The Rise and Fall of WeWork: Exploring its Bankruptcy Impact

As you probably heard, we got some pretty big news that WeWork, the Chic office leasing company with the mission statement of elevating the world’s Consciousness and lofty goals of solving the problem of children without parents and eradicating world hunger filed for chapter 11 bankruptcy protection. Bummer. Now, as devastating as this probably is for kombucha drinkers around the world, it was a largely expected move.

In September, their quarterly earnings management highlighted that they had substantial doubt around the company’s ability to continue to stay in business. Just last month, they announced that they were going to miss two of their upcoming interest payments. And really, ever since the company’s failed IPO in 2019, there have been questions about the firm’s longevity.

But this is 2023, a company going under is not really that big of a deal. We’ve already covered several stories of companies going bust this year alone. What makes WeWork notable is that just a few years ago, they were valued at $47 billion, making them the most valuable startup in the US. And with $22 billion invested into WeWork over its lifetime, it makes it one of the biggest Venture Capital failures in corporate American history.

Now, you might be wondering, geez, how did this company fall so far from grace? A better question is, how did they get as far as they did? Because the thing about WeWork is, they never really worked—at least for their investors. They never recorded a single year profit, had a history of self-dealing conflicts of interest, and questionable acquisitions. And they didn’t seem to have a solid idea of what they even were.

What the company did have, however, was an incredibly eccentric co-founder, Adam Neumann. Known for walking around the office barefoot, partying on his private jet, and frequently letting the tequila flow at company-related events, he still managed to convince venture capitalists to invest billions of dollars into his business over the past decade.

So today, I’ll give a bit of background about the company, talk about how it failed, and discuss the implications of its bankruptcy. Because outside of just being a fascinating story, when you get into the weeds of who this Adam Neumann character was and how he managed to raise all this money, this bankruptcy does actually have meaningful consequences for certain markets, especially within America. So, we’ll touch on all that today. But let’s start from the beginning: what is WeWork?

Background of WeWork

Well, as mentioned, they are an office leasing startup that was founded in 2010 by Adam Newman and his co-founder Miguel McKelvie. Outside of trying to help us all mentally ascend, the actual core function of WeWork was that they would go out and lease larger office spaces, refurbish them, and split them up into these sort of micro offices with a more communal feel to them.

They would then lease those spaces out with more flexible terms but with a bit of a markup in the price to startups, entrepreneurs, and really anyone who’s looking for more flexible terms when renting office space, acting as a sort of office middleman.

Now, for our main character Adam Newman, this wasn’t actually his first venture. He had already tried a few other businesses such as a collapsible heel as well as a brand of padded baby jeans called Crawlers with the slogan of “just because they don’t tell you doesn’t mean they don’t hurt, Jesus.” But WeWork itself seemed to take off, and to be fair, it was a solid offering for customers.

Offices were designed to foster creativity and collaboration, often having this sort of premium feel to them. Aside from flexible terms that would let people go month-to-month, for example, it was a great place to build connections and network with other entrepreneurs and startups in your space.

The company also spent pretty lavishly on refurbishments and amenities to create a unique work experience, as well as offering free kombucha and beer on tap.

The Fall of WeWork

Unfortunately, the one party that the WeWork business model wasn’t great for was WeWork itself. As mentioned, they never earned a profit, which makes sense when you consider how flippant they really were with their money. But outside of that, there just wasn’t enough demand to match WeWork’s ambitious growth targets. The company grew its number of locations tenfold from 2015 to 2019.

The company also had a pretty unattractive risk profile by leasing out properties for 15 years or longer and then renting that space out on a month-to-month basis. In some cases, they obviously had this asymmetry between the costs that they had to face and the revenues they were bringing in. Not to mention, their target customers, startups, and entrepreneurs, were likely to be the first to close up shop if there were a recession, which, considering they were operating for over a decade, was something they were going to run into sooner or later.

But if history is any indication, the one thing that trumps an unattractive business model when it comes to venture capital is a quirky leader with a strange aesthetic. So, with Adam Neumann allegedly bringing vodka water guns to company retreats, aspiring to live forever, and one day be president of the world, needless to say, venture capitalists loved him.

