Case Study: The story of a Meteoric Rise and a Catastrophic Fall of WeWork

Read time: 4 minutes

Welcome to the 25th edition of The Growth Elements Newsletter. Every Monday, I write an essay on growth metrics & experiments and business case studies.

Today’s piece is going to 5100+ founders and leaders from businesses like Shopify, Google, Sage, Hubspot, Servcorp, Zoho, Apollo & more.

Happy Monday!

In this essay, we will talk about the roller-coaster journey of WeWork, and it provides valuable lessons for aspiring founders, entrepreneurs and growth leaders unravelling the fundamental mistakes that led to its downfall.

Let’s dive into the story of a meteoric rise and a catastrophic fall of WeWork.

Once valued at an astounding $50 billion in 2018, the company has seen its stock market valuation plummet by approximately 99% and filed for bankruptcy.

WeWork Business Model

At its core, WeWork's business model appeared deceptively simple:

• Lease office buildings.

• Furnish them with amenities.

• Sublease smaller units to startups needing a plug-and-play workspace.

On the surface, it bore a striking resemblance to a conventional real estate company, raising the question of how it achieved its astronomical valuation.

The answer lies in the power of storytelling, a skill that WeWork's founder, Adam Neumann, excelled at.

Marrying Crisis with Hopes

In the aftermath of the 2008 financial crisis, Neumann painted an enticing vision:

• Liberate individuals from the grip of corporate giants

• Transform them into entrepreneurs

• Empower them to build million-dollar businesses within WeWork's "physical social network."

The vision was audacious, projecting a total addressable market (TAM) worth nearly $3 trillion, suggesting that anyone occupying a desk was a potential WeWork member.

“Rent a Desk Service” (RADS)

Investors were captivated by this narrative, willingly overlooking the fact that WeWork essentially offered a 'rent-a-desk' service.

In a pivotal meeting in 2016, SoftBank's CEO, Masayoshi Son, encouraged Neumann to be even more audacious, giving birth to a vast 'We'universe.

This expansion encompassed:

• Design consultancy firm

• Residential apartments

• Gyms

• Schools

- all contributing to the staggering valuation of nearly $50 billion.

Losing a Dollar for Every Dollar

However, beneath the grand vision, deep financial cracks were emerging.

WeWork was losing a dollar for every dollar it earned, and financial records from 2017 and 2018 revealed the stark reality:

• 2017 Revenue: $886 million, Loss: $931 million

• 2018 Revenue: $1.8 billion, Loss: $1.7 billion

Mismatch of Lease and Rental Length

The core issue that led to WeWork's downfall was its flawed business model.

The company entered into long-term leases for properties but offered customers short-term rental contracts, which could be cancelled at a moment's notice.

The stark mismatch between an average lease length of 15 years and rental contracts of fewer than 15 months left WeWork extraordinarily vulnerable to economic shocks.

IPO Curtain Closed

In 2019, WeWork's decision to go public was met with disapproval from the market.

Investors were alarmed by the company's staggering losses and Neumann's questionable financial practices, including purchasing real estate and leasing it back to WeWork.

This raised severe concerns about corporate governance and transparency.

In response to the mounting backlash, WeWork was forced to postpone its IPO and eventually oust Neumann from his role as CEO. Nevertheless, the damage had been done.

By 2022, the company was drowning in $15 billion in lease payments and over $3 billion in loans, standing on the precipice of bankruptcy.

The WeWork saga imparts several pivotal lessons to future founders and entrepreneurs:

Business Model Fundamentals

• A sound business model is the bedrock of any successful venture.

• WeWork's model was intrinsically flawed, leading to its eventual collapse.

• Entrepreneurs must critically evaluate the feasibility and sustainability of their business models.

Transparency and Governance

• Maintaining high standards of corporate governance and financial transparency is non-negotiable.

• Unconventional or questionable practices can deter investors and stakeholders.

Growth vs Profitability

• Striking a balance between growth and profitability is crucial.

• WeWork's excessive expansion led to mounting losses.

• Entrepreneurs should focus on achieving a financially sustainable trajectory.

Market Realism

• While grand visions are admirable, entrepreneurs must remain grounded in market realities.

• Idealistic projections can lead to unsustainable growth and eventual downfall.

Adaptability and Resilience

• Economic shocks and unforeseen challenges are inevitable.

• Entrepreneurs should be prepared to adapt swiftly to changing circumstances and pivot when necessary.

The WeWork story is a stark reminder that the startup world is not immune to failures, regardless of grand valuations and compelling narratives.

Learning from its mistakes can empower future founders and entrepreneurs to build resilient, transparent, and sustainable businesses capable of withstanding the test of time.

That's it for today's article! I hope you found this essay insightful.

Wishing you a productive week ahead!

I always appreciate you reading.

Thanks,
Chintan Maisuria