The Rise and Fall of WeWork

Benefits for the Audience

 At what extent one should take funds
 Importance of Analyzing own Business
 Importance of leadership
Figures and Facts
 In 2015, the company was grown to $10 Billion Valuation.
 In August of 2017 We Work had a $21.2 billion valuation. 
 As of 2019, WeWork had a valuation of $47 billion, more than the valuation of
SpaceX of Elon Musk
 At one time, WeWork had more than 5,000 employees in over 280 locations, spread
across 86 cities in 32 countries.
 The current valuation of WeWork is approximately $7.5 billion on paper based on the
recent Softbank takeover and continued losses at the company. 
 Many of the economists and journalists says that the $47 Billion valuation is an
illusionary number.
Coworking Phenomenon
Coworking seems to be a regular part of life for those who freelance, work remotely, or run
startups today, but this was not always the case. The story of coworking began in 2005, and
it has evolved dramatically ever since. Software engineer Brad Neuberg is credited with
starting the coworking phenomenon from a San Francisco collective space. Although
Neuberg began the first official coworking space in 2005, the culture have been following
from 1995.
Coworking is an arrangement in which several workers from different companies share an office
space, allowing cost savings and convenience through the use of common infrastructure, such as
equipment, utilities, and receptionist and custodial services, and in some cases refreshments and
parcel acceptance services. It is attractive to independent contractors, independent
scientists, telecommuting and work-at-home professionals, and people who travel frequently.
Additionally, coworking helps workers avoid the isolation they may experience while
telecommuting, traveling, or working at home, while also eliminating distractions. Some
coworking spaces charge membership dues.

Back Story
Adam Neuberg was an Israeli Navy. He had started many companies. Later, in May
2008, Israeli-born Adam Neumann and American-born Miguel McKelvey established
GreenDesk, an "eco-friendly coworking space" in Brooklyn. 2010 was a year when there were
many empty buildings and vacant rooms in USA.
In 2010, Neumann and McKelvey sold the business and started WeWork with its first location in
New York's SoHo district with partial funding from Manhattan real estate developer Joel
Schreiber who purchased a 33-percent interest in the company for $15 million.
WeWork designs and builds physical and virtual shared spaces and office services
for entrepreneurs and companies. 
Extraordinary Growth
By 2014, WeWork was considered "the fastest-growing lessee of new office space in New York"
and was on track to become "the fastest-growing lessee of new space in America.
As of January 2015, the firm had 51 coworking locations across the U.S., Europe, and Israel –
twice as many as it had at the end of 2014 with plans to expand to reach every continent.
WeWork was named among the "most innovative companies" of 2015 by Fast Company
magazine.
On January 30, 2017, The Wall Street Journal reported: "SoftBank Group Corp. is weighing an
investment of well over $1 billion in shared-office Space Company WeWork Cos., in what could
be among the first deals from its new $100 billion technology fund."  In September 2017,
WeWork expanded into Southeast Asia via the acquisition of Singapore-based SpaceMob, and it
set aside a budget of $500 million to grow in Southeast Asia.
No one disputes that Neumann had an uncommon vision. In nine years, WeWork grew from a
single office to encompass more than 45 million square feet of real estate, with roughly 527,000
tenants — or “memberships” — in some 110 cities. Large corporations including IBM,
Microsoft and Salesforce moved employees into WeWork spaces.
Business Model
Membership Option- Flexibility is the key in WeWork’s business model, especially when
clients no longer need to worry about long-term leases. The company offers four levels of
membership: Hot desks, dedicated desks, private offices, and custom build-outs.
The cheapest option for single workers is the hot desk, when users pick a primary WeWork
location, show up whenever they wish, pick any available seat in a common area and start
working immediately. For those who want a little more stability, WeWork offers dedicated desks
that they lease to one client or one business only.
Teams and businesses of all sizes can also opt for private offices, which come equipped with
furniture and can accomodate dozens of workers as businesses grow. The most personalized
option is a custom build-out, which presents maximum freedom for groups that want to
customize their workspace with features like CEO suites, conference rooms or labs. WeWork
scouts buildings and then transforms them and has already done this for Facebook, Microsoft,
HSBC and Deloitte.
1. How We Work Make Money- In a nutshell, WeWork rents buildings from property
owners at one price and then rents them out to clients at higher prices. Not all of the
locations WeWork uses are similarly priced; buying up real estate in Baltimore or
Nashville, for example, is cheaper than New York City. These price discrepancies help
keep WeWork's overhead from getting too high.
After renting the buildings, WeWork transforms them, updating everything inside and adding
features like cafés, offices, and community spaces. Once finished, the company rents out the
spaces for significantly higher prices. Apart from making money on rent, WeWork also provides
additional services for a fee, such as partnerships with local businesses and car rentals.
2. Shared Office Costs- The most basic membership costs only $45 per month and includes
access to WeWork offices in 200 locations in 53 cities worldwide. It also includes access
to WeWork's social network, WeWork Commons, which enables entrepreneurs to
interact and exchange ideas. However, actual use of the facilities costs an additional $50
per day, so it is best suited to those who are primarily interested in networking and only
have occasional need of office space.
The company offers several plans to workers and business with varying prices. For example, a
worker can get a “Hot Desk” for $220 per month which will give them guaranteed workspace in
a common location. For a desk of your own in the same spot each day, the fee is $350 per month.
Standard private office space starts at $400 per month. The spaces come with high-speed
internet, printers, bike storage, coffee, and shared front desk service. Other amenities include
office supplies, water, and daily cleaning services.

