How WeWork Rose and Went Broke
Investors who put tens of billions of dollars into WeWork were hoping the co-working space startup would be the next Facebook. It hasn’t turned out that way. WeWork on Monday filed for Chapter 11 bankruptcy, serving as a painful lesson in how easy money fuels speculative investment.
Adam Neumann founded WeWork in 2010 amid a boom in so-called “sharing economy" startups such as Uber, Airbnb and TaskRabbit. Mr. Neumann’s idea was to lease office space long-term, add millennial amenities such as hammocks, ping-pong tables and microbrews, and then sublease the shared space to startups at higher rates.
The charismatic founder pitched investors on the vision of WeWork as a tech startup with unlimited growth potential that would transform how people work and live. Sophisticated investors such as Softbank, T. Rowe Price Group and Fidelity Investments bought Mr.
Neumann’s pitch. It’s easy to second-guess those investors now, but you have to think back to the mania of those easy-money days. Flush with capital, Mr.
Neumann rapidly expanded WeWork’s real-estate footprint. Its private valuation soared as high as $47 billion in the months before it planned to hold an initial public offering in 2019. But his business model could work only as long as financing remained cheap and commercial real-estate rents increased, letting the company arbitrage the prices it paid and charged.
Reality set in when the company disclosed huge losses and Mr. Neumann’s business conflicts. Its future lease obligations were 12 times greater than commitments from subleases.
Under investor pressure, Mr. Neumann stepped aside and the IPO was shelved. Softbank provided a $5 billion rescue while new company management cut costs and liabilities.
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