WeWork: The rise and fall of another tech darling

A WeWork logo is seen outside its offices in San Francisco September 30, 2019. ― Reuters pic
A WeWork logo is seen outside its offices in San Francisco September 30, 2019. ― Reuters pic

SINGAPORE, Oct 3 — Once valued at US$47 billion (RM197 billion), co-working space operator WeWork is now in the doldrums.

Its parent We Company lost US$1.9 billion last year. Founder and chief executive officer Adam Neumann has been ousted and the firm has also shelved its Initial Public Offering (IPO) plans.

WeWork Singapore declined to respond to TODAY’s queries when asked whether the problems it is facing in the United States would have an impact on its operations here.

TODAY takes you through the rise and fall of another tech darling.

What is WeWork?

Founded nine years ago in New York, WeWork rents office real estate from landlords and then leases these spaces out to individual members or companies in a shared office environment — a real estate business model that is now known as co-working spaces.

Besides just the physical space, WeWork also throws in networking events, tasteful interior designs and alcohol as a way to make them stand out from traditional office leasing arrangements, where the tenant typically deals directly with the developers or landlords.

It has been aggressively expanding in the last few years, with about US$2.5 billion spent globally in 2018.

In Singapore, WeWork has grown from its first co-working location in December 2017 to 11 properties now — all in a span of less than two years.

The cheapest hotdesking space in Singapore is at its Jalan Besar location — the only one outside the Central Business District — at S$490 a month, while the rest are in the range of between S$500 and S$600.

A private office space would start from S$1,160 to S$2,690 a month.

How did it all happen?

There have been question marks over WeWork’s business model, given that flexible office leasing has already been offered by lesser-known companies for years, such as Regus.

But the firm is in its present predicament mainly because it wanted to go public.

As part of the requirements, it had to file documents containing never-before-seen information on the company with the United States Securities and Exchange Commission.

Unfortunately, after those papers were filed on August 14, a string of reports on the company’s financial situation, mismanagement and Neumann’s bizarre behaviour — such as smoking marijuana on private jets and drinking tequila shots during meetings — surfaced.

That led to him being ousted a little more than a month later, and the company’s new co-chairs Artie Minson and Sebastian Gunningham announcing earlier this week that they are scrapping WeWork’s IPO plans.

What did those papers reveal that caused concern for investors?

First and foremost, the papers revealed that the company was not in a financially sound position. It mainly lost more money than it made.

Last year, it made losses of US$1.9 billion, raking in US$1.8 billion in revenue. It also lost US$900 million in 2017 and more than US$400 million in 2016.

For the first half of this year, the company made losses of about US$900 million.

Due to its aggressive expansion, profitability was elusive — a point admitted by the firm in its filing.

“We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level for the foreseeable future,” it said.

Corporate governance expert Mak Yuen Teen, who is also an associate professor at the National University of Singapore’s Business School, said that WeWork was focused on growing revenues rather than making profits.

“It was burning through cash — potential investors did their math and realised that the initial valuation was not justified,” he added.

Commenting on the cash-burning strategy that several startups seem to have adopted of late, Alan Cheong, the research head of property consultancy Savills, said: “This amazonian model that people are banking on to capture market share even at negative net present value (NPV) for the foreseeable future — it’s mind-boggling. Maybe (these founders) drop out of school and didn’t learn about NPV.”

NPV is used in capital budgeting and investment planning to analyse the profitability of a project.

Another sticking point was corporate governance issues.

Neumann was found to have taken personal loans at cheap rates from the company to fund his own lavish lifestyle. He owned some of the buildings that WeWork leases from, and cashed out US$700 million from the company before the IPO.

All these meant that the company had to look at lower valuations — even as low as US$10 billion to US$12 billion, as reported by news agency Reuters.

With WeWork planning to issue shares based on three classes, and with Neumann having 20 votes for each share, that would mean he would have a high level of control over the company even after going public.

Associate Professor Mak said: “WeWork is the latest wakeup call for those who believe that multivote shares are the answer to innovation and entrepreneurship. We are seeing the problems of such shares at Facebook and at CBS/Viacom. Imagine entrenching someone like Adam Neumann — with multivote shares, there is no escape valve.”

What is the possible impact on WeWork in Singapore?

At this point, it is unclear whether the ongoing struggles WeWork is facing in the US would have any impact on its operations in Singapore.

WeWork’s new co-chairs are weighing possible manpower cuts, news agency Bloomberg reported, although WeWork Singapore did not want to say if any employees here would be affected when asked by TODAY.

However, even if WeWork exits in a worst-case scenario, analysts said that the impact on Singapore’s commercial real estate would not be too significant.

Shivaji Das, the Asia-Pacific managing director of consultancy firm Frost & Sullivan, said that this is because there is a demand for co-working spaces and there are other companies who can pick up the spills.

Cheong of Savills pointed out that there is a growing number of tech companies coming to Singapore, such as TikTok and Juul, and these companies can take up the space vacated by WeWork. — TODAY

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