“…looking forward to tackling the next chapter with you.”
That was what Bolivian–American technology entrepreneur, Marcelo Claure, supposedly received from the “WeWork family”, which is a nice warm way to describe what’s left of the embattled co-working space giant. With 2,400 employees laid off and more to go, it seems like the best way to wrap that up is to have a “pasta overdose”—a night of tasting-menu dinner at upscale Italian restaurant Babbo, which typically cost hundreds of dollars.
It was a nice Thanksgiving dinner but thousands of employees were served a cold plate of you’re fired. In a frosted-glass room at the headquarters, staffers faced an executive who made it quick and painless by “dryly reading a few lines apologizing for a period of uncertainty”. It was a batch firing: there was multiple staff in the rooms that became former staff at the same time. There were others who could only make do with a video conference.
Regardless, Softbank’s injection of Claure creates a very unique position for the senior management team, as described by a WeWork employee during the company’s first all-hands meeting. With two co-CEOs and Claure promising to be an active chairman, the WeWork mess runs deep.
Unlike the two co-CEOs, Claure is no stranger to battle plans; after running Sprint as the COO for four years, the 120-years-old telecommunications company generated net income. In his lengthy speech at the all-hands meeting, Claure claimed that this moment in time for WeWork is an “inflection point”. It is the point where businesses will struggle, but the rewards after that will be uncountable.
The problem is that this inflection point is a giant shitshow and WeWork is bleeding dry at lightning speed.
How Large is the Hemorrhage?
Over at down under, WeWork walked away from several large lease deals, with tens of thousands of square meters given up and leaving companies like Mirvac to look for alternative occupants. Apart from co-working space deals, even the pool of property ownership that WeWork attempted to dip their toes into frozen up—the negotiation to purchase a building at 401 Collins Street has fallen through.
No dough in Australia for WeWork, and likewise in China as well.
A year ago, WeWork plunged deep into the country, expanding to 60 locations across megacities like Shanghai and Beijing. Today, every location in China has emerged to be WeWork’s biggest blood-sucker, with ultra-low occupancy rates starting from 35.7%.
Here’s the problem: WeWork needs to reach at least 65% occupancy to break even. In Shenzhen, there is only 30% to 50% of the space filled up. With that, WeWork is stepping the brakes on the China expansion plan—or maybe not, because recent moves might see Kr Space acquire every single WeWork co-working office in China.
It is not just China: WeWork is also giving up space in Hong Kong.
Plugging the Hole
There’s a huge hole to plug at WeWork and it is constantly getting bigger. Besides being busy saving themselves, rivals like Industrious, Knotel and Impact Hub are swooping in to grab market share—all while WeWork is touting a 90-day plan to turn themselves around, which Observer describes as “probably too ambitious”.
The plan is logical, but nothing surprising: jobs are being cut, non-core businesses are divested from and acquisitions are being sold away. With 80% of the company owned by Softbank today, the startup is no longer “founder-led” but instead, led by senior executives.
Besides Claure and several other Softbank executives, former Publicis Groupe and heavy corporate spender CEO Maurice Lévy have also joined the fire-fighting team.WeWork’s account is also awarded to Publicis and Lévy helming the marketing department as Chief Marketing Officer after the Frenchman presented a plan to Claure.
The team will have to get the company to profitability by 2021, which Claure vowed to do so. There’s “magic” in the company that he wants to get back. Sadly, layoffs aren’t doing any employees any good and company morale is at an all-time low, with some sources speculating the layoff to reach at least 6,000 employees.
WeWork will forever remain Softbank CEO Masayoshi Son’s worst private equity bet along with ride-sharing giant Uber.
Admitting that one’s foresight may not be as great as many thought is one thing, having a $100 billion fund on the verge of crumbling is another. Softbank’s Vision Fund forced SoftBank on an operating loss of $8.84 billion after the dive in Uber’s, Slack’s and Guardant’s shares. If not for a $2.6 billion gain in its stake in Alibaba Group, that loss would have billowed further.
To keep money flowing into Softbank’s balance sheets, the Japanese conglomerate needs to raise another $100 billion-dollar-fund. With less money around to drive valuations up and public markets treating unicorns like poorly-disguised rhinoceros, the best way for them to make money is through management fees.
Here’s the problem: private valuations are only as good as what the private investors think. Public markets are different. WeWork’s 83% devaluation from $47 billion to $8 billion may not mean that the company is worth $8 billion; that just means that Son and his team think that the company is worth that much. Uber, Slack, and Guardant are all examples of where the valuation-tagging was off.
WeWork we know today is the WeWork that was expected from the beginning. Growth comes at a price: with an all-in, aggressive market expansion plan with no semblance of structure, cost-cutting measures and streamlining, the giant gets too big to feed.
At one point, it is going to fall apart, revealing problems that ran too deep.
The former co-founder and CEO, Adam Neumann, is nothing but a symptom to the problem—WeWork operated on a massively unprofitable model that could not see returns in time.
WeWork is still bleeding insane amounts of cash—specifically $1.25 billion—and the occupancy rate is still sliding, even though they are adding more desks.
If it wasn’t for Softbank’s US$9.5 billion life-line, the business world would have announced the time of death weeks ago. With a commitment to the size of $18.5 billion, Softbank has invested more money than the GDP of Bolivia, a country of 11 million people.
Without having to take drastic measures, the lifeline will not last. To put it to perspective, WeWork will barely last another 2 years if they are making equivalent losses from here on out. With so much to lose and little to win, no one really knows if WeWork can last to see the third Christmas.