WeWork or ReWork? A Cautionary Tale for Startups

WeWork or ReWork? A Cautionary Tale for Startups

by Mark Selby, 25 October 2019

The We Company (formerly WeWork) has transformed the world of serviced office space for all the wrong reasons.

The firm’s meteoric rise from niche “workplace solutions” provider to international “tech” phenomenon preparing for its initial public offering (IPO) turned out to be this decade’s biggest bubble – a brand with a deflating credit rating posting £79 million annual losses in the UK alone.

Just as Uber’s valuation relies partly on third-party car ownership (which in no way guarantees economic return), WeWork’s business model never guaranteed or apparently considered a route to profitability. The lack of a sticky revenue model or authentic tech solution, despite the perfunctory app, has left WeWork looking like the emperor’s new clothes – although, in this case, the emperor has walked away with a $1.7 billion payout to the detriment of his empire.

Most posts on the Innovation Warehouse blog – like our Pitching 101 series – give constructive advice on how, when, where and what entrepreneurs should focus on in order to get started and ultimately succeed.

This time around, we’re flipping that approach on its head and talking about what not to do.

Brand Bubble

In 2010, after a variety of other ventures, founder Adam Neumann launched WeWork – a startup promising to reimagine shared office space by creating a super-stylish environment in urban centres around the world. Hot-desking freelancers and aspiring Silicon Valley-style ventures would finally be able to congregate, work and collaborate.

Coworking spaces offering artisan coffee, craft beer and regular party nights – what could possibly go wrong? The Israeli-born CEO did many of the right things that startups should do – he was charismatic, had strong communication skills and was capable of wooing big investors with an ambitious idea.

“It made me think of Theranos – the investors appear to have fallen for the founder’s charisma and failed to smell the bull,” says Innovation Warehouse investment lead Stephen Bloch.

 

“The Israeli hippy CEO took the money of the Saudis and gave it to businesses by subsidising their rent.”

 

Supported by capital from SoftBank tycoon Masayoshi Son’s Vision Fund and the Saudi Arabian government, Neumann’s firm expanded big time. 

In the span of just nine years, branded work spaces popped up in cities around the world under local subsidiaries – the London outpost finding its feet in the Innovation Warehouse offices – and the company diversified into living and education through new branches WeLive and WeGrow, all unified under a new name: The We Company.

Style vs. substance

We next took aim at Wall Street, announcing plans to join the big investment leagues with an IPO in 2019. To some, company shares appeared to be a dead cert – the next big thing. 

However, impressions quickly changed after the IPO process required the company to open its books. 

“I suppose that’s when the smoke cleared,” says Bloch. “Once the spell of an illusion is broken you are left with nothing. Promotion is important for any business but not when it is effectively a sleight of hand.”

Instead of soaring year-on-year profits, some would-be investors saw multi-year losses and no clear path to reverse the trend. The shock factor really kicked in when Neumann made headlines for allegedly bringing cannabis into Israel on his private jet, and was forced to step down as CEO – leading the We Company to indefinitely delay its IPO.

 

“The problem is that the We product is about fashion and lifestyle and not about productivity. It’s more about feeling good.”

 

Like a handful of other well-known brands, the We Company had consistently failed to cover its own operating costs – essentially paying its rent with investors’ money – underscoring a dangerous flaw in its business strategy.

Basically, the Israeli hippy CEO took the money of the Saudis and gave it to businesses by subsidising their rent. The We Company has more liabilities than assets, therefore it is in effect worthless. Long-terms leases and high rents, supported by long rent-free periods, is coming back to bite,” says Innovation Warehouse CEO Ami Shpiro. “WeWork is everything that is wrong and bad about capitalism.”

“Suddenly, a flood of WeWork landlords are putting their properties on the market. The obvious approach would be to put the company into administration. The shareholders lose their stake – in particular, Mr We would get nothing. The other main shareholder is Softbank, so they could put a plan into action to turn it around at a lower cost.” 

Narcissism 

What does this story tell us about startups? Number one, beware of style over substance. Entrepreneurs need to establish clear, viable routes to profitability. They at least owe themselves, their employees and their investors that much. 

Second, it’s better to be a slow burn than a bonfire. Reaching profit may well take years – plan for it, take the time to reflect and grow.

“If the We product gave us an order of magnitude more of efficiency it would make sense. The problem is that the We product is about fashion and lifestyle and not about productivity. It’s more about feeling good and self indulgence – narcissism,” says Shpiro.

“A growth company culture is created by being aligned behind a mission to motivate the team to work super hard. It’s not about innovating around the coffee machine – it’s more about doing than being. Being is for lifestyle, and will always be small for that reason.”

Are you a tech company or small business in London facing fundamental decisions? Contact us to learn what sets Innovation Warehouse apart from other workspaces and how our growth culture can help fuel your ambitions.

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