Thomas Cook was formerly a successful profitable business formed 148 years ago. WeWork, however, formed the characteristics and psychology of a distressed business or misaligned actions vs the challenge like Thomas Cook before it started…
The inflexibility of the Thomas Cook business model to cope with shifts in revenue predicated its failure. This created an insurmountable gap that justified its liquidation.
WeWork, however, was founded upon a flawed business model from the start and scaled in an expectation that somehow growth would fix. The incredible cash losses 2x revenue highlighted the reality that growth could not make it better.
Its investors included Son of Softbank who had already been burnt by Uber desperate to recover its losses. Why was this?
This in part is not unlike the failure of Barings bank where Nick Leeson did all he could including fraud to recover his position and achieve certainty. It’s well known that people will make bad decisions to reach a position of certainty.
WeWork formed the characteristics and psychology of a distressed business: misaligned actions vs the challenge before it started…
This is NOT something you learn about at business school
So what’s the cause of this issue? Management today simplified this to the founder Adam’s inflated ego issue. It’s far more involved and subtle than that.
Background and observations
paraphrased from the Business insider article below
With its stratospheric $47 billion valuation and preposterously ambitious co-founder and CEO, Adam Neumann — his goal wasn’t merely to make money or rent office space, he claimed, but to “change the world” — WeWork had become a glaring symbol of Silicon Valley’s boundless audacity and self-professed exemption from the laws of economics.
“We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness.” The inside cover carried a dedication to “the energy of we — greater than any of us but inside all of us.”
Deluded actions fitting the deluded mantra
It included a commitment from the Neumanns to donate $1 billion in cash and stock — wealth they hadn’t earned yet — to charity as well as a pledge to save 20 million acres of rain forest.
It listed the company’s underwriters in a circle instead of the customary pecking order. Months earlier, they’d changed the company’s name from WeWork to just We, to better communicate the enormity of their ambitions. An earlier version of the prospectus listed a series of competitive advantages under the heading “Our Superpowers.”
Fitting “facts” to the mantras:
But perhaps what made WeWork different is the apparent problems with the company’s business model. It was on the hook for $47 billion in future lease payments to building owners while having committed revenue of only $4 billion. Last year’s loss jumped to $1.9 billion on revenue of $1.8 billion — for every dollar it made, it was spending two. For the first half of this year, losses climbed to $904 million even as revenue doubled to $1.54 billion. The company also used a made-up metric that it called “contribution margin” — renamed from the “community-adjusted Ebitda” that was much maligned earlier in the year — that made it harder to understand how the underlying business was performing.
Negative generals: normalising the status quo
“We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level,” the firm said in its filing, “for the foreseeable future.”
Approachability and dialogue duping investors
Triton Research’s Rett Wallace would later call the prospectus a “masterpiece of obfuscation.”
The New York University marketing professor Scott Galloway wrote a takedown of the company titled “WeWTF.”
John Coffee, a Columbia University professor who directs the university’s corporate-governance center, told the Financial Times that to navigate past investor concerns about the company’s structure, market volatility, and a tougher climate for IPOs, Neumann would have to “go through an ordeal of fire.”
Obfuscation of analysis
“WeWork’s magical thinking disguises a flawed model.”
“Hype is one of the tech sector’s most magical qualities,” Elaine Moore wrote in the Financial Times. “Like Uber and Lyft, no one can say for sure whether its business actually works.”