“We dedicate this to the energy of We - greater than any one of us but inside each of us” - printed on the very first pages of the S-1 in 2019 … 🙄

What do we remember from the epic failure of WeWork (renamed the We Company) and it’s attempt to launch an IPO?

Adam Neumann, an eccentric CEO who was wrapped up in partying, surfing and jetting off to exotic locations, when he should’ve managing his company. Smoking weed on his private jet and having tequila parties at work. Having an office fitted out with a jacuzzi. A CEO who wanted to be the world’s first trillionaire and wanted to “Elevate the world’s consciousness”. Those were the glamour stories.

But more importantly, we remember

the poor corporate governance, risky business model, and of course terrible financial management;
the Company running out of cash and their poor dealmaking. We remember the company claiming valuations of $47 billion, all the way up to $104 billion.
the Company’s valuation tanking to $8 billion and withdrawing their request to IPO.
the spectacular dismissal of a man who elevated nothing but his own financial standing.

Having worked in the real estate industry myself, I followed the tales with intrigue. Hulu’s also coming out with a documentary and just the trailer tells a compelling story. (Such bad timing for the company!)

But, now with Adam Neumann out and a year gone by, has the company really made the turnaround it needs to go public again?

Well, they’re certainly hoping so. On 26 March 2021, WeWork announced plans to go public by the third quarter of 2021 via a SPAC merger with BowX Acquisition Corp. in an attempt to raise $1billion from the market at a valuation of about $9 billion.

Truth be told, it doesn’t feel a whole lot different this time around.

The Company may not have Adam Neumann but their financial problems have not gone away.

So what’s changed?

New Management
Focused strategy only on Workspaces
Cost reductions - 67% staff reduction, more strategic locations, lease negotiations

What hasn’t changed?

They still claim to be a tech company
The Numbers still don’t look right. After a 47% dip in occupancy in 2020, the Company managed to keep revenues at the same level of $3.2B. 🤔
Revenues for 2021 will also be $3.2B but with increased occupancy of 75%. They expect to double revenues by 2024. 🤨
The Company is still making losses - 2020 Adj. EBITDA loss was $1.7B; 2021 is expected at $909M but, expects to breakeven by 2022. 😖

WeWork paints a very optimistic turnaround picture. But, if anything the pandemic has made things worse, not just for WeWork but for the entire industry. Amid bankruptcy filings for even the largest companies, what makes WeWork think that they could prove themselves worthy of the market, again?🧐

I thought this would be a good time as any to break down the previous “failed” S-1 (2019) and compare it to what the Company is telling us this time around.

Read on for the full story. ⬇️

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Events that Led up to the proposed IPO in 2019

Going public was not in WeWork’s immediate plans. In fact, they were quite happy to remain a private company with the founder, Adam Neumann controlling majority voting rights. But, when their largest backer, SoftBank decided not to invest in their last round of funding, the Company was left with no choice.

SoftBank had invested or committed a total of $10.65B since 2017 and Adam Neumann was trying to get them to go in on another $10B to buy out all the other stakeholders, at a valuation of $47B, the highest value a unicorn had ever commanded.

But, the company was burning cash fast and they needed additional funding. Morgan Stanley was eager to lead an IPO for them quoting a valuation of $104B, but Adam still wanted private funding. They tried private placements, they tried bonds, and they even negotiated a loan of $10B with Goldman Sachs, all of which fell through.

Eventually, Adam turned to JPMorgan who raised $6B in loans for WeWork conditional upon the Company being able to raise at least $3B through an IPO. And with that, the S-1 was off to the presses.

2021 Presentation vs. The Original S-1

Let’s start out with a few basic facts as presented in 2021:

As of June 2019, the Company had 528 locations in 111 cities with 527k memberships , 604k workstations and estimated revenue of $3.4B for the year. So, while the number of locations and cities have increased, memberships and revenue has not probably due to the pandemic. Despite this, the Company claims that they have achieved cost savings of almost $1.7B and is set to breakeven by 2022. That sounds like quite the transformation!

Business Model

The Moat

The company has a good product but it’s by no means unique. The first coworking spaces started in the US in 2005 and well before that in 1989 in Europe with Regus being one of the pioneers.

So by the time Adam Neumann started WeWork in 2010, the coworking concept was not novel. They’ve recycled the shared workspace model and made it more chic. Yes, it’s appealing but not enough that a competitor with more cash can’t come in and take market share.

The Tech Startup

Adam Neumann tried to position WeWork as a tech company, probably to justify the valuations. Their app claimed to be a tool for networking and solving work-related problems. It wasn’t simply a portal to book workspaces. It was envisioned as a holistic solution for millennial entrepreneurs and freelancers. “The new app will connect members with questions about running their businesses with others who have relevant experience and make it easier for members who want to advertise their services to reach customers.”

