News Analysis
WeWork was the star player of the office space scene in 2019 when it prepared for the launch of its initial public offering (IPO) under its then-parent company, The We Company. At the time, SoftBank gave WeWork a valuation of $47 billion.
Now, the company questions its ability to keep operating. “As a result of our losses and our projected cash needs … substantial doubt exists about the Company’s ability to continue as a going concern,” WeWork wrote in an SEC filing on Aug. 8.
How Does WeWork Work? The Business Model
This real estate company billing itself as a tech startup makes its money by snagging long-term leases on office spaces and then subleasing those spaces out on a monthly, yearly or whatever-you-need basis. As of June 2023, the company has 777 locations around the world.
Why the tech company angle? WeWork likes to envision itself as an organization with a Silicon-Valley-esque culture, one that emphasizes innovation and touts its technological investments as differentiators. It doesn’t hurt that tech companies often receive higher valuation multiples than real estate or service-based businesses due to their rapid scaling, network effects and high margins.
WeWork Market Outlook: Bad to Worse
Despite the company's promising run, today it faces a comparatively measly valuation of $270 million. Stock prices dropped to a low this week of $0.13 per share.
In the second quarter of 2023, WeWork reported revenues of $844 million — an increase of 4% year-over-year — and a net loss of $397 million, a decrease of 46% year-over-year. Yet, while the numbers improved for the company in 2022, revenue and earnings per share figures still missed analyst estimates.
Related Article: Minimum Viable Office Is the Future
Where Did WeWork Go Wrong?
The tech-real-estate company with a shooting star future looks ready to crash and burn. Where did it all go wrong?
The ‘Membership’ Problem
The biggest issue, according to the company, is weakened membership due to a struggling economy. “The recent macroeconomic environment has caused higher member churn and weaker demand than contemplated,” WeWork stated in its recent filing.
Back in 2018, paperwork from WeWork's attempt to go public showed it had been roughly doubling its revenue and memberships (monthly rental payments) every year. And the majority of revenue came from those monthly rental payments.
In August 2019, WeWork filed its S-1 form — an initial registration document filed with the US Securities and Exchanges Commission (SEC) when a company first goes public. Seven months later, COVID-19 lockdowns began in the US.
“WeWork had some success targeting Fortune 500 companies to utilize their locations, but most of their business came from small businesses, startups and freelancers,” said Chase McAteer, a corporate real estate agent with Oxford Partners, LLC. “The majority of these clients signed very short-term rental agreements.”
WeWork was leasing those spaces for a premium compared to the rent they paid the building owners, he added. But they were also locked into long-term lease agreements while their tenants could more or less leave whenever they wanted.
“You can see that this means WeWork was carrying a lot of risk in their business,” said McAteer. “Now imagine a pandemic comes along and completely upends the office real estate market. Those short-term rental agreements expire, and the small business owners and freelancers work from home. WeWork still carries the cost of all those long-term leases on their balance sheet. They are liabilities.”
Related Article: The Value and the Limitations of Returning to the Office
The IPO Problem
The pandemic’s timing was unfortunate for WeWork. But problems at the company started before that. When WeWork filed its S-1 form to first go public, S&P Global Ratings and Fitch Ratings gave them ratings of B and BB-minus, respectively — putting the investment into “junk” territory.
Why the poor score? For one, investors questioned the firm’s creative accounting. Companies typically offer “adjusted earnings,” but WeWork decided to use a number they called “community adjusted Ebitda,” by which it subtracted not just interest, taxes, depreciation and amortization, but also expenses like marketing, general and administrative and development and design costs.
“I’ve never seen the phrase ‘community adjusted Ebitda’ in my life,” Adam Cohen, founder of bond research company Covenant Review, told the Wall Street Journal.
And more, investors were also concerned about WeWork’s growth trajectory. In 2017, its revenue per user fell 6.2%, but sales and marketing costs more than tripled. And the company would be taking on debt during a downturn with a business model yet to be tested.
WeWork postponed the IPO and entered a period of restructuring, laying off thousands of employees and selling off non-core businesses, something it called its “Transformation Plan.”
The Debt Problem
WeWork already had the risk of taking on long-term leases while their clients could walk away at nearly a moment’s notice. However, they layered debt on top of those long-term leases with their approach to their office space vision.
“[WeWork was] investing tons of money into tenant improvements to make these spaces beautiful, modern and enjoyable to their clients. If you have ever walked into a WeWork location, you know what I mean,” said McAteer.
The company upgraded rental spaces with modern furniture and fixtures, even adding start-up-friendly amenities like free fruit water and craft beer dispensers. “But those improvements are very expensive, which is one reason they struggled with profitability,” McAteer added.
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In 2018, the year WeWork showed it was doubling its revenue and memberships, its losses also more than doubled to $933 million due to hefty construction costs for the new offices it opened.
The Management (and Governance) Problem
Adam Neumann, co-founder and CEO of WeWork until 2019, was another red flag for investors when the company went public. His tenure had been marked by bizarre stunts, including his 2016 decision to pair layoff announcements with a performance by Run-DMC’s Darryl McDaniels and tequila shots for stunned staff members. And despite his departure, it seems the company can’t shake off his opaque reputation.
“This would have meant he potentially de facto controlled the actions of the board and they could not actually serve the corporate governance role they should have had.” Neumann, she explained, owned a small number of shares that had greater voting power than other shareholdings — making him CEO and chairman and giving him the right to veto all successors.
“The board could not act as a ‘sober independent voice’ and take the company in a smart direction or get management not to do ‘crazy’ things if they felt that was happening, because he could just ignore them.”
When the company attempted to go public, it came out that WeWork loaned large sums of money to Neumann with low interest rates, as well as rented out buildings he owned. Ultimately, with the IPO in jeopardy, Neumann accepted his reported $1.7 billion golden parachute and stepped down as CEO in 2019.
Will WeWork File for Bankruptcy?
Since the implementation of WeWork’s Transformation Plan in Q4 of 2019, it was able to cut $2.3 billion in recurring costs. And in 2021, it went public through a merger with a special purpose acquisition company (SPAC) called BowX Acquisition Corp. But those wins might not be enough to save the company.
A representative from WeWork told Fortune that this recent “going concern” warning is merely an “accounting determination” and does not fully reflect recent improvements to the company’s balance sheet.
However, WeWork has brought in a new group of board members with experience in restructuring companies post-bankruptcy following the resignations of three board members the week prior.
Ultimately, while the financial operating model was risky, done the right way, it could have worked, said Heale. Instead, “WeWork had a share valuation and corporate control structure that new investors were not willing to invest in,” adding, “A whole combination of financial, management, and governance factors were at fault here.”
