How WeWork Lost its $47 Billions Valuation in Record Time

Posted by

WeWork was founded in the year 2010 in Soho, New York, United States by Adam Neumann and Miguel Mckelvey.

Before WeWork, Adam Neuman started a Kids clothing venture called Krawlers which later was turned to Egg Baby. This company still exists today as a luxury kids clothing company but Neumann is no longer involved in its day to day operations.

Adam Neumann

Neumann met Miguel Mckelvey through a mutual friend just after the launch of Egg Baby. The two bonded well and started working together in the same building in Brooklyn.

Soon they developed the idea of co-working space and pitched to their landlord. They wanted a floor to be rented out for this idea and Greendesk was born.

Greendesk

Greedesk started making profits and soon enough both of them cashed out by selling their shares to the landlord for $3 million.

With the profits they made, Neumann and Mckelvey started on their own and soon established WeWork in New York.

The idea behind WeWork was to lease/rent out commercial office space to companies and start ups with no set up costs. Any start up could just pay the office rent and start working!

WeWork took long term lease on properties in prime locations, renovated them, divided them to smaller units and rented them out to interested parties.

Basically it was a real estate company but positioned itself as a technology company. This allowed the company to raise huge funds as technology companies can grow quickly.

The founder Adam Neumann was so successful in selling WeWork as a technology company then even SoftBank invested in the company. The SoftBank CEO, Masayoshi Son even compared WeWork to Alibaba at one point of time.

The valuation of the company went up like crazy. Investors poured in funds from all sides and at one point it was valued at $47 Billions.

But WeWork was neither a tech company and nor profitable. In fact it was losing millions in operating cost and the owner was spending money on personal stuff.

All this came out when WeWork filed for IPO in 2019. The financials of the company was out in the open and faced scrutiny from experts.

The technology part that the founders brandished came from WeWorks use of software in optimizing the operations. Yes, it optimized how the company could maximize the use of space within the company but it was nowhere close to the label of a technology company. It was just smart branding to raise funds.

It also came out that Adam Neumann liquidated close to $700 millions of his stock before the filing. WeWork were looking to raise $3.5 Billions from the market.

The personal lifestyle of the founder also became a topic of hot debate. Neumann led a lavish lifestyle complete with private jets while the company was drowning in loses.

Analysts found that the fundamental business model was seriously flawed. While WeWork leased for long term – some 7 to 10 years at one go, their customers took up only short term commitments of 2 months to a year. The remaining time they had to find new customers or risk the property running empty space for long.

The company was losing money because the business model was incorrect and in the future too it would incur huge losses. There was no technology which could turn around the situation at WeWork.

It is said that the reason behind WeWork being able to generate so much hype was SoftBank. The banking company has a 100 Billions fund for start ups around the world and the CEO is thought to be a shrewd investor.

When SoftBank poured billions into WeWork after just a 12 minutes tour of WeWork quarters in New York, the world took notice. After all the CEO of a 100 billion fund can not be too wrong!!

But that was precisely the primary reason of WeWorks downfall. With SoftBanks funding behind, WeWork now was a heavyweight and scaled quickly and grew beyond expectations.

But WeWork’s core business model was not working at all! They expanded to new areas like School, Gym and Artifical Wave even before the company could turn profitable. There was too much money and too little to do.

Adam Neumann said that he wanted to bring together people in a community to work and innovate. Everyone will be more energized if like minded people bonded in the workspace. While it is true that great work atmosphere contributed to increase in performance, with WeWork it was kind of undecided as some people did not find the co-working spaces a joy to work in.

WeWork scaled quickly to 120 cities and 800 locations in the World. Most locations were in prime areas and the leases taken were long – of 5 years to 10 years. The locations were renovated with everything that a modern office needs and rented out as co-working space to companies and start-ups for a monthly fee.

This massive scale up was made possible by infusion of funding from SoftBank. The banking company with $100 Billions dollars fund pumped in money in WeWork to make it bigger and faster.

At one point WeWork became the 4th highest valued start up in the world just behind companies like Uber.

But WeWork was operating with losses from day one. Despite the the loss making nature of the company it has been scale up and highly valued due to the infusion of fund from SoftBank.

The business model of WeWork was like that of a real estate company but the founder projected it as a tech company. WeWork was an inefficient intermediary in the real estate business. Landlords could lease out workstations on their own and did not need WeWork!

