Lessons from the We Work fiasco

The recent collapse of WeWork the well-entrenched US-based Unicorn has again brought to the fore the lacuna in the management of growth by startups. The low success rate of new-age startups can be attributed to unbridled ambition for speedy growth – a tendency for quick gratification and a lack of appropriate checks and balances in managing growth. The transformation of business ideas of startups is driven by technology and connects the service providers and service seekers in a seamless distribution network. It can bring economies of scale for startups and immense convenience for users. Many times, a lack of systematic growth strategies exposes the unit to risks that can potentially perish the unit. The story of the bankruptcy of WeWork can provide immense learning points on enterprise risk management (ERM) for budding entrepreneurs.

“We Work” was founded in 2010 during the venture capital boom by Mr. Adam Neumann way back in 2010 with a vision to create an environment where people and companies come together and do their work. With technology connectivity and the gig working community growing, co-working has become a new way of life. The Pandemic paved the way for a work-from-home culture that brought a new realization that permanent offices are not necessary for organizations to thrive. 

The limitation of hiring permanent offices has given way to sharing office spaces at economical prices widening the scope to reaching out to larger geographies and expanding businesses. Hiring an office in high streets in megapolises needs huge permanent rental commitments. Instead of hiring office spaces with firm rental commitments, small office spaces/workstations could be hired from entities like We Work at flexible rental rates which can be easily discontinued if enough viability is not established. There need not necessarily be a long-term commitment for users. The flexibility to alter the shared space is also available in a coworking environment. 

The business model of We Work is to obtain leased office space in mega cities/towns and rent it out in bits and pieces to users for conducting their businesses/networking. It can even provide an address on high streets to enable users for greater client relations – a unique value proposition that comes at an affordable cost. Though the business at We Work experienced some shocks during the pandemic, it withstood the downturn and sustained the business model. 

It witnessed a meteoric rise for close to a decade after starting operations lack of long-term sustainability, weaknesses in governance, founder-centric decisions, and lack of rigor in enterprise risk surfaced in due course. The slow and steady missing risk management policies led to unbridled growth strategies. The ambitious growth led to revenues falling short of rental commitment. A deep dive into the rise and fall of WeWork will be able to provide a cue to upcoming startups/Unicorns on the significance of implementing systematic enterprise risk management systems. 

Rise and Fall of We Work:  

After setting up the coworking startup, it soon raised billions of investments by venture capitalists and often doubled revenue year on year quickly becoming a global company and winning the position of the most valuable start-up in the US at one point in time. While it grew faster than its peers, its performance peaked in January 2019. It could muster secured funding of US $ 10 billion from the Softbank Group – a Japanese multinational investment holding company. Consequently, its valuation scaled to US $ 47 billion. At that time, it was rated as one of the most valuable non-public companies in the world offering coworking spaces to freelancers, startups, and other businesses in over 500 locations across the globe. WeWork India has co-working facilities in 50 locations, comprising around 90,000 desks, across seven cities. 

Ambitiously, going beyond co-working spaces, it began to offer residential real estate (We Live) and education (We Grow). Like many startups, though it did not make profits from its business operations in its nine-year period, its valuation was ticking and businesses were growing.  It decided to launch its maiden initial public offer (IPO) in April 2019. However, the investors found several weaknesses in the prospects of long-term viability and We Work had to withdraw from IPO.  

Eventually, the imbalance between revenue and expenses grew. The viability of operations of WeWork continued to sink. By August 2023, its long-term lease obligations were US $13 billion, and even its projected future income from rents was just US $9 billion. Further, WeWork maintained US $205 million worth of cash, just a tenth of its current liabilities (payments due in one year or less) of $2.2 billion. The liquidity strain arising from inconsistency in its growth strategies and plans to diversify into unchartered territories of risk without appropriate risk governance systems led to the collapse of such well well-grown unicorn. It had to finally file for bankruptcy protection under Chapter 11 on November 6, 2023. Its collateral damage could be huge sending many people out of business.

Global position of start-ups: 

With the interoperability of technology and the development of digital public infrastructure (DPI) in different parts of the world, start-ups have started proliferating. There are over 150 million startups in the world. 50 million new start-ups get added every year but only 10 percent of them survive and 90 percent are vulnerable to failure. Most start-ups fail due to a shortage of funding and a drop in demand for services. But every failure has its collateral damage and brings down the enthusiasm of potential entrepreneurs. 

The growth plans of the startups are not well aligned with the prospects of demand for the products and services on offer. According to Hurun Global Unicorn Index 2023, when the valuation of a start-up reaches US 1 billion or more, it turns into a unicorn. Out of a large number of millions of Startups, 1361 of them, a minuscule turned into unicorns in the world by 2023 from 1312 in 2022. There are 666 Unicorns in the US, 316 in China, and 109 in India. India ranks third in terms of Unicorns. 

Lessons from the WeWork fiasco: 

Technology can enable startups to grow into unicorns and then turn into big publicly listed behemoths provided it is nurtured with well-calibrated policy, and people supported with well-integrated enterprise risk management. The case study of WeWork only reaffirms that the ideas of start-ups are good. There could be venture capitalists and angel investors funding the transformation of business ideas into business models. The reason for the large-scale failure of startups is the lack of the right strategies for scaling up business models and keeping the customer base enlarged proportionally. Failing at a nascent stage is painful but the most painful is the closure of well-grown entities like – WeWork where the destiny of a lot of dependent associates are interlinked. The prime investor – Japan-based Soft Bank lost its sheen on account of its debacle. WeWork would have lived today, had the growth trajectory been kept within its risk appetite and risk governance been ensured. The perils of non-sensitivity towards risks could be devastating as seen now. 

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