How WeWork Lost $47 Billion

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Since its inception, WeWork has raised $14.2 billion in venture capital.

Founded in 2010, WeWork rents funky, state-of-the-art coworking office space to freelancers, small business owners and even tech giants, offering fledgeling and established businesses alike functional premises from which to operate and network.

In the milieu of the sharing economy, WeWork’s basic business concept has broad appeal. The company quickly grew to encompass 847 locations in 123 cities worldwide. In both London and Manhattan, WeWork is the largest private renter of commercial office space.

In 2017, Masayoshi Son, the CEO of SoftBank, invested $4.4 billion in WeWork after a 12-minute meeting with WeWork CEO Adam Neumann. Son, an investment guru who has previously invested venture capital with the likes of Alibaba, encouraged Neumann to think big.

Then, Neumann reorganized WeWork as The We Company and launched WeLive, a service that leases cutting-edge furnished apartments, and WeGrow, an experimental private school with astronomical tuition fees.

Masayoshi Son “had found a new apprentice in Adam Neumann, and in Son, Neumann had found a mentor. But Son’s belief in Neumann, while it gave way to his rise, may also have been part of the reason for his eventual downfall.”

Despite global growth, WeWork wasn’t profitable. Neumann framed his company as a tech venture, many of which don’t make a profit as they grow. But WeWork doesn’t sell hardware or software.

What the company does was using data analytics to improve its operations, as do many enterprises, but it isn’t in the tech business. WeWork is essentially a landlord and will never achieve the explosive growth of a tech giant. In May 2019, following Uber’s IPO, WeWork became the most highly valued private company in the United States, worth an estimated $47 billion.

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WeWork Unsettling Financial Disclosure

When WeWork filed public financial disclosures in preparation for a September 2019 IPO, investors noticed some unsettling discrepancies.

WeWork’s fundamental business model has an inherent risk. It signs long-term leases of 15 years on average and pays a fixed price each year while subletting those spaces to occupants. As long as rents are robust and property prices rise, WeWork can remain afloat.

But if property prices dip or rentals fall off, WeWork must charge occupants lower rents in order to fill its office spaces yet continue to pay the agreed-upon lease price. Should another property bust unfold, fewer people would be willing to rent coworking spaces, and WeWork’s business model would collapse.

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New Financial Stability Risk

According to the president of the Federal Reserve Bank of Boston, WeWork’s business model has established a “new financial stability risk” that could ignite an economic crisis.

In January 2019, SoftBank reduced its funding to $2 billion from $16 billion, which made other investors nervous about WeWork’s valuation. Analysts discovered the company was losing more than $5,000 on each new customer. Market watchers also worried about Neumann’s egotism and his hedonistic, erratic behaviour.

Scandalous stories surfaced about Neumann’s extravagant parties, gross personal expenditure at the company’s expense, nepotism, and drug- and alcohol-fueled temper tantrums. Meanwhile, it emerged that Neumann, dubbed “the newest most hated man in America,” engaged in shady self-dealing. Neumann borrowed millions from WeWork at less than 1% interest rates. Investors eventually forced him out and put the IPO on hold, but Neumann walked away from the company with $1.7 billion.

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The undoing of WeWork ends the allure of investing in unicorn companies.

WeWork could face bankruptcy as early as 2020. Its ultimate fate may hinge upon the health of the global financial markets. On September 17, 2019, the US repo market, upon which financial markets depend, failed, and since then, the Federal Reserve has been pumping up to $100 million daily into the system to prop it up. A closer look at this blip indicates a weakness in the real estate sector. And a property crisis would annihilate WeWork.

“People are no longer willing to buy the hype of IPOs.”

As WeWork foundered, SoftBank invested an additional $5 billion into the company in October 2019 and gained a controlling share. In terms of precipitous devaluation, WeWork is on par with such infamous collapses as Lehman Brothers and Enron.

The biggest loser is Son, who lost billions of dollars and whose reputation as a savvy investor has been sullied. Ultimately, the story of WeWork’s financial fall is a cautionary tale to investors to look beyond the unicorn status of hyped IPOs in favour of examining the fundamentals.

This does spring Warren Buffet preference for value investing to mind.

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Author: Muhamad Aarif

A notorious book addict by night and an oil and gas executive by day. As Mark Twain said, "The man who doesn't read good books has no advantage over the man who can't read them." So, read, read, and read some more.

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