In the dynamic landscape of the last few years in the business world, companies often faced challenges that could test the resilience of even the most robust entities. If you ever talked or searched anything about coworking, you definitely heard about WeWork. The company was a prominent player so strong in the industry that its name was often used as a synonym of coworking. It “was”, because it has recently found itself navigating treacherous financial waters, culminating in the decision to file for bankruptcy a few days ago. Founded in 2010 by Adam Neumann and Miguel McKelvey, We Work rapidly ascended to prominence on the strength of its innovative business model, which consists of providing more flexible office space for start-ups and businesses with shorter arrangements as we are used to see in commercial real estate. The objective was to bring people together, build communities and enhance productivity by offering beautiful and inclusive spaces.
At the heart of WeWorks business model was a strategic fusion of value for landlords and for businesses at the same time. The landlords could benefit from higher value tenants in their buildings due to the economic and cultural activity that WeWork generated and from a possible appreciation in property value as WeWork acted as anchor to tenants and as a bridge to individuals and companies looking for space solutions. The businesses could benefit from beautifully designed workspaces accessible 24/7, a collaborative culture at a lower cost and an opportunity to spark employees' innovation and productivity.
The company revenue model, which was once the biggest tenant in Manhattan, is principally composed of memberships and services like printing, photocopies, IT services, parking fees, etc. The sustainability of this strategy was tested as demand for offices became lower in the post pandemic environment, leading the company to collapse into bankruptcy
Once valued at an impressive $47 billion, WeWork made the difficult decision to file for chapter 11 bankruptcy in New Jersey on November 6 in an attempt to restructure itself. The primary catalyst for this action was the negative impact of the pandemic on WeWork's real estate strategy, particularly its reliance on long-term leases. The bankruptcy filing targeted the rejection of 69 leases, a crucial measure aimed at addressing a substantial $13 billion in lease obligations. As of the end of June, WeWork had assets totalling around $15.06 billion and a substantial debt of $18.66 billion.
The most adversely affected party in this bankruptcy scenario is SoftBank, a significant investor that injected over $16 billion into WeWork, securing a majority stake with 65% equity. The potential failure of WeWork carries considerable implications for the company. However, SoftBank is not the only entity spearheading the effort to rescue WeWork; indeed, a noteworthy 90% of lenders, including SoftBank, have concurred to convert $3 billion of debt into equity. This collective decision is anticipated to assist WeWork in mitigating its financial strain and strategically positioning itself to confront its monetary challenges.
Nevertheless, there exists discontentment surrounding WeWork's financial decisions, particularly its refusal to honour lease payments. Landlords, who are also grappling with the repercussions of the pandemic, express notable dissatisfaction. Their dissatisfaction stems from the absence of both the incentive and the means to mitigate this financial loss, a situation that disproportionately affects smaller businesses, including start-ups.
WeWork emerged post-financial crisis, in 2010. Focused on leasing shared work spaces in metropolitan areas, the business demonstrated promise, with the first location turning profitable within a month. The success of their flagship Soho location in New York City caught investor attention, leading to the establishment of four additional sites. Early investors, including the venture capital giant Benchmark (known for backing Uber and Twitter in their early days), Jp Morgan and Goldman Sachs, contributed to WeWork’s growth.
In its early stages, WeWork was seen as a venture capital gem set to revolutionize the work space industry, in parallel to the impact that Facebook had on the tech industry and Amazon on e-commerce. Bolstered by a prestigious reputation and access to low interest rates, the company secured substantial amounts of capital, facilitating rapid international expansion with hundreds of new locations. Founder Adam Neumann pursued other projects like WeLive, Rise by We and WeGrow to create the powerful “We Company”, an attempt to establish itself in various sectors.
Fast forward to April 2019, WeWork initiated an IPO with a staggering valuation of $47 billion, representing the peak of WeWork’s valuation history. The narrative shifted when the company revealed its financials to the public, triggering investor skepticism about the company’s valuation, business model and profitability. In 2018, WeWork reported revenues of $1.8 billion against expenses of $3.5 billion.
Additionally, Adam Neumann’s leadership style, marked by chaos, extravagance, unpredictable management decisions and questionable expenditures, aggravated the challenges facing the startup. WeWork reportedly hosted a party culture that investors overlooked until financial distress surfaced. Following the failed IPO of April 2019, Adam Neumann resigned as CEO in September of the same year but retained a non-executive chairman role. Only under the leadership of new CEO Sandeep Mathrani, and two years later, did WeWork finally go public at a significantly reduced valuation of $8 billion, reflecting the tumultuous preceding years. After the first day of trading, the stocks of the company went up by 13% to close at $11.78.
In early 2020, amid the challenges of Covid-19 and its subsequent lockdowns, WeWork found its offices empty as tenants severed ties to work remotely. With expensive global rents and a lack of cash flows from tenants, WeWork already encountered difficulties in meeting the rental obligations of the numerous locations it had acquired during the period of low interest rates preceding the pandemic. The situation worsened post-pandemic, as the Federal Reserve took a hawkish approach in order to cool down the economy, ultimately contributing to the company’s financial distress as leasing became even less profitable. In October 2023, the startup missed its first interest payment of $95 millions, and only a month later, it filed for Chapter 11 bankruptcy. As Erik Gordon, a business professor at the University of Michigan, stated; “It’s a testament to how damaging near-zero interest rates are to the market mechanisms that allocate capital”. “Near-zero interest rates make capital get allocated stupidly.” The shares of WeWork are now trading at approximately $1.25.
WeWork’s rapid yet foreseeable downfall comes after the bell was run months ago when it comes to the risk associated with backing startups following SVB Bank’s own announcement of chapter 11 bankruptcy filing last spring. These series of events will likely continue to affect the willingness to back start-ups, as YoY VC investments have already been cut in half, and the latest event will certainly not entice any new VC appetite. As we saw in this restructuring process, unsecured, mezzanine debt, which is popular in the startup world for its covenant lite attributes and more attractive returns for debt investors, seems to be an increasingly risky bet, required higher returns and thus inflicting a higher cost of raising capital on the startup ecosystem. However, some still seem to believe in WeWork, as softbank converted $3B in debt into equity (perhaps to avoid losing everything) after multiple prior interventions to help improve the financial health of WeWork, but to no avail.
Capital Markets Team - Equity Research,
Vaibhav Munjal, Pruthvin Batham, Thomas Nycz, Louis-Philippe Gagnon, Étienne Sigouin, Ayden Rathipanya