His wife, Rebekah Neumann, also really contributed to Adam’s image here, known for trying to incorporate spirituality into the business and even going so far as to allegedly fire people after just a few minutes of meeting them because she “didn’t like their energy.” But as ridiculous as all these things are, Adam was apparently a very motivating and charismatic individual, and he had a lot of success selling venture capital investors on the future of the company.

When it comes to private investing, there just aren’t the same rules when it comes to reporting requirements and disclosures, and Adam was apparently able to convince many that WeWork was more than just an office leasing company—that they were a physical social network in the business of offering space as a service, a play on software as a service. He saw a future where the company would take its way of business and expand it into other areas, with ventures like WeLive, WeWork, and We To (alright, I made up that last one, but I think it would fit in).

Now, WeWork did have some tech initiatives to try and separate itself from all the other office landlords who could basically do the same thing, such as an AI system that tried to gain insight into how its office space was used. The problem is, they kind of sucked. They weren’t very fruitful for the company’s operations. Though with money flowing in from investors, the company did manage to roughly double its revenues every year leading up to 2019.

The sort of growth-at-all-costs type of strategy is something that might work for a software as a service type business, where there’s a very small cost to onboarding new customers and a future state where you’re able to reduce your costs and just generate profits from the user base you’ve built. But again, with WeWork, there wasn’t really that future or that possibility. There were a lot of substitutes with very low switching costs given the flexibility of the office leasing terms, and obviously expanding capacity was very expensive.

Nonetheless, this pitch of where actually a tech company seemed to work and garner enough support from VCs to help fuel this rapid expansion with their capital, mainly with the support of people like Masayoshi Son, the CEO of SoftBank Group, who over the company’s lifespan allegedly invested $8.5 billion into the business.

WeWork’s Attempted IPO

In 2019, the year that the company decided to try and go public, the cracks started to show. Despite Adam’s success in the world of venture capital, the public market proved to be a lot less hospitable. When they publicly filed their S1, which is the form that’s filled by companies looking to have a security listed on a National Exchange, they weren’t met with roaring applause. Instead, they were sort of gasped at and really ripped to shreds by anyone who read through their statements.

First of all, the filing was pretty atypical. It started off with this weird poetic bit, a pretty grand introduction for a company that basically just provided office space. There’s also this random photo collage partway through. But worse than the company’s marketing decisions were their finances.

The losses were staggering, with their operating expenses being double their revenue each year. They also had these massive long-term liabilities on their balance sheet because of all the leases they had entered into, and their complicated organizational structure didn’t make a lot of sense to investors.

WeWork’s Public Struggles

But arguably more concerning than all this was the shady stuff it revealed. WeWork was leasing properties that were owned in part by Adam Newman, and the company disclosed that it had bought the trademark for the word “we” from Adam Newman for roughly $6 million, a deal he only ended up reversing after the public backlash. In fact, the response was so negative that WeWork ended up postponing its IPO, and Adam Newman was pressured to step down.

So, without Adam out of the way, we finally have this possible turnaround point with someone new at the helm to finalize and focus our strategy and help WeWork achieve its full potential, right? Uh, yeah. Needless to say, it ended up being a pretty bad time to be in the office space. Literally, as a bunch of people canceled their leases, causing revenue to fall.

Now, October 2021, the company would still actually end up going public, this time via a special purpose acquisition company or SPAC. That’s right, SPACs, the big fad of a couple of years ago, whereby a bunch of investors basically go public with an empty company, if you will, and then use the funds they generate to buy a private company, merge the two, and thereby end up taking this firm public without going through the typical IPO process.

At this point, however, the company was only valued at $9 billion, an 80% decline from just two years ago. And if the pandemic and the beaten-down valuation weren’t bad enough for this company, just six months later, the Federal Reserve would start hiking its interest rates, further pressuring the real estate space, the economy as a whole, and bringing us to where we are today.

With a company in the second quarter of this year supporting liabilities of $19 billion, the majority of which are these long-term leases, despite only having itself $15 billion in total assets, with sales being slightly down since 2019, despite the company still spending pretty aggressively on capital expenditures.

