Why is WeWork Failing (Case Study)

WeWork, the co-working space Start-up, that was once valued at $ 47 billion is now struggling to survive. It's failing & failing fast. What went wrong? Did it happen all of a sudden? Or, was the failure inevitable?

If you visit WeWork's website, you'll instantly be greeted by their tag line - "Revolutionize your workspace" & some pictures of their fancy interiors.

Impressive? Isn't it? A couple of years ago I too worked at a co-working space. And, let me tell you, look-wise & feel-wise they weren't even close to WeWork. The office spaces built by WeWork are simply gorgeous.

The WeWork Start Up Story

Founded in 2010 by Adam Neumann & Miguel McKelvey, WeWork is a co-working real estate company. It's head office is located at New York. Right now, WeWork's office spaces are spread across 86 cities in 32 countries.

As of 2014, WeWork's investors included the following:

• JP Morgan Chase & Co.
• Goldman Sachs
• Harvard Corporation
• Benchmark

Yes, big names indeed.

Coworking means leveraging of common office infrastructure & facilities by several individual freelancers, startups or companies. So, what coworking companies like WeWork do is lease properties from landlords & renovate them into a coworking space. They then sub-lease the coworking space to freelancers, startups & companies.

The advantage of coworking for clients is lesser cost. Since the common infrastructure like printers, internet, cafeteria, kitchens, rest rooms are shared by many, the cost is lower as compared to leasing a full-fledged office facility.

Coworking isn't a new concept. In 2006 (before WeWork was born), Noel Hidalgo & Beka Economopoulus started the World's first coworking space in Williamburg, Brooklyn. It was later renamed as Brooklyn Coworking.

As per a stat, 2188 new coworking offices were opened in 2018. Out of which 1,000 were in the US alone. There're various smaller players in the coworking space but WeWork aim has always been to become the Uber of coworking industry.

But here's the twist: WeWork isn't just a normal coworking space. It's instead a deluxe or premium coworking space. As you can see in the above pictures, the interior & the feel at WeWork's offices are pure bliss. On top of that, WeWork's coworking spaces are generally located at high-end commercial locations.

The other advantage of coworking spaces is the community that comes with it. You can meet, network & collaborate with like-minded professionals. Also, these coworking spaces support start-up training & incubator programs.

Adam Neumann

WeWork is also known for its charismatic CEO (former CEO now) - Adam Neumann.

As WeWork's CEO, Adam was known for his aggressive vision, innovative ideas & fast execution. However, on 22nd September, 2019, The Wall Street Journal reported that WeWork directors were insisting on Adam's resignation following his eccentric behaviour & drug use. The publisher further reported that Adam used his private jet to fly from the US to the Israel along with his friends & that Adam has wild dreams like "living forever", "building WeWork on Mars", etc.

One of the former employees of WeWork also complained of the "harassment" culture existing in the company. She was later fired for "poor performance".

Apart from these, Adam was also involved in various shady deals. I'll talk more about it later in this article.

Softbank

WeWork's real breakthrough came when SoftBank invested $ 10.65 billion thereby soaring its valuation to $ 47 billion.

But, who's SoftBank?. Think of it like a company that holds/owns many other companies. It's a Japanese telecom conglomerate headquartered in Tokyo. SoftBank is known for its successful investments in the following companies:

• Alibaba
• Didi Chuxing
• T-Mobile
• Ola
• Paytm
• Oyo
• Slack Technologies

Mayoshi Son, the founder of Softbank is a well-known face of the company. He's known for his incredible talent of spotting potential unicorn start-ups & investing heavily in them.

Softbank also runs a "vision fund" of $ 100 billion that's focused on investing on tech start-ups. The media reports say that the SoftBank is even planning on a "vision fund 2.0" of another $ 100 billion.

