By: Aaron Puthan

WeWork slashes its IPO as skepticism rises over its risky business model

You probably know WeWork, which recently changed its name to The We Company, as an office space with an idiosyncratic aesthetic. The glass walls, plants, cafes, mid-century-style furniture furnish its spaces. WeWork’s basic business model is to lease large spaces, transform  them, and then rent them out to individuals and companies at a higher price. As of 2018, the company operated more than 35 million square feet of space globally, and it currently occupies 528 locations in 29 countries around the world. To cover the costs of the renovations and leases, WeWork charges individuals and companies through four different member options. For one of the cheaper plans, a member can bring their laptop and sit in a common area if space is available, and for the most expensive plane companies can rent out full offices, suites or entire  floors. WeWork also offers a service called Powered by We, full custom big-outs for larger companies.

Although at first glance, this seems like a sustainable business model, the question arises —why are analysts and investors skeptical? One possible reason is growing concerns about the lease obligations. When WeWork signs a lease on a building in the U.S., they commit to an average of 15 years, but WeWork’s members only commit to an average of 15 months. WeWork’s obligations top $47.2 billion, but its customers have only signed leases on $3.4 billion worth of space. Recently, WeWork’s IPO was postponed after the company announced that it would withdraw its request to go public. Swirling questions over corporate governance, valuation and its business model catalyzed this delay. A lot of numbers are churning around, but to really understand WeWork’s business model let’s look at $47 Billion, which is how much the company is on the hook for in lease obligations as of June 2019. This significant amount reveals a lot about how the company works, and why investors have become wary of the risks.

Although the company has started signing more long-term clients, such as Yelp, Lyft, Goldman Sachs, and Pinterest,with 528 locations, there is a lot of time and space to fill. It’s unclear how much space WeWork needs to break even, but the company’s occupancy rate fell from 84% to about 80% in the final quarter of 2018. The company claimed that the drop was caused by expansion. New offices traditionally take up to 18 months to fill, but it’s unclear what would happen in an economic downturn, when fewer start-ups and freelancers look for a  workspace. It’s also not lucid as to what would happen if existing clients started to default. One place investors are looking for precedent is International Workplace Group, formerly known as Regus, a Swiss company with a similar business model to WeWork. During the economic downturn in the early 2000s, IWG’s U.S. unit filed for bankruptcy, as its revenue fell but long-term leases remained in place. WeWork has said its flexible business model would help keep it safe in a downturn. The company’s rapid expansion has helped it stay out in front  of competitors, but some investors are concerned that this is not a strong enough reason for the company to stay afloat. Ultimately, WeWork’s business model is easy to replicate. The company has filed for some industrial design and furniture patent protections, but in theory, anyone with enough cash can lease out industrial office space and flip it — which is exactly what has occurred in the recent past. A New York-based rival, Knotel, hit an estimated $1 billion valuation following a recent round of funding and in 2017, Blackstone acquired a majority share in The Office Group, a flexible workplace provider in the U.K. If the WeCompany decides to move forward with its IPO down the line, investors will have to decide if WeWork’s design and size is enough to keep it afloat in times of economic uncertainty.

Sources:

Bogost, I. (2019, September 26). The Wildly Appealing, Totally Doomed Future of Work Retrieved from https://www.theatlantic.com/technology/archive/2019/09/why-wework-was-destined-fail/598891

Dowler, A. (2017, June 17). Blackstone Invests in TOG. Retrieved from https://www.blackstone.com/media/press-releases/article/blackstone-invests-in-tog.

Mesure, S. (2013, December 8). Regus becomes first UK firm to file for Chapter 11. Retrieved from https://www.independent.co.uk/news/business/news/regus-becomes-first-uk-firm-to-file-for-chapter-11-124472.html

Sherman, A., & Levy, A. (2019, October 16). SoftBank is in talks with JP Morgan on WeWork bailout as cash is expected to dry up by mid-November. Retrieved from https://www.cnbc.com/2019/10/15/softbank-is-in-talks-with-jp-morgan-on-wework-bailout-package.html

Stamm, S., & Brown, E. (2019, September 11). Why WeWork Is Struggling to Sell Its Story to Investors. Retrieved from https://www.wsj.com/articles/why-wework-is-struggling-to-sell-its-story-to-new-investors-11568206801.