WeWork Makes For A Good Business School Case Study.
WeWork is nine years old and losing $3B per year. Let that sink in for a moment, first, the term startup is rarely applied to a company which is nine years old, those are small businesses, growth companies, or big businesses depending on how fast they grow. Why because VC projected exits are five years or less in typical tech sectors. Second, the only industry where a company losing $3B per year can survive is technology and WeWork is not a tech company.
WeWork could argue they are a new type of real estate venture. Adam Neumann was able to sell investors a story that WeWork is a tech company and apparently, they took him at his word with little or no due diligence. I really would love to hear that pitch. Neumann saying “WeWork happens to need buildings just like Uber happens to need cars, just like Airbnb happens to need apartments” is silly. Sorry dude that makes zero sense. Why? Because Uber doesn’t own cars and Airbnb doesn’t own homes. WeWork customers aren’t bringing their own building or office furniture to work. WeWork is IWG with beer!
Digging deeper WeWork changed from the traditional coworking model to look much more like IWG, formerly Regus a few years ago. Why? Because saying you are a better version of IWG doesn’t get you a multi-billion dollar valuation. WeWork shifted its focus from the traditional coworking market of freelancers and solopreneurs to higher-leverage opportunities, for enterprise and “WeWork-as-a-service” offering called Powered by We which was sold to the largest companies on the planet for their traveling staff or instead of a long-term lease on a remote office. To be clear over 40% of WeWorks customers are large enterprise clients.
Is WeWork exactly like a typical real estate play? No. That said it is like Regus but in nicer digs at a higher price. Both provide flexible space, on-demand, with short-term or month-to-month leases. This solves a problem that WeWork says plagues startups yet that is less than 15% of their business and even then the startups are fast growing VC backed startups because that is necessary to afford the rent at WeWork. Who does it really help? Big business that wants to be able to throttle expenses as needed.
Why is WeWork more expensive? Because their rent is higher too. In 2018 WeWork reported they were paying 15–29% premiums to their landlords for the space they are leasing. Considering the premium they pay and charge WeWork still says they save companies 57–66% of the cost to have their own space. WeWork customers get less than 100 square feet of space per person where the average office is 200 square feet per person. That might be true in some markets for a small amount of space but it doesn’t pan out at around 10 employees or in highly utilized locations where shared space for meetings and events is at maximum utilization.
Obviously, WeWork saw this which is why they tried yet another pivot or add-on in 2017 with WeWork Services which is like having a Kinkos in your office. People this is nothing new, most large office buildings in major cities have restaurants, a gym, dry cleaner, car detail shop, and copy/print services because they know people will pay for convenience. Saying this is a differentiator is telling your customers they are too dumb to look at the signs in the building. In 2018 the re-launched the previously failed WeWork Labs which is supposed to replace people like Techstars and help startups scale. Something rather ironic about that move as well. At the beginning of 2019, they launched a new app to allow members to collaborate. I suppose Neumann thought this might help legitimize them as a tech company.
Part of the “tech company” story was based on acquisitions which began in 2018 with Teem an analytics platform for optimizing spaces followed by Euclid which is similar but track how people use space. WeWork announced they wanted to be “Google Analytics for space.” Seems like you should make some part of the business profitable to prove viability, right? Not in the eyes of people writing Mr. Neumann checks.
Investors generally say “show me the money” but WeWork’s best year was 2016 and they lost just shy of $400M with 2019 being the worst year and they have lost $1.4B as of July not to mention losing $38B in valuation. in 2019 WeWork stated 88% of their revenue came from membership which is down from 2017 where that number was 93%. This is due to the acquisitions of other companies that provide training and other services.
With 88% of your revenue comes from memberships and you are consistently losing 40% or more of membership depending on the city how do you reach profitability? Even the revenue per member has declined as shown in data WeWork provided to The Financial Times.
While WeWork touted startups and tech companies as their target in 2018 during their first bond sale their membership was 15% software, 20% were financial, or legal services, 20% business and 40% enterprise companies.
Still trying to find the pathway to profitability WeWork began looking more like a traditional real estate play again offering custom buildouts for tenants
WeWork now claims to be an “office space-as-a-service” aka Powered by We service, launched in 2018. This combines global access and custom buildouts which is interesting but not worth $47B on its best day.
What about some of the “We Concepts” most people never heard of like WeLive aka co-living which started with 14 locations and now has 2, WeGrow an elementary school with a cost of $36-$42k per year, or Rise by We a fitness center which has only one location with little use and lackluster reviews.
IWG has been at this game for over 30 years, they are multinational with five main brands: Regus, Signature by Regus, Spaces, HQ, and No18. For clarity, IWG has 5 times more members and 6 times more locations in 10 times more cities and 6 times more countries. the most interesting mathematical comparison, however, is actual revenue. IWG has double the revenue of WeWork, they are profitable and have been for decades. For VC’s who always use comparables when establishing a valuation they were clearly out to lunch on this one because even with those stats IWG has a market cap of $3.7B and in 2018, IWG reported $200M in operating income and $140M in net income on revenues of $3.3B.
If this looks ugly, that’s because it is. WeWork rents a 100,000 square foot building for $75/sq. ft and owe $625k per month. They put 800 desks in an open area arrangement and find after price exploration that people will pay $350/mo per desk. This provides $280k per month in revenue which results a $345k loss per month. Add $50,000 per month for debt service on the redecoration, community manager staff, snacks and beer for a total loss of $400K per month one a single building! Raise the price you say? There is no way they can raise the rate to $800/mo. and break even. If you fired the entire staff and the building owner discounted your rent by 33% gave you can’t turn a profit.
