WeWork Warns of Possible Bankruptcy
cnbc.com
cnbc.com
> WeWork founder Adam Neumann received $245m in company stock [....] In addition to the $245m grant, Neumann received $200m in cash, was able to refinance $432m in debt on favorable terms, and allowed a finance company controlled by the former chief executive to sell $578m in WeWork stock. [1]
That guy got incredibly rich creating a company that was clearly not viable and seems likely to bankrupt. Corporate government seems to be non-existent here.
Who are the people that are left holding the bag? Hopefully it is mostly just private money like the Saudis + SoftBank (if they screw up, they suffer the consequences, that is great) and not public pension funds. Otherwise, the public fund managers should go after this complete lack of governance and oversight.
[1] https://www.theguardian.com/business/2021/may/27/wework-foun...
Correctly or, more likely, not - it seems the payoff was made in early 2021 at a time when valuations were soaring and there was a renewed push for an IPO. Neumann could have blocked that.
If I'm parsing a quick read of the data correctly, they backdoored an IPO in October 2021 at an $8bn valuation - and shares jumped 13% (so + $1Bn). A snapshot at that time could be used to argue they paid Neumann $x00 million to realise a multi-Billion dollar valuation and $1Bn+ growth in market cap.
Could they have forecast the rapid decline thereafter? Maybe some of those investors didn't care, as long as they got some return? If Neumann had dragged the battle out for another year, into 2022 when the markets went South, it probably would have cost WeWork a lot more on paper than whatever they paid him.
https://www.businessinsider.com/wework-ipo-fiasco-adam-neuma...
The SPAC merger (not IPO) in October 2021 at $9B but then it has continued to slide now down to $250M. That IPO does seem to be trying to get some value out of this turkey by passing it off to public investors.
There was never a viable business here, just hype. Going through its finances that are public, it has never made any money. Its net losses per year are roughly its income in most years. Its valuations were completely speculative.
Why in 2021 did they give him that payout? Likely because they thought it offered the best ROI moving forward (and for some shareholders, especially anyone who sold at the post-listing peak, it did).
It definitely wasn't recognition for past success.
But it's certainly dubious enough to warrant a lawsuit to see if there were false claims made.
This makes no sense to me.
Why would you pay hundreds of millions of dollars to someone for a paper valuation and market cap? It was all meaningless.
Imagine you could buy a house for $200,000, live in it for a year, and then sell it for $1M. Would you take that deal, even if you didn’t like the seller?
"We invested in a company structured so that the CEO could hold us to ransom, and agreed the bad terms because we thought the CEO would have breached his fiduciary duty to other shareholders and blocked advantageous exits if we didn't pay his ransom first" doesn't sound any better...
I actually kind of respect Neumann. Not in a moral/ethical way, of course, but in a defend-yourself-at-all-times way.
He never would have gotten that payout if he hadn't legally fortified his position like he did, and then successfully maintained it through SoftBank's initial due diligence.
"Heads, I win. Tails, I win." type stuff.
The public fund managers would be the ones guilty of not doing their due diligence.
Softbank's "investment strategy" would've ended the company decades ago if it didn't buy a quarter of Alibaba for $20m, a share that would end up being worth over $100b a few years ago.
https://www.wsj.com/articles/softbanks-boss-bet-22-billion-o...
Implications: They then pushed companies to expand way faster then was appropriate. This meant that companies made decisions that was not justified by the profitability, just because they needed to spend the money.
An example would be when WeWork started offices in most expensive areas of manhattan and served them to customers at effective discount, hoping that the market would shift. Originally, WeWork took office space in distressed areas and made them viable for companies to use at a markup--creating value and being profitable overall. Under the pressure, they made stupid unprofitable decisions. Under this environment, even solid companies are forced to spray and pray money.
Generally speaking, money brings greater velocity but founders and investors should understand if the market will change at the same rate. For WeWork, commercial office space has leases with lengths of 5-10 years. Bottomline, there is not enough "liquidity" to absorb that quick an expansion.
WeWork is an extreme case, but this kind of thing happens with tech companies all the time.
Why do you think people in Silicon Valley equate an "exit" with success? Because at that point the insiders are paid out. What else matters?
Look at companies like Uber, Coinbase or Snap. Even Tesla. Insiders have accumulated billions in compensation that dwarves the value generated by the companies themselves (as measured by earnings).
Thank you for coming to my Ted Talk
I don't see where the logic of your comment comes from either way though - capitalists are typically in favour of a free market, no? And typically the "purpose" of a free market is accruing wealth as part of a private enterprise?
