WeWork’s bankruptcy filing is a cautionary tale about the perils of overvaluation, questionable assumptions on profitability, and an unsustainable business model.
Founded in 2010, WeWork grew into a behemoth in less than a decade, from a single coworking space to a global giant with a $47 billion valuation.
But as the enterprise grew, it started to crack. WeWork’s business model relied heavily on lease arbitrage, which involved leasing properties and subleasing them to tenants at a higher price.
Arbitrage is an investment strategy that takes advantage of price differences in different markets. The problem with arbitrage is that price differences are seemingly everywhere, in all facets of life. It takes a serious level of talent to profit from arbitrage. Making steady profits from arbitrage is harder than it seems. When you add leverage into the mix, there’s less room for error.
In this case, WeWork placed bets on the difference between the monthly lease payments it made and the monthly rent it charged tenants.
This strategy worked when the economy was booming, but as soon as the economy began to slow down, the company was left with a risky multibillion-dollar portfolio. To make matters worse, the company was notoriously unprofitable.
In August 2019, for example, WeWork filed a periodic report with the Securities and Exchange Commission, revealing its financials. The company had lost more than $1.9 billion in 2018 and was set to lose even more in 2019. It turned out that the company’s dependency on long-term leases made it vulnerable to economic downturns.
The initial public offering was eventually canceled, and the company was forced to seek a bailout.
In September 2019, Adam Neumann, the company’s founder and CEO, was ousted. Mr. Neumann had come under fire for his bizarre management style and extravagant lifestyle.
He has been described as a master salesman—or a master manipulator—yet he has managed to create a billion-dollar net worth despite creating a crumbling company.
After he was ousted from the company, it was disclosed that Mr. Neumann had received incredible financial payouts, including a $5.9 million licensing payment for the rights of the name WeWork, a $245 million “golden parachute” payout, $200 million in cash for an exit package, a $185 million noncompete agreement payment, a $106 million settlement payment, and $578 million in stock sales.
If you’re wondering where his billion-dollar fortune came from, look no further than the payments made to him when he was in the midst of being ousted.
Also worth noting is that Mr. Neumann was known for employing the star power of his wife, Rebekah Neumann (née Paltrow), who’s a first cousin of actress Gwyneth Paltrow. Mrs. Neumann was known to fire people based on impulse, going as far as dismissing an airplane mechanic after initially meeting him because he had “bad energy.” This was documented in a 2019 story in Vanity Fair.
The chaos was further dramatized in a 2022 miniseries starring Jared Leto called “WeCrashed.”
Despite all of this, the company ended up going public. This was akin to putting a Band-Aid on a mortal wound.
The highs and lows were severe. WeWork’s stock price hit a high of $520 per share in 2021, before dropping to $0.84 a share on Nov. 3, 2023.
What was formerly the most valuable U.S. startup became a company worth about $50 million, with a looming restructuring that wipes out all equity holders.
For a company to go from $47 billion to a market cap of less than $50 million is a dramatic failure. WeWork looks like nothing more than a shell game.
Now, Mr. Neumann has a new company named Flow, but even that’s a mystery.
An article in Fast Company from earlier this year states, “Based on how Neumann described the business model, listeners may ask if Flow is actually real estate’s version of a multilevel-marketing scheme.”
Let’s hope he stays away from public market equities with his new venture.
