WeWork is a coworking startup that provides flexible office space and services to individuals, small businesses, and even large corporations.
The startup that was once termed the “next Alibaba” was valued at about $47 billion, but recently, that figure had depreciated to $45 million, with shares of WeWork’s stock falling more than 98% since the beginning of the year.
What happened and how did WeWork get here?
The once-flying startup on Monday 6th November, filed for bankruptcy listing nearly $19 billion of debts.
It wasn’t supposed to be this way. WeWork was a unicorn, a very strong and well-funded company, so failing wasn’t an option.
WeWork’s former CEO, Adam Neumann, is an eccentric entrepreneur who exuded confidence and charmed investors around the world.
He pitched Wework on a simple premise, which was making office spaces feel chic and trendy, then renting them out daily or monthly, and trying to foster some kind of community around free beer and ping-pong tables.
The idea was nice, but problems started when the company started to open too many offices around the world.
Here is what happened.
WeWork was taking out 15-year leases but had no idea how they would fill up their numerous locations. They lost focus by spending on activities that did not directly impact the business growth. It wasn’t long until 2 major things happened;
- They ran out of cash, and
- The pandemic hit, so a lot of people were working from home.
The WeWork saga provides several valuable lessons for startups, founders, and investors. Here are 5 key takeaways from the fall of WeWork:
1. Focus on Making Profit
If a company is spending more than it’s earning, it’s likely to run into financial trouble.
WeWork’s rapid expansion without having a clear path to making profit was a significant red flag. The startup grew rapidly but was consistently losing money.
They spent a lot on marketing, expansion, and office leases without making enough profit to cover those costs.
As a startup, you must limit your spending especially if you are yet to start making “profit” to cover your expenses.
2. Have Proper Corporate Governance
Regarding WeWork’s founder, Adam Neumann, it was said that he had too much control over the company. This power allowed him to make some questionable decisions. For instance, he wanted to trademark the word “we” and lease properties he partially owned, which raised a question of “conflict of interest”.
As a startup, it is important to have clear rules and a clear decision-making process in place, so that the people running the company can be held accountable for their actions.
3. Don’t OverValue Your Startup
It is important to place value on your idea, product and company, but be careful not to overestimate the value of your startup.
WeWork’s valuation was extremely high, reaching about $47 billion at some point. Sadly, this valuation didn’t align with the financial reality of the company.
Investors were willing to invest large sums based on this valuation, but this eventually caused problems when the real financial situation became known to the public and these investors.
As a founder, don’t exaggerate how much your company is worth. Be honest about the value based on its financial health and potential.
4. Manage Your Finances
It’s no longer a secret that at the moment, WeWork is a money-losing business. It is reported to have lost $1.6 billion of its $1.8 billion in revenue last year.
WeWork spent extravagantly on things like luxurious office designs, opening new locations (which can be quite expensive) and hosting lavish staff parties.
This excessive spending contributed to their financial troubles when they needed to cut costs later.
One way to avoid this type of mistake as a startup is to be careful with how you spend your money. Don’t waste your limited resources on things that don’t directly help grow your business.
5. Avoid Bad Behavior and Other Distracting Business Priorities
WeWork’s culture was “work hard, party hard,” with an emphasis on the party. This culture was initially celebrated, however later, there were reports of a party-heavy and often chaotic work environment. There were also reports of sexual assault by some female employees at two mandatory work events where alcohol was served.
The company also made bad business acquisitions and investments. For instance, they invested $13 million in a wave pool company, gyms, and co-living apartments just to mention a few.
To build a successful startup, you need to avoid distractions and focus on activities that directly impact your business growth
Before a startup fails, the warning signs are always visible but most times, founders and investors tend to ignore those early signs.
In order to build and sustain a successful startup, you must be able to avoid some of the mistakes made by the WeWork team.
We understand that it can be difficult to know how to tackle some of the challenges that may arise, so click here to set up a Free 15-minute discovery call with us, where we help you to figure out the path to having a successful business.