How to lose 99% of the peak valuation of a company in 4 years and find yourself on the brink of bankruptcy? It's simple. Just create a false vision of business conquest of the world, and then sell it to investors with a few daring moves. Exactly as WeWork founder Adam Neumann did.
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At the beginning of August, WeWork published internal financial reports for the first two quarters of 2023. A rather pessimistic picture emerges from them. The favorite startup of American investors, at its peak valued at 47 billion dollars, is currently on the verge of bankruptcy. Even the company's board does not hide this, which in an official press statement directly informed about such a possibility.
"There are serious doubts whether the company will be able to continue its operations in its current form. The company's ability to continue operating depends on the successful implementation of the management's plan to improve liquidity and profitability over the next 12 months," we read in the statement.
The situation is indeed dire. In the first half of 2023, WeWork recorded net losses of 700 million dollars. And although this is 40% less than in the corresponding period of the previous year, it may still prove to be too little to save the entire company. The company's current long-term obligations amount to 13.3 billion dollars in office space rental costs and 2.9 billion dollars in debt. The total stock market valuation of the company after the publication of financial results fell by over 99% - at the time of writing this article, the value of WeWork is only 241 million dollars.
However, it is hard to speak of a big surprise in this case. On the contrary, the first signs of the current situation of the WeWork startup could be seen as early as 2015, just five years after its operation. Reporter Nitasha Tiku from BuzzFeed News then got access to a number of internal company documents, which showed that its business model not only does not allow for great hopes for profit, but also that it is not sustainable in the long run.
It was based on a very simple mechanism: WeWork paid developers for long-term office rentals in trendy, urban locations, then adapted them to its own standards, and then sublet them short-term to smaller companies and freelancers. In practice, the company did not own any properties, it functioned more like a platform for subscribing to office spaces. And although this was not a new, let alone revolutionary way of operating, it turned out to be an astonishing success for two reasons.
The first was a good market situation. Low interest rates on loans and falling property prices after the 2008 crisis allowed the company to achieve above-average and largely artificial growth in a relatively short time. By 2014, WeWork had achieved the magical status of a "unicorn" among investors, that is, a startup whose valuation exceeded one billion dollars. The second, decidedly more important factor was the character of the founder himself, Adam Neumann, and his unconventional, even daring, methods of convincing others of his vision.
Neumann was a true master of personal marketing. He had the perfect predispositions for it. As a thirty-something, long-haired hipster raised in an Israeli kibbutz, he radiated a hippie aura of a wild visionary and genius who came to New York from another world to revolutionize the idea of work as a communal experience. He was also tall, charismatic, and had an extraordinary gift for saying exactly what his interlocutors wanted to hear, in a way that no one else said it.
His sales meetings became famous, among other things. At one of them, Neumann is said to have invited a group of Chinese investors to the roof of a WeWork-rented apartment building in Lower Manhattan. Finalizing the transaction, he sent one of his colleagues for a tray of tequila shots. After a joint toast, Neumann grabbed a fire extinguisher and set it off over the heads of the stunned investors. Instead of breaking off negotiations, they laughed heartily and immediately signed the agreement.
And it was this combination of audacity, natural charisma, and origin that effectively deceived the sharpest business minds in the world and made the not-so-revolutionary idea of mass leasing of flexible workspaces appear to investors as a revelation. That's how Neumann sold his vision. According to him, the office was not just a regular workplace, but a commune - a complex melting pot of creativity and entrepreneurship, where people would want not only to perform their professional duties, but also to live.
The conditions were perfect for this. WeWork provided modern, spacious spaces equipped with various amenities: from beer kegs and prosecco machines, through foosball and ping-pong tables, to sleep capsules and extensive relaxation zones. The whole, maintained in the spirit of ecology, luxurious prosperity and constant partying, was seasoned with a solid dose of lofty slogans about community and social unity expressed using the English personal pronoun "we".
