Between 2010 and 2019, WeWork was a huge success story. From its initial founding, it had reached a valuation of approximately $47 billion. It had also received some pretty substantial support from top venture capital firms and major banks. And its highly charismatic founder Adam Neumann seemed as if he couldn’t fail. The growth of WeWork and its growth targets can definitely be described as bold, and many invested in it as a result. But in the last five years, we have witnessed the company’s collapse, and this collapse climaxed in a WeWork Chapter 11 bankruptcy filing this month. Though restructuring is being pursued, there’s much doubt about the company’s long-term viability.
In examining the collapse of WeWork to date, both internal and external factors can be identified as causative. Poor management and fiscal irresponsibility certainly attributed to the company’s decline. Likewise, the pandemic and a massive shift to remote work similarly played a role. Combined, these factors were key ingredients in a recipe for WeWork’s demise. And even if internal issues are resolved, there’s little guarantee the climate today is favorable for the office-sharing company. This simply goes to show that it takes more than being bold to realize true success. Boldness guided by best practices and keen insights are needed. And the WeWork Chapter 11 bankruptcy filing suggests these key aspects didn’t exist.
“The company was the product of a boom, and during booms, investors ignore the flashing warning lights. ‘Charismatic CEO’ is a term that should strike fear into any investor’s heart.” – Steve Clayton, Head of Equity Funds, Hargreaves Lansdown
Ignoring the Guardrails
The basic premise of WeWork’s business formula involved pursuing long leases on large office properties. Once secured, smaller spaces would be rented to small businesses using flexible and short-term agreements. In theory, WeWork could leverage economies of scale on these leases against higher rates from sublessees. And the flexibility and short-term structures were attractive to small businesses from a risk perspective. The strategy sounds both bold and feasible, especially during an economic growth phase. Few would have expected this would have led to a WeWork Chapter 11 bankruptcy filing. But it wasn’t a bad business concept that contributed to the collapse of WeWork. Instead, it was a failure to heed the warnings along the way.
When WeWork sought its initial IPO in 2019, major investors like Softbank suggested the company’s valuation was $47 billion. But the IPO failed for a variety of reasons. At the time, WeWork had grown to lease office spaces around the world. In fact, it still has 777 office spaces globally with millions of square feet. But in addition to these assets, WeWork also had hefty debt and some notable revenue losses. It had chosen to grow at the expense of debt, which investors found unpalatable. Combined with Neumann’s lax management style and lack of structured corporate oversight, the IPO failed. This was the beginning of the collapse of WeWork that ultimately led to the recent WeWork Chapter 11 bankruptcy filing.
“I believe that, with the right strategy and team, a reorganization will enable WeWork to emerge successfully.” – Adam Neumann, Founder and Former CEO, WeWork
A Climate Adding Insult to Injury
On the heels of WeWork’s failed IPO, the company received a bit of a bailout with Masayoshi Son of Softbank leading the way. Neumann was asked to step down from the company as part of the deal. And despite efforts to restructure and renegotiate existing leases, the company’s valuation fell sharply. Within a year, WeWork had lost half of its value, and by 2021, it had fallen to $10 billion. It was finally able to finally go public in 2021 as a special purchase acquisitions company. But this only delayed the eventual WeWork Chapter 11 bankruptcy filing. The collapse of WeWork was occurring gradually but progressively. And several factors contributed to this decline.
The most significant factor was the COVID-19 pandemic. Suddenly, not only did pandemic restrictions prevent workers from leaving their home to go to an office. But the vast majority of workers preferred remote work, which has only grown in popularity since. Naturally, this lowered demand for office space, and this greatly contributed to the continued collapse of WeWork. At the same time, however, interest rates and inflation has made even shared office space less attractive to businesses. This is especially true in large cities experiencing the urban doom loop with growing numbers of unoccupied office spaces. As such, the recent WeWork bankruptcy filing showed a $3 billion debt-to-asset difference for the company. WeWork had little choice at this point but to attempt some kind of corporate restructuring.
“I would not be surprised if SoftBank is simply trying to get as much of its own investment out of the company before it joins Titanic at the bottom.” – Sam Stovall, Chief Investment Strategist, CFRA Research
Where WeWork Will Go from Here
According to the WeWork Chapter 11 bankruptcy filing, the company has gained approval of 92% of its investors for its restructuring plans. This will turn secured debt into an equity amount, which will eliminate $3 billion in debt. This will allow the company to again match its assets with its existing lease debts. At the same time, WeWork will be continuing the pursuit of lease renegotiations to further lower its debt. But many doubt this will prevent the eventual collapse of WeWork. Instead, many suspect major investors are simply trying to get as much out of the company as possible before it tanks.
In retrospect, no one can question the boldness with which Neumann and WeWork grew the company. The idea of leveraging large-scale office leases to acquire assets and revenues is a creative and innovative concept. But boldness without limits is a bad recipe for success when changes in economic, market, and social climates aren’t considered. This is where WeWork failed, and it’s what has led to the collapse of WeWork. Neumann might believe the WeWork Chapter 11 bankruptcy might give the company new life. But overcoming years of poor oversight will be tough, especially in today’s environment.