The $42 Billion to $2.9 Billion Unicorn
How one company failed to learn a simple lesson from the golden arches.
During its inception, WeWork claimed to be one of the most innovative co-working spaces, gripping a world that is blinded by trends. While its open plan and collab-friendly workspace designs led to the influx of freelancers, the leadership overlooked serious gaping holes and failed to question the business structure’s longevity.
At its initial stages, WeWork made booming profits with lucrative investments from JP Morgan, Goldman Sachs, Amazon, and SoftBank, securing $6 billion in funding. This was complemented with the opening of office spaces in 847 locations worldwide, and a highly awaited IPO filing on August 14th, 2019.
However, after a mere 80 days, history was made as the company came crashing down like a house of cards, soon after the IPO filing documents went public. With its incoherence publicly ridiculed and Softbank’s initial investment of $16 billion revised to $2 billion, its $45 billion valuation was brought under scrutiny for the very first time.
While the core idea of the business was inspired by the sense of community and belongingness Adam Neumann grew up in, he failed to deliver this idea to his own employees in many ways. From introducing a meat boycott movement within the company and deliberately failing to adhere to its expensing policy, to the promotion of a dysfunctional workspace typical of the ‘frat boy culture’ characterised by executive retreats encouraging heavy drinking and sexual misconduct, WeCompany was reduced to a mere $2.9 billion valuation.
Neumann then, trademarked the term “We” and had the company pay him 5.9 million dollars in licensing fees, as he bagged the most unfathomable exit package after stepping down as CEO — a total of over $1 billion after he sold his shares to SoftBank on top of collecting a $185 million consulting fee.
Essentially, the company roadmap focused on renting out hip and fresh contemporary workspace to freelancers, small business owners, and even tech giants to revolutionize the conventional and mundane office structures that hinder collaboration and innovation.
While WeWork’s dominant focus rested on practically a real-estate business, the problem of the once $46 billion company was the lack of clarity with regards to the same — the company awkwardly enough considered itself to be a tech company. A very hot potato twist to a fairly straight-forward business.
This expectation of a real estate company to match a tech company’s profit or return rate was reflected in a perilous business model. Where average land leases lasting over 15 years aren’t exactly cheap, the company reported long-term lease obligations of $17.9 billion in its IPO filing along with a $900 million loss in six months.
The further dilution of the company focus on WeLive and WeGrow drew focus on some of the most fundamental holes in the company’s revenue-generating strategy. While promoting its $42,000-a-year “conscious entrepreneurial school,” the company failed to recognize the implications of pairing long-term office leases with short-term occupants.
As real estate market fluctuations have repeatedly challenged the company’s profitability, the question remains: Did the company go bust because of its business model and the decisions surrounding it, or because of the lack thereof?
I see an eerie coincidence of history repeating itself in many ways, as Ray Croc was once at the precipice of a similar problem. As McDonald’s was emerging as one of the most efficient, family-oriented fast food service centers, it was losing money hand over fist to the wave of new fast-food chains that emulated its model, and more importantly, to the volatile real estate prices.
At this time, Harry J. Sonneborn, or the “financial wizard, “ came to the rescue and condemned the arrangement of allowing the franchises the freedom to choose the location for the branch and get a lease (usually of 20 years) whilst benefiting from the company’s construction loan. Instead, he encouraged Kroc to “own the land upon which that burger is cooked.” By buying up plots of land which could now be leased to franchisees from Kroc, and Kroc alone as a part of the deal, would ensure what WeWork only promised in paper — a steady cash flow before the first stake breaks ground, and greater capital, to fuel further expansion and land acquisition.
“You’re not in the burger business; you’re in the real-estate business.” is one of the first words that Sonneborn said after he took a tour of the mountain of debt the McDonald’s ledger revealed. An advice WeWork would now resonate with. Could WeWork sustain itself with this model? Was it the lack of preparation in the case of a recession in its stability model, which hammered the final nail in the coffin? Or could it grow a revenue stream out of its subsidiary businesses across the world by owning the land under? And finally, could the clarity of the business WeWork was actually in alter the fate it suffered?