The Journal. - WeWork: From $47 Billion Unicorn to Bankruptcy

Episode Date: November 7, 2023

WeWork, the office space coworking company, filed for bankruptcy yesterday. The company’s decision comes after it struggled with debt and a slump in the commercial real estate market. WSJ’s Eliot Brown recounts how the embattled startup ended up in bankruptcy. Further Listening: -WeWork’s CEO on the Future of Work  -WeWork: The Enablers  Further Reading: -Adam Neumann Wounded WeWork. An Office Market Bust Finished It Off.  -WeWork, Once Valued at $47 Billion, Files for Bankruptcy  Learn more about your ad choices. Visit megaphone.fm/adchoices

Do you want to just start out by introducing yourself? Sure. I am Elliot Brown. I'm a finance reporter based in London. For years, our colleague Elliot has been following the story of WeWork, the startup that rents out shared office space. And of all the things that you've written about in your career, is WeWork your favorite story? It's certainly taken the most time. Yes, no, I'm trying to wean myself off the addiction with some success, but particularly for a few years, it was just this hypnotic tale that I kind of just love diving deep into.

Elliot got another chance to dive deep into the WeWork story again yesterday. And the company filed for bankruptcy. How did WeWork die? Was it killed, or was it of natural causes? It was just incredibly reckless, the way the business was initially built. And so, particularly how they grew at the top, they were spending in reckless ways,

and it wasn't a sustainable model. And what we're seeing today is the result of that. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudson. It's Tuesday, November 7th. Coming up on the show, why WeWork didn't work. When it comes to smart water alkaline 9.5 plus pH with antioxidant, there's nothing to overthink. So while you may be performing mental gymnastics over whether the post-work gym crowd is worth it, if you'll be able to find a

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had moved to New York and was really just trying to make it as an entrepreneur. And he kind of stumbled into the office market at this brilliant time where you'd have this casualization of the workforce. And suddenly a lot of people didn't want to be working in a sort of buttoned down, you know, law firm type atmosphere. And they wanted exposed bricks and to wear jeans to work. And so he was sort of, styled himself as this kind of millennial whisperer and was able to go to, you know, people often wearing suits, landlords,

who weren't used to this sort of a young energy and convince them that he'd sort of unlock what the next version of office was going to look like. And they just had to follow him. All they had to do was give him money and he'd sort of unlock what the next version of Office was going to look like. And they just had to follow him. All they had to do was give him money and he'd make everyone rich. And then basically from there, from 2010 through 2019, he was able to just sort of go the world over, the world's funding sources over,

and get top-tier investor after top-tier investor to buy into this vision. investor after top-tier investor to buy into this vision. At its most basic level, the idea behind WeWork is simple. It would sign long-term leases with building owners, renovate the spaces to make them cool, and then rent out short-term office space to individuals and companies at a higher price. What was WeWork's original vision? Where did it start and how did it grow so massive?

Yeah, so I think WeWork was the sort of poster child of the crazed venture capital-fueled startup frenzy of the 2010s, where you had unsustainable companies getting launched and stuffed with money. And the vision was that it wasn't about desks, it was about community. They were about bringing creators together, having them sort of cross-pollinate, as you see it, a graphic designer next to a musician. And, you know, people can work together. They develop ideas together and, you know, form bonds in a way that is so much better than the standard office. And who was investing in WeWork? And how much money did they put in? So many people. So the list is really long and it has prominent people in there. You have Benchmark, sort of

first and foremost, this really talented Silicon Valley venture capital firm that had backed Uber, you know, eBay back in the day, Zipcar. I mean, it's sort of, they're one of the better regarded firms. Then a whole bunch of others followed on. Other investors like J.P. Morgan and Goldman Sachs, the Harvard Endowment, and the billionaire founder of Alibaba, Jack Ma. But then by far the largest, and the reason that there's WeWorks across the globe, was SoftBank, which, you know, under Adam,

committed $10 billion plus to the company. And what, ultimately, back in 2019, what started to bring WeWork and Adam Neumann down? WeWork was, for years, losing a dollar for every dollar it took in, meaning its expenses were twice its revenue. And, you know, WeWork would say, we're growing really fast, but the reality was so were their losses. So Adam, when he ran out of money,

we needed a lot more. And it was twice as big as the year before. So they needed even more money. So an IPO, the public market, the stock market, was really the only place to get that type of money. And so they set out on the path that any company who's going public would. They put out a public document that listed all their numbers and tried to tell a story, and they just got pilloried. One analyst calls WeWork the most ridiculous IPO of 2019. WeWork's public debut on the way, but lots of questions lingering about the company's structural and financials. Not only is this another startup losing enormous amounts of money, $1.9 billion last year, but it is extremely complicated.

