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  • Aryaman Kapoor

The Rise and Fall of Wework

Introduction

The idea of a modern-day tech company is filled with glamor, cutting-edge tech and a collaborative atmosphere which frees workers from a mundane life and work. This dream is exactly what Wework sells to people (Wiedeman, 2020). Wework is a company that rents out co-working offices to freelancers and small business owners. The company had an exciting fast-growing start-up on course to issue an IPO in September 2019 valued at 47 billion dollars, things were going great for Wework until people started looking into the company and more importantly their founder and CEO Adam Neumann. This article aims to do a deep dive in the history of Wework and its former CEO Adam Neumann to understand how a company which was considered one of the best start-ups of all time is now struggling to survive. This article contains of two parts, one will have its focus on the rise of Wework and the other case study will talk about the fall of Wework and at the end will be a combined analysis of both parts.

The Rise- Making of a $47 billion company

In order to get a clear understanding, we need to understand the rise, it all started with the company's former CEO and founder, Adam Neumann. Adam Neumann is the co-founder of WeWork and was its CEO for a while. He came over to New York for higher studies after being in the Navy. And started a few businesses, including a baby clothesline with knee pads (Kumar, 2020). When he came to New York, his landlord was showing him a building and that is where he got the idea of subdividing that space. His co-founder Miguel McKelvey, who is a trained architect, came up with the plans and they started a company called Greendesk in 2010 which they sold, and that was the birth of WeWork. The reason Wework worked so well is because there were a lot of landlords who had empty office buildings and vacancies, WeWork actually presented a solution for them. The very first building down in Grand Street in Downtown Manhattan was where WeWork launched its first co-working spot, and from there it was sort of a success. From 2010 to 2011, it doubled in size. And from then on, the growth was exponential. Some of their original investors were people who were involved in commercial real estate, they got some early investment from a venture capital firm called Benchmark, and eventually sort of kept growing, kept taking on new leases and started to grow the business starting in New York City. Business grew quickly and by 2015, the company already quadrupled its valuation to $10 billion, counting 23,000 customers paying memberships in 32 locations, renting desks for as little as $45 per month (Ace, 2019).

WeWork's whole idea was not to just be a commercial office leasing company but accelerate the new world of how people work and make it better. Adam Neumann at TechCrunch: Disrupt in 2015 said “Being surrounded by a group of like-minded individuals, being part of something bigger than yourself inspires people to work harder, spend more time at work, and just have fun doing it is the idea of Wework”. And initially, this attracted the attention of young entrepreneurs looking to expand their companies. They created a very close bond with the very early employees, making them realize that WeWork was more than a company. It was a bit of a family, it was a community, and the members too sort of realized that they could lean on each other in terms of networking and in terms of growing their own businesses. This excitement drew in even more investors to the company and the most crucial investor would be SoftBank. WeWork really started to take off was when SoftBank invested in them in, that gave them a valuation of $20 billion (Sherman, 2019). And that is really when it got into the high ranks of other venture-backed private companies.

With SoftBank's investment, WeWork quickly expanded its footprint throughout the world. And it is also the beginning also of this partnership between Adam Neumann and Masayoshi Son, who is the head of SoftBank. They have this meeting that is often told again and again in the lore of WeWork, where Adam made this pitch, and Masa said, "That's great, but let's make it even bigger." WeWork is actually one of over 88 companies that SoftBank Vision Fund has backed with its backing of over $220 billion. SoftBank's idea is, there is lots of money out there in this unique period of transformation, let us make everything happen faster with more money. And let us enable companies that have smart ideas to get even more ambitious, bigger, and faster. Between 2017 and 2018, SoftBank would invest around $8 billion into WeWork, doubling its valuation to 20 billion dollars in 2017.

In 2019, SoftBank floated a potential $16 billion investment, which would give them a controlling stake in the company. Ultimately, they would scale back to just $2 billion, but it was enough to double WeWork's valuation again to $47 billion. So, at $47 billion, which is a little bit of an illusory number put WeWork in the very top tier of high valued young start-ups.

