Why We Work Doesn't Work

Barely a week ago, Adam Neumann was sitting atop the most valuable startup in the U.S. and getting ready for a blockbuster initial public offering.

Now he’s out of a job.

Back in April of 2018 I dedicated an episode to WeWork and the problems that I saw with their business model. I currently run a shared office rental business consisting of 5 offices. There is no comparison between what I’m doing and WeWork. They are operating on a much larger scale. But for someone who is actually in the same business, I understand the risks and pitfalls of what WeWork is doing, including staffing, master lease agreements, and how to position different product offers in the space.

I’m coming to you live from NYC where WeWork has their largest presence and 55 WeWork locations in Manhattan alone. If you want to rent a dedicated office in NY, it will cost you about $1,100 a month. A dedicated desk will run about $750, and a hot desk will be able $500 a month. All pretty reasonable prices. I think these low prices are both the reason for its widespread adoption, and one of the causes at the root of its financial problems.

The biggest problem with the WeWork business model is that they have signed multi-year master lease agreements and their customers only have a 30 day obligation. The buildings that are owned outright have long term debt. Again, their customers only are on the hook for 30 days.

But here’s the kicker. As if these risks are not enough, the company has never turned a profit. The S1 filing for the IPO was done back in August. A study of their S1 shows that not only were they losing money, they were also losing money from operations. That means that the startup costs for expansion of the business were not the only reason the company was losing money.

The company was losing money in their day to day operations. If they stopped their rabid expansion immediately and spent nothing on growth, they would still be bleeding red ink from operations. They brought in $1.8B in revenue. For every dollar they brought in, they spent $2. So their very survival is predicated on the assumption that they continue to get cash infusions until some point in the future when they might someday, who knows, turn a profit.

Their principal funder was Softbank, the Japanese cell phone carrier who opened an aggressive fund several years ago that was being managed by the founder’s son. But in the past week, the governance at Softbank seems to have stepped in and put a stop to the craziness.

Particularly egregious was the lavish spending by the founder on things that bring zero shareholder value. This included lavish parties, a private jet, and many other expenses.

How is it, that these situations that seem so obvious take months or even years to play out?

Now it looks like JP Morgan and Goldman Sachs are in discussions with the company to lend about $3B, and the company will need to tap the private markets for a couple of hundred million in additional equity. Given that equity investors just took a 66% haircut on the valuation, I personally think this is going to be a difficult sell. This is a $3B loan to keep the company afloat. It’s not to grow the company to profitability. So far, the larger the company has grown, the faster the losses have multiplied.

As a minimum, the new leadership will need to demonstrate to investors that they can manage the company’s finances. That’s going to mean significant headcount reductions and a steep cost cutting program.

I personally can’t imagine myself speaking to investors with a straight face and proposing a money losing proposition. Yes, there can be periods of negative cash flow during the construction and lease-up of a project. That’s different. But this company hasn’t turned a profit since its founding and the founders have sucked out hundreds of millions of dollars to fund their lavish lifestyle. It's the shareholders money!