We never seem to learn – bubbles bursting, WeWork edition

We never seem to learn – bubbles bursting, WeWork edition Rita McGrath | Thought Sparks

Rita McGrath | Thought Sparks

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Introduction

Every bubble produces its own poster children. One of the more astonishing is WeWork – a company that promised to defy the gravity of conventional real estate transactions by leasing long-term and renting short-term. At one point, it was valued at $47 billion – now it is warning that it may no longer be considered a “going concern.” How did we get here?

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Inspiring vision and great timing

Back in 2020 I had suggested that WeWork and a whole bunch of other highly valued startups were basically a re-run of the dot.com debacle of the late 1990’s. If something is not sustainable, eventually the end will come. And so it seems we are looking at the end for WeWork. Let’s review.

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The Intoxicating promise of exponential growth

WeWork's initial ascent was nothing short of spectacular. Neumann painted a picture of a global network of interconnected spaces where individuals and businesses could flourish together, transcending the mundane confines of traditional offices.

WeWork further tried to extend its reach into spaces beyond the office in a series of ill-considered ventures into spaces where, if we’re being honest, there didn’t seem to be any real customer need.

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A governance nightmare WeWork's governance structure was weak to non-existent, with Neumann wielding disproportionate power that allowed him virtually unchecked authority. Questionable transactions and conflicts of interest flourished. Neumann's grip on the company, combined with his penchant for unorthodox practices, became a red flag for later investors. Among many dubious decisions was the choice for a profitless company to buy a $60 million private jet, later unloaded when Neumann’s turn as CEO came to an end.

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How not to do an IPO

By 2019, it was starting to sink in for some investors that putting endless amounts of capital at the disposal of ambitious entrepreneurs with big growth plans and zero profit plans was perhaps not such a good idea. As observer David Trainer put it in Forbes, “WeWork might not be the largest IPO of 2019, but it is easily the most ridiculous, and the most dangerous. At least, Uber and other recent big-money IPO’s offered some legitimate innovation in their business models even if their valuations were far too high. WeWork has copied an old business model, i.e. office leasing, slapped some tech lingo on it, and suckered venture capital investors into valuing the firm at more than 10x its nearest competitor.The company also burns tons of cash, carries huge risk factors in a recession, and sports some of the worst corporate governance practices I’ve ever seen. WeWork (WE) is in the Danger Zone.” At the time, the IWG group, operating as Regus, actually made a profit and was valued at around $3.7 billion (versus the heady $47 billion valuation sought for the WeWork IPO).

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The company did eventually go public via a Special Purpose Acquisition Company (SPAC) in 2021. That deal valued it at $9 billion. The pandemic both hurt and helped it. With people working at home, short-term office stays dropped like a rock. But in the rebound, flexible office space started to look sexy again.

The company at the moment has a Board member as its interim CEO, three other board members who have stepped down and it is reporting “substantial doubt” about its ability to continue as a going concern. It is likely to be able to limp along for a while, as no one with current leases is going to want to push the company into bankruptcy.

The movie gets more sober from here

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Key lessons?

As always in such tales, there are untested assumptions, taken as facts, big bets on a specific, unproven idea, leaders with nearly magical abilities to weave a great narrative, and hot money looking for a killing. Not that Neumann (who did very nicely from the proceeds of all this, thank you) did anything illegal, as far as is known. He and early equity owners were able to cash out. The bankers who managed the various transactions probably earned a sweet return for their time as well.

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WeWish!

We’re fans of the WeWork concept over here at Valize, just not of the economics. We hope they are able to pull off the miracle they seem to need. In the meantime, for the rest of us, we’d be happy to chat about your startup, growth or innovation challenges. Our contact form is here.

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