The Fall- How Wework stopped working

Now, at the same time a similar company in the UK called IWG (previously known as Regus) is valued at a number which is exponentially lower than that of Wework. People were looking at IWG which is profitable and then looking at Wework which is losing money and trying to figure what the hype is about. In many areas including number of customers, business locations, profits, revenue and et al, IWG was doing better with the exception of Valuation. IWG was valued at $13 Billion but Wework had a whopping $47 Billion valuation.

In an interview, Mark Dixon, the CEO & Founder of IWG said “Every single day we looked at the valuation and wondered if there is something that we are not doing or if something has been missed by us which we could not find”. Wework got the money from Softbank and a license to quickly spend money after which they opened several offices around the world and made investments in a plethora of companies as well as opening a primary education institution. They recklessly spent money on companies which had no future like a company which made surfing pools with waves to a company that makes superfoods and was run by a person who impressed Adam Neumann on a vacation. This was one of the warning signals as a growing start-up company which is in the commercial real estate sector started investing companies which were in a different industry altogether. However, the reality of how bad the situation of the company was could not be comprehended until mid-2019 when Wework filed for an IPO. After the filing of the IPO, everyone could look at the financial statements to try to figure out what was actually going on inside the company. One of the interesting findings in the IPO Filings showed that Adam Neumann purchased the trademark of (We) in his name and sold it back to the company for $5.9 million (Palmer, 2019). Further, loans were being made to the founders by the company to pay his rent. These are two examples of how the corporate leadership of Wework tried to gain wealth for themselves at the disadvantage of the company’s shareholders like Softbank. The filings also showed that during the first half of the year, the company had lost upwards of six hundred million dollars and the total losses of the company were 3 billion dollars (J, 2019). After this, there was shift in the opinion about the viability of Wework. Investors started pulling out their money as they understood what actually was happening. The valuation of the company dropped from 47 billion to 10 billion dollars. This information that came to light led to the debate of the viability of Wework to go public as it did not have a system as robust as one would expect from a public company. After this, the company decided to postpone its IPO (Farrell, 2019). The investors and especially Softbank thought that there was now a need for a big change and that there needs to be a major restructure in the company and pressure was put on Adam Neumann which led to his resignation. After that, two senior executives of Wework, Sebastian Gunningham and Artie Minson were made Co-CEOs. Now the company had the responsibility to sell the extra investments and liabilities it had garnered up like the several airplanes it bought. During this time, the IPO was postponed indefinitely, and their educational institution was also closed. The company was so cash-strapped that they did not have money to pay the fired employees their severance packages. However, the two CEOs had managed to secure packages for themselves. Finally, employees were fired, and Softbank bailed out the company after providing them with over nine billion dollars and taking over the majority stake. Ironically, the value of the company now was less than eight billion dollars. Now, after the bailout there is a certain level of uncertainty in the company about the future and how the current and past employees are unhappy with the betrayal that they faced.


Analysis

Looking at the rise and fall of Wework, it can easily be figured out that it is a tale of a company got too much money to fast with no effective oversight on how to spend it.