Take a look at its corporate structure. Why was it losing so much money? Because it's not a great business. So there's a couple of reasons. They were expanding super quick and not filling spaces immediately when they do, and that's one. And then under Adam, WeWork was just poorly managed. I mean, they were going in all sorts

of wild directions that followed his hobbies and interests. They spent $63 million buying a top-of-the-line private jet at Adam's direction. They launched a preschool that was holistic-minded. It was called WeGrow, and it was supposed to expand around the world. They had an autonomous robot division that was trying to develop robots to deliver mail within WeWork. They invested in a wave pool company. And so there was all these diversions, and they were well overstaffed on sort of the central business, the office leasing. Investors also had concerns about Newman himself, especially after Elliott broke stories about Newman's partying,

including tales of tequila shots at the office and how he once brought marijuana on a private jet to Israel. There were concerns about Adam Newman's management of WeWork, which was erratic, chaotic, and, you know, all these revelations sort of came out at once, and reality set in. So the would-be investors in the IPO balked. Nobody thought it was worth anything close to what it had been worth, and they had to scuttle the IPO. In the fall of 2019, the IPO was canceled, and Newman was pushed out. SoftBank, the company's

largest investor, came to the rescue and pumped $5 billion into WeWork in order to keep it afloat. So a few months after Adam left, they did a search and found Sandeep Mathrani. And, you know, he basically had a pretty good reputation in the real estate sector and was seen as someone who could like actually, you know, turn around a business and knew how to speak the real estate talk, which was one of the things that Adam lacked. Mathurani planned to streamline the company. He renegotiated leases, laid off thousands of employees, and overall tried to turn WeWork into a more boring yet stable real estate leasing company. Here he is talking to Kate on our podcast back in 2021

about changing the company's perceived party culture. Right. But is there going to be beer on tap and tequila shots? You know, do you know me? No. No. So, you know, again, we haven't had that, you know, in the United States at all. You know, and that's not what... Fun is not defined by those aspects to it. As I said, I'm 59 years old. I'm uber serious.

And so maybe having an adult in the room will change that aspect. So why wasn't this new CEO able to turn WeWork around? That's after the break. With Smartwater's pure, crisp taste, there's nothing to overthink. So while you may be spiraling over double texting your crush, whether your skincare routine is working because you look the same or is doing nothing because you look the same and whatever the heck red light therapy is, it's definitely not that. Don't overthink how you

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Bacardi, its trade dress and the bat device are trademarks of Bacardi and Company Limited. Rum 40% alcohol by volume. So how did it go for Mothrani and WeWork once this new management and new strategy was in place in 2020? So basically, immediately what happens is COVID-19 hits. And one of the first ways that a lot of us realized this was such a huge thing sweeping the world was that our offices were closed. And when you don't have offices, that makes it hard to be an office leasing company. And one of the core features of WeWork's business model and the way it made money was that it signed long-term leases with

landlords and then renovated the space and then leased short-term offices and desks to tenants for as little as a month. And then because it was such a little amount of time, they could charge them more for that. When you don't need your office space, you cancel it. And so that's what everyone did starting in March and April of 2020. I'm surprised that, like, why didn't that kill WeWork immediately, the pandemic? If everybody was able to just cancel their leases, all the tenants were able to cancel their leases so quickly when the pandemic hit and WeWork had these long-term leases,

why didn't it die right away? I think it's that they basically had raised so much money from SoftBank, which at the time I think SoftBank figured that it was so much money that of course this company will be able to turn itself around. They were able to kind of feast on that for a while. They cut some temporary deals with landlords to sort of pull back on rent. And they did engage in some lease cancellations. It just wasn't that many.

