The following is a rough analysis of where WeWork has failed. It includes some nuts and bolts with which WeWork can turn the business model in a profitable direction.
For an industry comparison, some of WeWork's numbers are compared to the results of the Global Coworking Survey. This may give you an idea of how WeWork compares to other coworking spaces, even though the methodology differs. A ten-minute survey cannot replace a tax return or quarterly stock report.
The most worrisome items were on the expense side.
Let's start with debt, interest, and lease costs. These were among the few expense items whose figures could be extracted in any detail from the hundreds of pages of company reports.
Debt & Interest:
WeWork: Lease & interest expense, and total debt as a percentage of revenue
In the last report for the second quarter of 2023, the company reported long-term debt of about $3 billion. This roughly corresponded to the company's total annual revenue.
By refinancing its debt, WeWork appears to have reduced this burden this year. But it did so at a higher interest rate. Instead of 5%, the company had to pay between 11% and 15% on most of its new loans, or two to three times as much as before. Some of it was immediately reclassified as a new loan to keep the direct interest expense from skyrocketing.
Loans are considered debt capital in accounting and are not operating income, so their repayment does not appear in expenses. Only debt costs, which primarily include interest, are taken into account. These interest costs accounted for around 8% of all expenses at WeWork in the second quarter. Conversely, 12% of all income alone was used for this purpose.
In the Global Coworking Survey, we asked about monthly debt (re)payments, including interest, when it comes to expenses. Coworking spaces in areas similar to WeWork spend far less on these costs, especially if they are profitable. This is even though they were able to include debt repayments in addition to interest.
A deeper analysis is hardly necessary to draw a conclusion. WeWork's debt and interest payments were too high for a profitable business model.
Do coworking spaces only work with debt?
Generally, no. Loans often enable new businesses in the first place. Coworking spaces are not alone in this. Businesses in all sectors do the same. The low-interest rate policy of central banks has been extremely attractive for debt-based investments for over a decade.
Interest rates, which have been rising sharply since 2022, are now increasingly damaging the balance sheets of many companies that relied heavily on debt-based growth in the past. This phenomenon does not affect coworking spaces more than other businesses. Moreover, many coworking spaces have opened and continue to open with little or no debt.
WeWork grew differently than most coworking spaces - it grew much more extreme
WeWork was characterized by a quality that many coworking spaces did not use to the same extent as startups. WeWork not only had a charismatic, well-connected leadership that wanted to grow with coworking spaces - like many others. The leadership also focused on extreme growth to serve financial market clients, was able to ignore the risks involved, and sold their business model accordingly. Think big! Think positive!
With interest rates low, debt was not only cheap. Many investors sought new investment opportunities that promised significantly higher returns than negative-yielding government bonds. These included investors whose business model was based on reselling their shares at a profit in the short term. However, this required rapid growth for a timely exit.
They found these investments in startups with the most talented barkers. These existed in many industries and were an asset in the startup funding environment. The startups with the best storytelling were heard more than others. One such startup was WeWork.
The combination of large loans and deep-pocketed investors allowed WeWork to grow in a way that no other competitor could. With the money behind it, the company was able to buy into coworking space markets virtually at will.
The strategy prioritized short-term growth - for the financial market - over a successful long-term business model - for the coworking market. This made WeWork a normal start-up product for the financial market but an outlier in the coworking industry.
Then came the pandemic, a war, a crumbling economy, and a new interest rate policy. With interest rates rising since 2022, not only did debt become more expensive, but investing in startups became less attractive. Especially those that have not (yet) turned a profit and have been unable to turn things around fast enough. The debt burden, combined with a changed market environment in which investors were stingy with venture capital, crushed these companies - and WeWork.
Debt wasn't the only reason for bankruptcy.
In its last quarterly report, WeWork reported a profit margin of -32%. Bankruptcy could allow the company to get out of debt service. But it was still losing money even without it. On a self-adjusted EBITDA basis, excluding interest payments, depreciation, and book value losses, the most recent profit margin was -4%.
So why did WeWork still fail?