What went wrong at WeWork?
WeWork (or The We Company), has been in the news a lot recently for all the wrong reasons. After a few years of being heralded as the startup of startups, WeWork has tumbled and crashed, failing its IPO and slashing its valuation by tens of billions of dollars. WeWork’s controversial CEO, Adam Neumann, has been ousted and with no path to profitability in sight, Softbank, WeWork’s single largest investor, has taken control of the business. The latest valuation of the company signals that one of the largest investment funds in the world have lost billions of dollars of their own investments on a bet that now seems like they were always set to lose.
WeWork embodies the stereotype of startup culture – meatless and plastic-free canteens, bright colourful spaces, considered and modern furnishings and full of millennials with big ideas. The sprawling network of spaces, which extends to over 30 countries, are almost impossible to miss in any major western city. But, in just a matter of months, this idyllic unicorn’s cracks have become gaping crevasses into which money (billions of it), employees (thousands of them) and all sense of hope for the business achieving any form of profit have fallen headfirst into.
So, what went (and is still going) so wrong? Well, it’s a combination of many things, but I’ll focus on two areas: a broken capital structure and a false sense of who WeWork truly are – both compounded by controversial and damaging leadership.
Profit, and the lack thereof
There have been many comments on how other similar unicorns, such as Uber and Lyft, have been known to operate with a similar disregard for reality and the need to make an actual profit. Bleeding money in order to elevate your business to worldwide dominance can work, but not at the scale and speed of WeWork, and certainly not when the proposition, brand and business model do not support sustainable growth. When fantasies about a non-existent future start to overrule practical and realistic visions, venture capital pours in, cash is burned and eventually, businesses collapse. By quickly looking at WeWork’s closest competitor, IWG, stark financial and business model differences start to become starker. Although IWG are more established and the business has matured, one clear differentiator is the fact that IWG turns a profit, something WeWork has never done and looks at this point like it never will. WeWork has also assumed over $47 billion in future lease obligations, versus IWG’s $7.8 billion. Now, at this point I must point out that WeWork is growing exponentially (100% year-on-year compared to 12% for IWG), and is generating far more revenue per location than IWG is, but this growth appears unsustainable and requires far more cash injection than they are actually earning, hence the massive losses they have accrued.
This growth and revenue can be put down in part to the fact that WeWork has managed to cram far more workstations into their locations (roughly 1000 per location more than IWG). IWG has a presence in nearly 100 more countries, and nearly 1000 more cities than WeWork, yet WeWork actually have more workstations in total than IWG. This backs up WeWork’s vision of being a tech-powered real estate business, leveraging tech to logistically manage to set up and run their locations at a much larger capacity than their competitor. But again, this means little when the business itself is losing billions of dollars every year. The championing of tech within their identity has undoubtedly contributed to their ability to lure venture capital at a level rarely seen in any business other than Silicon Valley-esque tech companies. However, this brings me to my next point – WeWork isn’t a tech company.
WeWork isn’t a tech company
From the beginning, WeWork looked to establish themselves as a tech-first company, helping to reinforce this image by the look and feel of their spaces, and by the individuals and businesses who became their tenants. Their brand and marketing efforts consistently pushed this narrative of being a tech-powered (big print) real estate (small print) business. Although on the surface WeWork has an undoubtedly powerful brand, indeed far, far superior to IWG’s for example, their positioning completely overlooked the fact that, at the core, WeWork is essentially a company that sublets office space, with the brand identity of a 21st Century tech company.
Now, I’m not arguing that there is not huge potential for operational savings, human connectivity and innovation to be achieved from bringing modern tech into the real estate sector. As mentioned before, this focus on tech also helped to draw in investors and tenants at a scale that probably wouldn’t have been possible if not for centralising this within their positioning. However, to position yourself foremost as something that you fundamentally are not is only going to come back and bite you, which in WeWork’s case, it most certainly has. To put it plainly – their business vision didn’t stand up to their brand vision. Their business model didn’t match up to their brand – it essentially didn’t match how the business was actually run. It appears that they created a strong brand mission and vision, but hadn’t clearly figured out how the business would deliver on the brand strategy. Investor, public and media reactions to their failed IPO and the subsequent dramatic reduction in valuation saw how the positive perception of the WeWork brand melted away almost instantly.
Lessons learnt (hopefully)
WeWork now acts as a perfect example of the dangers of a great marketing strategy and its ability to cloud judgement and push unrealistic visions of an unattainable business model. WeWork had figured out where they wanted to take the business, but hadn’t figured out how they were going to get there. The how is vitally important, and the business, as it slowly matures, isn’t matching up to the brand vision that investors, employees and customers bought into. The downfall of WeWork also highlights the damage that huge amounts of venture capital can do to a fledgling startup with big dreams. Perhaps things may have panned out differently if WeWork had moved slower, and taken the time to properly figure out how they could grow in a sustainable and consistent way. The billions that were pumped in simply served to prop up an idea that only worked if the billions kept rolling in, possibly forever. Once that kind of money starts to be invested, there is very little choice but to massively ramp up every aspect of a business – and when the leadership is failing and the brand isn’t ready or positioned properly for that level of expansion at such pace, it won’t be long before small issues turn into a domino-effect and end up crushing the business altogether.
WeWork’s mission, as stipulated on their website, is to “create a world where people work to create a life, not just a living”. This is a nice bit of copy, but it also acts as an ironic statement of how many thousands of employees are now set to lose their jobs, whilst Neumann walks away with billions. Making a living before they ‘create a life’ may be preferable to many people at this point.
 EquityZen analysis of company filings; IWG financial information converted to USD using 8/20/2019 GBP:USD spot rate of 1.22