Its competition is a 'plug at Starbucks': Billionaire investor Sam Zell says WeWork is the 'Enron of real estate' - and explains why similar models are also doomed to fail

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• Sam Zell, the legendary investor and entrepreneur, has seen WeWork-esque business models pop up since the late 1950s - each of which has gone belly-up.
• In addition to providing historical anecdotes, he harps on the harsh realities of being a marginal supplier, having overwhelming competition, and featuring low barriers to entry.
• Zell also points to the fickle nature of venture-backed funding to provide cash flows to the company.
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The rise and fall of WeWork has been a captivating to say the least.

A botched IPO, the removal of an eccentric CEO, and an 80% drawdown in valuation seemingly happened in an instant.

But Sam Zell, legendary investor and entrepreneur, has danced this dance before - and he's not surprised that WeWork's business model led them to this outcome.

"My first exposure to the WeWork model - which is basically leasing an office floor for 15 years, and then breaking it up, and then leasing it to small users at higher rates - the first example of that was a guy named Paul Fegen in the late 50s," he said on "The Tim Ferriss Show." "In the late 50s and early 60s, no new office building existed without a floor or two leased to Fegen."

He continued: "And then supply became much more prevalent and he went broke."

Fegen's bankruptcy was one of the largest in American history. Today, he performs card tricks for as his main source of income.

"And then somebody else did it again, and they went broke," he said. "Today, even the largest coworking company in the world called Regus, they went broke."

To Zell, history is the ultimate teacher - and the WeWork-esque business models of the past seem to be short-lived.

"If you're the marginal supplier, when things are good, everybody uses you," he said. "And when things start to soften, you're the first one to feel the impact."

He added: "It's just the Enron of real-estate."

To bolster his thesis, Zell harps on omnipresent competition, the fickle nature of venture-backed cash flows, and low barriers to entry.

"What was WeWork's competition?" he said. "It was a plug at Starbucks. In other words, the guy came and he occupied a desk from you. But if things got tough, he went back to Starbucks and plugged his computer into the wall and he was in the coworking space."

Clearly, Zell doesn't think that there's anything proprietary or unique about a WeWork coworking space. In fact, he thinks it can be replicated with some coffee, a few people, and an available outlet.

"The question that I keep asking people about WeWork was: 'Just tell me the cash flows that WeWork generates - what do they come from?" he said. "Do they come from profits in other businesses, or do they come from venture capital? Which in effect, doesn't have the discipline of profitability."

Zell says that the answer to that question is obvious. The company is kept afloat through piles of VC-backed cash flowing through its coffers. Nothing more.

With all of that under consideration, he relays a final piece of information from his business acumen.

"When it's all said and done, any company that doesn't have a barrier to entry is vulnerable in any business," he concluded. "The reality is they're creating new WeWork's all the time, just calling them different things."

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