One of the greatest stories in finance of the last few years is the rise and fall of WeWork. Spectacular in scope, scale, and absurdity, the story has become an entertaining podcast from Bloomberg (titled “Foundering”), which glosses over financial details which, in honesty, need not much in-depth analysis. At its core, the failure of WeWork was a failure of investors’ due diligence, making the numbers less important than the personalities involved.
This in large part was because of a core belief by Softbank’s Masayoshi Son, who famously said “in a fight between a smart man and a crazy man, the crazy man will win every time.” This seems to be the impetus behind the lofty valuation and investment he gave WeWork, as he encouraged then CEO Adam Neumann to be crazier. Neumann obliged, resulting in a failed IPO and fall from grace that is brilliantly explored in the podcast.
But what if the IPO went as planned? This counterfactual is entertaining to explore, but also instructive because it uncovers the points of failure in WeWork beyond Son’s questionable judgment and due diligence.
In late 2019 when WeWork’s S-1 was released, many absurdities turned the company into a laughing stock in the financial press and on Wall Street. The conflicts of interest, absurd valuation, and massive cash burn made it a non-starter, but in a world of a more inflated tech bubble, these may have been shrugged off and WeWork would have gone IPO–just in time for Covid-19.
The pandemic’s impact on coworking is self-evident, as is the reasons why. Coworking has become an incredibly challenged business model, and if the IPO had gone according to plan the firm would have seen cash flow dry up, greater logistical and practical issues with customers, and a general threat to its long-term viability. By not going IPO, buyers of the stock have been spared potential losses, which have been contained to Softbank’s (which, post-failed IPO has been forced to take a majority stake and essentially become WeWork’s management).
The lesson here is that there were three points of failure to WeWork: the company’s overly high valuation (had it listed for much less, the eccentricities of its CEO could be handwaved away by miserly investors); the CEO’s eccentricities (the lofty valuation could be justified as justified to pay for future growth had it been run by a more conventional or tolerable figure); and the difficulties in the business model itself (unforeseen catastrophes and changing attitudes to coworking fundamentally destroyed what was at its core a luxury and unnecessary business model. Despite fans of coworking’s insistence to the contrary, people can get work done without coworking, as the world has become painfully aware of in the global pandemic).
Of these three weaknesses to its business model, it was really the last that had staying power–and it was also the one that no one predicted, planned for, or hedged against. Thus we see in WeWork’s failure how fundamental risks to a business model are more impactful and dangerous than even the very worrisome red flags of a crazy, self-serving, conflicted CEO and a sky high market valuation.