As many experts have talked about how the whole idea of leasing a building and then subletting it to people for a shorter period of time while having the majority of the building empty for most period does not make sense and the whole thing is “doomed to fail” (Leary, 2020). It makes us wonder if the failure can be attributed to the whole business plan and not just the management practices of Adam Neumann. It feels like the company sold a fairy tale to the employees, customers and the investors which would only work at the expense of shareholders. The blame needs to be equally shared by the investors and especially SoftBank who did not vet the figures of Wework and never wondered how and when the revenue model will become profitable enough and when the company would be in a position that would allow the investors to get back their money. SoftBank has had the same fate with their investment in Oyo Rooms, an Indian alternative to Airbnb which might be viral and famous but in the long run and under stress tests shows no signs of survival or growth and is operating on losses and cash infusions. Although the situation in WeWork was much worse than the situation is of other investments of Softbank and that is because in the situation of WeWork, there was a senior management which had a malafide intent which may not have been from the start but did develop along the way when they realised that this business model is not reliable and that they need to have a fallback plan for themselves when things go south. Coming to what could be next for WeWork, I feel that there is no way that it will reach back to its valuation of over forty five billion dollars and that there needs to be a complete change in the management and the corporate structure. Just the ousting of Adam Neumann will not do as there still are people within the company who had siphoned off funds and hold senior positions. Given the pandemic that has hit us and the situation of real estate and how all companies are brainstorming and coming up with viable methods of continuing with the method of work from home not only during the pandemic but permanently and are offering flexible policies to the employees of avoiding the offices, the future and the chance of survival have started looking extremely bleak as the whole business of Wework depends on people stepping out and working offline. Even after the pandemic is done with and people are comfortable moving out and we reach the old normal (that too in a conservative manner is at least two to three years away), the work from home policy would be preferred. Hence even if SoftBank keeps injecting money into the company and keeps it operational for a few years, there will not be enough market and enough profits available for it to even break even. The only possibility here for the investors to salvage this is to file for Chapter 11 and declare bankruptcy and restructure the whole company and use WeWork’s reach and assets that it has created around the world to work in cohorts with other investments of SoftBank’s Vision Fund. There are several multibillion companies (like Oyo Rooms, ByteDance, Grofers, Unacademy, Lenskart and Policy Bazaar) in the portfolio of Softbank who could easily salvage not only the assets and liabilities but also the goodwill of Wework which will allow them to grow more. This costly mistake however has a very important lesson for all investors like Softbank which are investing in unicorn start-ups or in fact any start-up which has a multi-million valuation and that is to keep evaluating the viability of the business plan of the company throughout the time you have a financial interest in a concerned firm and pay close attention to the SWOTs (Strengths, Weaknesses, Opportunities and Threats) of the firm and how they will in turn affect the company as a whole. The management of Wework started becoming careless and did not pay attention to the financial viability of their plans and continued to invest even though they did not have enough revenue and virtually no profits to sustain. Softbank gave a free hand to the management and it has done the same in its other investments of the Vision Fund and the most prominent example for that will be Oyo Rooms. Ritesh Agarwal is the founder of Oyo Rooms who was once referred to as the next Adam Neumann by the CEO of Softbank, Masayoshi Son which might have been inspirational till last year but is now riddled with irony. The company has been valued at over a billion dollars but in reality, is still not profitable. They have contracts all over the world but because of the faults in the inherent business plan that has not been taken care of, they have sustained increased losses because of their focus on scaling rather than making profits and that is in itself the sad story of new age start-ups (like Uber and Lyft) who have never been viable and have always operated in losses. The future for these companies looks bleak and their fate may be similar to WeWork unless they reach a position where they are too big to fail as the markets eventually correct themselves and focus on companies which maximise the value of its shareholders. Hence, the lesson that everyone should learn from WeWork is that the focus should be on making a company profitable instead of bigger.

References

Ace. (2019, December 23). $47 Billion Catastrophe. Retrieved from infogalaxy: https://www.infogalaxy.co.in/47-billion-catastrophe-wework/

Farrell, M. (2019, September 17). WeWork Parent Postpones IPO. Retrieved from Wall Street Journal: https://www.wsj.com/articles/wework-parent-expected-to-postpone-ipo-11568671322

J, M. (2019, March 25). WeWork’s Losses Swell to Nearly $2 Billion as It Seeks Global Expansion. Retrieved from NY Times: https://www.nytimes.com/2019/03/25/business/dealbook/wework-loss-billion.html

Kumar, J. (2020, December 19). The Shocking Rise and Fall of Wework. Retrieved from LinkedIn: https://www.linkedin.com/pulse/shocking-rise-fall-wework-47-billion-disaster-jatin-kumar-kumar/?articleId=6617331168712982528

Leary, K. O. (2020, February 27). Shark Tank's Kevin O'Leary On Why WeWork Failed & How to Invest In The Right Company. (P. M. Take, Interviewer)

Palmer, A. (2019, September 4). WeWork CEO returns $5.9 million the company paid him for ‘We’ trademark. Retrieved from CNBC: https://www.cnbc.com/2019/09/04/wework-ceo-returns-5point9-million-the-company-paid-for-we-trademark.html

Sherman, A. (2019, October 22). CNBC. Retrieved from WeWork’s $47 billion valuation was always a fiction created by SoftBank: https://www.cnbc.com/2019/10/22/wework-47-billion-valuation-softbank-fiction.html

Wiedeman, R. (2020). Billion Dollar Loser: The Epic Rise and Fall of WeWork. New York: Hodder & Stoughton.



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