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Is WeWork Fixable?

Over the past year, WeWork has experienced roller-coaster-like valuations, messy legal battles, and executive turnover like no company ever before. It became a household name for attempting to scale its coworking platform globally before its well-documented rise and fall. This piece is a follow up to our original piece detailing the factors that led to WeWork’s rise and fall. I teamed up with Neil O’Donnell along with the Capital Technologies Quant team to explore how the market currently is discounting its future prospects (through curent bond issue pricing) and what it will ultimately take to turn the business around. For those less familiar with the back story, let’s explore a few pertinent details before diving into the business model and our recommendations for turning the business around.

WeWork – The Back Story

- In 2010, Adam Neumann and Miguel McKelvey started WeWork after Neumann departed from his baby-clothing startup, Krawlers (now known as Egg Baby).

- In 2017, WeWork’s valuation rose to $17 billion after SoftBank invested $300 million in the firm.

- In early 2019, the company was valued at over $47 billion after a follow-on investment led by Softbank. Its initial public offering (IPO) was among the most highly anticipated of all the unicorns minted over the decade. In the second half of 2019, however, WeWork began to stumble as investors began to take a closer look. In April 2019, WeWork confidentially filed to go public with the SEC and began preparing its Form S-1 to complete an IPO. In August 2019, The We Company (WeWork’s corporate parent) filed the S-1 to go public. The disclosures in the S-1 revealed that the company had huge, growing losses.

- In the third quarter of 2019, WeWork lost $1.25 billion on just $934 million in revenue and its occupancy dipped to 79%. While these losses were to some extent anticipated, the disclosures also raised several questions regarding the entity’s corporate governance and finances. WeWork had paid Neumann more than $5.9M in preferred stock after Neumann incorporated the “We” trademark and transferred it to the company. In addition to this inside dealing, Neumann also owned several properties that were leased back to WeWork.

- Overall, the financial statements disclosed in the S-1 were opaque. WeWork did not report its company-wide cost of revenue expenses and relied on several non-GAAP metrics to present its financial results in a more favorable light. As the Wall Street Journal noted these financial statements initially contained very significant inaccuracies:

“[h]ow many new workstations did We deliver in the first half of the year? The prospectus filed in August said 273,000. Barely a month later, an amended version said 106,000. What was the total gross cost? In August We said $1.3 billion. In September: $800 million.”