From WeWork to WeFail

The problem with WeWork’s business model was also related to the mismatch between its leases with landlords and its client base. — Bloomberg

WEWORK, perhaps the most recognised startup among unicorns with a top-of-the-range valuation of US$47bil just four years ago, has finally called it a day and thrown in the towel as the company filed for bankruptcy early last week.

Its biggest investor, Softbank, probably saw the worse outcome as all of its US$11.5bil in equity investment in the company will be wiped out while another US$2.2bil in debt papers are probably as worthless as toilet paper.

According to court papers, WeWork had a net liability of US$4bil as it only had some US$15bil in assets against liabilities totalling some US$19bil.

The company went from stardom to bankruptcy in just four years, and in essence, WeWork is now WeFail.

Nuemann becomes a new man

Adam Nuemann, the face and the man behind WeWork, founded the company in 2010 and quickly became the talk of the town with its innovative co-working space ideas.

Escalating its market reach with new lease agreements, the WeWork business model centred on leasing large spaces over a long-term period and thereafter sub-leasing the space by crafting out smaller workable spaces based on the client’s demand.

In other words, WeWork offers customised workstation spaces that are both flexible and adaptable to client’s needs.

WeWork offers multiple choices to clients and it ranges from providing just a simple workplace to on-demand/all-access service, a dedicated desk, private office, single floor, or even up to the whole lease of a particular building.

The ecosystem where WeWork operated showed the seriousness of its business model with high-brand value clients (including big names like Uber, Google, IBM and Airbnb), partnering with some of the biggest names in the industry, and working with well-known service providers like CBRE, JLL and Colliers.

WeWork, which failed to be listed in 2019, saw the departure of its founder in a lucrative buyout package, which saw him walking out as a new man with a total payout amounting to US$1.2bil, inclusive of proceeds from the sale of WeWork shares owned by him worth some US$578mil and a refinancing of US$432mil debt on a more favourable term.

Neumann is still very much into the property market, focusing on the residential real estate market via a new startup, Flow.

Double whammy

The problem with WeWork’s business model was also related to the mismatch between its leases with landlords and its client base.

WeWork’s philosophy was to lease as much as possible and as long as it could to get a better rate and to lease out to tenants for a short term at higher rates, thus making the margin.

It was all well and fine but when overextends oneself, the outcome can be disastrous, especially if the market dynamics have shifted permanently and are not in line with a company’s business model.

The market dynamics shifted post-pandemic as the United States and many developed markets experienced a new paradigm shift in commercial real estate demand.

Work-from-home culture became a permanent feature among employees, reducing market demand drastically. The rise in benchmark interest rates too did not help as it only made borrowing costs higher and margins thinner.

In essence, WeWork was whacked with a double-whammy in the form of a collapse of market demand as well as higher interest rates.

Loss-making

As at the end of the second quarter (2Q) of 2023, according to the company’s filings, systemwide, WeWork served 777 locations across 39 countries with some 906,000 workstation capacity.

It had some 653,000 physical memberships and some 75,000 all-access memberships, making it the biggest market player globally in the co-working industry.

Sounds great, but WeWork never made money, which is the bottom line of any business model.

WeWork reported losses after losses with the losses in the first half of this year alone at US$696mil, although much better than last year’s total of US$1.14bil, thanks largely to foreign exchange gains and better margins.

However, the company was bleeding to death with a shareholders’ deficit of US$3.72bil, dragged by accumulated losses of US$16.8bil as at the end of June 2023.

Nothing new

Loss-making startups are nothing new, even post-listing. One does not need to go far but look at some of the recent financials of companies like Grab and GoTo.

In Grab’s case, although the company reported adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) of US$29mil, the first quarterly adjusted profitable Ebitda ever, the company still reported a net loss of US$99mil.

For the cumulative nine months, the mobile technology company reported an adjusted Ebitda loss and net loss of US$57mil and US$496mil, respectively.

Since its inception, Grab has yet to report a net profit, and its cumulative losses sitting on its balance sheet now stand at US$16.8bil.

As for GoTo, the Indonesian eCommerce technology-based company reported a gross adjusted Ebitda of 942 billion rupiah in the latest 3Q period while net loss totalled 2.39 trillion rupiah.

For the nine months, GoTo reported a cumulative adjusted Ebitda loss of 3.75 trillion rupiah while the net loss for the same reporting period totalled 20.91 trillion rupiah.

Similar to Grab, GoTo too has been struggling to show profits, despite narrowing the losses in the last few quarters. GoTo’s accumulated losses in its books are at 128.2 trillion rupiah or approximately US$8.23bil.

The losses at these two companies and the tough business environment are reflected in the share price of the two companies, which is down almost 80% from their historical peak levels.

Despite the steep decline, the two companies are still trading at expensive price-to-sales (P/S) ratio and the price-to-book (P/B) ratio.

GoTo and Grab are presently trading at trailing 12-month P/S and current P/B ratios of 6.6 times and 6 times, and 0.8 times and 2.1 times, respectively.

Once listed, profits matter

The ultimate goal of the founders of startup businesses is to not only achieve unicorn status, which is a company valued at more than US$1bil, but to get it into the public market.

Once it achieves the objective of a public company, investors can be forgiving if the newly listed company is still loss-making but that trend must be reversed in the shortest possible time, post-listing.

As seen in companies like WeWork, GoTo and Grab, the public market is a different ball game and if the business model is not able to see these companies’ turnaround, the market is not forgiving.

With more than 1,200 unicorns globally, according to statistics provided by CBInsights, some big names are waiting to be public companies including Shein, J&T Express and our very own, Carsome.

These companies, while currently valued highly based on the latest funding round, may be in for a surprise post-listing stock price performance if they fail to deliver.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.