You say how can you compare WeWork’s beautiful offices to IWG? For people who think IWG is your grandmother’s co-work space, think again. As you can see that’s not the case and you get global access with many of the same perks as WeWork for about 40% less.
Bottom line Adam Neumann is a great salesperson or shyster depending in your point of view. He sold VC’s on a concept versus reality and convinced them WeWork was different that IWG. He also gave himself a killer golden parachute and they allowed it. Neumann is laughing all the way to the bank while his employees are laid off, the company flounders, and investors take a bath. You can’t feel too sorry for the VC’s because they know better and this should serve as a wakeup call on valuations moving forward. Unicorns are mythical for a reason. Just because you give yourself a massive valuation doesn’t prove you are worth it or that you ever can achieve it and deliver a reasonable return to investors.
When you compare WeWork to the top 20 reasons startups fail you will find a lot of commonality.
1- RAN OUT OF CASH — WeWork had less than 30 days of cash left when SoftBank agreed to acquire them.
2- NOT THE RIGHT TEAM — Clearly this was the case.
3- GET OUTCOMPETED — This is crowded market and IWG could easily put WeWork under if they want.
4- PRICING/COST ISSUES — You cannot spend more than you charge and for space and turn a profit.
5- NEED/LACK BUSINESS MODEL — There is a model but unfortunately under the previous leadership it changes day by day.
6- LOSE FOCUS — See one through five above.
7- DISHARMONY ON TEAM/INVESTORS — Yes and yes.
8- PIVOT GONE BAD — The question here would be which one?
9- NO FINANACING? INVESTOR INTEREST — This one is tricky because investors put in a lot of cash, too much cash. Yet after the curtain was pulled back on this deal 75 meetings resulted in no offers other than SoftBank who is likely doing this only to save face with their Vision Fund and the hopes of raising a a second one.
10- LEGAL CHALLENGES — Yes, multiple.
I could argue there are more than these ten but most startups die when they fail at one of the twenty.
So how will this all play out? One thing is for sure Wall Street doesn’t like it. And the belief is that Softbank shareholders also get screwed in this deal. SoftBank shares fell 6.6% to ¥4,017 ($36.97) in the past week on the Tokyo Stock Exchange, while credit-rating firms have signaled concern. The shares of SoftBank are trading where they were at the start of 2017 before it announced the Vision Fund.
SoftBank has made some odd moves too. Masayoshi Son, Marcelo Claure and Ron Fisher are all on the Sprint board and have been unable to turn Sprint into a competitive force in the U.S. and are counting on a sale to T-Mobile which still pending. This trio is now calling the shots at WeWork even though they have a poor track record. When SoftBank acquired 72% of Sprint the same group was put in charge and now SoftBank owns 80% of WeWork. Will this be a case of history repeating itself as they try to steer another floundering company to sustained profitability.
Perhaps Masayoshi Son has allowed friendship to cloud his judgment. He handpicked his friend Claure to be Sprint’s CEO and they even bought home next door to each other in Kansas City near Sprint’s headquarters. Since the SoftBank takeover Sprint’s annual revenue has shrunk from $35.3 billion to $33.6 billion. Subscribers are down and the company recorded a $1.9 billion loss last year. Through all of this, Claure made over $40 million in compensation from 2015 through 2017.
Analysts and Wall Street don’t look at the Sprint deal favorably either. Craig Moffett, a telecommunications analyst at Moffett Nathanson stated “Sprint has been an unmitigated disaster. Sprint has contracted steadily since SoftBank bought it, even in a growing wireless market. Their only hope for an exit is to pray their deal to sell it to T-Mobile is approved.”
Wall Street, VC’s, and normal people are scratching their head over this debacle. Adam Neumann’s antics and self-dealing was so egregious that most people can’t believe he isn’t in jail. Unfortunately, at least based on what we know so far everything Neumann did may not have been ethical but was apparently legal. Everyone who gave Neumann money was a rich, experienced investor and they all voluntarily gave him managerial control and professional venture capitalists are generally better able to assess the viability of a business model than the government.
While building WeWork Neumann live the life of luxury at the expense of the company borrowing hundreds of millions of dollars against his stock in the company leaving himself and WeWork exposed depending on future valuation. He also charged his own company $5.9 million for trademark rights to the word “we” which he gave back after intense criticism.
What will happen with the Softbank takeover of WeWork? If Son is plays it smart they will shed anything they can and optimize operations. They will need to keep prices set because WeWork members won’t tolerate an increase now and to have any hope of achieving profitability they must keep memberships steady. It is almost certain unnecessary acquisitions of training companies, co-living spaces, the elementary school, etc. will be sold off and focus will go back to the core business of providing flexible space to entreprise customers because that is really the only pathway to profitability. What is the end result for those who bought into the dream of a self-absorbed, egotistical CEO like Neumann? For those who were around for the dotcom boom this feels a lot like Pixelon except David Stanley aka Michael Fenne went to jail. That is unlikely to be the outcome here but we will see unemployed workers, wasted capital, losses to shareholders of investors are some of the collateral damage that occurs when investors but into the pixie dust or get hung up on FOMO. Unfortunately, this will probably not be the last time.