A Lesson to be learned from WeWork’s crisis: Don’t build you startup on sand but on rock
I am not overtly a religious person but I wonder if Adam Neumann or Masayoshi Son or the other investors in WeWork ever read Mathew Chapter 7 versus 24-27 in the Holy Bible, because I cannot help draw a parallel to the parable when I think about the curious case of WeWork.
“Everyone then who hears these words of mine and does them will be like a wise man who built his house on the rock. And the rain fell, and the floods came, and the winds blew and beat on that house, but it did not fall, because it had been founded on the rock. And everyone who hears these words of mine and does not do them will be like a foolish man who built his house on the sand. And the rain fell, and the floods came, and the winds blew and beat against that house, and it fell, and great was the fall of it.”
The rise and fall of WeWork is a harsh lesson in an investor’s confidence in a founder and over confidence of a founder in the perpetuity of an idea.WeWorks went from a USD 47 billion valuation to a cancelled IPO to now filing for bankruptcy.
The potential bankruptcy filing marks a significant turn of events for WeWork, once valued at an impressive USD 47 billion in 2019. But more importantly it also raises concerns for investor SoftBank who invested USD 9 billion from its USD 100 billion ‘Vision Fund’.
WeWork co-founder and former CEO, Adam Neumann, was ousted from the company as revelations about self-dealing and mismanagement helped to derail the planned IPO.
In an interview with Forbes, SoftBank founder and CEO Masayoshi Son expressed, “It’s always difficult. It’s not science, it’s art. You get excited with an entrepreneur who seems great but does not necessarily deliver a great return.”
Analysts opine that Son’s fundamental error was that he behaved as though WeWork couldn’t fail. This idea is reflected in the deal he negotiated with Neumann, who was allowed to retain vast amounts of power over his startup. Conceding this power suggests a conviction that WeWork was as sure a thing as anyone had ever seen.
WeWork, founded in 2010, the brainchild of Adam Neumann and Miguel McKelvey promised a revolution in office space solutions by offering flexible workspaces to startups, businesses and freelancers. It is unique business and disruptive business model based on long-term leases and short-term sublets caught on globally in the surge of startups and new age businesses.
WeWork was a revolutionary idea but ideas run its course or situation runs an idea out of its course. And that was unfortunately, precisely the fate of WeWorks. When the COVID-19 pandemic struck the world and lockdown was forced upon the people globally. Work from home became the new normal and the demand for physical office spaces plummeted. Once valued at USD 47 billion, the company has failed to recover from its disastrous 2019 IPO launch, which was ultimately delayed and which saw WeWork’s valuation plunge by 70 percent in about a month. Its share price has dropped almost 99 percent since it went public in 2021.
WeWork was presented with a mandate to scale quickly, even well before profitability had been achieved in individual markets. That many trade analysts see as the problem that WeWorks WeWork was creating a very large business that did not make money. Fundamentally, WeWork attempts to act like a tech start-up when it is fundamentally a property business could have been the error behind the business model. The other problem of course was that they were relying on continuous growth to cover up the fact that they were losing money on every lease they signed. Eventually, once that growth stopped, the whole house of cards would come tumbling down and it did in the case of WeWork.
The problem it appears is that Adam Neumann, did what some founders do when big money starts to pour in on high company valuations – he was more concerned with making money than with running a successful business. WeWork was not making money and it relied heavily on investors to keep the company moving along. In order to make up for its poor business strategy it relied on aggressive growth tactics such as giving out free rent to new tenants.
But the fault is not only Neumann’s it is also the investors, who pumped billions of dollars into WeWork, giving it an inflated valuation. And when WeWork had to raise more money, those same investors refused to provide additional funding and it has to go public. Going public was a failed strategy of WeWork.
The curious case of WeWork a revolutionary idea that has been run into the ground by fate and blind faith is lesson for the startup ecosystems that often it is not the inflated valuation that matters but the profitability of the business that keeps it sustainable in the long-run. It is a stark reminder of the grave risks of exuberant investment in unproven business models. For a startup to succeed and become a legacy it is important to have ethical leadership, responsible investing from the founders and its investors, and of the most important ingredient to a successful business mix, sustainable growth.
WeWork is a castle built on a beautiful sandy beach and it captivate everyone with its uniqueness but it is castle built with sand, it is only natural that strong waves of the sea will wreck it because it is not built on strong rock-like foundation.