WeWork’s Bankruptcy Filing

With a portfolio of over 800 properties across 35 different countries, the company has filed for Chapter 11 bankruptcy protection. Now, Chapter 11 is often misconstrued as meaning that it’s the end of this business. It’s actually an opportunity for the company to try and turn itself around.

It allows it to continue operating while giving it some respite from its liabilities, its creditors, and in this case, its landlords that it owes rent to. And it does appear that the company intends to reemerge. It’s already gotten 90% of its bondholders to agree to a billion-dollar conversion of debt into equity.

And before filing for bankruptcy, they had already renegotiated 590 of their leases, essentially wiping out $12.7 billion of future rent payments that they would otherwise owe. Now, they’re still looking to negotiate with 400 other landlords, but this really does give WeWork the opportunity to break all these long-term contracts that would otherwise likely drive it into the ground.

But to be clear, any company that does emerge from this is going to be a fraction of the size of what WeWork was beforehand, and public investors have virtually lost everything, with the stock down 99%, with it being very possible that the shares end up worthless. Now, obviously, this sucks for any public investor who looked past the weird messaging of their filings and really believed in Adam Newman’s vision for a WeWork world.

But there are wider implications outside of just investors losing their money, because it comes at a pretty awful time for commercial real estate. As you might know, this area was already suffering pretty significantly, thanks again to the pandemic, which forced a lot of businesses to shut down and forced a lot of companies to have their employees work from home.

Now, in the US, over 17% of office supply is already vacant. So when you have one of the largest private tenants all of a sudden try to pull out of the space and end all these long-term contracts, it’s only exacerbating that pain, which will not only hurt property owners, who again are losing a paying tenant.

But also likely financial institutions who lend money to the space, because if the person you gave a massive loan to, to build or buy an office property, is no longer able to earn money from its tenants, you might lose all the money you lent them. With this already having been a big headwind for financial institutions in 2023.

Implications of WeWork’s Bankruptcy

So with this announcement, obviously, there’s more pain to be expected. With roughly 42% of WeWork’s occupancies located in New York, Boston, and San Francisco alone, those markets are going to experience a pretty acute effect from all this.

So that’s the situation around WeWork. With the recent guilty verdict handed down to SPF regarding the whole FTX scandal, you might think this is 0 and 2 for quirky startup founders. But don’t worry too much about Adam; he’s doing just fine.

He was out of the front lines for a bit, but now he’s already onto his next startup called Flo, which received a $1 billion valuation and a $350 million investment last year, despite not having any operations yet. The business aims to operate multifamily residential properties aimed at promoting community, which I can only imagine offers a pretty good opportunity for Adam to repurpose those vodka water guns from WeWork.

While Adam’s net worth was hit by the downfall of WeWork, he was also provided a $16 million settlement payment when he was laid off, given a $185 million non-compete agreement. He sold a bunch of his shares to venture capitalists for hundreds of millions of dollars and even borrowed $740 million, nearly a billion dollars, from SoftBank against the value of his shares, which have plummeted.

But if you thought this would leave some bad blood between Adam Newman and WeWork, you’d be sorely mistaken. There are actually rumors that he might come back to helm the business through the tumultuous period ahead. Sorry, Timmy, Adam needs his Nerf Super Soaker back.

Conclusion

Regardless of where things go from here, it’s already a moment in history, being one of the biggest venture capital failures that we’ve ever seen. In a way, it shows some of the consequences of having a prolonged period of low-interest rates.

Not only can unsustainable companies last longer, given that the cost of capital is so low, allowing them to keep fueling their losses, but the investors who provide that capital tend to be less diligent, as this story probably portrays.

The reason being that there’s not the same opportunity cost to just park your money somewhere and earn a decent return. Investors are more incentivized to take on risk and perhaps believe one too many entrepreneurs that their business is actually a tech company that’s going to change the world. But as we see, when rates rise, it really trims the fat.

And let me know your thoughts in the comments down below, especially if you’re someone who invested in WeWork or what your thoughts were at the time and what you’re thinking hearing all this.