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18 Nov

Lessons On WeWork’s Fall

Well-publicised hero start-ups offer a ready source of learning for aspiring business owners on what to get right for success. Just as important, though, is knowing how to avoid the pitfalls that waylaid the almost-theres. Except, we hardly hear about the latter group.

Let’s change that – in the news right now is the imploding tragedy of WeWork. The story has lessons (in bold below) not only for companies aiming for the big-money venture capital market, but for the common garden variety of start-up or family-run small business…

According to Crunchbase News, WeWork was founded in 2010 in New York as a co-working and short-term office space, and rapidly grew globally after its series A funding of $17m in 2012. After several funding rounds – the latest being series H in January 2019 of $1b by SoftBank – WeWork was valued at $47b and seemed poised for the stars just a few months ago, ahead of its initial public offering (IPO).

But the IPO was postponed, the founding CEO was resigned-fired, and its latest valuation is estimated “only” about $20b-$30b. For a business that carved a solid niche in the market for co-working space, competing against IWG’s Regus and Spaces brands (AllWork), WeWork had a lot going for it and did a lot of things right. So how did they blow it?

In fact, “blowing it” is their first mistake. Some commentators say they got too much money too fast. Nope, that’s sound-bite bullshit. There’s no such thing as getting too much money, provided the ecology of its source and flow are sound. WeWork’s problem was uncontrolled spending, like investing in a kindergarten school and Wavegarden, a maker of indoor surfing pools, both unrelated to WeWork’s core business.

Even if the wave pool business came free, it distracts executive attention from building the fundamentals in the business that create value for customers and shareholders. You need all hands on deck during hyper-growth. And in a market offering so much growth, there’s no reason to diversify.

That’s not to suggest competition was light. While WeWork offered something different, it wasn’t revolutionary. As IWG’s CEO mused on trying to discern WeWork’s secret sauce, “We asked daily, is there an ingredient . . .  that we’re missing out on, but we never found it.” (BloombergWhen your product or service is easily substituted, there’s never a time to slack off, a further indictment against diversification.

Through deals within the WeWork group, it became obvious the owners were enriching themselves to the detriment of investors. A headline in The Verge sums it up: “WeWork’s founder makes his best business move yet: quitting.” It’s clear that costs are not prioritised against their value to the business when one of the first corrective actions after a leader’s departure is to sell off his $60m private jet.

Some analysts cite a lack of board oversight and poor controls to protect shareholders’ investments as the reason for the IPO postponement. That’s not an astute insight; the reasons behind postponing the IPO are no different from what existed since founding. It seems there were indeed, “No adults in the room,” as one observer quipped. Corporate governance is a patent weakness in WeWork’s SWOT analysis since inception. Regardless of size, every business must apply governance to assure strategic goals are achieved.

Finally, WeWork’s main investor made “some” mistakes. Despite never posting profits and, with operating losses of $1.69b in 2018, SoftBank continued to invest literally billions. As if pulling the middle finger to minority shareholders, SoftBank’s severance deal in September with WeWork’s ousted founder totals (coincidentally) nearly $1.7b. (BBC News) While WeWork reportedly can’t pay severance costs in “trimming” its operations, how staff are treated seems incongruent with the vibey collaboration culture espoused in the marketing.

To summarise these 9 case-study lessons: whether you’re building a business as a lifestyle employment or to one-day make it rich with an IPO, the time to build it right starts at the start.

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