Home Business News WeWork meltdown: Did the shared workspace giant get anything right?

WeWork meltdown: Did the shared workspace giant get anything right?

by LLB Reporter
26th Nov 19 12:36 pm

No matter your feelings on the company, there’s no denying that shared workspace provider WeWork has revolutionised what employees now want from their surroundings. Founded in 2010 with a pioneering focus on flexibility, perks and a community spirit, the company reinvented the blueprint for the perfect, modern office. As a result, employers in all industries have been inspired to rejig their own workspaces and create the ideal environment for their millennial workers.

However, WeWork’s unique corporate culture described as “cultish” by former executive Richard Markel has drawn plenty of criticism. Markel recounted an office atmosphere drowning in free-flowing alcohol, where party-heavy camping trips were mandatory, stating: “When you mix a bunch of 27-year-olds with raging hormones and unlimited amounts of alcohol […] you’re just going to have problems.” This came to sobering light in an October 2019 lawsuit, which detailed the sexual assault of a former WeWork employee at two company events, claiming that the alleged assailant “professed to be too drunk to remember the incident”.

Corporate vision aside, there’s one fact that remains unanimous its failure as a business. WeWork was valued at a whopping $47bn at the beginning of 2019, but by that October its valuation dropped to $8bn. This huge decline was triggered by its failed initial public offering (IPO), which exposed the company’s bleak financial position, continuous losses even as revenue increased and no clear path to profitability. WeWork also faced intense scrutiny over the inappropriate behaviour of its CEO and co-founder Adam Neumann, causing them to indefinitely delay the IPO in September 2019.

Though its vision of a new way of working was strong enough to capture the attention of its numerous investors and employees, WeWork’s flawed business model, and the problematic personality of its CEO, dragged it from being one of the most promising startups of recent times, to a Wall Street disgrace.

Misguided business concept

A major WeWork obstacle is the divide between what the business actually does, and Neumann’s insistence that the brand be considered a tech company. Indeed, according to CBInsights, the brand’s S-1 IPO paperwork of August 2019 used the word “tech” 123 times, supporting Neumann’s 2014 claim that his business “happens to need buildings just like Uber happens to need cars, just like Airbnb happens to need apartments”. In WeWork’s S-1 it’s argued that, as well as hiring 1,000 tech employees, it uses technology to enable the personalisation of its members’ workspaces and experiences. Furthermore, they claim that the efficiency of this technology also lets them benefit from an almost 60% reduction of costs-per-employee almost 60% than its competitors.

Falling into this bracket is what earned WeWork its $47bn valuation in January 2019, a figure it could only earn as a tech company, not a real estate company. Its main competitor IWG, which is considered a real estate business, was valued at a mere $3.7bn. This, in spite of the fact that unlike WeWork IWG saw no losses, and actually profited in 2018, a particularly significant fact considering that critics believe WeWork has no right to be labelled a tech venture. Writing for the Harvard Business Review, Vijay Govindarajan and Anup Srivastava demonstrated that WeWork misses all five factors, such as low variable costs and capital investments attributed to tech companies. The analysts concluded that WeWork “doesn’t have the features that make those companies cash-generating machines, so it doesn’t warrant a tech-type valuation.”

With WeWork now on the brink of bankruptcy, some property experts believe that the business simply isn’t viable. The company doesn’t own any real estate, instead investing in long-term leases and relying on income from tenants. Though customers are free to leave the premises, WeWork is contracted to its leases, and as profits depend entirely on its own rent payments, it isn’t necessarily the most sustainable business. Saying that, IWG’s valuation and profit does prove that this kind of company is able to thrive in the current climate—just at a much lower valuation.

Focus on growth over current value

WeWork made a grave mistake in prioritising its plans for growth over its current profitability. The company raised a huge amount of cash in its early years, including investments from J. P. Morgan and The Goldman Sachs Group, allowing it to buy space in 200 locations all over the world. In 2017, Neumann met Masayoshi Son, the head of SoftBank, a Japanese conglomerate that has previously made major investments in brands including Uber and Slack. According to New York Magazine, Son told Neumann that WeWork wasn’t being “crazy enough”, and instructed him to make his business “ten times bigger than [his] original plan.” Son eventually invested $10.7bn into WeWork, either via SoftBank, or his separate entity, the Vision Fund.

As Neumann continued to build his global WeWork network at the time of writing there are 836 locations his losses kept mounting, and the company haemorrhaged nearly $2bn in 2018. Though investors were initially prepared to accept this in the faith that WeWork’s commitment to growth would eventually result in significant profits, this optimism changed once its S-1 IPO filing was published. The document revealed that WeWork’s losses grew even as revenue increased, losing $900m during the first half of 2019 25% more than the previous year. What’s more, there was nothing in any documentation detailing how the business would become profitable. The filing read, “We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level for the foreseeable future.”

It’s now thought that investors will learn from WeWork’s mistakes in their future endeavours, paying less attention to growth stocks, and looking at a company’s present earnings and cash flow first and foremost.

Controversial CEO

A great piece of advice AirBnb CEO Brian Chesky received was: “Imagine everything you do will be on the cover of The New York Times, because one day it very well could be.” Unfortunately, this was not a mantra Adam Neumann followed, which led to him attracting extensive press attention for his controversial behaviour, both at work and in his personal life.

Neumann initially attracted investors with his ambition and eccentricity he had long, shaggy hair and always wore a t-shirt and jeans, while he reportedly aimed to become “president of the world”, live forever, and be crowned the world’s first trillionaire. His persona was also a big part of the WeWork brand. As noted by Vanity Fair’s Gabriel Sherman, Neumann “was heralded as the millennial prophet who foresaw a new kind of office culture”, while the business relied on his “egomaniacal glamour and millennial mysticism” to succeed.

For these reasons, his associates chose to ignore evidence of his problematic leadership like the fact he was paid $5.9m by his own company to trademark the name “We”, reportedly cashed out $700m from the business ahead of the IPO, and even made millions of dollars leasing his own properties to WeWork. The latter incident is currently being investigated by the New York State Attorney General.

However, investors and employees weren’t so lenient after Eliot Brown published a lengthy article on Neumann for the Wall Street Journal in September 2019. The piece reported on his extensive marijuana use, including a time he wasn’t allowed to travel home on a private jet after leaving the drug onboard in a cereal box—and his decision to ban meaty meals from company expenses while he continued to eat meat. It also recounted an incident where Neumann announced 7% of WeWork’s staff had been made redundant to cut costs, and followed the bombshell with trays of tequila and a live performance from Darryl McDaniels of Run-DMC.

This was the beginning of the end for Neumann, as SoftBank pushed to remove him as CEO, while other investors refused to provide funding until he was replaced with a more experienced executive. On 24 September 2019, Neumann resigned as CEO, he said, “While our business has never been stronger, in recent weeks, the scrutiny directed toward me has become a significant distraction, and I have decided that it is in the best interest of the company to step down as chief executive.”

Sebastian Gunningham and Artie Minson took over, and SoftBank has offered WeWork $9bn to help it stay afloat. But after recently announcing that 4,000 WeWork employees will lose their jobs, and currently facing an inquiry from the U.S. Securities and Exchange Commission into possible rule-breaking in the run-up to its unsuccessful IPO, the future of WeWork is still undoubtedly troubling.

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