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“I think I’ve run out of the words to describe what’s been going on, from surreal to crazy to unbelievable to — someone texted me yesterday — “bonkers,” all of those things are true and yet the reality is that we’re still here and we’re still here together. I just want to remind all of us that we came here to do something meaningful in the world,” said Miguel McKelvey, WeWork’s co-founder and chief culture officer, in a leaked recording of WeWork’s recent all-hands meeting.
The WeWork carnival is settling down and the dismantling is about to begin as the company searches for a more sustainable future. It has been quite a ride from zero to a $47 billion valuation and back down to whatever lies ahead. The circus master lost control, the cracks began to show, now customers consider their memberships, and staff fear for their futures. The main investor has seized control to save the company from complete collapse leaving uncertainty as the only certainty for the key stakeholders in this unprecedented mess.
WeWork is running out of money. We have long spoken about the spend-to-grow strategy of WeWork but it seems that things got out-of-hand in the build-up to the planned IPO in September. The filing stated “$2.5 billion in cash on hand” as of June 30 but now the company claims it will run out of funds in November, suggesting an annual burn rate of roughly $6 billion! WeWork is so short on funds that it has, reportedly, delayed laying off its staff because it couldn’t afford their severance packages.
Yesterday, WeWork confirmed it received an early payment of $1.5 billion from SoftBank Group Corp., The $1.5 billion investment was announced in January and was originally scheduled for April 2020, but brought forward as part of a bailout package to rescue the troubled co-working startup after the failed IPO. According to one anonymous source from Bloomberg, the co-working company increased spending in recent months, expecting the last quarter of 2019 to be its first quarter as a public company. They wanted to show strong revenue growth by rapidly building new desks and offices, the source said.
“The $1.5bn in funding that WeWork received today from SoftBank positions the company for the future and underlines Softbank’s steadfast belief in the business,” Marcelo Claure, WeWork’s new executive chairman, said in a statement. “This financing package enables the company to accelerate the path to profitability,” he continued. SoftBank is reportedly pushing the company to focus on its core business of leasing office space and to shed unprofitable locations that have drained resources.
The We Company’s new executive chairman, Marcelo Claure, is SoftBank’s COO and the former CEO of Sprint, where he dealt with WeWork as a customer. Jeff Sine, who famously negotiated the merger of Sprint and T-Mobile, also joined the board of directors of WeWork on Wednesday — just days after he helped advise SoftBank on the pivotal rescue package that totals $10 billion. Sine was a senior banker at UBS and Morgan Stanley before starting Raine, a merchant bank. He has worked in financial roles with Google, Time Warner, News Corp, Disney, and Sony.
Softbank, and the Saudi-financed Vision Fund, have expanded the board from seven to 10 people and will have a say over half of the appointments. They have, so far, named Claure, Sine, Ron Fisher (Vice Chairman and Head of Investment at SoftBank), and Steven Langman (Rhone Group co-founder and early private equity investor in WeWork). Wisely placing strong financial minds into key positions in a company whose current valuation has fluctuated between $47 billion and $0, according to various reports and predictions in recent months.
“I think WeWork has a pretty high probability of being a zero for the equity, as well as for the debt,” billionaire activist investor Bill Ackman said. SoftBank might have to write off its entire investment in WeWork. “As someone who has put good money after bad, I think this looks like putting good money after bad, and SoftBank should have walked away.” Ackman also called WeWork cofounder Adam Neumann “an amazing salesman” but said the company was still very leveraged.
It is hard to tell if Adam Neumann is laughing or crying right now. His co-working empire is in limbo awaiting its fate, but if the stories are to be believed, Neumann was already too focused on his bold charitable goals, (“saving the orphans of the world”) and having a good time (weed and tequila on international flights). Whichever direction Neumann plans to go in the future, the $1.7 billion exit package he receives as part of the bailout will certainly allow him to do some really good stuff.
WeWork’s employees are not so thrilled about “an unprecedented exit package” for the disgraced founder, who was forced to step down as CEO in September after his poor judgment and self-dealing was the center of the firm’s stalled IPO attempt. A substantial 85% of WeWork employees said the severance isn’t fair, according to a survey on the anonymous workplace social app Blind, just 15% thought it was fair.
“Should we tackle the Adam?” Claure asked in response to a question at his first all-hands meeting at WeWork. “First, maybe it’s popular or unpopular. There’s a level of gratefulness that we got to have for Adam because he’s the one who built this business or the leader that built this business until today,” he continued. “Businesses go through transition. There are different leaders for different types in the business and this is why Adam is no longer here and this is why I’m here.”
On the payout, Claure accused the media of exaggerating and explained that the reported $1.7 billion exit plan was not as simple as it was being made out to be. “Adam is a shareholder of the company and we believe so much in this company that we’re going to put a tender of $3 billion for any shareholder that wants to go sell their shares,” he explained. “So Adam has the ability to sell. I have no idea if Adam is going to sell one share, a billion dollars, 500 billion. I don’t have the slightest clue what it is. But as a shareholder, he has the ability to sell his shares.”
Claure also highlighted that Neumann “for whatever reason” borrowed money from JPMorgan, and WeWork will “lend Adam a certain amount of money for him to pay his loan, but in exchange as he sells those shares, he needs to pay us right back,” said Claude, who was also pushed to explain the $185 million consulting fee that Softbank is paying Neumann. He spoke of Neumanns valuable knowledge and experience of running the fast-growing startup, but also of the price of getting him off the board and away from company decisions.
“Adam had voting rights of 10 to 1, meaning Adam could do whatever he wanted. He had total autonomy for good or for bad, to do anything that he wanted, and Adam has agreed to relinquish all his votes in favor of the board. He has relinquished being the chairman. And he has relinquished even being in the board of directors. He will now only be an observer with basically no voting rights,” Claure explained. “That has a price and we thought that’s going to be a great investment to basically put the company back into our hands for us to be able to run it without having somebody with a gun, always basically voting shares 10 to 1.”
For the rest of the sector, what happens to Neumann and WeWork as a company is somewhat irrelevant. The growth of the proptech industry and the availability of flexible office space will continue unabated for those hungry markets. Some companies always stumble and fall as emerging markets correct and strengthen to ensure sustainable growth. However, even a partial collapse of the We Company leaves a big hole to fill. Potentially triggering a disruptive phase of correction where some of the firm’s competitors are no doubt positioning themselves to seize the opportunities.
The major threat to the co-working trend and the industries that thrive off it is the same as it has always been — recession. An economic downturn will burst the startup bubble and may see corporations retract to their traditional offices, recession places an uneven strain on these kinds of commercial real estate companies.
While a recession is not expected tomorrow, dark geopolitical clouds grow over major economies. A recession soon would inevitably bury WeWork but the rest of the sector is more robust, no doubt with one eye on surviving such events and the other on WeWork’s market share.