Riblet#13: Suspend Disbelief?

Microsoft and Amazon did it: years of losses to establish a dominant market share, and then make big monopoly profits.  In between, investors held their belief.  Uber has lost billions over the last decade (including over $5bn in one quarter) in an attempt to do something similar, or perhaps even bigger.  And recently WeWork fell from grace after a decade of losses.

WeWork leases office space long-term, refurbishes it into fun, social places to do work, then sub-lets desks on short-term agreements to start-ups and other entrepreneurs.  It seeks to change the way people work by creating a physical social network with beer on tap and meditation rooms and games machines.  By 2018, it controlled more office space in London than anyone apart from the UK government, and had 739 locations in 37 countries.

The charismatic founder and CEO, Adam Neumann, convinced investors to plough in money, most of it coming from Japan’s SoftBank which pushed WeWork to expand ever faster.  But the cash was being burned faster than it was being invested, and losses mounted; nevertheless, the valuation of the company continued to soar with one valuation set at $104bn.

SoftBank’s owner got cold feet after Neumann made more and more demands on him, and he decided to hold back on further investment; so WeWork went for a stock exchange listing.  The scrutiny that that brought revealed that Neumann, amongst many other little foibles, leased buildings he owned to WeWork (one imagines the deal benefited one party more than the other), and he had also sold the trademark to the word “We” to his own company for $5.9m.  Those things led to the listing being pulled and SoftBank stepped in to save the by now cash-strapped company and to minimise its own considerable losses.  SoftBank kicked Neumann out with just a $1.6bn pay-off.

Going for growth requires belief, but understanding the business model and testing assumptions as you go has to be part of that.  WeWork (now the We Company) still has ambition, but SoftBank now maintains a close eye on the model and on the cash-burn.

Data Source: FT Weekend magazine.

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