3. Funding- WeWork's investors include a number of global entities, including holding

conglomerate SoftBank, private equity firm Hony Capital, and real estate developer
Greenland Holdings. In August 2017, SoftBank and its founder, Masayoshi Son,
poured a massive $4.4 billion investment into WeWork. This included $3 billion for
WeWork itself, namely through primary investment and the purchase of existing
shares, and $1.4 billion dedicated to WeWork’s expansion into the Asian market:
WeWork China, WeWork Japan and WeWork Pacific. In August 2018,
WeWork announced yet another $1 billion in funds from SoftBank. As of 2019,
WeWork had raised nearly $47 billion in private-equity and venture capital funding
in the years since its founding. Western companies like Goldman Sachs, J.P. Morgan
and T. Rowe Price have also invested in the Manhattan-based WeWork.

Why Landlords were flexible with WeWork?

From the perspective of a landlord  WeWork's business model makes more sense despite the
high fixed costs and long-term lease agreements. For commercial property owners and
managers, It's easier to have one contract with a single large company for a fixed
period than to find and lease to several different tenants for shorter periods, especially if the
building is in a challenging real estate market. Overall, the managing efforts and negotiation
processes are much less troublesome with one tenant, and WeWork usually leases
properties for 10 years. This takes less time and resources away from the building owner
and takes care of the biggest concern for landlords - vacancy rates. WeWork has also
garnered enormous media exposure by attracting young, innovative businesses and curating
established corporate clients.
Even smaller landlords don't seem overly threatened by this up-and-comer. Some
assume WeWork's business model won't be sustainable if the economy takes a downturn. Others
see WeWork as a sort of incubator where small businesses can grow until they're ready to move
into traditional office space.
Problems with this Model
Whenever there is a slowdown in the economy and there is no demand from the renters, the
company has to essentially keep paying lease obligations with no revenue coming in. This is the
fundamental problem that no public or private investor could address how we work is positioned
to overcome.
WeWork’s implementation of this model has another unique problem. They have a skewed
selection of demand with startups being ~50% of the customer base, who are first in the line to
take a hit when a slowdown happens.

Company Loss, IPO and the Following Controversy

WeWork lost over $2 billion in operations in 2018.
In January of 2019 its valuation was set at $47 billion as the company prepared for its IPO.
WeWork withdrew its S-1 filing on September 30, 2019 while also postponing its Initial Public
Offering of stock. The real valuation of the company at the time was readjusted to around $10
billion based on its poor financial performance and the money it was losing.
On September 5th, 2019 WeWork considered selling more private shares at a $20 billion
valuation. 
In October SoftBank had a $9.5 billion takeover of WeWork. This was structured as $5 billion in
debt, a $3 billion buyout of current shareholders, along with $1.5 billion in equity funding that
had already been committed but would be sped up. SoftBank’s takeover slashed WeWork’s
valuation to just under $8 billion.
SoftBank reported a $9.2 billion write-down on its investments in WeWork on November 6,
2019. The losses were about 90% of the total $10.3 billion SoftBank had invested in WeWork. 

