The co-working rental company has quickly expanded in big cities including London, but its business model is deeply flawed.
Before we move on to discussing WeWork’s business model’s flaws, let us take a step back and explain what allowed WeWork to grow so fast — too fast, perhaps. In essence, it is a combination of the following. Smartphones and social media enabled startups to expand globally, and low-interest rates forced return-seeking investors towards investing in them. The success formula of high growth, limited regulation and almost no physical assets has already been pioneered by Facebook, Google or Alibaba. That being said, it was just a matter of spreading this formula into every industry one could think of: ride-hailing, accommodation, food delivery or office space, among others.
However, this magic formula does not seem to translate into profits in most industries. Companies like Deliveroo or Uber lack one key aspect that enabled Google or Facebook earn so much: a natural monopoly. As a result, super fast revenue growth can only be achieved through deep discounts. Consumers can celebrate, investors less so: shares of Uber, Lyft or Slack all lost a significant portion of their value since their respective IPO’s.
At least they managed to do an IPO, though. This seems out of touch for WeWork, which was valued at $47bn this January. Later the company decreased its expectations to $15bn, but at this point, it may not even be able to raise $10bn. Even one fifth of its original valuation seems like a very bad overvaluation: IWG, WeWork’s biggest competitor which is valued at only $4.5bn, has almost double the revenue and is actually making a profit.
There are three issues with WeWork that concern investors the most: its lack of profits, its ability to survive a recession and Adam Neumann, its flamboyant CEO (albeit he offered to step down and remain non-executive chairman).
WeWork’s inability to make money is posing a serious threat to its mere existence. It burned through $1.4bn in the first half of 2019 alone, and currently has around $2.5bn in cash left. At the current rate, WeWork would be out of liquidity in less than a year. Some reports say the company could run out of money as early as next month.
With continuing signs of an upcoming recession, a mountain of $47bn in lease payments and only $4bn in committed future revenues from customers, WeWork is in a pickle. “Co-working firms generally acquire long-term leases for office space that they lease out for shorter durations to small companies. Smaller firms are more vulnerable to a recession—and, by relying on them for revenue, so are the co-working firms,” said Eric Rosengren, president of the Federal Reserve Bank of Boston.
Will WeWork fail? Right now it seems inevitable.