When WeWork, which shot to fame for its shared coworking spaces worldwide, went public in October 2021, it was a significant comeback moment since its infamous IPO debacle in August 2019.
The failed IPO attempt began to unravel some deep-seated suspicion over the leadership and financial stability of the company. Once considered one of the most valuable start-ups with a $47 billion valuation, WeWork’s valuation has fallen to around $9 billion today. Despite the chaos, WeWork is very much in existence, doing its best to grow again, albeit under new leadership.
What happened between WeWork’s phenomenal rise and fall may present some of the most cautionary notes for every other young start-up.
Let’s have a look.
Overview Of The “WeWork Meltdown”
It’s a case study of what can happen when a company gets too much money too fast with no full-proof strategy on how to spend it.
In 2010, Adam Neumann, the company’s now-ousted CEO, and Miguel McKelvey began leasing office space in New York and renting it out for coworking at a premium. The business grew double in size from 2010 to 2011, and from there on, its growth was exponential in the financial boom after the great recession.
The idea of “the futuristic office” and making a workplace enjoyable to boost productivity seemed extremely promising. The WeWork spaces were sleek and had magnetic vibes. There were endless seating options and community spaces for collaboration, from extra-large couches to cafe-style tables. A pantry served beer, wine, and kombucha on tap, while a barista whipped up cold brew and vegan lattes. The bright and bustling ambiance bolstered the entrepreneurial hustle of millennial start-ups.
It created a cult-like sensation where members could lean on each other to network and grow their own businesses.
Neumann’s knack for selling his wild vision and convincing investors such as Goldman Sachs, JP Morgan, and particularly Softbank that he could revamp the way people work got the company billions of dollars in venture capital to fuel its rapid growth.
Over the decade, WeWork invested this money to amass 847 locations across 123 cities globally. By Jan 2019, when Softbank completed a $2 billion funding round, WeWork was valued at $47 billion.
And then, in Aug 2019, everything crumbled like a house of cards.
It was when WeWork filed to go public that the investors could really peel back the curtain and see into the company’s financial performance and so-called growth. And it wasn’t pretty at all!
Amidst all the fantastical profit projections, the filing exposed that WeWork was bleeding millions of dollars — in just the first six months of 2019, the company lost $ 690 million, bringing its total losses to almost $3 billion in the past three years. Despite that, as The Wall Street Journal reported, Neumann profited from his position as he leased his own properties to the company, sold the trademark to the company for $5.9 million, and gained credit card debt secured by WeWork stock.
The skeletons of Newmann’s questionable business dealings and theatrics tumbled out of the closet, raising red flags and adding fuel to the fire of the discussion: does the company have the control in place a public company should have to protect the value for shareholders?
On 17 Sep 2019, WeWork pushed back its much-awaited IPO. The company’s expected valuation dropped from $47 billion down to less than $8 billion in just six weeks. The company didn’t even have enough cash to pay severance packages to thousands of employees that it planned to lay off.
Due to an alleged loss of confidence, the board decided to have a major change in top management. On 24 Sep 2019, Neumann was forced to step down from his position as CEO. Softbank ultimately bailed WeWork out, injecting a much-needed $ 9.5 billion into the company.
From reckless cash burning to expansion at an unsustainable rate, there are some valuable lessons (that nobody wishes to have hard-earned!) for all the businesses and would help in their own growth journey.
4 Biggest Takeaways For Businesses
- Focus On Profit Growth Rather Than Revenue Growth
WeWork makes 9-20 years of the lease agreement with constructed office space buildings. After renovating and refinishing, it divides it into smaller units to rent out to freelancers and start-ups.
There was an obvious risk with WeWork’s business model. For long-term expenditure, the company gets only short-term revenue commitments from the clients, given that WeWork’s main selling point to its tenants is no long-term commitments. Moreover, in quest of being “creative,” WeWork tried to incorporate every latest corporate trend in their spaces. What resulted was an expensive business model with little room for profit and a business struggling to stay afloat.
A business’s primary goal should be long-term profitability, not just revenue growth. The profit is the revenue that remains with the company after deducting all the expenses. Thus, without profit, a business’s long-term sustainability is sabotaged. Even if the company is financed, for the time being, it’s ultimately a liability and not an asset.
Expanding At The Wrong Time Can Be Detrimental
When enormous investments started pouring in, particularly after being backed by Softbank’s Masayoshi Son in exploring his wildest visions, Neumann began to take over iconic buildings all over the country and continents: before being anywhere close to profitable. Thus even if it seemed like the perfect time to expand, rapid expansion while riding on an unsustainable business model proved to be fatal for WeWork.
Growth can be dangerous if not done the right way. There are chances that it will make you lose track of finances and create overly-optimistic growth projections. So breathe! Have long-term plans in place before making long strides.
Invest Into New Ventures Only When The Core Business Becomes Profitable
WeWork recklessly spent its money on businesses far from its core sphere — businesses from indoor wave pools to superfoods to an experimental elementary school. And all this when WeWork itself was starting up.
However hard-to-resist new ventures are, there are enormous odds against their success if your core business itself is not profitable.
Choose Your C-levels Wisely
It’s a classic illustration of how loose corporate leadership finds opportunities to enrich themselves at the expense of shareholders and the company. There were reports of Neumann taking personal loans from the company at below-market rates to support his lavish lifestyle, indulging in a private jet worth $60 million, and cashing out millions of dollars before the company filed for going public. In the end, it was not about “we” but “him.” Despite so many red flags, no responsible person stepped up to remove him.
CEO-orchestrated moves account for 45% of a company’s performance. When C-level executives like Neumann start to lead off the company and tarnish the brand image, it’s a distress signal that it may be time for change management from the top.
Building and sustaining a thriving business calls for strategic leadership. There’s nothing wrong with being ambitious. But in excess, ambition mixed with impulsive decision-making is a sure-shot recipe to catastrophic failure.
Aanya Rachel is the Content Manager at The Address, a coworking space in Ahmedabad, Gujarat. She is passionate about sharing her knowledge, experience, and extensive research in this field. She writes on a wide range of topics related to coworking, the growth of remote workers, startups, and real estate.