WeWork: Public versus Private Markets Custom Case Solution & Analysis

Evidence Brief: WeWork Public versus Private Markets

1. Financial Metrics

• Revenue and Profitability: In 2018, revenue reached 1.8 billion dollars, while net losses totaled 1.9 billion dollars. The company lost approximately 1 dollar for every 1 dollar earned.
• Lease Obligations: Long-term lease liabilities stood at 47.2 billion dollars as of mid-2019. These are fixed, non-cancelable commitments spanning 10 to 15 years.
• Valuation Discrepancy: Private valuation peaked at 47 billion dollars via SoftBank investment in January 2019. Initial public market feedback suggested a valuation between 10 billion and 15 billion dollars.
• Cash Burn: Net cash used in operating activities and capital expenditures exceeded 2.3 billion dollars in the first half of 2019.
• Contribution Margin: The company utilized a non-standard metric, Community Adjusted EBITDA, which excluded rent, depreciation, and marketing expenses to show 467 million dollars in positive margin.

2. Operational Facts

• Global Footprint: 528 locations across 111 cities in 29 countries as of June 2019.
• Membership Base: 527,000 memberships, with 40 percent of members belonging to enterprise companies (500 plus employees).
• Business Model: Duration mismatch. The company signs 10 to 15 year leases with landlords and provides month-to-month or short-term memberships to users.
• Non-Core Assets: Diversification into WeLive (co-living), WeGrow (education), and Rise by We (fitness), alongside the acquisition of Managed by Q and Conductor.

3. Stakeholder Positions

• Adam Neumann (CEO/Founder): Held 20:1 voting rights per share. Controlled the board. Engaged in self-dealing by leasing personally owned buildings back to the company and trademarking the word We for 5.9 million dollars.
• Masayoshi Son (SoftBank): Pushed for aggressive, capital-intensive global expansion. Provided over 10 billion dollars in total funding.
• Public Market Investors: Expressed severe skepticism regarding governance, the path to profitability, and the tech-company label for a real estate business.
• Benchmark Capital: Early venture investor focused on scaling, now concerned with governance and path to liquidity.

4. Information Gaps

• Churn Rates: The case lacks specific data on membership retention across different city tiers.
• Unit Economics by Vintage: No granular breakdown of profitability for mature versus new locations.
• Landlord Recourse: Lack of clarity on whether parent company guarantees exist for all 47 billion dollars in lease liabilities or if they are ring-fenced in Special Purpose Entities.

Strategic Analysis

1. Core Strategic Question

• Can WeWork survive a transition from a capital-dependent growth model to a self-sustaining operational model while facing a 70 percent valuation collapse?
• Does the duration mismatch between long-term liabilities and short-term assets constitute a structural insolvency risk during a market downturn?

2. Structural Analysis

The business model suffers from a fundamental mismatch. WeWork operates as a high-risk financial intermediary. Landlord power remains high because prime real estate is finite. Threat of substitutes is high as traditional landlords (Regus/IWG) and boutique operators enter the flexible workspace segment. The value chain is broken: the company pays premium prices for long-term supply but sells a commoditized, short-term service. The tech label is a misnomer; the business lacks the marginal cost advantages and network effects required for tech valuations.

3. Strategic Options

Option A: Governance Reform and Down-Round IPO

• Rationale: Secure immediate liquidity to prevent bankruptcy.
• Trade-offs: Requires stripping Neumann of control and accepting a valuation below 15 billion dollars.
• Resource Requirements: New independent board members and a 3 billion dollar capital infusion.

Option B: Private Rescue and Asset Liquidation

• Rationale: Avoid public scrutiny. SoftBank provides a bridge loan while the company sheds non-core units.
• Trade-offs: Increases SoftBank exposure and delays the inevitable market pricing.
• Resource Requirements: 5 billion dollars in debt or equity from existing investors.

