WeWork’s collapse: A story of unchecked ambition and KCS corporate governance

January 2019 marked a high point for WeWork. Still a startup, the New York-based firm had secured funding of $10 billion from the Softbank Group and had attained an after-funding valuation of $47 billion. At the time, this made it one of the most valuable non-public companies in the world. Offering attractive co-working spaces to freelancers, startups, and other business clients in over 500 locations across the globe, WeWork saw itself as “defining the workplace of the future”.

The company seemed poised to join the ranks of Google, Amazon, and Apple, in becoming yet another corporate behemoth that was built up from scratch by a visionary entrepreneur with humble roots. WeWork had rebranded itself as the “We Company”, expanding to cover not only co-working spaces (WeWork) but also residential real estate (WeLive) and education (WeGrow). Even though it was yet to turn a profit in its nine-year history, WeWork filed for an IPO (Initial Public Offering) in April 2019.

By August 2019, however, WeWork’s fortunes started reversing. As the company filed its “S1” prospectus with the regulator for public listing, troubling details emerged. These included inter-alia, non-sustainability of its business model (expensive long-term lease expenditures and cheaper short-term rents from tenants), a complicated organisational structure, a questionable relationship between WeWork and CEO Adam Neumann (including unchecked voting power and loans from the company), and grandiose mission statements (“Our mission is to elevate the world’s consciousness”). Such was the backlash from prospective investors that WeWork cancelled its IPO.

After a takeover by Softbank Group, WeWork restructured its business and attempted to repair relations with investors. It replaced Adam Neumann with an experienced real estate executive as CEO, and cut down costs, including by way of large layoffs. Despite the otherwise negative effect of the pandemic on commercial real estate, WeWork survived by focussing on its flexible working space offerings and catering to larger firms. It even managed to list publicly in 2021, by merging with a Special Purpose Acquisition Company (SPAC), a less rigorous method of public listing compared to an IPO.

However, WeWork’s troubles did not end there. The company’s core business — renting properties for long periods and leasing them out for shorter periods — continued to run at a loss. Its quarterly financial report from August 2023 painted a dire picture. The company’s long-term lease obligations were $13 billion, even as projected future income from rents was just $9 billion. Further, WeWork maintained $205 million worth of cash, just a tenth of its current liabilities (payments due in one year or less) of $2.2 billion. WeWork finally filed for bankruptcy on November 6, 2023.

By all accounts, WeWork’s pre-IPO story was unique. It was the result of large-scale, no-strings-attached VC funding, lack of accountability, unchecked ambition, excessive spending (including lavish parties and a personal aircraft for Neumann), and KCS corporate governance. Yet, this story of excess has some valuable lessons for startup founders in navigating their business journeys.

Firstly, the role and responsibility of investors remain paramount. Management professor Tom Eisenmann once noted: “(Along with the founders) a broad set of stakeholders, including employees, strategic partners, and investors can play a role in a venture’s downfall”, and this was especially pertinent for WeWork. The company expanded rapidly and became a global brand early on in its existence. Much of this success — and the accompanying hype — centred around co-founder and CEO Adam Neumann. Softbank, in its attempt to capitalise on this larger-than-life figure, followed a blank-cheque approach — significant funding with little to no accountability.

This not only encouraged Neumann’s excesses at the expense of the firm’s other stakeholders but also significantly elevated its financial valuation. Even as prospective IPO investors initially showed interest in WeWork, they were ultimately put off by the very actions that Softbank’s funding encouraged. Moreover, a less rapid path to expansion may also have helped WeWork in being more selective in its property leases and therefore in attaining profitability after its failed IPO.

Second, the choice of startup business model is directly linked to macroeconomic conditions. In the 2010s, VCs preferred a very specific type of business model — a unique product and rapid business expansion. Startups were expected to capture a customer base, gain economies of scale, and eventually turn profitable. Such an approach, in no small part, was made possible by an era of low interest rates.

But, at a time when even safe-haven investments (such as US treasury bonds) are yielding close to 5 per cent returns, VCs themselves may be under more pressure to generate returns for their investors and therefore would be less forgiving of loss-making startups where profitability is not on the horizon.



Source: India Express