Working spaces that have glass doors, plants, cafes, fancy furniture, and other glorifying facilities, sounds expensive, right? Startups and Freelancers having been able to afford such places.. It is no more a dream! WeWork made it all possible with the idea of clubbing like-minded people to give rise to better innovations. So let's have a look at the details.
What is WeWork and how does it function?
WeWork is a U.S. based startup launched in 2010 aiming to build co-working spaces. It finds big, centrally located buildings in growing densely populated areas and takes them on lease for 5-15 years. They then convert these buildings into workspaces and sublease them monthly. The question arises, "Is WeWork just like a real estate broker?"
Well, in a way, yes, but it has certain advantages. It could set up the rent much lower than the market price as it is backed up by huge fundings.
But if WeWork is always on sale, how it will earn profits?
Here comes the role of the long-term leases that the company enters into.
So no matter how hiked the rents will be in the future, the company still has to pay the same lease price. Its ideology made it the 4th most valued startup in the world that has operations in 29 countries. The company even entered three new sectors of housing, gymnasiums and elementary schools.
Things were going on track for them until they decided to launch their IPO in August 2019, which got postponed to a future date.
Why did the IPO fail?
Several loopholes were discovered when the company's IPO prospectus was evaluated. Firstly, the company termed itself as a tech company, whereas it is a real estate giant. Bluffing in front of investors made their valuation fall drastically.
Secondly, the company financials of 2019 were so poor that the revenue generated matched their losses. Profits seemed unrealistic for them.
Thirdly, the company does such long-term leases that in case of an economic slowdown, it cannot reduce its costs. In case the demand decreases in the future, it will just increase the debts for them. The list is still not over. According to the Wall Street Journal, the company's CEO Adam Neumann sold some of his shares before the IPO, which showed his disbelief in the company. It was even found that there was no employment agreement done with him.
Imagine that the person responsible for taking most of the decisions has no contractual obligation towards the company. With such blunders, the IPO was certain to fail. The domino effect was bound to happen. The occupancy rate fell. The tag 'most-valued' turned to 'over-valued'. People lost faith and shifted to Regus, WeWork's main competitor. This was a major setback for the company and for Softbank, the chief investor.
Currently, the company is going through a lot of problems and there is a strong need to make changes before it goes bankrupt. The major decision taken till date is to reduce the voting powers of the CEO Adam Neumann. Yes, the company is highly over-valued, but still, there is a ray of hope as Softbank is backing them up. WeWork even plans to relaunch its IPO in the near future.