They also really kind of cut back on their staff. And then they did have a lot of deals where companies had signed year-long leases, three-year-long leases with them. So that helped them sort of muddle through. With SoftBank's cash keeping it afloat, WeWork was optimistic that the office leasing market would quickly turn around. If you rewind back to mid-2020, late-2020, early-2021, we still had no real idea of what the office world was going to look like after the virus. You know, would people be wearing masks? Would everyone be working from home because they loved it so much? Would everyone be leaving home because they hated working from home

so much? Everyone had theories, but it was very unclear. And WeWork's theory was that we would relatively quickly bounce back to a pre-2020 norm. And if that had happened by their own numbers, they would have made plenty of profit, certainly enough to sort of pay their debts. One of the theories that I recall hearing about WeWork's viability was that big office companies will shut down their offices because people aren't going into work as much. And therefore, that'll actually be an opportunity

because people will still want to get out of the house. And so they'll go to WeWork or a big company will shut down their main office and they'll just hire WeWork. They'll sort of outsource their office to WeWork and it'll actually be a boon for the company. Yeah, I think that actually wasn't a crazy theory. And if you talk to some of the competitors, that has actually worked.

But it didn't work for WeWork. One of the problems was that the company signed a lot of its long-term leases with building owners back in 2018 and 2019, a time when the market was hot and those leases were really expensive. What happened is overall rents in the office market have been plunging, and particularly in kind of major cities like New York and San Francisco. So demand has fallen so much in the office market that the rents WeWork can charge have fallen so much that they can't make money on it. So, you know, today, even if demand for a building is,

you know, the rent someone would pay has fallen 20, 30 percent, WeWork is still stuck paying for another six years the rents they signed in 2019. And so, you know, earlier this year, I would say, it became increasingly clear that WeWork was going to run out of cash. Mithrani struggled to implement the turnaround as the office market went bust. And sources told Elliott that Mithrani struggled to implement the turnaround as the office market went bust. And sources told Elliott that Mithrani also clashed with B-Works' largest investor, SoftBank. Mithrani stepped down in May. And almost immediately, SoftBank puts in a new CEO

who has bankruptcy restructuring experience. So they quickly signal that that's the route they're going down. Yesterday, that bankruptcy finally came. But it doesn't mean the company is actually going away. WeWork says it's, quote, restructuring. For now, most WeWork offices will remain open. A spokesperson said, quote, we have exceptional confidence that we will emerge from this process a financially stronger company. The way bankruptcy court works in the U.S. is it is very favorite. One of the easy things to do in bankruptcy court to save money is to cancel a lease. You aren't on the hook for the rent at all if the court agrees, which they often do. And so it's just this hyper-efficient way to cancel a lease. And so that's by far the biggest tool that WeWork plans to use. I mean, they just want to look at all these uneconomic leases where

they're losing money, shut down those offices. Who knows what happens to them? Tough luck for the landlords. But maybe, you know, WeWork can keep existing. Right. So there are some bankruptcies that result in a liquidation and you never hear from that company again. It's sort of dead. But this sounds like a bankruptcy that WeWork might be trying to use more strategically so they can shed leases that are weighing it down right now and maybe try to emerge from this as a leaner, smaller operation. I mean, WeWork wants to live again. They want to be around to fight for another day. They didn't put their European operations or their global operations in bankruptcy. It's just the U.S. and Canada. And so they're thinking that they can use this to cut debt, of which they have $3 billion plus, and cut expensive leases.

How is Adam Neumann doing? Adam has fared quite well, considering. Adam left WeWork a billionaire, and he did not start WeWork as a billionaire. So if Adam Neumann walks away a billionaire, who lost money here? SoftBank loses billions upon billions. The tally is over $14 billion by my count. That's a lot of money to lose. It is an extraordinary amount of money.

The amount of things that I could do for $13 billion. Oh, man. I tell you, the first thing would not be to build a co-working company. There are a lot of losers in this. But, you know, this is what happens as a result of bubbles. Sometimes you get a lot of weird stuff actually built. Like the Empire State Building was the result of a total frenzy in construction financing for offices. And even if no one occupied it in 1930 when it was completed or 1931, you still have it left on the skyline.

So this is our version of the Empire State Building. We have gobs of co-working spaces that maybe WeWorks in the future, maybe there'll be some competitor that takes over the space. But this is the result of frenzies. But it's not the kind of thing that you'll look at in the skyline and say, ah, look at that beautiful co-working space inside that building. You're just not going to see it. Look at that beautiful

serif font sign on the top of the building that says WeWork in all lowercase. That's all for today. Tuesday, November 7th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Alexander Gladstone, Conrad Puzia, and Alexander Saidi. Thanks for listening.

See you tomorrow.