Sometimes it pays to question the fundamentals of life. WeWork did just that, by questioning the very construct of an office. Before WeWork disrupted the industry with shared workspaces, offices were part of the established norm. While it suited mid to large-sized companies, startups, and entrepreneurs were at a significant disadvantage. Real estate lease, rent, furniture, maintenance, and utility bills are a major chunk of expenses that can put serious pressure on companies with bootstrap business plans.
But everyone had to have an office and had to incur those recurring expenses. The only exceptions were those startups operating out of dorm rooms or garages, or writers working from cafes. If this was a challenge for hundreds of thousands of small-scale businesses and entrepreneurs, for WeWork, it was a massive opportunity. They saw coworking spaces as a viable business model that could be scaled up to create compelling cost efficiencies.
Today, WeWork is synonymous with coworking. Remote work and digital offices are now getting normalized due to COVID-19. This new normal is not just applicable to small businesses but large enterprises too. Coworking is here to stay irrespective of a company’s size. What the pandemic forced on the world is what WeWork had imagined almost a decade ago.
Which leads one to ask, what is the WeWork business model? What did WeWork do differently? How does WeWork earn their revenue? Why did investors bet big on the company? Importantly, is its business model sustainable?
What is WeWork?
WeWork was started by Adam Neumann, Rebekah Neumann, and Miguel McKelvey. Although it was founded in 2010, its origins can be traced to Green Desk, an eco-friendly shared workspace that the founders had started in 2008. What they started in a warehouse soon became a coworking model that was spread to over 100 spaces. After a year, they sold the business to their partner who was also the landlord of the building. From the profits of that transaction, WeWork was born.
Today it’s probably the most recognized name in the coworking industry. WeWork has around 828 buildings worldwide catering to close to 600,000 members. The company that has 6000 employees is now valued at around $3 billion. The company’s sub-brands include Rise by We, WeLive, and WeWork Labs, a startup incubator. Since February 2020, Sandeep Mathrani, formerly of Brookfield Property Partners, and GGP Inc. has been the CEO of the firm.
What does WeWork Do?
WeWork offers flexible coworking solutions to entrepreneurs, freelancers, and small businesses. The company also has large enterprises as its clients. The company leases space from landlords in cities, remodels it into a coworking space with desks and private offices, and then rents it out to small businesses and entrepreneurs. The company disrupted the commercial real estate sector by making it flexible.
Small companies and startups cannot commit to the minimum viable rent required for office spaces due to two important reasons. They often don’t have the financial bandwidth to sign long-term leases. Secondly, these companies with limited budgets and manpower may not need large offices. Even then, they are forced to sign leases which leads to significant redundancies and recurring expenses. WeWork solved that problem by aggregating office space. Now, entrepreneurs didn’t have to shell out exorbitant rents for space they didn’t need. They only had to pay for what they used, and importantly, when they used it.
By making real estate flexible, something unheard of in the industry at a large scale, WeWork realized that it could exponentially increase the demand for shared office spaces, especially in urban areas. They also knew that their solutions couldn’t be one-size-fits-all.
WeWork has a versatile suite of offerings that include hot desks, dedicated desks, private office spaces, and custom-built spaces.
Hot desks are ideal for freelancers who don’t have a fixed schedule and can use the facility whenever they like. They can walk in and choose any available desk. This is beneficial for business travelers who may need office space for a day or two. Dedicated desks are for those regular workers and businesses who might need space reserved for them. For small businesses that need their employees to sit together, WeWork offers private office spaces that have all the amenities one would expect from a professional setting. They offer privacy and exclusive access.
The company also has a premium option of custom-built spaces that are designed for enterprises that would want their office space customized. These offices are equipped with labs, board rooms, and suites for senior management. For larger teams, WeWork offers the option of headquarters that comes with private floors, the option of exclusive branding, and the freedom to have the floor plan customized.
WeWork’s unique design was one of the factors that got it a lot of media attention in the starting days. The focus was on developing common areas that would foster a sense of community among the occupants. For the founders, the ‘we’ in the company name was not ornamental or gimmicky. It reflected their vision of a community of individuals, and companies, all working and networking harmoniously.
It’s important to note that WeWork is not an aggregator in the sense that Uber and Airbnb are called aggregators. They are not a platform where demand and supply meet. They are not bringing together buyers and sellers. They are the buyers, and they are the sellers. The company isn’t in the business of merely aggregating office spaces and connecting them with entrepreneurs and small businesses. Uber doesn’t own cars and Airbnb is not in the business of purchasing properties. WeWork, on the other hand, leases space, converts them into viable office floors and then sublets them with differing amenities at various price points.
