WeWork: Leasing Hopes & Defaulting Dreams

When we think of famous startups, we often imagine a trajectory much like a YC-backed rocket ship — fast, disruptive, and aiming for the moon. With its ambitious vision of redesigning how we perceive and use workspaces, led by an equally ambitious CEO, WeWork once embodied this ethos perfectly.

Founded in 2010, WeWork didn’t just aspire to provide co-working spaces but to fundamentally change our relationship with our professional environment. And for a while, it seemed they might.

The Company’s rapid proliferation across major cities and jaw-dropping valuations suggested that they were onto something monumental. WeWork raised a $157M Series C round in November 2013, achieving unicorn status three years from its inception. By 2016, it had 80,000 paying members across 110 locations globally.

But as with many ambitious companies, the line between groundbreaking innovation and overreach can blur quickly. Once valued at $47 billion, WeWork now has “substantial doubt" about its long-term survival, according to interim CEO David Tolley.

The stock was in trouble before that, and the NYSE put WeWork on delisting notice for failing to maintain a $1 share price. Calling all meme investors…

This saga is a painful reminder that meteoric rises often come with equally swift descents, especially when fundamentals are overlooked in favor of greed and ambition. So it begs the question - how did we get here? And what can founders and investors learn from it?

Broken Business Model

At its core, WeWork's business model was relatively straightforward: lease large spaces, beautify and subdivide them, and then rent them out to businesses and freelancers at a premium. This concept wasn't entirely new, but WeWork added a layer of panache and a sense of community, making office spaces feel hip, contemporary, and open to collaboration. The ‘We’ vision was to separate employees from the lonely cubicle that had defined professional work for decades.

And its value proposition was compelling. For startups and freelancers, WeWork spaces offered month-to-month leases, removing the long-term commitments of traditional office rentals. It gave fledgling companies room to grow, pivot, or retract as necessary, saving them thousands of dollars annually in fixed costs.

Once an office template was designed, it could be replicated across various locations. This allowed for rapid expansion, creating the allure of a global network - music to the ears of investors, who typically crave scalable, network-effect solutions.

However, the underlying business model was flawed, specifically the mismatch between long-term lease obligations and short-term revenue. WeWork made money by charging its clients more than its property leases, essentially rent arbitrage. While WeWork committed to extended leases (often 10-15 years), their tenants were not obligated to stay beyond their short-term agreements.

This model seemed to thrive in stable economic times, but the cracks appeared when demand slowed in downturns. The company took on the brunt of the risk through long-term leases, while the rewards (short-term lease revenue) were inconsistent and highly susceptible to market conditions. When economic activity slowed, WeWork was anchored to commitments it couldn't sustain.

As the chart above shows, maintaining the luxurious aesthetics and amenities wasn't cheap, creating significant cash flow problems that WeWork never recovered from.

Know Your Business, Know Your Market

It's an easy yet dangerous path, mistaking market enthusiasm for market validation. As the hype around the brand grew, investors poured billions, driving WeWork’s valuation to a peak of $47B.

The most notable of these investors was Masayoshi Son, CEO of SoftBank. Masa and his Vision Fund, a massive $100B investment vehicle, represent one of the most audacious bets on technology and innovation in our time. With a fund size surpassing many nations' GDP, Son's approach is both revered and sometimes met with skepticism. His investment thesis, a mix of intuition and a deep-seated belief in the transformative power of tech, has shaped industries and propelled unknown startups into global limelight. WeWork was among these crown jewels, embodying Son's penchant for big bets on disruptive ideas.

But therein lies the problem. WeWork was never a technology company - it was a real estate developer. Pitched as a tech pioneer, its valuation soared to levels typically reserved for Silicon Valley's finest. WeWork’s mobile app and community algorithms may have been sleek, but at its core, it was reshaping real estate, not rewriting the code of technology.

Labeling yourself a tech company brings certain expectations — scalability, high margins, and the promise of digital disruption. As such, tech companies command higher revenue multiples in the private and public markets (7-15x). Meanwhile, real estate firms often trade at 1-3x.

But when the operational reality aligned more with brick-and-mortar and long-term leases, investors began to notice WeWork’s capital-intensive model. Initial valuation reports suggested a $20-30B IPO, later reduced to $10B. By March 2020, the IPO was halted, CEO Adam Neumann stepped down, and 2,400 employees had been laid off.

Overvaluation not only sets unrealistic expectations but can fuel an unsustainable expansion rate. WeWork was pressured to continually open new spaces without considering local market dynamics or saturation points. Not every city is created equally - competition, economic standing, and cultural behaviors impact product demand. You can’t just copy an industrial, brick-walled New York office and expect it to delight citizens of Japan or France.

So, as WeWork ambitiously dotted the globe with its logo, one has to wonder if they paused to understand each city deeply or if the desire for growth drowned out any due diligence.

The same thought applies to its investors. Masa’s Vision Fund shows that while capital can accelerate growth, it cannot, in isolation, guarantee the longevity or sustainability of a business model. In the hunger to be everywhere, don't lose sight of the foundational 'why' and 'how' that anchored your beginnings.

Leadership Matters

In his best-selling book ‘The Lean Startup,’ author Eric Ries wrote the following:

“A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.”

Leadership is the guiding light for startups. Most investors would prefer a strong team over a strong market - a capable team is more likely to execute a business plan, iterate the product based on feedback, and even pivot entirely. Markets evolve and change over time, but only humans can sell a contagious vision to others.

Leaders' charisma can also be a double-edged sword; it can rally troops, inspire loyalty, and charm investors. Adam Neumann, WeWork's spirited frontman, embodied this. With a vision transcending co-working spaces, he painted a future of reshaping the fabric of how we live and work. But as the WeWork story unfolded, it became evident that vision alone wasn’t enough. Behind the curtain were strategic missteps and financial irregularities that raised eyebrows.

The first red flag was the deviation from the core business, which ranged from co-living ventures (WeLive) to education (WeGrow). Such diversification can signal ambition, but without a clear roadmap, it burns a vital resource: cash.

A second point of contention was using an adjusted EBITDA metric called ‘Community Adjusted EBITDA.’ No, you can’t make this up. This metric excluded regular operating costs, painting a rosier picture than traditional accounting methods that investors trust and rely on.

There's also the matter of Adam Neumann trademarking the term “We” and selling it back to the company for millions (which is hilarious). Transactions like this, where a founder monetizes an intrinsic aspect of the company's brand, can appear self-serving. It's not just about the financial implications but the perceptual ones. Actions like these question leadership's alignment with stakeholder interests.

Charisma can be a catalyst, but without integrity, it can be a company’s undoing.

Key Takeaways

WeWork symbolizes ambition and miscalculation in the world of startups. For founders, it's a testament to the dangers of prioritizing rapid growth over providing value. Speed can dazzle, but its depth, the essence of a company's foundation, endures.

It's a reminder for investors: however bright, the glow of a startup's promise should never surpass its fundamentals. We live in a world in love with unicorn trajectories and get-rich-quick plans, but the WeWork tale beckons us to question and dig deeper.

Because, as founders and investors know, it's not just about growing fast, but growing right.

Cheers for reading.