The failure of WeWork should teach us a lesson about sustainable growth (but it probably won't)
On WeWork and Unicorns
Over the last few weeks, we’ve seen everything that is wrong with the Startup VC Growth complex rear its ugly head with WeWork, the scam failing co-working space provider.
With 854 locations across 123 cities around the world, WeWork is the poster child for the latest craze in office space solutions – co-working.
Full disclaimer – we co-work at Thinkspace in Auckland, and we love it.
There’s fancy coffee machines and couches. Breakout space and video games. Polished concrete and exposed brick (it sounds like a great apartment, huh!).
But behind all the fancy soft furnishings, co-working space providers are at their heart commercial real estate companies.
And commercial real estate is all about occupancy and risk.
Let’s take some time to compare IWG and WeWork:
· WeWork -45 million square feet, Pre IPO Valuation $47bn, Revenue c. $1.8bn a year, $900m first half 2019 loss
· IWG – 57 million square feet, Market Cap $3.7bn, Revenue $2.8bn a year, $171m pretax profit in 2018
As this great Forbes article points out, WeWork have concentrated their building leases in some of the world’s most expensive real-estate markets, including New York, where they’re the largest tenant in the city. We have also taken on significantly longer leases and discounted them differently, effectively enabling them to understate the risk that a fall in occupancy creates.
One of WeWork’s biggest problems (leaving their enigmatic scam artist CEO out of this) is that they don’t see themselves as a commercial real estate company – they see themselves as something bigger, something very in line with the vague thinking of Silicon Valley.
Their mission: create a world where people work to make a life, not just a living.
When we started WeWork in 2010, we wanted to build more than beautiful, shared office spaces. We wanted to build a community. A place you join as an individual, 'me', but where you become part of a greater 'we'. A place where we’re redefining success measured by personal fulfillment, not just the bottom line. Community is our catalyst.
This is really nice in theory, but it’s more challenging in practice. We’s value add over and above traditional office space like that offered by IWG is in its nebulous community – but there’s a limit to what We’s customers, business owners similar to me, are willing to pay for their employees to experience community.
Wine and cheese tastings are nice, but are they double-my-rent-nice? Hell no.
Everything about We is evidence of a company that’s forgotten how it makes money. One look at the website turns up an article titled 10 stunning staircases in WeWork locations around the world, carrying the strapline These high-design staircases aren’t just beautiful—they also promote workplace connections and camaraderie
Granted, they’re nice staircases. But they are so far from any of their customers’ thoughts about what they’re looking for in office space that they’re the ultimate evidence of a culture of total excess.
Many of Silicon Valley’s startups have had similar signs of excess in the way they ran their operations – but they were providing excess for staff, not for their customers.
If you’re going to provide excess for your customers, they have to be willing to pay for it.
If they’re not willing to pay for it, you have an unprofitable business that goes broke.
And that’s exactly what’s happened to WeWork.
The We Company is reportedly so low on cash that it can’t afford to pay severance payments to its employees – forcing it to keep them. NYU Professor Scott Galloway on his podcast Pivot believes that We are inevitably headed for bankruptcy.
When we dig into how we got here, we discover the problem with what growth has become in the age of the unicorn.
WeWork was never built to grow sustainably out of its own cashflow. As soon as they started to pull in investors and venture capital way back in the early part of this decade, the entire model became about the one thing that that money cared about: the exit.
To attract money that focuses on the exit, the exit has to be glorified. Made sexy. And made HUGE.
Why would you invest money in a company that promised you sustainable positive net cashflow, profitability, and a three times exit, when you could let someone else fund their negative net cashflow, losses and hope to achieve a twenty times exit?
If you can get your money out before reality strikes, you’ll always choose the latter.
And that option locks businesses into a dangerous cycle of risky decisions and oversteps – just to achieve the thing they promised investors – a mega exit.
Sure, they might believe they’re changing the world, or working to make a life, or whatever other bullshit they shove down your throat, but the pressure of the situation is there.
It’s why we as entrepreneurs need to move away from the culture of the unicorn, towards a model that is borne out of sustainable, consistent and profitable growth, where companies aim to achieve their goals with as little investment as possible – not as much as they can possibly find.
Adam Neumann has already made out like a bandit from his decade-long WeWork adventure. Even his $185m consulting payment is more than most people will make in 100 lifetimes.
The real impact of the collapse of WeWork won’t be felt by Adam Neumann, though. Nor will it be felt by Softbank, their biggest investor – or Goldman Sachs, the lead on their aborted IPO.
It’ll be felt by the small, niche businesses that supplied goods and services to WeWork, and by WeWork’s passionate employees. It’ll be felt by the landlords who get their leases ripped up in the inevitable bankruptcy. And it’ll be felt by the customers of WeWork – innovative, exciting businesses, now without a home.
Failed Unicorns like WeWork show us why we need to change our focus when it comes to growing businesses – away from growth at any cost, towards a world where growth is about maximizing the utility that our business delivers to society, and about delivering a financially sensible profit that enables sustainable operation.
Because that’s what will actually enable organisations like the next “We” to deliver their ambitious goals.
October 23, 2019