The Rise and Fall of WeWork

Background

WeWork is a company that provides flexible office space to companies worldwide. Founded in 2010, WeWork was a middleman between property owners wanting long-term leases and startups enjoying short-term leases.

The idea behind WeWork started as a company called Green Desk, founded by Adam Neumann and Miguel McKelvey. Green Desk was a company that allowed customers to rent a private office on a month-to-month basis. The company offered startup services like utilities, printing, offices, food, and internet access. The company generated profit by renting these spaces for more than the rent they paid.

Green Desk still thrived during the 2008 financial crisis; the founders noticed that community drove people to Green Desk, not sustainability. After this, both Neumann and McKelvey sold their Green Desk shares and started WeWork. 

Rapid Expansion

The first location of WeWork was 3000 square feet in a tenement-style building in SoHo which Neumann and McKelvey rented on a trial basis due to low credit. After turning a profit in one month, this location was used to host investors and developers to grow the brand.

In two years, WeWork was able to open four new locations. From this, they caught the attention of Benchmark, a venture capital firm that made early investments in Twitter and Uber. It raised $17 million from investors during its Series A funding round. A Series A funding round is a stage of investment by venture capitalists where these investors look for companies with a great idea and a strong strategy to make money from the said idea. 

By 2014, WeWork had gained 10,000 members and 1.5 million square feet of space. WeWork also opened its first international location in London, UK.

In 2016, WeWork expanded into a new market: residential business under a subsidiary called WeLive. This program provided customers with fully furnished apartments that come with amenities like maid service and free internet.

Expanding again, WeWork announced a school for children aged 2-11 called WeGrow which focused on entrepreneurship. During this time, they also bought the New York City location of the Lord & Taylor store for $850 million. In October, WeWork also opened a gym called “Rise By We” which features yoga and boxing classes.

And it all…

In December 2018, WeWork filed IPO (initial public offering) papers with the SEC at a valuation of approximately $47 billion.

This filing generated intense scrutiny from investors and the media as this document was the first comprehensive look at WeWork’s finances, revealing the insane losses of the company, like when they posted a $1.6 billion loss on a $1.8 billion revenue stream in 2018. People were concerned about WeWork’s leadership and ability to turn a profit.

Due to these losses, investors grew skeptical about investing in WeWork, causing Neumann to consider slashing the valuation by over half, down to a $20 billion valuation for its IPO. This number continued to drop, and by September 2019, We Work’s IPO valuation dropped to $10 billion, and soon thereafter, their IPO was delayed.

By now, investors and the general public shifted their focus from WeWork’s path to profit to its leadership. Reports of mismanagement were rampant throughout the company. Prominent examples of this are Neumann smoking weed on a private jet, serving employees tequila shots, trademarking the term “We”, and making the company purchase it for $5.9 million.

As a result, on September 24th, Adam Neumann stepped down as WeWork’s CEO, and two of its executives, Sebastian Gunningham and Artie Minson, filled Neumann’s empty position.

…comes crashing down

Investors' worst fears came true. WeWork got into serious financial trouble. It started selling companies it had acquired and laying off employees. In 6 weeks, WeWork fell from a company valued at $47 billion to talks of bankruptcy. Shortly after, in early October, WeWork was looking for lifelines from JP Morgan and Softbank.

Now, Softbank (WeWork’s biggest investor) is taking over WeWork and paid Adam Neumann $1.7 billion to step down as chairman. The offer entails $1 billion for Neumann’s stock, half a billion in credit, and $185 million in consulting fees.

This fall was propagated by Neumann’s many mistakes as CEO. One of the most prominent examples of such is his focus solely on growth and not on turning a profit. The company was trying to grow on a very unsustainable business model which had slim to no profit margins. In 2018, WeWork had a shocking revenue of $1.8 billion dollars but they ended up losing $1.9 billion in the process. A business model that generates staggering losses with billions in revenue is clearly not a good one. However, Neumann’s only focus was to sell an experience and grow WeWork into a giant company. He did not focus on the financials and business model at all which contributed to WeWork’s inevitable demise.

In a short few years, WeWork grew to one of the most valuable companies in the world and fell to bankruptcy due to bad leadership, bad decisions, and no clear path to profit.

In the present, Adam Neumann recently created a new startup called Flow. Flow was founded as a company to WeWork-ify residential real estate. However, they have recently pivoted into the digital wallet business as well. They launched a digital wallet that can store currencies like various cryptocurrencies and the US Dollar. This startup got a hefty $350 million investment from Andreessen Horowitz. Do you think Neumann will be able to avoid the mistakes he made with WeWork?