Option C: Operational Retrenchment (The Fortress Strategy)

• Rationale: Halt all new leases. Focus exclusively on filling existing capacity to achieve positive cash flow.
• Trade-offs: Abandons the growth narrative that justifies the current valuation.
• Resource Requirements: Massive headcount reduction and termination of non-core business lines.

4. Preliminary Recommendation

Pursue Option C in conjunction with a private down-round. The public markets will not currently accept the current governance structure or the burn rate. WeWork must pivot from a land-grab strategy to a margin-optimization strategy. This requires removing the founder, divesting WeLive and WeGrow, and renegotiating leases to include more revenue-sharing components rather than fixed costs.

Implementation Roadmap

1. Critical Path

• Week 1-2: Governance Reset. Remove Adam Neumann as CEO. Reconstitute the board with a majority of independent directors. Rescind the 20:1 voting rights to a 1:1 structure.
• Week 3-6: Liquidity Injection. Finalize a 5 billion dollar rescue package with SoftBank. This is the only viable capital source given public market hostility.
• Week 4-12: Asset Divestiture. Initiate the sale of Managed by Q, Conductor, and the corporate jet. Close WeGrow and halt WeLive expansion.
• Day 90: Operational Right-Sizing. Execute a 30 percent reduction in global headcount. Implement a moratorium on all new lease signings for 12 months.

2. Key Constraints

• Cash Runway: The company is burning roughly 700 million dollars per quarter. Without an immediate capital event, insolvency occurs within six months.
• Legal Liabilities: Terminating leases early will trigger significant penalties. The success of the retrenchment depends on landlord cooperation.
• Brand Erosion: The negative IPO press makes enterprise clients wary of long-term commitments to a potentially unstable partner.

3. Risk-Adjusted Implementation Strategy

The plan assumes SoftBank remains willing to protect its previous 10 billion dollar investment. If SoftBank withdraws, the company must enter a distressed restructuring or Chapter 11. Contingency involves identifying a stalking-horse bidder for the core real estate portfolio. Execution success depends entirely on shifting the corporate culture from a cult of personality to disciplined real estate management.

Executive Review and BLUF

1. BLUF

WeWork is a distressed real estate company with a broken capital structure. The attempt to price it as a technology firm has failed. The company faces an existential liquidity crisis driven by a 47 billion dollar lease overhang and a 2 billion dollar annual burn. Management must abandon the IPO immediately. Survival requires a total governance overhaul, the removal of the founder, and a shift from growth to unit-profitability. The valuation must be reset to a multiple of cash flow, likely 70 to 80 percent below the last private round. Without these changes, bankruptcy is certain within two quarters.

2. Dangerous Assumption

The analysis assumes that SoftBank is a rational actor that will continue to fund the business to protect its reputation. If SoftBank faces its own liquidity pressure or internal revolt from Vision Fund partners, the primary source of capital vanishes, rendering the implementation plan moot.

3. Unaddressed Risks

• Cyclical Downturn: A moderate recession will cause membership churn to spike while the 47 billion dollar lease obligations remain fixed, leading to a catastrophic margin squeeze.
• Landlord Contagion: If one major landlord triggers a default clause based on the failed IPO, it may create a cross-default ripple effect across the global portfolio.

4. Unconsidered Alternative

The team failed to consider a wholesale conversion of the business model from leasing to management contracts. Similar to the hotel industry (Marriott/Hilton), WeWork could stop signing leases and instead manage spaces for landlords for a fee. This would eliminate the duration mismatch and the heavy capital expenditure requirements, though it would require a total renegotiation of the existing 500 plus site portfolio.

5. MECE Assessment

• Mutually Exclusive: The options clearly distinguish between public market entry, private rescue, and internal retrenchment.
• Collectively Exhaustive: The analysis covers governance, finance, and operations, which are the three pillars of the current crisis.

Verdict: APPROVED FOR LEADERSHIP REVIEW