They called their model - “Space-as-a Service” offering subscriptions to members to use workspaces in any of their locations all over the world. They offered several membership options and claimed that their technology “includes software and hardware solutions that deliver improved insights and an easier-to-use workplace experience for employees.”

In the 2021 presentation, not much has changed. WeWork still calls themselves a “Worldwide Property Technology Platform” and promotes their digital offering. In fact, they are merging with a Tech-focused SPAC.

The Real Deal

Despite their claim to be a tech company, what it really came down to was that WeWork was a real estate operator. Their basic business model was leasing buildings and renovating them to be re-leased by individuals or smaller companies.

WeWork improved the shared space concept to include well-designed spaces with glass and mid-century furniture to appeal to the millennial crowd. Seriously who wouldn’t want to work in a place like this?

There’s an inherent problem with this model though. While WeWork signs leases for about 15 years, they rent out spaces for 15 months on average. So, their largest cost is fixed and unless they can make sure that they replace those rentals after 15 months, the company will be in trouble. The company needs to drive occupancy and keep costs down to provide a cushion for any reduction in occupancy. I’ve seen this model work in the real estate industry. But this was a major point of contention for investors. Why?

Because their total future lease obligations over the next 15 years was $47.2 billion as of June 30, 2019. With Expected Revenues of roughly $3bln for 2019, this was a massive number to swallow even with their exponential revenue growth.
They couldn’t keep other costs down, bringing in designers, special materials and unique expensive furniture to give character to their spaces. Not to mention, they hired an army of people and ran events that cost them money. Unfortunately, the bills do add up and they were burning through their cash.

Client Base

To solve the rent term issue, WeWork seemed to suggest that they were focusing on shifting their client base from individuals and small business to Enterprise customers, who made up 43% of their client base at the time. Now, Enterprise customers are 50% of their client base. They claimed that these customers signed longer rent terms (avg. 15 months) and they provided better margins. However, the presentation still claims to give these clients absolute flexibility, which means they can be let out of their contracts quite easily.

But, overall this sounded very confusing in terms of their strategy. I thought, they set out to create a networking experience, a sense of community and extremely flexible terms, which are all focused towards the smaller customer. Yet here they are, saying they are actively trying to sign larger customers.

In 2019, they also claimed to provide ~66% cost savings per employee for Enterprise customers, as their major selling point. This number always struck me as too high. And now we know it is, because the 2021 presentation shows it to be far less.

Financials

This is where all the magic happened and apparently is still happening. I’ve compiled numbers from the S-1 and the presentation so we can look at the past and the forecasts in one go.

WeWork never focused on Occupancy earlier but now that they have a CEO with a real estate background, they’re quoting occupancy numbers. As expected 2020 saw drop to 46% in occupancy numbers but the Company is very optimistic in saying they will reach 75% this year and drive this to 95% by 2024. They’ve mentioned their breakeven EBITDA to be at 70% occupancy which is not at all bad for commercial properties.

There were major objections with how the Adjusted EBITDA was calculated in the S-1. The definition this time around seems to be more in line with how we normally calculated EBITDA. What I’ve done is restate previous years as Operational Losses + Depreciation & Amortization + Stock Based Expenses. The Adjusted EBITDA losses come out to be much higher.

The Company expects a minimal increase in Revenue by 2021 but a rather drastic jump from 2022 onwards. They expect to almost double their revenues in 3 years adding 1 million new members during this time. (It took them 9 years to reach 619,000 members)
In 2019, they had quoted committed revenues of $4B. Unfortunately, in 2021, the number has reduced to $1.5B with a sales pipeline of $4B. At least, the presentation is clear in saying that the pipeline is not committed and may not materialize and if it does, they don’t know the timeframe.
They also expect to breakeven by Q4, 2021 once they hit 70% occupancy, and generate positive EBITDA by 2022 onwards, although they haven’t shown us what Net Losses will look like. They also expect to reach almost 30% EBITDA margin which is higher that the average 20% for the industry.
Positive EBITDA is apparently being driven by a reduction in costs which was major point of contention previously.
- Lease Expenses - These are yearly fixed expenses for leasing the building. The total amount of leases obligations was $47B as of 2019, we don’t have an update on this number now. WeWork claims that they have negotiated lease terms yet, we don’t see real change until 2022.
- Community Managers - A major portion of the lease expenses ($300M+) was employee payroll. They had 2500 community managers. With ~600 locations, that’s 6 managers per location, which is so inefficient and this did not include cleaning crew, maintenance etc. These were managers who greeted clients and arranged events. When I worked in real estate, we had 2 employees per property, for the larger properties and a centralized management team. These are not hotels!
- Staff Costs - In 2019, WeWork employed 12,500 employees, which was a startling number to me as well. Now, they claim to have reduced the workforce by 67% which shows up as a reduction in functional expenses but also only in 2022.
- Pre-opening Expenses - I’m trying to understand what’s going on here. This number reduces from 20% of revenue in 2018 to 2% of revenue in 2024. Yet, the company is adding almost 500,000 new workstations.
- Other Ventures - WeWork started trimming their other ventures like the Flatiron School and Meetup.com in early 2020. This is good because these ventures were losing about $200M per year at an EBITDA level. But, I also remember, the company paid $600M+ for these acquisitions, booking almost $550M as goodwill. These were never efficient purchases and we’ll need to see what happens to the balance sheet.