The Softbank vision fund of $ 100 has the following investors:

• Saudi Arabia ($ 45 billion)
• Softbank ($ 28 billion)
• Mubadala ($ 15 billion)
• Qualcomm & Sharp Corp. ($ 12 billion combined)

Very rightly, the Softbank's vision fund makes it the World's largest tech investor.

WeWork's Business Model

WeWork's business model is simple. Lease rental properties from landlords & sub-lease them to freelancers, remote workers, start-ups & companies.

So, how does WeWork generate money? Let's understand this with an example:

Assume WeWork leased a property with 5 floors from a landlord. The agreed lease price is $ 1.5 million a year. Now, WeWork renovates the property & sub-divides it into various products like hot desk, dedicated seats, conference rooms, private offices, lounge, kitchens, etc. WeWork markets the property & attracts a good number of its target users. Let's say 500 freelancers. Each freelancer is charged $ 300 a month (WeWork has tiered pricing structure. Let's take a fixed price for simplicity). So, the aggregate revenue WeWork gets from sub-leasing per year is $ 1800,000. The profit that WeWork makes from this property is $ 300,000 a year.

The business model I explained above is how WeWork planned it to work. However, due to various factors, WeWork still hasn't ever generated a profit. Instead, its losing money in billions. The reasons? I'll talk about it later in this post. Stay tuned.

WeWork generally selects high-end commercial plots for its products & renovates them from top to bottom. That practice surely shoots up the fixed cost considerably. And, not to forget other variable expenses that WeWork has to bear like staff, beverages, cleaning, internet, telephone, air conditioning, electricity, security, utilities etc.

WeWork's pricing is flexible. It largely depends on the type of product you want (hot desk, dedicated desk, or private office) & the location of the property. They also run a membership program that allows its members access to WeWork's properties from across the globe.

On its website, WeWork lists the following advantages of working from their properties:

• 24*7 access
• Access to lounges, roof-top & other common area facilities
• Internet & phone booths
• Conference rooms
• Kitchens

WeWork also earns money by providing various ancillary services to its members or clients like:

• Front desk reception
• Printing
• Mail & courier handling
• Managing bills & invoices

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Reasons for WeWork Failure

Flawed Positioning

WeWork's positioning itself isn't demand-oriented. You need to understand a typical start-up's requirement. All what start-ups want is an affordable place to work from. Yes, community matters. Yes, coffee matters. Yes, a cool furnishing also matters. But, primarily, what a freelancer or a start-up wants is a dedicated yet affordable space where they can work from.

WeWork's major problem is its occupancy rate & average revenue per member. As per a stat, the occupancy rate of WeWork fell to 80% in 2019. And, the average revenue per member fell to $ 6,360 a year. Once, you've built a premium coworking space, you need to charge a premium price for it. However, if your target audience is fresh start-ups & remote workers, will you be able to charge those premium rates? So, what do you do? You lower your prices to attract as many members as you can. But, by losing money.

May be WeWork would do better if it focuses on high-end corporate clients. But, again, why would an established organization need a coworking space. Sure, they've the capital to lease & build their own space. Don't they?

Start-up Bubble

When it comes to business, I'm old school. I feel sorry when I see astronomical valuations of start-ups solely based on some "world-changing ideas". Ideas are cheap. They sound pleasing to our ears. But, how many start-ups really execute their ideas flawlessly?

As per a stat, 90% of the start-ups fail. Isn't it high time, we change the way we value our businesses? Isn't it time for VCs & Angels to invest in "real" businesses with "real" track records.

What's even more disappointing is that most of these start-up founder aren't serious when it comes to building a sustainable business. All they want is to pump up their valuation artificially & then exit by selling their shares for millions dollars.

Losing Enormous Money In Short Time

WeWork lost $ 2 billion in 2019 alone. Aggressive expansion, lower occupancy rate, charging basic rates for its deluxe properties, high lease costs, high operation or variable costs were some of the factors that contributed to its loss.