E.g.: Democracy, oligarchy, dictatorships are forms of government.
Capitalism, socialism, etc... are economic systems.
I point this out because people in my country sometimes forget that it's a system of elected officials that govern us, not capitalism.
That's why we see so many mergers and intensive lobbying for government regulation in things like healthcare, telecoms, and air travel, it's way easier to make money if you can restrict competition in your market and it's something essential to consumers
No, that's not what defines capitalism at all. That's a degenerate form more usually called "predatory capitalism".
In what was is predatory capitalism not the rule of the day?
He deserved every penny of it as far as I can see.
What’s the alternative? That his stock and voting rights went to SoftBank for free?
Why do people think selling dollars for 75 cents is some incredible achievement to be lauded?
Brands built upon selling product for less than it is worth are easy to build up. That isn't a real business though, it is just VC-funded make believe.
> What’s the alternative? That his stock and voting rights
Wouldn't it have been better back when WeWork's IPO failed to materialize in 2019 for SoftBank to just stop investing in WeWork it dropped from a planned $100B to $5B in a span of a year or so? And then SoftBank continued to invest to gain control and keep it afloat. Definitely a situation where someone is throwing good money after bad. Should have just left it for dead then.
That is the alternative. And it would have been best for the investors for sure.
In the end SoftBank just offloaded this turkey to the public via a SPAC merger. Did SoftBank end up making any money off this at all? I suspect there was no liquidity for the shares in this SPAC thus I bet they recouped almost nothing from this whole debacle.
It's sometimes surprising how shocking simply knowing people is.
Having rented multiple dedicated offices from WeWork I can attest that the corridors are become more and more like a post-apocalyptic landscape as the tenants — no longer taking advantage of introductory rents — move out one after the other. Go to the hot-desking spaces floors and you’ll find it bustling and sometimes not even possible to get a seat somewhere.
Why they haven’t aggressively cut underperforming locations and consolidated more hot-desking space into the better buildings is beyond me. Especially in the current work environment where arrangements with companies are flexible and the line between home and work becomes ever blurred. It seems like the perfect base to start on to build a new offering for companies that can provide employees with hot-desks on a flexible basis.
However, I wager that they have had long enough to plan around this one - _surely_ there are a non-negligible amount of leases they can trade or sell on / do something with as most WeWork locations are in highly desirable spots.
WeWork’s core model has always been borrowing long and lending short; they are inherently vulnerable to a sharp spike down in commercial rents.
Apart from financially hedging that, or penning fancy outs when they signed their leases, it’s tough to see how even prescience a few years ago could have saved them. And that’s amidst Silicon Valley’s attitude in 2021-22 that the Fed couldn’t—not wouldn’t, couldn’t—raise rates or else America would go bankrupt or some nonsense.
Without having your experience of breaking a commercial lease, I would imagine one avenue to explore would be trying to offload some of these leases to emerging companies doing what I refer to above.
Better to keep them and tell your shareholders that this is a temporary blip, and profits will be coming any day now...
a) have long term leases
b) paid a reasonable amount for them
c) those leases can be traded
d) those leases are actually worth enough to be useful.
That is, a dedicated employee for receiving, kitchen stocking, security management, and even utility management (how many novice office managers try cable Internet before buying fiber)
Only if you use $1000 worth of office manager every month.
When it came time to renew they tried to more than double the rent. We then downsized to a space less than a fourth the original space - just a couple desks and a small meeting room. That worked out great - most employees are now firmly remote anyway, but we have a good space, and anyone can use our block of credits, so if we need to have a bunch of folks onsight for an in-person meeting we just book a large meeting room and it works great.
I think WeWork was horribly mismanaged by Neumann, but I still think they'd be in giant doodoo even if they had great management. The pandemic really fundamentally changed work patterns forever.
Weirdly I'm writing from a WeWork floor in central London that has about 3 people in a room sized for about 30. I've never seen it even half full, though I don't drop by very often.
Even the common areas have enough space to go sit in and have a meeting on demand.
The conference rooms are pretty busy however.
This is especially apparent on Tue/Wed/Thu, when previously cafes were recently less busy, due to these days commonly being in-office days for hybrid workers.
To be fair, WeWork is just another roll of the dice company from the Uber era of free money. Let's pump it up and become too-big-to-fail! It appears WeWork wasn't big enough..
