For nearly nine years, WeWork, the New York City-based co-working startup enjoyed a dream run in the global real estate market. Then, just weeks ago, came the news that shocked the world – a sudden implosion that saw the company previously estimated to be worth $47 billion reduced to a mere $7 billion.
WeWork’s sudden, unexpected failure is the biggest of its kind in the entire history of startups and most certainly warrants a closer look.
So, let’s have a look at WeWork’s vision first and then we will find out what is making the startup drowning.
WeWork was founded in 2010 by Adam Neumann and Miguel McKelvey as a real estate company that designed and built flexible and affordable shared office spaces, both physical and virtual. The company’s founders wanted to utilize the office spaces that had been left empty and unused by the economic crisis for housing startups, freelancers and virtually everyone else that was looking for an economical working space.
While the concept of shared workspaces wasn’t new, WeWork focused on increasing the appeal of their co-working spaces by making them scalable and suitable for businesses of different sizes and market value. Whether a business needed one single office desk or one hundred, WeWork was supposed to provide the ideal real estate solution – which it did for years.
What set WeWork apart from other co-working solutions was that WeWork offered the complete package of services required to start and efficiently run a business. It wasn’t just reception and catering, businesses, both new and established could hire anything from legal and financial services to basic plumbing and IT aid.
WeWork benefitted its customers by helping them cut down on the expenses while streamlining their operations. WeWork workspaces were designed to create the same kind of working experience as Google’s ‘employee-happy’ workspaces.
The list of WeWork members has included well-known startups like Reddit, Consumr, and Fitocracy. At its peak, WeWork was operational in over 280 locations in 32 different countries, with over 12000 employees on its payroll.
So, what happened next that played havoc with the fate of this shining startup and is leading it to doom these days? Let’s find out.
In April 2009, WeWork legally changed its name to We Company. WeWork confidentially filed for an IPO in April 2019 with the goal of raising $3.5 billion. In August 2019, when the company filed S-1 paperwork, it revealed that WeWork had been suffering heavy financial losses for a while, including $2 billion in the last year itself. This drew widespread media attention, drawing a question mark over the company’s chances of future profitability.
In September 2019, the company announced the decision to postpone its IPO and founder Adam Neumann stepped down as the company’s CEO. By November 2019, the company had laid off almost 20 percent of its global workforce – approximately 2400 employees around the world. Here are a few reasons that are causing it to fail:
WeWork’s recent troubles have highlighted several issues that went overlooked in the years when the company was performing well. Industry experts are pointing at everything from eccentric leadership and a flawed business model to an unfocused and overblown vision.
But what are the real reasons behind WeWork’s spectacular story? Let’s find out-
1.A Popular But Unprofitable Business Model
Everybody loved the WeWork approach of leasing spaces that could be customized as per the consumer’s needs. The companies that rented the space loved the idea of outsourcing to a single real estate provider. Private investors had complete confidence in the marketability of the business idea and the workers using the co-working spaces enjoyed the upgraded workplaces.
What nobody focused on was the limited profitability of WeWork’s business model. WeWork’s operations involved high, recurring expenditures that go into leasing the properties which the company then rented out for short durations.
Since a lot of the leased properties were prime locations that the company rented out for long durations, the expenditure to WeWork was always on the higher side. The income or returns, however, were volatile and subject to the market’s situation.
Such business models have little scope for increasing income and are largely at-risk during market upheavals.
2.An Abundance of Unproductive Co-working Spaces
A big part of WeWork’s operations revolves around constructing high-tech workspaces that are rented out to businesses and entrepreneurs looking for shared office spaces. While the company owns several properties where it’s constructed a lot of high-end offices, a big portion of its co-workspaces are located in communal areas that don’t generate much revenue. One of the reasons WeWork has failed at making profitable returns even in favorable market conditions is that it continually pays high rents for its workspaces in cities like New York and the returns from these workspaces aren’t good enough to translate into a big profit.
3.The Reveal of Financial Losses Affected Investors’ Opinion
WeWork had high hopes of its IPO which were dashed when the company had to reveal its losses during the filing process. Prior to that, the company was largely viewed as one of the most successful and promising unicorn startups heading into 2020.
WeWork had recently acquired Managed by Q – a platform for hiring service providers (professionals such as receptionists, cleaning staff, tech support), and Spacious – a company that leases unutilized restaurant spaces during the daytime hours and rents them out to mobile workers.
With a public focus on these acquisitions, the company’s financial losses in the past year had gone largely unnoticed. The reveal came as a shock to both existing and potential investors and forced the company to postpone its plans of going public.
4.Question Marks On the Company’s Governance Structure
WeWork’s founding member and now former CEO Adam Neumann has always been a controversial figure with unconventional methods and philosophies.
Whether it’s the culture of unlimited access to alcohol in the company’s early days to his “energy and spirituality” based approach to business that differed from the traditional focus on profit and losses – Neumann’s leadership was always irregular.
And while a lot of the company’s success can be attributed to his unique approach, it’s also one of the reasons for the company’s setbacks.
WeWork’s S-1 paperwork disclosed an ownership scheme built for personal benefit that promised Neumann with more than half of the voting power in the company. This would have severely affected the shareholders’ rights and degree of control in the company.
There have also been reports of Neumann working to cement himself as a world leader instead of focusing on successfully running the established businesses. All this led to speculation and mistrust about WeWork’s governance structure and direction and likely played a major role in its recent misfortunes.
5.Flawed Investors Model
One of the reasons WeWork was able to carry on unchecked over the years was due to the backing of Softbank, the Japan based multinational holdings company that owns an approximate 29 percent share in WeWork.
Even with Neumann being forced to step down, Softbank has executed a bailout for WeWork and worked out a deal that promised $1.7 billion to the former CEO who will be taking on a consulting position with the company. The package includes $970 million from selling his WeWork stock and approximately $185 million as consultancy fee for the next four years.
Softbank past investment ventures include similar examples where it’s funded startups to drive up their valuations, enabling them to attract more investors. While this investment model definitely generated paper profits for Softbank, it’s a big flaw in a widely accepted investment model that needs to be corrected.
WeWork set out to transform office culture and it was certainly doing a good job at it until it couldn’t. Did the management overestimate the worth of their business idea and lose sight of the key metrics while trying to expand its avenues? To an extent, it definitely did.
While it remains to be seen if WeWork can endure and get anywhere close to its best days, it’s failures definitely offer some valuable lessons to everyone in the organizational ladder – from VCs, bankers, and advisors to founders themselves.
Going forward, there’s going to be more focus on factors like shareholder rights and organizational structure and startups will likely reevaluate the profitability of their business model and approach. Let’s hope learning from WeWork’s failure helps other companies avoid the same fate.
Want to discuss your startup idea with experts? Contact Now!
(5 ratings, average: 3.80 out of 5)
Get the weekly updates on the newest brand stories, business models and technology right in your inbox.