands of apartments, as part of the deal. 

So why is anyone taking a gamble on Neumann again? Because, as it turns out, when it comes to raising VC money, the fact that you founded a company that ended up worth billions matters more than the fact that you destroyed a lot of value in getting there. In fact, Travis Kalanick, the cofounder of Uber, also raised hundreds of millions earlier this year for his startup CloudKitchens, even though he, too, left his company in disgrace.

VCs’ preference for entrepreneurs with previous experience is long-standing and profound. For instance, a 2007 study found that compared with novice entrepreneurs, those who had previously founded venture-backed companies were able to raise venture capital earlier in the process, and that across the board serial founders raised more venture capital in general.

A 2013 study of unicorns (startups valued at more than a billion dollars) by venture capitalist Aileen Lee found that 80% had at least one cofounder who had previously started a company.

And, according to a 2019 study by Rajarishi Nahata of Baruch College, previous founders get much better terms in their deals with VCs (retaining more board control, having to give up less equity) and get earlier access to capital than first-time entrepreneurs—even when the founders’ earlier ventures were unsuccessful. Perhaps even more striking, previous founders were able to raise more money earlier, and on better terms, than novices, even though the operating performance of the serial entrepreneurs’ companies was, on average, poorer. 

Why is this? Repeat founders likely benefit from having raised money before, not just in the sense that they have connections and preexisting networks, but also in that they have experience dealing with venture capitalists.

For novice entrepreneurs, this creates a variant of the perennial 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 women entrepreneurs—who find it harder to even get a foot in the door—have been vocal in their frustration over Neumann getting a new pile of money. 

Yet VCs are also generally inclined to bet more on the rider than the horse, and can always convince themselves that even serial entrepreneurs who were unsuccessful at least learned important lessons from the experience. (In his letter explaining the investment in Flow, Andreesen made this exact argument, writing, “[W]e love seeing repeat founders build on past successes by growing from lessons learned.”)

Paradoxically—given the sheer amount of investor capital Neumann vaporized at WeWork—it’s hard to say that he was a failure from the perspective of his original investors.

Benchmark Capital, the VC firm that was the first major investor in WeWork, put money into the company at a valuation of $100 million, which means that it plausibly got a return on its investment of somewhere between 30 and 60 times that (depending on what endpoint you want to choose).

Neumann destroyed tons of value at WeWork, but the value he destroyed was for the investors who poured money into the company at massively inflated valuations (most notably Softbank). And unlike Theranos (a company linked in the public mind with WeWork), which was a fraud through and through, WeWork ended up as a real company that is currently worth around $4 billion. 

It may seem improbable—and infuriating—that someone can go from being the epitome of a cautionary tale to being handed a billion-dollar valuation overnight. But this is a country that made a guy who ran multiple companies into bankruptcy the star of a TV show about 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.