WeWork : The 47 Billion Dollar Disaster
“If you are open-minded and you let the universe come in, you never know where things might go.”
— Adam Neuman, Former CEO of WeWork
From a failed IPO to the ultimate firing of their CEO and now the possibility of filing for bankruptcy, the story of WeWork is an extraordinary and catastrophic one, with twists and turns not many could expect especially since it was backed by such high profile investors such as SoftBank, Amazon, Goldman Sachs, J.P Morgan Chase to name a few.
WeWork is a perfect example of investors trying to jump onto the “next big hype” without looking much into the fundamentals, business models or the overall structure of the company. At the peak of its popularity, WeWork was valued at a staggering 47 billion dollars without having made a single dollar of profit.
So then why did such prominent investors throw their money towards this burning building of gold?
Well to answer that question, we must first take a brief look into the business operations of WeWork. WeWork is essentially a real estate company, started in 2010 by Adam Neuman and Miguel McKelvey, which offers shared workspaces for technology startups and other such enterprises. It also used technologies such as data analytics to offer better experiences to their customers.
WeWork grew at a tremendous rate amassing more than 897 locations over 127 different cities. It was also the major office occupier in some of the most metropolitan cities in the world like Manhattan and London. This phenomenal growth rate could be majorly contributed to the immense financial backing WeWork was receiving from its investors as well as due to the charismatic leadership of its CEO Adam Neuman.
This charismatic and overconfident attitude also had its negative effect with Adam Neuman and the WeWork management relying more on gut-based decisions rather than data-based. They relied on traditional methods of management and were persistent in not adapting themselves in a rapidly changing industry. As a result, WeWork kept losing money in spite of growing which ultimately became too much to handle.
WeWork functioned on a business model which was too risky to attract new investors and made the current investors worrying about their investment. WeWork engaged in an average lease of 15 years with the landowner and each year used to renew the contract. What this means was that the company used to buy the land/building on a yearly basis and then rent them out for various startups and establishments. If occupancy was high or property prices increase, then WeWork makes a profit of the space but if occupancy was low or property prices decrease then WeWork would have to cut down on the rent but still pay the agreed fee to the landowner.
In spite of making severe losses year-in-year-out, Adam Neuman did not hesitate in buying extravagant commodities and hosting glamorous parties which further drained through the company’s resources. He bought a 60 million dollar jet despite the company losing 1.6 billion dollars that year. He even trademarked the term “We” and forced WeWork to buy the trademark off him for 5.9 million dollars.
The nail on the coffin though, was when WeWork filed for an IPO in the month of August. During the filing of an IPO, a company has to disclose several information such as financials, business models, disclosures to the public. As a result, when WeWork filed for its IPO, the whole world got to catch a glimpse of the internal functionings of the company and it wasn’t a pretty sight. From some of its financial statements it was seen that WeWork was losing more than 5000 dollars per new customer. Such information did not bode well with the public and as a result its valuation dropped nearly 80 percent by the end of 2019. Adam Neuman too dumped a majority of his shares, which clearly wasn’t a good sign for the company.
Adam Neuman was soon ousted from the company and is currently suing WeWork’s biggest investor SoftBank on the grounds of breach of contract and breach of fiduciary duty.
With the onset of the coronavirus pandemic, the business of WeWork has taken a massive toll with sales dropping to new lows and due to the lack of further investments, the company might have to face the prospect of bankruptcy in the very foreseeable future.
SoftBank and its CEO, Masayoshi Son, often considered as pioneers in investing is enroute to losing nearly 19 billion dollars as a result of this endeavour. WeWork once considered as one of the largest startups in the world is now not even a mere shadow of its former glory.