And they can blame COVID all they want, but the business model was already showing sights of failure before 2020. Yes, COVID accelerated this but it was not the cause.
1. Free Money was the tail end of boomers investments pools 2. There will be a 12-year gap until the next investments pools increase from the new workers entering the working market. 3. Next investments pool increase from the new worker cohorts group will be smaller than the boomers.
All this indicates that the strategy of throw money at getting monopoly of market is sun setting and VCs will now have to have the slow growth strategy in their toolbox.
That also means potential founders now need to have that in their toolbox, things to look for:
1. Founders getting creative and partnering up with older experienced people in the domain they are creating their product in.
Why 12 years?
This is voodoo statistics and just plain bad math, a bit like what I like to call "astrology technical analysis". Actual populations don't fit as nice into specific generations that demographers like to put them in. People enter and leave the workforce all the time.
The financial numbers are pretty sad too.
- Market cap below $500 million.
- Lost $700 million in 6 months this year
- Lost $2.3 billion in 2022
- Roughly 3 billion in debt
- Total liquidity of only $680 million (only 1/3 is cash).
https://techcrunch.com/2022/08/16/how-a16zs-investment-into-...
https://www.bloomberg.com/opinion/articles/2019-08-07/moviep...
1. https://fortune.com/2023/07/11/adam-neumann-new-company-flow...
They know that one day Adam Neumann is gonna sit on the other side of the table, and whoever is clearing the financing right now will take his turn in proposing his AI-crypto-{NEW TREND HERE} venture and get the money.
- Adam Neumann's exit package $445 million
they were gullible as hell and were educated people that couldn't understand a single word of Wall Street Journal and the investment banking community's dunking and pile-ons about WeWork
they couldn't understand the tech community's dunking and pile-ons about WeWork
everyone was saying "why are investors buying shares of this company at prices as if its a tech company"
employees were like "my first tech company omg guys I love shares and family"
just collect a paycheck, its fine, but the hopium was flat out dumb. its one thing to be at a startup that never tells you its valuation or gives you a clear answer about the strike price of your options in a way for you to model an outcome, its another thing for the financials to be presented clear as day and put blinders on.
Even without the push from some to WFH WeWork was a terrible product in the 3 WeWorks I've had to work in.
Is it actually surprising? If you too many assets that you bought with variable interest rate debt, then going bankrupt in a higher-interest-rate environment is exactly what I would expect.
I might be wrong though?
I remember thinking it was like a bank (exposed to time risk) but with property...
This is not so easy as it sounds at scale, landlords aren't stupid. AFAICT, the main model is that WeWork simply charged more per desk/office/unit of surface area than they paid in rent to the building owner. This can intuitively work because they rent office space in bulk but rent out individual desks, and prices for individual "items" are almost always higher than buying in bulk. Obviously that model only makes a profit if you can maintain high occupancy rates though, and with COVID and rising interest rates the demand for expensive pay-as-you-go office space fell through the floor.
Through that lens WeWork is indeed like a bank: they rent long-term and rent out short-term. Companies like that are very vulnerable to a "run" where all the short term renters suddenly leave but the long term liabilities don't.
Apparently not greedy nor MBA enough!
I love how HN blames MBAs for everything.
This was greedy "tech people", nothing more nothing less. Maybe if a few of the characters in this saga had MBAs they would have been able to better judge the value of the business, as opposed to gut and vibes. After all, it was the MBAs who pulled the IPO, while the tech crew continued to push this garbage on the public.
> This was greedy "tech people", nothing more nothing less.
It's hard to talk about WeWork without talking about Adam Neumann. And looking him up, it seems that he does have a degree in business -- albeit only in 2017 -- rather than a degree in something like computer science or engineering. And prior to WeWork, he apparently founded a children's clothing company: not exactly a "tech people" industry.
So I'm not getting tech people vibes from him.
[1] https://techcrunch.com/2017/06/05/weworks-adam-neumann-is-gr... [2] https://en.wikipedia.org/wiki/Adam_Neumann
Frankly I'm a little saddened so few who consider themselves "in the know" about these things didn't at least know of the doc...
To be fair I know I do the same no matter how much I try not to!
So often someone will spout off on a topic as though they know a great deal but when I start actually trying to have discourse on it I discover they actually know very little.
Dunning-Krueger type thi g I'm sure, but it's just so common as to be mentionable.
I'm in Hamburg, Germany for reference.
Now my business is worth €1.7 million. €3.3 million disappeared and I owe that businessman + interest.