Reasons of Failure
1. Poor corporate governance/ Dictatorship- WeWork’s corporate governance issues are
myriad, and the company’s corporate structure is at the root of it all. Like many other
tech companies that have recently gone public, WeWork had a multi-class stock
structure that gave Neumann more power than the company’s other stockholders.
When multiple share classes are typically issued: one share class is offered to the general
public, while the other is offered to company founders, executives and family. The class offered
to the general public has limited or no voting rights, while the class available to founders and
executives has more voting power and often provides for majority control of the company.

Neumann had been able to maintain control of WeWork because the Class B and Class C shares
he owned each had 20 votes to every one vote regular shareholders would get for their Class A
shares. After a wave of criticism, WeWork amended its S-1 and limited Neumann’s super-voting
shares to 10 votes for every one regular share’s voting power — still a high ratio. 

Form S-1 is an SEC filing used by companies planning on going public to register their
securities with the U.S. Securities and Exchange Commission (SEC) as the "registration
statement by the Securities Act of 1933". The S-1 contains the basic business and financial
information on an issuer with respect to a specific securities offering. Investors may use
the prospectus to consider the merits of an offering and make educated investment decisions. A
prospectus is one of the main documents used by an investor to research a company prior to an
initial public offering (IPO)
Following his resignation, Neumann’s shares were worth three votes. As part of the bailout, We
stock now all has the same voting power, the Wall Street Journal reports, saying Neumann’s
stake in the company will decline to below 10 percent.

With the previous multi-class stock, it would have been hard to get rid of Neumann if he didn’t
want to leave since his super votes still gave him the power to fire the entire board. But if
Neumann did get rid of his opponents on the board, he would have run the risk of making
WeWork look even more chaotic than it already was in the eyes of investors, threatening the
outcome of an IPO.

Neumann’s board supremacy allowed him to enact a number of nonstandard financial practices
that many have viewed as a conflict of interest.

WeWork, which at its heart is a company that leases long-term office space in order to rent it to
others in the short term, didn’t initially plan to own property. Not doing so saved it from larger
expenses that would burden its already laden balance sheet. But earlier 2019, the Wall Street
Journal reported that Neumann was privately buying property that he then leased to WeWork.
And at the same time, Neumann was borrowing money from WeWork at little to no interest. So
the company was paying him rent while lending him money.
Responding in part to investors’ concerns, Neumann said he would transfer ownership of these
buildings to the company’s real estate investment vehicle, ARK.
In a similar vein, WeWork paid Neumann nearly $6 million to change its name to “The We
Company,” a trademark that Neumann owned. Later, he gave that money back.
Neumann reportedly cashed out of $700 million in stock ahead of the IPO — the S-1 pegs his
last stock sale to “late 2017” — which isn’t a good look for a CEO trying to convince others that
they should buy the stock.
The company has also attracted public scrutiny for, until recently, having no women on its board.
WeWork finally appointed its first female board member in September.