This crucial difference means that WeWork has to make significant investments upfront to acquire the property, retool it, and get the final product ready. This delivery module also leads to a situation where the price is relatively fixed, with little potential for variable and temporary premium charges based on surges in demand. But the company believes that the significant benefits they offer negate any risks associated with higher investments.
Why WeWork?
The universalization of the modern office can be traced to the industrial era when supervisors and management physically had to be located at the factory premises. This made overseeing production easy. It also made sense to optimize resource allocation by having all personnel under one roof. All manufacturing plants are based on this idea of cost efficiencies through centralization of people and processes. But in post-industrial societies, a permanent office seems like excess for most sectors. Certainly many organizations in the manufacturing and service sectors need their employees to be on-premise. For several other companies and institutions, it’s entirely possible for the staff to be off-site and still be functional as a team.
After all, if the idea of the office was to connect people, what need does it serve when the employees are already connected? This is acutely true for entrepreneurs, freelancers, and small businesses. WeWork makes professional spaces accessible to them at a fraction of the cost of traditional office space.
Convenience
To begin with, entrepreneurs and business owners can save a lot of time with WeWork. Finding the right office space in a city is time-consuming. For small businesses with limited resources, this can be limiting, and will often lead to sub-optimal leasing decisions. With WeWork, they can start immediately. There’s no scouting around, no discussions with landlords, no negotiations on lease.
Low Investment
There are no investments needed upfront. Renting office space translates to significant expenses on not just the lease but brokerage fees, interior decoration and furniture costs, on-site branding expenditure, etc. Entrepreneurs and small businesses save a substantial amount of money when they opt for the WeWork model that doesn’t require any of these.
All-Inclusive
WeWork makes immense sense for smaller operations is that there are no additional recurring costs. With a regular office, everything from utility bills to security charges to hardware maintenance costs to other miscellaneous expenditures can add up to high monthly costs. Most of these charges are independent of the size of the organization. Whether it’s a two-person startup or a small business with half a dozen people, there will be these unavoidable costs. But not with WeWork. This also means that small businesses and entrepreneurs don’t have to worry about the usual operational issues related to office spaces.
Accessibility
The fourth benefit of WeWork is that most of its properties are in admirable locations. These are addresses that employees would love to travel to, and would love to flaunt. The right location also means that its incumbents don’t have to travel too far or be forced to work from more congested parts of the city. Plus, the amenities WeWork offers are a great attraction for employees. When small businesses have offices that employees look forward to going to, equipped with desirable facilities, it also becomes easier for them to attract talent.
Community
Finally, freelancers and entrepreneurs prefer WeWork for its sense of community. The floor plans and interiors are intentionally designed to encourage interactions. There is a provision in their app that allows users to communicate with each other through messages and posts. All these are supposed to not just organically lead to more opportunities but also a sense of community. These five benefits are compelling value propositions for those starting out or are leading small businesses. But their advantages are attracting tenants beyond those from the gig economy. Large enterprises have also partnered with WeWork for the unmistakable benefits the co-working giant offers. Several of them have started using WeWork facilities as hubs for some of their localized employees.
The History of WeWork
The founders and how it started
To understand why the founders felt the need to expand, it’s important to realize the overall economic scenario of the times in which the company was started. The 2007 economic crisis that left hundreds of commercial spaces and office floors empty in cities around America. Layoffs and furloughs were becoming normal for both upstarts and large corporations. There was uncertainty all around and real estate was one of those sectors that were hit hard. Companies were shutting down or cutting down on their operations, which led to an underutilization of commercial space.
The period also saw entrepreneurs and startups struggling to find office space due to the paucity of funds. Investments were slowing down, and it was becoming increasingly difficult for small businesses with limited resources to get real estate. This also coincided with the beginning of the gig economy where freelancers would move from projects to projects without being attached to any company and therefore, without a permanent office space. As more and more buildings were becoming vacant, landlords were in trouble too. It was being difficult for them to get tenants who would agree to long-term leases.
WeWork addressed these multiple challenges and came out with a solution that offered obvious advantages to everyone involved. But more than the cost efficiencies and economies of scale, the Neumanns were also driven by their belief in the power of the whole. The idea of a sustainable, wholesome, and productive community was at the heart of their vision.
For the Israel-born Adam Neumann, the previous decade was all about the ‘I,’ as evident, according to him, in iPhones, iPods, and iPads. He wanted to encourage the idea of a mentally, physically, and spiritually healthy collective ‘We’ against the prevailing selfish, and self-absorbed individualistic narrative. This was welcomed by people battered by the recession and angered by the greed and excesses of those giants in the finance sector. And the investors too were getting interested.
