Reasons for WeWork's Ongoing Financial Challenges

WeWork’s fall continues to dominate venture capital and startup conversations. Here is why. Founded in 2010, WeWork quickly grew into a provider of shared workspaces, reaching a peak valuation of $47 billion in 2019. However, as it prepared for an IPO, scrutiny revealed leadership issues, excessive spending, and accounting concerns, leading to founder Adam Neumann's departure & IPO delay. SoftBank acquired a majority stake, and WeWork went public through a SPAC merger but saw its market capitalization plummet to about $400m. WeWork now faces excess supply, lower demand, competition, and economic volatility, with over 18 million sq ft of office space in the U.S. & Canada. The company seeks funding to navigate these challenges.   As the "𝒑𝒐𝒔𝒕𝒎𝒐𝒓𝒕𝒆𝒎" continues, here are some takeaways and what startups can take note of: 1) 𝐑𝐢𝐬𝐤 𝐌𝐚𝐧𝐚𝐠𝐞𝐦𝐞𝐧𝐭: WeWork's exposure to risks, such as macroeconomic volatility and competition, underscores the importance of robust risk management strategies. Startups should identify and mitigate potential risks. 2) 𝐑𝐞𝐚𝐥𝐢𝐬𝐭𝐢𝐜 𝐕𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧𝐬: Startups should avoid overvaluations and focus on delivering real value to customers and investors. 3) 𝐒𝐮𝐬𝐭𝐚𝐢𝐧𝐚𝐛𝐥𝐞 𝐆𝐫𝐨𝐰𝐭𝐡: WeWork's rapid expansion were unsustainable. Startups should focus on steady, sustainable growth rather than pursuing unsustainable scaling. 4) 𝐋𝐞𝐚𝐝𝐞𝐫𝐬𝐡𝐢𝐩: The leadership of a startup is critical. Founders should prioritize transparency and ethical practices. 5) 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐃𝐢𝐬𝐜𝐢𝐩𝐥𝐢𝐧𝐞: The excessive spending, creative accounting, and conflicts of interest, contributed to its downfall. Startups must maintain financial discipline, prioritize cost control, and avoid overleveraging. 6) 𝐀𝐝𝐚𝐩𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲: The failure to adapt to changing market conditions, such as the shift to remote work during the pandemic, highlights the importance of adaptability. Startups should be responsive to market changes. 7) 𝐁𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐌𝐨𝐝𝐞𝐥 𝐕𝐚𝐥𝐢𝐝𝐚𝐭𝐢𝐨𝐧: WeWork's business model was questioned for its sustainability. Startups should thoroughly validate their business models and assess potential risks. 8) 𝐌𝐚𝐫𝐤𝐞𝐭 𝐓𝐢𝐦𝐢𝐧𝐠: WeWork faced challenges with its IPO timing, coinciding with increased scrutiny. Startups should carefully consider the timing of fundraising and public offerings. Learning from WeWork's experiences can help startups navigate them challenges of scaling and building successful businesses. VCs should also be wary of startups that generate hype but struggle to build a lasting and profitable business. Distinguishing between short-term success and long-term sustainability when evaluating startups is crucial. The reflection following the fall of WeWork is quite telling: “𝑰𝒕 𝒘𝒂𝒔 𝒇𝒐𝒐𝒍𝒊𝒔𝒉 𝒐𝒇 𝒎𝒆 𝒕𝒐 𝒊𝒏𝒗𝒆𝒔𝒕 𝒊𝒏 𝑾𝒆𝑾𝒐𝒓𝒌. 𝑰 𝒘𝒂𝒔 𝒘𝒓𝒐𝒏𝒈.” — 𝐌𝐚𝐬𝐚𝐲𝐨𝐬𝐡𝐢 𝐒𝐨𝐧, 𝐒𝐨𝐟𝐭𝐛𝐚𝐧𝐤 𝐆𝐫𝐨𝐮𝐩 𝐅𝐨𝐮𝐧𝐝𝐞𝐫.

RIP WeWork: WeWork was a long duration carry trade that came undone. WeWork was ‘short’ long-term lease commitments. WeWork was obligated to make those payments - so WeWork was ‘short’ a long-duration bond. WeWork generated revenue via short-term leases. This leg of the trade funded WeWork’s long-term lease commitments. WeWork was ‘long’ its tenants contractual cashflows. Those lease payments can rise or fall in price just like short-term interest rates. Tenants have no contractual commitment to roll-over their leases. So WeWork has an asset liability mismatch. WeWork lost on both sides of the trade. WeWork’s yield curve inverted. The prices of lease commitments are dropping as Commercial Real Estate gets whacked. At the same time, WFH has reduced the demand for short-term leases. Carry trades can come undone if the funding side of the trade is called. Successful carry trades require (i) permanent capital, (ii) non-callable financing, and (iii) a cost of capital on the funding leg (floating receiver) that is less than the cost of the lease commitment (fixed payer). WeWork has none of that. Warren Buffett by contrast has all of that.

When 75% of your gross revenues are being absorbed by your rent obligations, how long does it take for leadership to comprehend your business model is failing and you can't close enough locations to make it work? That seems to be the case with WeWork and their predicament toward coming out of bankruptcy. The newest twist for WeWork are the landlord's objections on the source or lack of new funding moving forward. In a wave of objections filed Thursday afternoon, attorneys for office giants including Boston Properties (BXP), Brookfield Properties and Starwood Capital Group asked a judge to reject WeWork's motion for debtor-in-possession financing. The attorneys argue that SoftBank Group Corp., as the proposed DIP lender, is leaving landlords too exposed in the event that WeWork's Chapter 11 restructuring falls apart. WeWork's DIP financing motion seeks a Section 506(c) waiver that would allow SoftBank to skirt paying maintenance expenses if the proposed restructuring falls apart and the company is forced to liquidate, another bone of contention with landlords. From these recent actions it is now becoming apparent and obvious that none of the stakeholders or bondholders want to provide fresh capital to fund any losses or operations moving forward. WeWork, meanwhile is trying to gain access to the Letters of Credit it posted with Landlords, which are a source of payment for Landlords in the event of tenant in distress. If you read between the lines, it seems the probability of a successful bankruptcy restructuring is declining and this further exposes the internal business model and overall approach to scaling their business. So many elements of the WeWork model never made financial sense and because WeWork handed landlords a gift by over-paying on rent, one must now wonder whether WeWork can sustain this charade into the New Year. The game of financial roulette and chicken is unfolding in front of the screen. The next hearing regarding the financing motion is scheduled for December 11th.