Debt

We’re given the following debt overview. Without looking at the full set of financial statements, there’s not much to say here. What I can tell you for sure is that these terms will need to be renegotiated. With the current forecasts, the Company is unlikely to be able to pay these amounts as they come due even with the listing.

Management

There were several Governance issues concerning Adam Neumann at the time. The Company had leased four buildings from, had guaranteed a large personal loan and given majority voting rights. I know the new CEO has a background in real estate and worked in Brookfield. This is a big comfort, although I’m still very skeptical about the numbers.

Industry & TAM

According to the S-1, as of June 2019 their TAM was $0.9 trillion based on their existing market and $1.6 trillion including their target market. This sizing was based on the average cost per employee of $11,200 per year and after deducting their ~60% cost savings. Obviously this number no longer makes sense because we know the cost saving is closer to about 25%.

Their new market sizing slide doesn’t make much sense to me. They’ve given us the quantum of office space in the US at 3.5B ft. and that they occupy 25% of that. What the rest means, I couldn’t figure out. But what I can see in the footnotes is that this is pre-Covid data and market dynamics may have changed significantly.

They also claim that the pandemic has actually helped them and with the shift in mindset, more companies will move to flexible spaces. I see some merit in this argument and so does the rest of the industry. But, the view is that this move to flexible spaces may be short lived as employers try to sort out their employees and space needs.

2020 saw a number of shared workspace operators file for bankruptcy, not to mention commercial real estate operators. People worked from home and sadly, the job market has shrunk. Companies are looking to permanently do away with office space with fewer employees and adopt the work from home approach where possible. Wherever, the model requires payments on longer term leases and revenues on shorter term rentals, the companies have suffered.

The SPAC - BowX Acquisition Corp.

S-1 Highlights

Listed on NASDAQ in Aug 2020. Currently trades under the ticker symbol BOWX
Raised $420m through the listing
Focus on TMT (Technology, Media & Telecommunications
Investment Criteria includes among others -
- EV of between $1b to $3b
- Proprietary Technology Platform
- Recurring contracted, revenue
- Strong Competitive Positions

Sponsors & Bow Capital

The main Sponsor and CEO behind BowX and Bow Capital is Vivek Randive.

The CEO is also the founder of Bow Capital is an early-stage venture capital fund founded in 2016 in partnership with the University of California. According to Crunchbase, the fund has raised $275m, has 22 investments with 2 exits. They are a seven member team. Their advisers include Sanjay Mehrotra, invented solid state memory (SanDisk). Shaquille O’Neal also happens to be an advisor.

The New SPAC Deal

To list by Q3, 2021
Pro-forma EV = ~$9 billion
Total Funding $1.3 billion: $483 million cash from BowX; $800 million private placement investment with key investors including Insight Partners, funds managed by Starwood Capital Group, Fidelity Management & Research Company LLC, Centaurus Capital, and funds and accounts managed by BlackRock (Source: WeWork)

WeWork doesn’t exactly fit the SPAC criteria. It would seem that the Company is still trying to position themselves as a tech company. The valuation of $9b also exceeds what the SPAC’s criteria. I realize that the criteria is indicative but, it’ve never a good sign when companies ignore their own guidance. The zeal of bringing a failed company with a turnaround story may have gotten the better of them.

My Personal Experience

For the purpose of this article, I signed up on the website, which was simple enough. Unfortunately, I couldn’t see any pricing options. I was sent an email saying someone will be in contact soon. Most of the other co-working spaces I’ve explored, all have the option to look at pricing on their website or app. They’re very similar to booking on AirBNB. You don’t even need to register to explore options; only if you actually want to book a space. For a company that prides itself on being a “worldwide property technology platform”, it’s not a very seamless experience.

The Verdict

We have some time until the offering comes to market and we should expect more clarity in the months to come. But, WeWork’s projections don’t sound all that plausible to me. Given their legacy issues, I think it’s too soon for them to be coming back to the market and I doubt I will think about investing. There are simply too many stories behind these numbers!

Banking on the Market

Can WeWork do Better this Time Around?