The investors
Joel Schreiber, a real estate honcho from New York, was one of the first investors in the company. In 2010, he bought a 33% stake, valuing WeWork at $15 million. By 2014, WeWork had some of the most sought-after names in the investment world as its investors, including, Goldman Sachs, J.P. Morgan Chase, Wellington Management, and the Harvard Corporation.
By the end of 2016, the company was valued at $16 billion, after raising $430 million from Legend Holdings and Hony Capital. This raised the total private capital investment in WeWork to $1.7 billion. But the big news was yet to come. In August 2017, the Japanese investment giant SoftBank, founded by Masayoshi Son, invested a whopping $4.4 billion in the company. That included $1.4 billion for the company’s expansion into Japan, China, and the Pacific markets.
By March 2018, WeWork and the private equity firm Rhône Group had successfully secured funding worth $400 million to make direct real estate purchases. Masayoshi Son was impressed by what he was seeing at the company, and by August of the same year, SoftBank invested another $1 billion in WeWork. By July 2018, the company secured $500 million in new funds for the expansion of its Chinese business which was being valued at $5 billion.
SoftBank was wholeheartedly behind the Neumanns as they poured in another $3 billion by November 2018. Within just three months, in January 2019, the Japanese conglomerate invested $2 billion more in the company. The repeated votes of confidence by SoftBank had its effect. By then, the company was being valued at $47 billion. With everything going in its favor, by April, WeWork filed for an IPO, hoping to raise $3.5 billion.
Which, of course, didn’t quite go according to plan.
Why it went wrong
WeWork’s business model involved the company making significant investments in either leasing properties, or later, buying them outright. Then there would be additional investments needed for the makeover of those properties to make them look functional and desirable, with all the necessary amenities. This meant that the upfront costs of the company just kept mounting, putting serious pressure on its bottom line. In 2018, the company posted a net loss of above $2 billion.
Analysts had always been doubtful of the company’s ability to be profitable with its existing business model. They were also critical of the high vacancy rates at WeWork properties. Most analysts had also questioned the expansion into childcare, and coliving, among other things. Most experts wondered why the company was expanding so fast, both geographically, and laterally into other verticals.
As the company filed for its IPO, experts attacked the prospectus for being complex, while relying on exaggerated assumptions to make its flawed practices seem credible. Many analysts believed that they couldn’t see WeWork being profitable no matter what path the company took. This led to several questions about whether the business model itself was viable. But business fundamentals weren’t the only things that were being questioned.
The company’s leadership, particularly the Neumanns, came under severe scrutiny. There were serious allegations of misconduct about conflicts of interest, particularly regarding the ‘We’ trademark. It came to light that WeWork had to pay one of Adam Neumann’s companies $5.9 million for the right to use the trademark. His penchant for private jets also came under heavy criticism. Analysts noted that while his staff didn’t receive the promised raises or bonuses, Neumann was jetting around in the company’s Gulfstream G650.
By week 2 of the IPO filing the criticisms went beyond financial mismanagement, and lack of an effective business model. There were accusations of unprofessional conduct and sexism. For a company that was constantly touting its belief in a selfless, sustainable, and wholesome environment, all these allegations revealed a different side of its management. Soon, WeWork decided to postpone its IPO and Adam Neumann was forced to resign as CEO of the company.
That turned out to be an expensive exit as Neumann left after selling $1.7 billion of his shares to the Japanese group that had backed him only months earlier, SoftBank. Neumann’s exit did nothing to calm the nerves of the analysts. By September 2019, Rebekah Neumann resigned as the CEO of WeGrow and exited the group. All these had a devastating impact on the valuation of the firm. From a mighty $47 billion, it was now at just $8 billion.
Where they are now
After the exit of Neumanns, SoftBank took control of WeWork. After a careful analysis of its business model, the new management decided to be more conservative. They have decided on a leaner model, divesting certain properties, and laying off close to 2000 employees worldwide. The leadership has also decided to sell some of the acquisitions WeWork had made. Importantly, they also decided to bring to a halt the expansion drive of the company. By July 2020, Miguel McKelvey, the last remaining founder, decided to leave the company.
Although its valuation has plummeted 89% since the failed IPO attempt, the company is slowly getting back on track under their new CEO Sandeep Mathrani, and Executive Chairman, Marcelo Claure. But there is enough to distract them, with multiple lawsuits from former employees, and litigation between the company and SoftBank. But the new realities of 2020 offer a glimmer of hope for the company.
The shared workspace industry is poised to grow at a significant rate. It’s up to WeWork to make the most of these opportunities with a focus on an effective business model without needless expansion and distractions. As remote work and satellite hubs become the norm in the post-pandemic world, it remains to be seen whether the torchbearer of coworking and shared workspaces and communal living can make a comeback.
