This past weekend the Wall Street Journal published an opinion piece titled “The Company Implosion Pageant” (paywall), in which writer Andy Kessler examines which multibillion-dollar valued company is most likely to fail the hardest.
According to Kessler, “venture capitalists are funding questionable businesses they pray will scale.” Kessler notes that these potentially overvalued businesses all have certain common features: minimal sales, an unproven business model, and huge losses. For those in the flexible workspace industry, it’s quite likely the first name that will pop into your mind is WeWork.
Experts have for over three+ years argued that WeWork’s business model is not sustainable, and that the coworking giant is indeed overvalued.
One just needs to look at publicly traded company International Workplace Group (IWG), formerly Regus, to understand why WeWork is overvalued. IWG has been around since 1989 and while WeWork boasts a $20+ billion valuation, IWG has been unable to land a buyer willing to pay a meagre £2.8 billion ($3.68 billion) for it. Both companies do the same thing: they enter into long-term leases, they re-design and outfit the space, and then they re-let it to others for short-term periods. (Suggested reading examining why WeWork is worth more than Regus.)
According to the Wall Street Journal, this type of business model “works great in up cycles but is still unproven, especially in downturns.” Kessler poses the same question many industry experts have posed before: “what happens when startups disappear and WeWork gets stuck with a lot of expensive space?”
Again, we only need to look at IWG to understand what happens. After the dot com bubble burst, Regus had to file for bankruptcy in the United States in 2003. According to an article of the time, “The group was forced into the move after it failed to persuade its American landlords to slash rental agreements. Its US business is losing between £2m and £2.6m a month.”
WeWork has entered into some revenue-sharing leases in some of its locations, but not all–or nearly enough. Though this adds some protection, it doesn’t mean the company is even close to bullet-proof, especially considering the eight-year old company remains unprofitable today.
Moreover, WeWork has already gotten a taste of struggling times, as it has been having a hard time filling some of its locations, which has led the company to implement questionable marketing and poaching strategies.
Additionally, “WeWork is tapping the debt markets as well”. The company lost $723 million in the first half of this year and it is particularly exposed to failing in an economic downturn due to its leverage and debt; WeWork reportedly owes $18 billion in leases, of which approximately $5 billion are due in the next five years.
Only time will tell whether WeWork will survive an economic downturn or not. For the time being, it appears not many have much faith that the coworking company will come out unscathed. Whether or not this will impact WeWork’s valuation and the willingness of new and existing investors to add more capital and debt for future expansion also remains to be seen.