Wework’s Waterloo: What’s Wrong With the Shared Economy?
In the past few weeks, WeWork has hit the headlines of most business journals. Since its public-offering paperwork on August 14th, WeWork has been the stage for a dramatic soap drama.
WeWork’s IPO valuation has plummeted from its initial $47 billion to $10 billion. CEO Adam Neumann stepped down from his role on September 24th. In October, the company’s biggest investor, SoftBank took control over WeWork and gave Neumann $1.7 billion to give up his voting rights. It only took them two months to become the world’s tragically failed IPO after being one of the most highly-valued companies. What happened to WeWork and what does its IPO tragedy mean?
WeWork was founded in New York in 2010 with a vision to create “coworking spaces” for entrepreneurs, startups and enterprises. It expanded at an incredible rate after its founding, expanding to 32 countries worldwide. Although they have successfully branded themselves as a tech startup, their business model mirrors that of a real estate company. WeWork leases and renovates office spaces, and then rent out individual working spaces to entrepreneurs. The most attractive part of the company’s business model is its flexibility; clients do not have to worry about long-term leases. However, this business model has long been under public scrutinization for its insurmountable financial risks.
WeWork pays the landlord a huge amount of money and invests the remaining overhead expenses into renovating the coworking space, so it largely depends on renting out individual spaces to clients at a higher price to cover its high cost. The rental cost has been the largest component of their total cost, and the current operation is far from covering its high cost. WeWork has been operating at a huge loss in the past few years: it lost $176.7 million last year in operating cash flows. Aswath Damodaran, a professor of finance at the Stern School of Business at New York University, claims that “If WeWork had been a mature company, you’d be less worried, but this is a company where 80% to 85% of its value is based on what you think they can do in the future.” He termed their business model as “extraordinarily risky.”
WeWork’s failure is an alarming caution on our utopian views of the shared economy. Aside from romanticizing its effects on our perspective of traditional business models, its innate shortcomings and huge risks are difficult to ignore. While the future of the shared economy is considered to be optimistic with an increasing trend of socially conscious mission statements in companies , the facts do not tell a positive story. Companies like Uber, Lyft, and Slack have turned out that they are not what venture capitalists dreamt about. Lyft’s stock prices are is 43% lower since its IPO in late March. Uber's stock prices collapsed 20% since May. Investors are now becoming increasingly alert to the profitability aspect, moving away from the idealistic visions of the shared economy.
It remains unclear which direction the shared economy bubble would lead us in, but the disillusionment of WeWork, the unicorn that painted a beautiful picture of coworking culture, brings us back to the harsh reality.
Edited by Aayush Gupta, Jenna Yun, and Naomi Santiago.
