WeWork Bankruptcy. Talking About Its Failure and the Road Ahead!
If Coca-Cola is for soft drinks, then WeWork is for co-working spaces. Sounds strange? We will clarify. WeWork is a popular brand that pioneered the idea of co-working spaces in the West back in 2010. Rather than just being a brand name, people sometimes use it to refer to any co-working space in the west. However, something strange happened last week. The company filed for bankruptcy protection in the US. For the sake of smoother reading, we will be referring to it as a WeWork bankruptcy for the rest of the article.
WeWork bankruptcy: The Culprit and The Future
This article will talk in detail about what and who caused the WeWork bankruptcy, its immediate impacts, and the future of co-working spaces across the world.
The Rise of WeWork
2008
- 2008 is obviously the toughest year for businesses in the West because of the global economic recession. Company revenues plummeted, many lost their jobs, and corporations quit their rented offices and were in search of something cheaper.
- To save money, the founder of WeWork, Neumann, rented out half of his office space. Here arises the genius idea of coworking spaces. Additionally, he persuaded the landlord to let them divide some floors of an empty building to rent it out. The business was named Greendesk. Young freelancers who were desperate for a space flocked in, and business started rolling. The idea was modeled on kibbutz-like communal living to create more than a coffee bar but less than an office space.
2010
- Expanded the business to more and more buildings by taking long leases and renting space to smaller businesses on flexible arrangements. Overall, real estate values were less due to weak demand and general reluctance to invest.
- In addition, the company gets big with a real estate developer who invested $15 million for a 33% stake. The name was changed to WeWork, with its mission to “elevate the world’s consciousness.” It was a picture-perfect opportunity that was leveraged by its founders, Adam Neumann, his wife Rebekah Neumann, and their friend Miguel McKelvey.
2017
- The world’s biggest tech investor, Softbank, invested $4.4 billion, helping it grow to be the most valuable U.S. startup worth $47 billion.
2020
- The COVID-19 outbreak and the associated lockdowns forced employees to work from home, and employers found it costly to continue paying for office space in these difficult times. So most left the space, and the WeWork revenue continued to fall because of membership losses. The landscape for shared working has changed dramatically during the period.
The Fall aka WeWork Bankruptcy
“It was not the pandemic that broke WeWork, it was their business model,” says John Arenas, CEO of Serendipity Lab. Lets make it clear.
Business model flaw
- The WeWork model works on a series of long-term real estate leases, which exposes them to more risk. The risk intensified when office spaces were empty during the pandemic and workers started to work from home. With cancelled corporate agreements and memberships, it cut off the revenue source for us, and they couldn’t pay rent that was taken on lease. At its peak, the company was holding nearly £19 billion to support 777 locations in 39 countries.
- As of the end of June 2023, WeWork’s long-term lease obligations were $13.3 billion.
Policy Failure
- The company operated on an aggressive note. They opened co-working spaces in new locations at a fast rate without considering the future prospects or the cost-benefit ratio. Neumann’s pursuit of swift growth at the expense of profits and his confession about his eccentric lifestyle led to problematic leases and many locations being unprofitable. The highest among them was from the USA itself.
Location flaw
- The conglomerate is concentrated in a few cities alone. But employees, especially in the white collar sector, do not prefer to work in big cities considering the high cost of rent and the fact that reaching there on time with the city traffic is a tedious task. This alarmed the employers, and they started to look for co-working opportunities in the suburbs and opted for competitors who provided the co-working experience at a minimal cost.
Interest Rate Hike
- Everything was perfect when WeWork started. The interest rates were low, and banks were giving away loans at the earliest moment possible to revive the economy from the recession. But this trend changed after 2018, when global interest rates increased and WeWork could not service the loans taken at cheaper rates earlier.
Failed IPO
- WeWork went public in 2019 even after the company was facing hefty losses. The share prices fell after investors questioned why a company that sublet office space was being valued like a tech company. WeWork’s value fell by $40 billion within a few months, and Neumann resigned as CEO afterwards. By 2021, WeWork’s value had fallen to as low as $10 billion.
Gross Mismanagement
- After resigning as the top official, Neumann walked away with over a billion dollars, and its share price slumped, leaving the business valued at less than $50 million. He has investments in other companies and has secured $350 million in backing from venture capital firm Andreessen Horowitz to launch a digital wallet that can store cryptocurrency along with US dollars. So literally, the founder itself abandoned the company after its failed IPO attempt in 2019.
To know more, you can watch the television series “We Crashed,” starring Jared Leto and Anne Hathaway as the lead characters.
The Road Ahead
WeWork was considered a traditional office disruptor with a model unhindered by property ownership. WeWork can be revived under the US bankruptcy code chapter 11. They could get rid of onerous leases under the U.S. bankruptcy code,” said law firm Cadwalader, Wickersham & Taft LLP. As per the reports, 92% of the lenders agreed to convert debt into equity under a restructuring agreement. This will reduce the debt amount by $3 billion. If this is real, it will be a noble idea to save the corporation from crashing.
It is important to note that only “WeWork USA” applied for bankruptcy protection, not their spaces in Europe and Asia. It was only last week that WeWork opened its new offices in Bengaluru and Hyderabad. Despite WeWork’s troubles, the future of the coworking industry is bright. As WeWork fades, the need for coworking spaces will be filled by other players like Regus, who are ready to seize the opportunity at the earliest time possible.