Neumann's plans were much broader and were not limited to work - in his vision, everything else was also supposed to be "we". Modern gyms and renewal centers - WeWork Wellness, flexible residential spaces for rent - WeLive (eng. we live), and even modern private schools - WeGrow (eng. we grow). This simple idea, based on embodying and monopolizing the idea of community, appealed so much to investors that money almost immediately began to flow to Neumann in a broad stream.
In just a few years, WeWork expanded its operations to over five hundred locations in over a hundred cities in thirty countries around the world, and by 2018 it had become the largest private office tenant in Manhattan. The company grew year by year, and the aforementioned reports of the unprofitability of the company's business model - despite the publication of BuzzFeed News followed by other reports from influential titles - did not bother anyone at that time.
– It was one big collective delusion [of investors - ed.], because Adam ran the company in the most chaotic way possible - said in 2021 in an interview for The Verge Maureen Farrell, financial reporter for The Wall Street Journal and co-author of the book The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion.
Together with another WSJ reporter, Eliot Brown, for several years she meticulously described the backstage of Adam Neumann's activities and exposed numerous inconsistencies in the functioning of WeWork. The most obvious of them was the fact that from the very beginning the company resembled a well-functioning business only in 2012 - investors actually made profits then.
A big problem should also be reports of numerous toxic behaviors of Neumann towards colleagues and his conflicts with the law. In 2018, the founder of WeWork rented a private jet from Gulfstream, on board of which he not only smoked marijuana, but also illegally transported it between the United States and Israel. Farrell and Brown's book also describes how Neumann demanded his subordinates to accompany him on trips from New York to San Francisco, then made them wait for him for hours, took off before their arrival at the airport or ignored them during the entire six and a half hour flight. Sometimes he also abandoned his employees after landing, forcing them to return home on their own.
However, Neumann's most serious misconduct turned out to be shady business activities. In 2018, The Real Deal, a service dealing with the American real estate market, published a report according to which the founder of WeWork privately invested in real estate, which he later rented to his own company and external contractors. At that time, WeWork's obligations for renting buildings partially owned by Neumann amounted to over 100 million dollars.
None of the reports described above, however, discouraged private investors from generously funding Neumann. The biggest financial support for his activities turned out to be the Japanese SoftBank, which since 2017 has pumped a total of 18.5 billion dollars into WeWork. Thanks to this, when the company was preparing for its stock market debut in 2019, its valuation reached a peak value of 47 billion dollars. And only then did the bubble burst.
Every company before the so-called IPO – Initial Public Offering, must make public the details of the Form S-1, an extensive document that describes in detail the structure of a given business. Its publication is one of the main requirements set by the US Securities and Exchange Commission before the official stock market debut. And it was then that the illusion meticulously built by Neumann painfully collided with reality.
Investors began to ask a series of uncomfortable questions about the unclear management model of the company and question Neumann's leadership style, his excessive spending, creative accounting, and numerous conflicts of interest. There were also further publications openly criticizing the lack of professionalism of WeWork's management, and Scott Galloway, a recognized analyst and marketing professor from New York University, publicly mocked the company, calling it WeWTF (ang. What the f*ck). He also stated that anyone who believes in the proposed valuation of the company "is either stupid or lying, or both".
As a result of this massive criticism, Adam Neuman soon resigned as managing director, and WeWork's stock market debut was delayed. In an act of desperation, SoftBank acquired 80% of the company's shares and provided it with additional funds of 5 billion dollars. A month later, the company laid off 2400 employees - almost a fifth of the entire staff. This crisis coincided with the outbreak of the Covid-19 pandemic and the flight of companies from offices in favor of remote work. This only deepened the troubles of WeWork, whose business model is based on sharing physical spaces.
Several years have passed marked by unsuccessful attempts to save the company. From the financial statements disclosed by WeWork, it appears that from the year 2020 to June 30, 2023, the company recorded net losses of $11.4 billion. The New York Times reports that WeWork still has nearly two million square meters of office space for rent in the United States and Canada alone, and its collapse could have a "significant impact" on the commercial real estate industry.
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