The WeWork Saga: Triumphs, Tragedies, and Lessons in Sustainable Business

Dreams to dust - WeWork’s billion-dollar saga

Arguably the fastest growing company of its kind at the time, WeWork transformed the industry of modern office solutions like no other establishment. With the aim to “elevate the world’s consciousness”, the company, founded in 2010 by Adam Neumann, Miguel McKelvey, and Rebekah Neumann, emerged as a global phenomenon, reshaping workspaces that coincided with a broader paradigm shift, wherein businesses sought flexible and collaborative solutions to adapt to the dynamic demands of the global market.

The third biggest startup in the US after Uber and Airbnb, WeWork had its modest beginning in a 3,000 square feet tenement – style building in SoHo, New York. The flagship turned a profit one month after launch which attracted developers and investors to grow the brand. The startup addressed a rudimentary economic challenge – that of optimization of costs and enhancement of efficiency which attracted more investors causing the company to expand, opening multiple locations worldwide as funding flowed in. WeWork thrived in the economic environment of the 2010s, which saw an increase in capital funding for innovative startups, securing significant investments and attaining the ‘Unicorn’ status. WeWorks valuation soared, reaching $47 billion by 2019.

WeWork was extremely methodical and thoughtful about site selection. Their offices were generally located in areas where discounted leases could be negotiated and where they believed there was potential for sustained and vibrant entrepreneurial hubs. Co-founder Miguel McKelvey, an architect by profession, ensured the key elements of the flow, look and feel of the space were replicated in each new site.

The co-founders were also very focused on building a community while lending office spaces. A major part of their user experience was to foster a community of entrepreneurs who looked out for each other. Their employees were also hired and trained in favor of this cause which is a crucial part of their business mentality.

Technological integration was also a pivotal game-changer as the enhanced user experience streamlined operations positioning the company at the vanguard of the digital transformation, having an impact on industries globally. This efficiency corresponded with the ongoing shift towards tech-driven business models while attracting users to the platform.

Now, if WeWork was performing so exceptionally well, being considered the most valuable startup in the world in 2017, what caused its plunge into the dark tunnel of bankruptcy? This downfall can be attributed to a multitude of reasons.

In 2018, WeWork filed for an IPO. This should’ve been a moment of triumph, right? In reality, it was the beginning of the end. Criticism began to fly nearly as soon as WeWork went public. WeWork faced intense scrutiny of its finances and leadership from both investors and the media. There were serious concerns about its profitability prospects, as statements revealed spiralling losses of $1.6 billion. In a span of one month, the company cut its valuation down to as low as $10 billion from $47 billion, removed Adam Neumann as CEO, and delayed its initial public offering indefinitely. Eventually, in October, WeWork was taken over by its biggest investor, Softbank and by November 2400 employees had been laid off.

But why was WeWork so unprofitable? To understand that, we must know that WeWork was essentially a middleman, one that would take out a giant portfolio of real estate leases, rent it out and make a profit. This required a huge amount of investment, for which WeWork took on tens of billions of dollars in debt. However, demand for shared office spaces never matched the acquisition WeWork made. This meant that WeWork couldn’t offset those losses or make rent payments on the office space they leased. Despite increasing revenue, the company experienced growing losses, leading to a deteriorating financial position. From 2016, WeWork's losses have surpassed $15 billion, and their listed liabilities of $18.66 billion exceed assets worth $15.06 billion. Hence, WeWork's business model was simply not sustainable. They were relying on continuous growth to cover up the fact that they were losing money on every lease they signed. Once that growth stopped, the whole house of cards came tumbling down.

Finally, WeWork’s CEO, Adam Neumann,  has been widely criticised and cited as one of the main reasons for its downfall. Neumann was known for his lavish lifestyle, while his company was hemorrhaging money. He was cashing out stock options, taking loans from WeWork and generally behaving like the company was his piggy bank. He was also accused of using company money to fund his personal projects. For example, WeWork leased a private jet from a company that Neumann owned. Adam initially received almost $6 million to purchase the trademark "We," which he later returned to the company in stock. Critics pointed to this transaction as indicative of WeWork's questionable corporate governance. While some people blamed Adam’s inexperience in managing a business, others said that Adam was more concerned with making money than with running a successful business.

Essentially, WeWork was a great concept, but its business model was flawed since the beginning. WeWork has done everything possible in the business cycle - except make money. They have tapped the international private investment community, and credit markets, borrowed billions from Softbank and obtained equity funding via public offering through a special purpose acquisition company. Going forward, one would need to have a very strong stomach to invest fresh funds into this company. In a world where startups continue to captivate our attention, WeWork teaches us an important lesson in the areas of sustainable growth, ethical leadership and responsible investing; even the most promising ventures are likely to plummet without a balance of these elements.

Authors: Shruti Rajiv Datar and Shruti Ramachandran