Last week I read a report that Paytm (One97 Communications) was valued at $16 Billion and felt that, Yes! India has made its presence in that particular list and kind of felt proud of that. This also reminded of something:
“Wework”
Wework had made history in 2019 by getting the title of ‘The Most Overvalued Startup in the World’, Being valued at $47 Billion and Softbank being the biggest investor in it. Not only did all the investors call it overvalued but also did its own founder and CEO call its own company overvalued.
Where did it all begin?
Humans get the best idea when they are actually in need of something. Adam Neumann shared his working space with Miguel McKelvey just so that he can reduce the burden from his shoulders alone. The idea worked out so well that they started a company called “Greendesk” which was something the same as Wework. As soon as they did start it, the world was hit by ‘The Great Recession’ and both the entrepreneurs prepared themselves for the
loss, but what happened what quite opposite of what they were expecting.
During the Recession, many people in America lost their jobs and chose to become freelancers and to cut down operating costs, all businessmen and entrepreneurs started looking for cheaper options for their office and thus Coworking Space became a reality.
Greendesk became a hit and finally, Adam Neumann and Miguel McKelvey earned a good amount of money by selling it.
Around 2010, the same business model, same people, and the same place started another company popularly known today as “Wework.”
So, let's understand their business model first:
What Wework does is, it looks for big empty building lying around somewhere in the prime locations of a city, leases it out for a period of 10, 15 or 20 years, gives the building a complete makeover designing it in such a way that it can easily accommodate a large number of people who are ready to share their working space.
Of course, the space is not free, you could rent it out for an hour, a day/ month or even a year without getting in all the legal steps required in renting an office space like signing the agreement and paying an advance.
The business model of Wework was loved by freelancers and entrepreneurs stepping up in the startup world. It was the ideal office a person would want to work in. Free coffee, no tensions of paying monthly bills for the internet, or even the office cleaning staff, and you could even use the conference rooms for important meetings.
What more, you could even work while sitting on a bean bag!
Not only did Wework create a coworking space but also, they created a community, where you could go around looking for a freelancer who is willing to do your job in your own building.
It was a massive hit. Their expansion was to so many countries at the same time that soon they became popular and got funding from Softbank.
Getting funding from Softbank means that you are going to go a long way, they have seen the performance of the company and have invested seeing future growth expectations.
Finally, Wework thought of launching their first-ever IPO( Initial Public Offering), which basically means that they could now sell shares of the company to the common public who are expected to be very much interested in earning profits and see the company fly.
Everything did not go in Wework’ s favour after they issued their Prospectus (a document containing information about the company used to attract investors).
No one wanted to invest in the company. Wework’ s valuation fell from $47 billion to just $10 billion, what’s shocking is that their valuation is even less than their investment of around $12.8 billion.
Mistakes happen but Wework made too many mistakes in their Prospectus which further led to a steep downfall in the company. The biggest one was that even after being a real estate company they stated themselves as a “Tech Company.”
They cannot be a tech company as they cannot earn profits or revenue like a tech company. Between the period of 1st January and 30th June 2019, the company generated revenue of $1.54 billion and incurred a loss of $900 million. And from which angle does a coworking space providing company look like a tech company to the investors?
The risky business of Wework is something that worries investors. The buildings are leased out, which means they cannot be treated as assets of the company. Leasing out also means that Wework would still need to pay the lease even if the building is not used or if it does not generate any revenue. The company also stated that in its lifetime, it has never faced a recession. Which blurs the picture in the investor’s mind as he won’t know what will happen to the company or how it would handle an economic recession. What does all this lead to?
“Loss”
Another shocking reason was that the Founder, Adam Neumann itself did not have any hope on the company’s working and IPO and according to Wall Street Journal, he had started selling his share of the company before the IPO, as he knew that the company’s valuation would fall drastically after the IPO would be launched.
Moreover, there was no Employment Agreement signed by him that he will continue to be the CEO of the company and this proved to be a bad move.
For now, the company has put its IPO on a halt. All of us have heard that Softbank’s investments never go wrong, but now Softbank is the one under pressure because it has heavily invested in the company and now is facing a loss. Adam Neumann has been removed from his voting rights and for now, the company continues to operate heavily with the help of investments only.
Obviously there was a lack in order before the IPO was launched and how everything was put in the prospectus led to such a great fall of the company.
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