2019 was a rough year for the co-working space company WeWork. At the beginning of the year it was valued at a whopping 47 billion dollars, making it the fourth highest valued startup in the world and at the end it was valued at less than 8 billion dollars by its biggest investor.
Its CEO and Founder, Adam Neumann, was forced to resign, and 2400 of its employees had to be laid off (about 20% of its total workforce).
WeWork was founded in 2010 by Adam Neumann and Miguel McKelvey. It gained popularity and quickly expanded to over 800 locations.
However, their pursuit for an IPO (Initial Public Offering) to finally allow them to be traded on the stock market was disastrous as the company was forced to publish its prospectus which had been kept secret, through which it was made obvious that the company was far from profitable, as it lost almost 2 billion dollars that 2019 alone.
Here are a few lessons to learn from the failure of Wework's IPO;
Corporate governance
WeWork’s corporate governance was extremely flawed. Adam used his position as CEO to profit from the company, taking direct loans from the company and then using it to buy out property which he’ll then lease back to WeWork.
Adam would take any opportunity he could to profit personally, the company having paid him 5.9 million dollars in order to use the word ‘We’ which he had previously trademarked. He even took low interest loans from the company.
Adam Neumann is also known for doing drugs on the company jet, and he was also caught trying to smuggle drugs into Israel.
WeWork lacked effective corporate governance. Adam recruited his wife Rebekah Neumann as chief brand and impact officer and also made her a part of the cofounders of the company. He gave senior executive positions to his close friends and family as well. These were some of the reasons the CEO Adam was forced to resign from the company.
Essentially WeWork didn’t realize that effective corporate governance was very important for both its IPO and reputation. Leaders of startups should incentivise far more effective governance and proper practices as it plays a vital role in serving both the members of the company and its shareholders
Branding isn't all
There is a difference when it comes to valuation between being a tech company and a non-tech company.
WeWork tried to proposition itself as a tech company whereas it doesn’t manufacture technological software or hardware but rather it deploys data and analytics tools and technology to make more effective decisions.
Nowadays, almost every company uses technology in some way or another to aid their business operations.
Tech companies are invested in differently than non-tech companies. Although it usually takes a while for a tech company to return a profit, Tech companies are valued using their potential because reach is almost unlimited and they are capable of producing high margins while non-tech companies are valued using mostly their assets, revenue and profits.
This brings to another co-working company, IWG plc, formerly known as Regus which had 3300 locations while WeWork managed 848 locations, and guess what, IWG is profitable, however it was valued at about 4 billion dollars while WeWork was valued at 47 billion dollars.
Why? Because unlike IWG, WeWork has managed to make itself look like a tech company, even though it's just a tech-enabled one thereby giving it accessibility to cheap capital and investments.
However, no matter how much it tried to escape the real estate label, even by changing its name to ‘The We Company’, it was still a landlord company that rents out co-working spaces to freelancers and enterprises.
Profitability is key sometimes
WeWork according to Forbes was the fastest growing lease company space in New York in 2014. WeWork had a huge amount of funding and capital and ignored losses while trying to increase revenue.
In 2018, it had a revenue of about 1.8 billion while its losses were almost 2 billion dollars, it was shocking to most people that the running costs was more than twice the revenue of a non-tech company.
WeWork essentially convinced investors without making any money or proving the viability of their business model. A business model that has been proven to fail countless of times.
Rather than focusing on profitability, WeWork focused on growth, going into more ventures like their high end gym known as Rise by We, a co-living venture WeLive, a private school WeGrow run by Adam Neumann’s wife Rebekah, and acquiring unrelated companies like Meetup, a social network for organizing events and purchased a large stake in Wavegarden a spanish wave pool company.
WeWork took a rather scattershot approach towards its ventures.
Short term profit, long term debt
WeWork’s business model is to sign long-term leases with landlords, which averaged about 15 years, dividing the space into smaller offices, and sub-leasing to freelancers, startups and companies for short-term monthly leases.
WeWork essentially puts itself into long term debt for short term gains, even at the detriment of its.
Critics argued that this was a very flawed business model and worried how it would fair in a time of recession or economic downturn. It could lose a lot of the money it gets from its leases which lasts a few months but will still be obliged to pay the property owner as they've signed years long leases.
Whether WeWork bounces back and files for a successful IPO is unsure at the time, but the above lessons can be learnt from the mistakes it made.