The interesting thing is that Regus, the closes real estate competition was profitable but valued at 1/13 of WeWork! Regus was ahead in most metrics of performance, but it never got the valutation of WeWork. The CEO of Regus once remarked that they once tried to find out what they were doing wrong but never found anything!

Due to its perceived positioning, WeWork was able to raise huge sums of cash. Because a tech company can wait till infrustructure is in place and then serve thousands of additional users at a very nominal cost. But this is not the case with a real estate company. WeWork had to lease more real estate in order to serve more customers and that was really not scallable.

The most mystifying of all investments into WeWork was that of SoftBank. The CEO of SoftBank, Masayoshi Son, reportedly committed to $4 Billions of fund in a meeting with Adam Neumann that lasted only 12 minutes! It is speculated the Son was dazzled by the charismatic Neumann.

The funding from SoftBank gave WeWork a sort of legitimacy. WeWork scaled massively with the money, but it was premature. The scaling had no purpose other than expansion. The formula for profitability was not there. Nobody seemed to bother. WeWork was not profitable in any of the earlier models and it seemed to extend to newer units too.

Secondly, the product market fit was never achived with this company. WeWork leased properties to divide them into smaller units and rent them out. Historically it has never been a great model for success. None has achieved any sort of profitability with this model. The technology part just enabled them to cut down on or enlarge certain facilities based on user behaviour. But that did not translate to profitability in any way.

Adam Neumann led a flashy lifestyle while the company was losing money. Employees worked hard and at odd hours to fulfill his sky high ambition, but he gave scant regard to their wellbeing. Reckless decisions were taken overnight that bound all employees except Neumann!

When a company is privately owned without outsider money, the owner can do whatever she/he wants. But once ivestors put in money then corporate governenece is needed to protect the investors shares. This concept seemed to be missing from WeWork as it continued with the whims of the owner even after getting funds from outside.

Adam Neumann was also charged with nepotism, giving his wife Rebekka numerous roles within the organization for which she was ill qualified. Corporate governence can go for a toss.

When the IPO was filed, it came out that Neumann diluted $700 millions of his own stock and restructured the organiztion to benefit from lower tax rates on the stocks then what the general rank and file employee would pay. He was growing at the expense of his employees.

There was also growing conflict of interest. Neumann would buy property and lease out to WeWork without full disclosure. By the end of 2018, he was paid $12 millions in rent. Some sources say that another $100 were lined up for payment.

Neumann also sold the brand name We to the company. The trademark name was sold through a subsidiary We Holdings to WeWork for $5.9 millions. That was quite bizarre and naked greed on Neumann’s part.

The private jet that the owner bought added fuel to the fire. WeWork bought and customized a private jet for the founder. Neumann justified that purchase as business expenses and rationalized that he used it to cut down travelling time and hold business meetings, but the employees griped that company had money to buy a jet while they had no bonus and incentives. They also alleged that Neumann used the jet for family purpose.

The unlimited amount of money thrown at WeWork led to premature scaling. WeWork opened units all around the globe at dizzying pace. That is not bad. But what about profitability of the model? WeWork was burning $2 dollars to generate $1. That is not sustainable.

WeWork acquired companies that had nothing to do with its core business model – Artificial Wave, School. It also dreamed up tangentially related businesses – day care ( WeCare ), WeLearn, bicycle valet service (WeBike), food delivery (WeFood) etc. What all these businesses had to do with WeWork? Precious nothing!

In the end WeWork lost billions of investors money and gained nothing. It was a classic case of overcharged, overambitious and charismatic leaders misleading investors once again. With a faulty business model WeWork was never profitable and could not hope to be ever profitable.

Business lessons to be learnt from WeWork case study

  1. Premature scaling is bad. Start small. Show that you can be profitable then go full scale mode.
  2. Focus. Focus. Focus. Adding more business to the mix are good if your business is in profit and these business can help in some way. Never add more businesses because your business is losing money!
  3. Corporate governance is the key for a mature business. Once you take investors money – keep the family out of it.
  4. Be a responsible owner. Spending in lavish lifestyle is not great when your company is struggling.
  5. Develop a sound business model. If your core business is bad then no amount of sh*t can cover it up for long.

Leave a Reply