2. Struggling finances-
It’s no secret that WeWork is, for now at least, a money-losing business. It lost $1.6 billion on
$1.8 billion in revenue last year.
But that’s par for the course when it comes to technology startups, which WeWork has tried
really hard to convince the world that it is. Its ability to burn money surely makes it seem like a
tech company — even if it doesn’t have other important tech company qualities, like low growth
costs and a network effect, meaning the value of its product increases when more people use it.
The company’s expectations have changed even since its initial IPO filings in August. The
company’s updated S-1 in September got rid of numerous references to “break-even,”
“profitable,” and “cash flow” — suggesting those goals are further off than expected.
And WeWork’s operating losses, what’s left after the costs to bring in revenue, are marching in
lockstep with its growing revenue. This means that the more money WeWork makes, the more it
loses. Ideally, you’d want to see the opposite: shrinking losses as the company gains more
revenue.
Its biggest expense — 65 percent of its revenue — is renting office space, which makes sense for
a real estate company but not for a tech company, where you’d want to be able to rely on savings
as you grow.
Of course, much of WeWork’s losses can be attributed to its breakneck speed of growth.
Opening up new locations is expensive and it can take time to see returns.
Presumably, if WeWork stopped expanding, it would curtail its losses. But even that is difficult
to know since WeWork hasn’t explained how profitable or not its established locations are.
As the Financial Times wrote in August, “[I]nstead of a neat profit and loss table for mature and
growth locations, WeWork calculates a ‘contribution margin’ — the metric formerly known as
‘community-adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization].’
Like any adjusted financial metric, it’s designed to say to investors, ‘ignore these costs, because
they don’t matter to our core economics.’” (Investors have been widely skeptical of WeWork’s
community-adjusted Ebitda measurement.)
The company also needs a lot more money, and raising it is becoming more and more difficult as
its valuation declines.
 3. Other bad behavior and distracting business priorities

Neumann was also reported to have frequently encouraged employees to drink shots of
tequila and smoke marijuana at work. This carefree attitude from the CEO, coupled with
reports of an increasing lack of gender diversity among the company’s managerial staff and
high-level executives, severely damaged the public perception of the company culture.
Last year, former WeWork director Ruby Anaya sued the company because she alleges that
colleagues sexually assaulted her at two mandatory work events where alcohol was served.
Anaya blamed WeWork’s leadership for establishing a top-down “frat-boy” culture, claiming
that Neumann himself “plied” her with tequila shots in her interview. WeWork has denied
Anaya’s allegations and called her a poor performer.
The company has also made a dizzying list of acquisitions and investments — like its $13
million investment in a wave pool company — that many have viewed as distractions from
WeWork’s core business (which is still burning through piles of cash). The company has also
tried to get into the business of running gyms, co-living apartments, coding camps, and even a
school aimed at budding child entrepreneurs, called WeGrow (which it recently announced it’s
shutting down).
The company has said its ambition is to create a “We” brand that permeates every aspect of
people’s lives, but according to the Wall Street Journal, these other endeavors outside of
WeWork’s coworking business have been struggling.
The turning point occurred after marijuana was found on Neumann’s company jet after it
landed in Japan (where it is illegal). Shortly after this incident Neumann stepped down as
CEO and drastically reduced his voting power on the board from 10:1 to 3:1.
Aftermath and What This Means to the Coworking Industry
SoftBank, WeWork’s biggest investor, has taken control of the company, with former Amazon
exec Sebastian Gunningham and CFO Artie Minson filling the CEO position temporarily. Its top
investors and executives have re-evaluated WeWork’s path to profitability and have already
implemented more conservative strategies to attain positive revenue in conjunction with the
company’s drastically reduced valuation. These strategies include cost-saving measures
like laying off of over 2,000 employees worldwide, the sale of several companies that WeWork
previously acquired, and an immediate halting of the aggressive expansion of the company into
new markets.
This scaling back of one of the world’s fastest-growing companies and its IPO troubles bear
many similarities to large tech businesses facing the ultimate test of going public. Many
coworking space operators are worried about how WeWork’s failed IPO will affect the public’s
outlook on the industry. 
Though recent events may be disheartening to potential investors in coworking spaces, studies
show that WeWork barely scratched 2% market share in the flexible office space sector, with
many of its clients being large corporations like Google, Microsoft and Salesforce. As a whole,
the coworking industry has grown steadily year-over-year and demand for local, independent
flexible workspaces with strong communities remains stable. 
If anything, the controversies surrounding WeWork serve as an example to other expanding
coworking brands, highlighting the necessity of creating a sustainable company culture and a
clear path to profitability in order to earn the trust of members and stakeholders alike.
Scholar’s Opinion
 The we-work story is a cautious reminder that — irrational exuberance will be
punished brutally and you will not see it coming in both public and private markets.
 The first mouse to chase the cheese is the one that gets caught in the trap.
 Pseudo Tech Giant