May be sometimes, its wise to simply slow down. WeWork isn't the first start-up to lose this kind of money. Most of these unicorn start-ups burn cash simply to acquire more users. Their flawed thinking says "Let's first get the customers, then we shall think about profit". But the problem is how long will you continue to lose money? And, how long will the VCs bail you out. At one point of time, you got to start generating positive figures.

And, with WeWork the issue isn't just acquiring users but also acquiring its lease properties.

Non-Scalable Business Model

A scalable business model is where you can increase your number of users or customers exponentially by keeping your fixed cost intact. Example: If Facebook acquires 1 million new users, it won't have to invest anything extra in terms of fixed costs. The salary or office rent it pays remain unaffected whether they've 1 user or 1 billion users.

On the other hand, the business model of WeWork is non-scalable. If WeWork wants to acquire next 1000 new users, it'll need a new property & will have to pay other fixed expenses associated with it like lease cost, salaries of staff, security, electricity, etc. The tangible nature of real estate makes it difficult to scale. Real estate isn't something you create simply by coding or programming. It requires huge efforts, time & money.

A better business model would be to simply connect the landlords with startups or freelancers & not lease or renovate the property directly. Similar to what Uber does with cars & Oyo does with hotel rooms.

Unit Economics

As I explained earlier, WeWork charges less than what it should from its members & clients. The reason being "growth". WeWork is focusing unilaterally on increasing its occupancy rate & users. Even at the cost of losing significant money.

Any business (new or old) only aim should to be serve its customers by generating a positive profit at unit level. Sure, initially, your investors can bail you out. But, the bigger questions is - for how long? And, with WeWork the problem gets deeper because of its deluxe positioning. I don't think start-ups & remote workers are in a position to pay that kind of price. There're many basic coworking spaces like Regus. Why won't they go there?

Aggressive Non-Vertical Expansion

WeWork started as a coworking space & rebranded itself as We Company. Then, they started various non-vertical segments like WeGrow (School), WeLive (Living), etc.

As per a media report, Adam Neumann had even envisioned something like "WeSail" & "WeBank" as well. What? Really? I mean who thinks like that.

The Charismatic Founder's Fancy Expenses

Adam Neumann's irresponsible work culture & fancy expenses were also some of the reasons why WeWork is struggling right now. In fact, those were the reasons why the directors asked Adam to step down as the company's CEO.

Softbank & Adam Neumann's Exit Deal

Adam resigned from WeWork on the following conditions:

• $ 1 billion exit package
• $ 1 billion in sell of shares to Softbank
• $ 185 million as consulting fees for the last 4 years

Really? A CEO that resulted in $ 2 billion loss for the company in a year is being paid more $ 2 billion simply for an exit. Wow!

Shady Transactions

WeWork dropped the word "Work" & rebranded itself as We Company. And, you know the funny part? From whom did they buy the "We" copyright? From Adam Neumann himself. That too for a whopping $ 5.90 million. After wide spread criticism, he refunded back the money.

It was also noticed that Adam was renting his own personal properties to WeWork & earning the lease revenues. And, how did he get the money for those personal properties? By pledging his own WeWork shares to banks. Ouch!

Not A Proper Product-Market Fit

Now is the time everybody is talking about work from/at home. Why should I care about spending dollars at WeWork?

Meetings? I've Starbucks. Or even libraries.

Even if in case I need a coworking space, there're other coworking spaces (at not-so commercial locations) offering better pricing options. So, why WeWork?

Again I say, WeWork will need to reinvent its business model. They should start focusing completely on high-end & high-growth companies or start-ups.

Softbank's Backtracking On Its $ 3 Billion Bailout Package

In October, 2019 Softbank had agreed on a WeWork bailout package of $ 3 billion (buying shares from existing shareholders including $ 1 billion from Adam Neumann).

However, Softbank recently announced that they're not going ahead with the deal because many of the conditions on which the deal was based wasn't met. So, does that mean WeWork is over? Only time would say.