If I sell lemonade for €3 a cup, but I'm only getting 50 customers a day with my expanded operations it will take me 60 YEARS just to pay down the principle.
Even if my product is expensive. Even if it seems like, for a lemonade stand, I'm doing well. Debt, the value of my assets, and mismanagement or corruption can vastly outweigh these factors.
The value of assets (which I doubt WeWork has a lot to begin with, I would assume they rent as well) and the amount of debt doesn't factor in there.
The value of commercial real estate is plummeting. I don't know how/if this is reflected in EBITDA.
It might be different in other locations but at least the two locations I've visited in Hong Kong were really not great.
1) Dump enormous amounts of zero-interest capital into {{ sector }}
2) Entrust leadership to charismatic politicians rather than domain experts (Adam Neumann)
3) Craft a PR narrative emphasizing innovation and diminishing critics (Softbank "Vision Fund", "swinging for the fences", "transformational" )
4) Construct Potemkin villages to show the world that all is well (going public)
5) ...followed by eventual rapid decline and collapse
WeWork is the most egregious example, but the same fate awaits the likes of UberEats and Lime and what have you.
It doesn't matter if its "public" or "private" it's the concentration that causes the negative effects.
Made more annoying by how difficult it is to explain that simple concept to the pseudo libertarian crowd that tends to congregate here.
They successfully got away with it, despite knowing that the business has hundreds of millions of dollars of losses pre-IPO, which was over $900M+ [0]; the biggest of all red flags as I said 4 years ago. [1]
This company could only exist in a cheap money era with decades long quantitate easing. Now just look at the ship sinking faster as the interest rates are now much higher with no cheap money this time.
WeWork is the gold standard of unprofitable companies who are good at losing money whilst pretending to be a 'tech company' or 'tech startup' and was just used as a vehicle for an IPO at an extremely inflated valuation before the bubble burst.
[0] https://www.cnbc.com/2019/08/14/wework-releases-s-1-filing-f...
Given the outright fraud prevalent in today’s tech landscape, it’s difficult to call WeWork a scam. Stupid, yes. But fraud; for that we lack evidence.
Scams are attempts to defraud. No fraud, no scam. If it feels scammy, that means (or should mean) you sense fraud.
I know this seems pedantic. But drawing clearly that line--between fraud and blind optimism--seems like a good takeaway from this past cycle.
Due diligence, focus on good governance etc are more directly influential in weeding out dodgy propositions and these behavioral aspects need not be closely correlated with any risk-free momey rate.
I expect that they will renegotiate the lease on this building to more favourable terms. It's either that or the building goes empty.
Just look at their financials: $3.7b in the hole and continual losses pulling them ever further into the red. Even operating cashflow is negative. [0]
[0] valustox.com/WE
I'll never admire Neumann because he squandered over $18bn(!), but there's a bit of poetic justice in how he took SoftBank for a ride..
The problem for WeWork is that they chose to grow incredibly fast, positioned themselves a a very high-end premium type of service, and funded it all with lots of debt and VC (mostly SoftBank) investments, despite nearly every financial professional warning them that they were over-exposed and any small disruption to their earnings would cause huge troubles for the company.
Then COVID happened, interest rates started rising and the demand for expensive rented offices dried up. Now they have a ton of bills and not enough paying customers to cover them all.
I think that many fast-growing start-ups have decided that it's cheaper and safer to work from home, so maybe WeWork needs to start working and look for other sources of revenue. or do nothing and implode.
The problem is their business model was to sign long-term leases with buildings and short-term leases with their customers. So they are paying 2018-2020 rates on office space, but leasing out at spot rates of 2023 office space.
In the past 6 months, WeWork split their buildings into 2 tiers. The All-Access pass at one tier is $149 and the other is $299. $299 also gets you access to both tiers of buildings.
I only go to the locations here in Portland and went from paying $299 a month to $149. They didn’t advertise this change to me, I had to find out from a friend who just signed up. I emailed the salesperson and asked why I wouldn’t make the change given my situation. He just replied defeatedly, “I’ll start the paperwork.”
The multiples were ridiculous for what basically is a internet connected REIT.
More discussion over here yesterday: https://news.ycombinator.com/item?id=37055563
You mean SPACs that actually acquired a company? SPACs where the initial SPAC investors (pre-acquisition) made money? Those that have a solid company behind them, regardless of if investors made/lost money on the price movement since it announced? People who bought SPAC shares post-acquisition where the price went up?
(For pre/post acquisition investors, I assume you mean retail investors).