In today’s Finshots, we chronicle the rise and fall of co-working giant WeWork and see if it can possibly claw its way back.

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The Story

If work was a party, WeWork was where it all went down.

Beer on tap, taco nights, and music concerts. Yup, the mid-2010s was a crazy time. And this hip place was where all the cool kids hung out (or worked). Such was the allure that VCs rushed to pump money into it. And the company was valued at nearly $50 billion in 2018.

But now, its shares are at $0!

Okay, it’s trading at around 20 cents. But it’s on the verge of bankruptcy and possibly turning into a meme stock — the kind which gets sudden virality because everyone on social media’s talking about it while trying to make a quick buck.

So, where did it all go wrong for WeWork?

Well, let’s take it from the top.

For the uninitiated, WeWork’s business model was simple enough — They leased office buildings from developers and landlords. They arranged for desks, internet, coffee machines, video conference facilities…basically everything a company would need. And they packaged this very attractively. They then rented out small chunks of it to startups who just wanted a plug-and-play model without the hassle of managing the boring admin stuff.

Basically, it’s a “co-working” space and they really popularized this concept.

But wait…that sounds like a real estate company, no? How on earth did it get that ~$50 billion tech-company valuation?

Ah, the secret trick is storytelling!

And evidently, its founder Adam Neumann, a former Israeli navy officer, was insanely good at it.

In 2010, the year it all began, he sold a dream. The 2008 financial crisis put many people out of their jobs. It was time to stop depending on big companies. It was time to create and become an entrepreneur. Build a multi-million dollar business. And WeWork was the space that could help them to do it.

Then he pitched WeWork as a “physical social network”. Yup, everyone loved tech platforms like Facebook and Twitter. So he simply said WeWork would take the best part of the internet, that is connecting people from varied backgrounds, but here they could all catch up physically. They could meet each other. And collaborate on building earth-shattering stuff. The fabled network effect would kick in.

Now guess what he said was the total addressable market (TAM) in such a case — it’s a term that VCs love to hear; the bigger the better — nearly $3 trillion. WeWork basically said anyone who worked at a desk was a potential member.

Oh, and they would also use AI to gather deep insights about their office spaces to grow at a breakneck speed. That’s the tech. And then he tacked on a mission statement — “to elevate the world’s consciousness”.

Now we don’t know what the investors were thinking at the time but they certainly lapped up this stuff. They ignored the fact that it was just a ‘rent-a-desk’ service at the end of it all. And apparently, when SoftBank’s CEO Masayoshi Son met Neumann in India (yup, India) in 2016, he kind of said, “Okay, I love this crazy idea. But you’ve got to be crazier man. Swing for the fences and we’ll see what happens.”

Well, WeWork listened to this advice. It decided it needed to be more. It had rebranded to just ‘We’ so that it could build out a whole ‘We’universe — a design consultancy firm, residential apartments, gyms, and even schools.

Ergo, the nearly $50 billion valuation.

But the losses were mounting. Sample this. In 2017, WeWork made $886 million in revenues. And suffered losses of $883 million. In 2018, the numbers doubled — it made $1.8 billion and lost $1.9 billion. Simply put, it lost $1 for every $1 in revenue!

Now you could attribute the losses partly to Neumann’s excesses — trips on private jets, the free-flowing booze, and music concerts in the offices. But the bigger problem was the business model itself. See, WeWork’s core issue was that it took buildings on a long-term lease. It then would have to spend a lot of money to make it hip. That meant it racked up a massive amount of debt too.

On the other hand, it would rent it on a short term contract. Companies could easily cancel on a whim.

For context, its average lease length was 15 years. But the incoming rental contracts were well below 15 months.

Imagine what would happen if there was an economic shock. Startups could sever their contracts. And WeWork’s rental income would plummet. Meanwhile, the lease payments wouldn’t disappear. It would translate to a cashflow mismatch.

But VC investors didn’t seem to really care. They had put blinders on because they were enamored by the possibilities.

Until 2019 when the company decided to launch an IPO. Public market investors scoffed at the loss making company. No one wanted to touch it with a barge pole. And they were appalled by Neumann’s exploits — such as buying real estate and leasing it back to WeWork. He made money even as his company burnt it. It was a major corporate governance red flag.

That was the beginning of the end for WeWork. They had to press pause on the IPO. And they kicked Neumann out as CEO.

But the damage was done. Their debt and liabilities were far too much. A new CEO couldn’t turn it around. By the end of 2022, they owed $15 billion in lease payments and had over $3 billion in loans. And well, WeWork is finally looking at bankruptcy now.

So, what’s next for the company? Is there some hope still?

Maybe there is.

See, there was already a Swiss company called IWG which did the same thing as WeWork. And the only difference was that it didn’t have a fancy spiel. That’s all. They’d set up shop in 1989. And they treated themselves as a real estate company. They grew slowly and steadily over the years. And the end result was that it was actually profitable.

But in 2000, IWG got caught on the wrong foot. The dot-com bubble had burst. And their model — which WeWork later copied — broke down. They too had signed long-term leases on which they had to pay rents. They couldn’t break contracts. But tech companies were imploding all around them and they began to cancel contracts with IWG.

Cashflows dried up. And the company began to quickly run out of money. Finally, in 2003, its US operations filed for bankruptcy.

Kind of the exact same situation that WeWork finds itself in, don’t you think?

But wait…IWG’s story doesn’t end there. IWG just reported record revenues last week.

How did it turn itself around, you ask?

Well, it had to cut costs drastically. And improve occupancy rates, of course. It had to get companies to pay and stay. But more importantly, it also turned to selling its services separately. If a company wanted tech support, they’d pay IWG extra. If they wanted dedicated office staff, IWG would make that happen for a fee too. IWG’s CEO had an analogy for this — “It’d be like having a hotel where you give all the food and drink away, and room service is free. You might have a full hotel, but you just cannot make any money.”

It survived.

And then, it tweaked the model some more. It doubled down on the franchise route! It basically gave its brand name (Regus) and expertise away in return for a fee.

It's the exact playbook that WeWork is trying out too — franchise + services.

It has a joint venture with the Embassy Group in India which seems to be doing quite well. It has signed similar partnerships in Israel and South Africa. And it also developed its own software called WeWork Workplace. It's a service that employers can use to book and coordinate desks among workers in a hybrid work environment. And that means it could even be used by companies that don't actually use WeWork as their office.

So maybe there’s still some hope for WeWork, eh?

Until then…it could masquerade as a meme stock at least.

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