Context
WeWork took offices on long-term leases, refurbished them and rented desks to companies and freelancers on short terms. The company opened new locations around the world. In January 2019 its main investor, SoftBank, invested at a valuation of $47 billion.
Symptom
Revenue grew fast, but losses grew with it. According to the prospectus, cumulative losses for 2016–2018 were $3.3 billion on revenue of $3.1 billion. In 2018, on revenue of about $1.8 billion, the net loss was about $1.9 billion.
Cause
The model combined long-term lease obligations with short-term customer contracts. Such a model makes money while offices are full and prices rise, and loses money quickly in a downturn. On top of that, the company showed investors its own profitability metrics that excluded a significant share of costs.
The fork
Keep growing on investors' money in the hope of a stock market listing, or first prove that a single location is profitable and only then expand.
Decision
The company chose growth and in August 2019 filed a prospectus for an initial public offering (IPO, Form S-1). The public filing became the first full test of the model by outside investors.
Execution
After the prospectus was published, investors questioned both the valuation and the company's governance. On September 24, 2019 co-founder Adam Neumann stepped down as chief executive, and on September 30 the company withdrew the prospectus.
Outcome
On October 23, 2019 SoftBank rescued the company with a $9.5 billion package at a valuation of less than $8 billion. In November 2023 WeWork filed for Chapter 11 bankruptcy in the United States.
What it means for you
Growth does not replace the economics of a single unit. If one location, one customer or one project does not make money, scale multiplies the loss.
- How much does one of your locations, customers or projects earn after all costs?
- Which of your obligations run longer than your customers' obligations to you?
- Which costs do you exclude from your profitability calculation, and why?
We would start by calculating the economics of a single unit with all its costs, including rent, staff and customer acquisition, and comparing the length of obligations on both sides.
Key dates
| Year | Event |
|---|---|
| 2019, January | SoftBank invests at a $47 billion valuation |
| 2019, August | IPO prospectus published |
| 2019, September 24 | Adam Neumann steps down as chief executive |
| 2019, September 30 | Prospectus withdrawn |
| 2019, October 23 | SoftBank rescue package at a valuation below $8 billion |
| 2023, November | Chapter 11 bankruptcy |
