WeWork Custom Case Solution & Analysis

Evidence Brief

1. Financial Metrics

Revenue: The company reported 886 million dollars in revenue for 2017, representing a 100 percent year-over-year increase from 436 million dollars in 2016. (Exhibit 1)
Net Loss: Net losses totaled 933 million dollars in 2017, exceeding total revenue for the same period. (Exhibit 1)
Lease Obligations: Total long-term lease commitments reached approximately 18 billion dollars by late 2017. (Exhibit 5)
Valuation: The most recent funding round led by SoftBank valued the company at 20 billion dollars, later reaching 47 billion dollars in private markets. (Exhibit 8)
Average Revenue Per Member: Revenue per member decreased from 7,174 dollars in 2014 to 6,328 dollars in 2017 as the company expanded into lower-priced markets. (Exhibit 3)

2. Operational Facts

Footprint: 212,000 members across 251 locations in 58 cities and 20 countries. (Exhibit 2)
Occupancy: Mature locations maintain an average occupancy rate of 82 percent. (Exhibit 4)
Product Diversification: Expansion into residential living via WeLive and early-childhood education via WeGrow. (Case Narrative, Section: Beyond Office Space)
Capital Expenditure: Net capital expenditure per added desk averaged 7,300 dollars before offsets from landlord tenant improvement allowances. (Exhibit 6)

3. Stakeholder Positions

Adam Neumann, CEO: Asserts that the company is a community-focused platform rather than a real estate firm. Maintains high voting control through Class B and C shares.
Masayoshi Son, SoftBank: Views the company as a central pillar of the Vision Fund portfolio, emphasizing rapid global scale over immediate profitability.
Benchmark Capital: Early investors focused on the technology-enabled growth aspects of the business model.
Enterprise Clients: Large corporations such as Microsoft and IBM now represent 25 percent of the membership base, seeking flexible office solutions.

4. Information Gaps

Unit economics for WeLive and WeGrow remain undisclosed in the case exhibits.
Specific breakdown of lease durations and break clauses for international locations is absent.
The exact percentage of revenue derived from the digital platform versus physical space rental is not quantified.

Strategic Analysis

1. Core Strategic Question

The fundamental dilemma is whether the company can justify a technology-sector valuation while operating with the capital requirements and risk profile of a traditional real estate firm.
The mismatch between long-term lease liabilities and short-term member contracts creates a structural liquidity risk.

2. Structural Analysis

Applying Porter Five Forces to the flexible workspace industry reveals a challenging environment. Barriers to entry are low as competitors like IWG and local boutique operators can replicate the physical aesthetic. Substitute products include traditional leases and coffee shops. Bargaining power of suppliers (landlords) is high in prime urban markets. The result is a commodity service where brand loyalty must overcome price sensitivity.

The Value Chain analysis indicates that the primary advantage lies in procurement and design speed. The company can build out a floor 30 percent faster than traditional developers. However, this operational efficiency is currently offset by excessive administrative overhead and non-core investments.

3. Strategic Options

Option 1: Pivot to Management Agreements. Transition from leasing spaces to managing them for landlords in exchange for a fee. This mirrors the hotel industry model.
Trade-offs: Lower revenue per location but significantly reduced capital risk and improved balance sheet health.
Resource Requirements: Stronger legal and business development teams to negotiate complex revenue-sharing contracts.

Option 2: Enterprise Market Consolidation. Focus exclusively on large corporate clients with longer-term commitments (2 to 5 years).
Trade-offs: Increases stability of cash flows but reduces the premium charged for flexibility.
Resource Requirements: Specialized enterprise sales force and customized architectural capabilities.

Option 3: Immediate Geographic and Product Retrenchment. Exit non-core markets and shutter WeLive and WeGrow to focus on high-density urban office hubs.
Trade-offs: Slower growth and potential brand damage in exchange for a clear path to profitability.
Resource Requirements: Restructuring experts and capital to fund lease terminations.

4. Preliminary Recommendation

The company must adopt Option 1. The current model of long-term lease arbitrage is unsustainable in a market downturn. Shifting to an asset-light management model allows the company to use its brand and technology without carrying 18 billion dollars in debt-like obligations. This shift aligns the interests of the landlord and the operator while protecting the company from fluctuations in real estate prices.

Implementation Roadmap

1. Critical Path

Month 1-3: Cease all new long-term lease signings. Initiate negotiations with existing landlords to convert current leases into profit-sharing management agreements.
Month 4-6: Divest non-core assets including WeLive and WeGrow. Reallocate capital to the core office product and the technology platform.
Month 7-12: Standardize the enterprise sales process to increase the average contract length to 24 months.

2. Key Constraints

Landlord Resistance: Major property owners may refuse to switch from guaranteed lease payments to variable management fees.
Capital Availability: The high burn rate requires a final bridge loan from SoftBank to fund the transition period before the model becomes self-sustaining.
Management Culture: The transition requires a shift from a growth-at-all-costs mindset to a focus on margin and operational discipline.

3. Risk-Adjusted Implementation Strategy

The plan assumes a stable economic environment. If a recession occurs, the company must accelerate lease exits even at the cost of significant penalties. To mitigate risk, the company should prioritize the conversion of the top 50 most profitable locations to management agreements first. This ensures that the core of the business is protected even if smaller locations fail. Success depends on reducing the fixed-to-variable cost ratio within 18 months.

Executive Review and BLUF

1. BLUF

The current business model is structurally flawed and poses an existential threat to investor capital. WeWork operates a high-risk duration mismatch by funding long-term liabilities with short-term, volatile revenue. To survive, the company must immediately transition to an asset-light management model, divest non-core businesses, and prioritize enterprise clients. Failure to de-risk the balance sheet before the next market contraction will result in a total loss of valuation. Profitability must take precedence over global expansion.

2. Dangerous Assumption

The most consequential premise is that high occupancy rates will persist during an economic downturn. The model assumes that members will value community enough to maintain their subscriptions when corporate budgets tighten. Historically, flexible office space is the first expense cut during a recession.

3. Unaddressed Risks

Regulatory Risk: Urban zoning laws and fire codes are increasingly targeting high-density co-working spaces, which could force a reduction in desk density and destroy unit economics.
Interest Rate Sensitivity: As a heavy user of capital, the company is highly vulnerable to rising interest rates which will increase the cost of servicing debt and future construction.

4. Unconsidered Alternative

The team did not fully explore a Franchising Model. By franchising the brand and technology to local operators in secondary markets, the company could achieve global scale with zero capital expenditure. This would allow the company to capture the high-margin technology fee without the operational friction of managing physical spaces in unfamiliar geographies.