Startup disaster – $47 billion company experiencing a financial meltdown because of its business model & bad-reputed CEO – WeWork
Innovation and new startups are what everyone is talking about. We have seen businesses started in the garage to reach billions of dollars within the span of a few years. The example of Google is one of the prominent ones that we often use and hear as a source of motivation.
In this article, we’ll be discussing We Work and the way it reached to the heights of $47 billion and its downfall that many of the business experts are predicting for WeWork in the future.
Start of WeWork:
Another such startup that actually acquired the trust of the public and investors alike in just a few months is WeWork. WeWork was founded by Adam Neumann in 2009, with $14.2 billion seed funding. It was just like a dream come true for Neumann. He pitched his idea to Masayoshi Son, and he agreed to make an investment. What could be better than that?
What is the company about?
WeWork was actually pitched as a technological company. But a bit of the description of the business model that we’ll share with you will give you the idea that it isn’t exactly a technological company. WeWork is a company that offers coworking spaces to freelancers, business owners, and even some of the technological giants on a rent basis.
The initial business model focused on getting investment from the investors and leasing the building and offices that could be used for renting out. The use of technology in the company was evident. They used technology in the best possible way to maximize the usage of space and ensured that the office had all the technical equipment required for the customers or tenants to acquire these workspaces.
How far did it go?
By using money from the investors, 847 locations in 123 cities globally were acquired by WeWork. After the IPO of Uber, We Work was the fastest growing startup that was accepted by the public and other companies alike. Large businesses were included in the investors of WeWork. The support from these large companies and the angel investor was what actually gave the boom to the business. WeWork is the biggest office Occupier of central London. So, just imagine the scale at which the business was actually operating.
WeWork did not plan to remain limited to the renting space business only rather it was planning to expand by opening up special schools for the kids where they would learn flexibility and reacting towards changing environment a. additionally, the provision of furnished houses for the tenants was also amongst one of the side business ideas that the company was planning to use for diversification.
What went wrong?
Even after a good reputation, the establishment in the main cities of the world, and strong backing from the investor, the company wasn’t making any profit. It could have been normal if it would have really been a technological giant, but as it wasn’t one that ringed bells in the ear of some of the experts.
The company decided to go public in September 2019. It was then it had to declare a lot of information that was initially hidden or covered under the leadership charm of Neumann. But for getting listed in the New York stock exchange, it was imperative that all the details were to be made public. So, the business model and the financials associated with it showed the entire business to be a bubble.
Despite its all efforts to call it a technological giant, it came out to be a real estate business where the average lease of all the buildings that the company required it to pay a fixed amount every year but the revenue of the company had high fluctuations depending on the occupancy rate and the prices if the properties. With such a business model, the company would not have sustained for a long time. And as soon as the property crisis would hit the market, it would have gone astray just in a single blow.
Which companies actually invested in WeWork?
The initial investment of WeWork came from Soft Bank. But apart from that, JP Morgan, Goldman Sachs, and even Amazon invested in the company, expecting it to be a huge company of the future.
Role of the founder Adam Neumann:
Despite all the ambiguities in the business model, there could have been a chance that the business model could have survived, but the reputation of the founder (as it came out in the reports) just before the IPO) was the main reason that the investors pulled out of the company.
Most of the employees and the old executives testify on some of the unique habits that the founder had. He believed in creating a community space where there was no dress code set. It actually makes sense with the overall changing work culture. But what was weird in it was that he had no routine for work as well. He would call a boxing instructor for boxing in the middle of the workday, drinking in the office meetings was common, arranging parties, where drugs and alcohol were the part of the deal was usual for the employees and the boss. He has even been accused of drug trafficking.
Additionally, he wasn’t sincere with the future of the business too. He sold his shares many times randomly without thinking about the impact that it would make on the business. On registering “we “as the trademark, $5.9 million licensing fees were demanded from the company. Moreover, he also charged the rent from the building to which he was the owner.
With such reports coming just before the IPO spoiled the entire charm that the company had. Soft Bank reduced its investment to $2 billion, which was taken as the rethinking of the decision by the initial investor. David Turner regarded this IPO as the ridiculous one. “WeWork is the ridiculous IPO of 2019” Forbes.
Sydney morning, Harold called Neumann the “most hated man in America.”
What’s the current situation of WeWork?
Currently, it is facing a massive cash crunch. It doesn’t have enough money to go beyond the first half of the next year. This is why this IPO of September 2019 was important, but now it has been postponed. The negative reports about the founder of the company were bringing bad name for the company, too, so the investors made Neumann resigned forcefully. If more cash is not arranged, then the company is quite likely to file for bankruptcy.
In October 2019, Softbank has made some investment in the company, and now it is in complete control of the company. The chances of bankruptcy still exist, and if such a situation occurred, the worth of bankruptcy of WeWork would be similar to the bankruptcy of Lehmann Brothers and Enron decades ago. Those case studies are the part of textbooks now, so you can imagine how strong impact would it create for the market as well.
The success that WeWork enjoyed in a few months was totally phenomenal. Irrespective of the wrong pitching of the idea, the company might have sustained a bit of modification in the business model, but we guess that the founder of the company wasn’t serious about it. If he had been serious, then he would have executed the plan properly from the start as it was clear that the company would need to go in IPO, and all such details would be required.
Moreover, in order to make a business sustainable, you should actually be knowing exactly where to take your business and how. But Neumann had no idea about it. His own character has been revealed as someone who wasn’t interested in carrying on the business.
Neumann still managed to walk away with $1.7 billion, but because of him, the trust of the investors on new businesses has been shattered a lot. Moreover, the reputation of Son faced a major dent that did not recognize the flaw in the idea and the flaw in the business.
$47 billion Company is just on the verge of bankruptcy because of Adam Neumann. Who do you think is to be blamed? And can you draw any similarities of this case with the Lehman Brother or Enron one? Do share your opinion in the comments section.