From a tech perspective, the big news recently is the postponement of the WeWork IPO. Investors have become unnerved by deepening losses at the company, which last year bled $1.61 billion in red ink; nearly equal to its revenue of $1.82billion! While the company had been valued at $47 billion, based on the last cash infusion by Softbank, in recent days its underwriters settled on something closer to $15 billion. Not surprisingly, this led to the CEO/Co-Founder resigning but staying on as non-executive chairman.
It is useful to step back and ask: what were the core problems that led to this mess. My sense is there were two major ones:
1.) The WeWork Business Model in Not Unique and Is Easy to Copy -There is nothing original or proprietary about the premise of providing shared workspaces on flexible terms – IWG, formerly known as Regus, and others have done it for 30 years. WeWork was initially successful through a blend of branding, marketing, and design. In the last 9 months, you have seen established landlords slowly wake up, and realize they can do the same, which is exactly what operators like Boston Properties, Tishman Speyer and others are starting to do.
To boost revenue, WeWork has recent been seeking to sign up larger enterprises, rather than just focusing on smaller firms, and it has further awakened the big traditional office brokers, who are realizing they can gain revenue by doing what WeWork does. Also, more and more landlords are refusing to lease space to WeWork. For example, the CEO of Empire State Realty Trust recently commented: “Why would a landlord assist someone who is trying to disrupt their entire business.”
2.) The CEO/Co-Founder was Bizarre and Out of Control – As stated by Fortune recently, “his view was that WeWork is a culture company that was going to elevate the world’s consciousness and create a communal utopia. He is a self-contained bubble – powered, we now know, by tequila and pot and dreams of trillion-dollar wealth, everlasting life, and becoming president of Israel.”
He became the poster-boy for the millennial-driven economy, building out trendy offices complete with beer kegs and ping-pong tables in urban centers around the world. To demonstrate how out of control WeWork has been, in the past two quarters, as revealed by the recently filed S-1, the revenue was $1.54 billion, but the expenses in that period hit an amazing $2.9 billion. As stated by one financial analyst, “those sorts of figures have forced many to question whether WeWork would ever make money, scaring off public investors and casting doubt on its valuation.”
Another major concern has been the CEO’s broad vision that caused the company to invest millions of dollars on acquisitions, with little to show for it. It paid nearly $400 million for four tech-focused companies between 2017 and 2019, including a search engine optimization company Conductor, Meetup.com, and the coding academy Flatiron. Collectively, they have generated negligible revenue.
The business lessons here are obvious. At all junctures, you need a unique and distinctive business model, and sound management. Clearly this does not match WeWork’s wild history!