WeWork’s American Dream

• Global
• Real estate, Start-ups, WeWork
• July 3, 2021

Since its inception, America has grounded itself in its founding ethos: that any American from any walk of life can succeed, as long as they’re willing to put the work in. Or, as it’s more commonly known, The American Dream.

At the heart of it is the unshakeable belief in the “fresh start” and reinvention. They’re steadfast that it doesn’t matter where you’re from, just where you’re going and, if you’re going in the right direction, success is just one door away.

It’s a lofty ideal, and one that WeWork is setting out to test.

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Dramatic Highs, Bitter Lows

WeWork’s rise and fall has become the stuff of legend, acting as a cautionary tale for investors and somewhat bringing the start-up fundraising frenzy back to reality.

To recap:

• In 2010, Adam Neumann and Miguel McKelvey opened the first WeWork in New York’s Soho District. It was a novel take on co-working flexible office spaces, offering free beer to all renters, the opportunity to do tequila shots with the founders, and be part of a growing community.
• Neumann’s charisma and zeal attracted investment from many high profile funders, including JP Morgan Chase and Goldman Sachs, and allowed WeWork to expand globally. He portrayed WeWork (a real estate company) as a tech company akin to Amazon that would soon take over the world and beyond. One of his most famous declarations is: “WeWork Mars is in our pipeline.”
• In 2016, Japanese billionaire and Softbank CEO Masayoshi Son saw Neumann speak at a conference and was instantly enamoured. After a 12 minute tour around WeWork’s Manhattan headquarters, Son invested $4.4bn in the company. Son told Neumann at the time, “The last person I felt this with was Jack Ma.”
• Spurred by this investment and Son’s trust, Neumann made plans to grow much faster, no matter what broke in the process. His investments became more erratic, and the newly dubbed We Company was burning through cash. The only option was to raise funds by going public.
• This is when disaster struck. The We Company planned to IPO at a valuation of $47bn, but had nothing in its prospectus to back it up. It had lost $900m in the first half of 2019 alone and had $47bn in lease obligations. The control structure also troubled analysts – Neumann’s shares had 20 times more voting power than anyone else’s.
• Stories soon emerged about Neumann smoking weed on a private jet flight, and within weeks Neumann stepped down as CEO – receiving a $500m payout in the process. The IPO was promptly cancelled as well.
• Son swiftly stepped in to steady the ship and hired Sandeep Mathrani, a real estate veteran, as the new CEO.

A documentary was released earlier this year (“WeWork: Or the Making and Breaking of a $47 Billion Unicorn”) and two books have been published that didn’t hold back any punches in their titles:

• Billion Dollar Loser: The Epic Rise and Fall of WeWork
• The Cult of We: WeWork and the Great Start-Up Delusion

For a long time, WeWork and Adam Neumann were easy targets and all that everyone was talking about. Need something to make your colleagues laugh at after-work drinks? Joke about WeWork. Need to look informed and knowledgeable during an interview? Bring up WeWork.

Then, as if the executives could hear the chorus of laughter reverberating around Wall Street, WeWork suddenly got serious.

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A New Dawn?

Mathrani stepped into WeWork with his gloves off and a point to prove. He closed 100 under-performing properties and laid off 8000 employees.

In March this year, WeWork announced plans to merge with BowX Acquisition Corp in a SPAC deal that would value the company at $9bn, raising $1.3bn in funding. It’s a far cry from $47bn, but it’s a start.

WeWork’s Q1 2021 results still reflected that of a business in flux, but there were promising indicators if you look closely:

• Revenue was $598m, a 10% decline quarter-on-quarter, driven by WeWork’s exits of non-core businesses.
• WeWork incurred a net loss of $2bn, but this included Neumann’s payout and various impairment and depreciation costs from exits. Adjusted EBITDA was $446m, a 6% q-o-q improvement.
• Enterprise Membership (space leased by companies) of 51% was in-line with the prior quarter, and the average commitment term for Enterprise members increased to 27 months. Enterprise members represented 60% of the total contract value for the first quarter.
• Gross desk sales ramped up from January to March 2021, growing from 25k to 38k, with March representing the first month where the Company achieved both positive net desk sales and positive net membership gains since February 2020.
• In April, 28 of WeWork’s 112 markets had over 60% physical occupancy.
• WeWork estimates that it saved $275 million in cumulative rent since the beginning of 2020 as a result of its restructuring.

Neumann may have been the one with the Messiah complex, but Mathrani seems to be engineering WeWork’s second coming, buoyed by the timing of the pandemic.

At first glance, one would think that WeWork would have been severely disadvantaged by the pandemic. Communal spaces were suddenly a no-go, and everyone started building offices in their home. However, WeWork benefitted less from the pandemic itself than from the mindset shift that it brought about.

Companies suddenly no longer saw the need to rent out large office spaces and became comfortable with employees working remotely. In New York, one of the most populous commercial real estate cities in the world, new office space is coming on the market 59% leased, down from 74% pre-pandemic. Many large companies, including Twitter and Facebook, have committed to allowing their employees to work from home.

The tide has definitely shifted.

WeWork’s wins will come from focusing on lease agreements with corporates that want to opt for a flexible option for their staff, instead of directly owning office space.

“There’s going to be a huge shift in coming back to work, and we’re a flex provider, so we’re completely the person who would see it first because we’re plug-and-play,” Mathrani said in an interview, “We’re starting to see, even in New York now, new activity, so we’re pretty optimistic.”

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