When Euan Blair needed cool new office space for his fast-growing start-up, he knew who to call. Like thousands of entrepreneurs before him, Tony Blair’s entrepreneurial son bought space in a WeWork.
Lured by its well-stocked bar, flexible rents and trendy open-plan décor, it was just what he needed: “People love coming here,” he says, leaning against a soundproof “phone pod” for staff to avoid the hubbub in his Marylebone WeWork office. “It feels like fun.”
Since Silicon Valley wünderkind WeWork opened its first shared space in London five years ago, the beauty of renting über-trendy offices for short periods has made it the destination of choice for tech tycoons and big corporates alike. With its table football, pool tables and regular networking parties, it felt like being part of a big, happy family. If you really drank the Kool-Aid, you could even hang out with fellow community members at its vegan Summer Camp festival in Kent.
Members flocked there for yoga, live music and the chance to worship its charismatic founder Adam Neumann. Over the past five years, WeWork has launched nearly 50 sites in London, from Shepherd’s Bush to Canary Wharf, and has quickly become the biggest occupier of new office space in the city.
But now, the WeWork balloon could be set to pop. This week, it was reported that the company is planning to lay off 2,000 people, or, about 13 per cent of its 15,000 staff. A much-publicised IPO was pulled last month — which in turn triggered severe danger for the company. That IPO was needed in order to secure a $6 billion loan to cover its running costs. With that now on ice, WeWork could be out of cash by the middle of next year.
And, having once been notorious for swashbuckling talk of becoming the world’s first trillionaire, Neumann was forced to quit last month, his reputation in ruins. Investors who had once turned a blind eye to the 6ft 5in entrepreneur’s tequila-and-marijuana-laced party habits, insisted he leave while the company attempts to reinvent itself on more conventional lines. It couldn’t have got more unconventional.
So what happened? Arguably, it’s been a long time coming. WeWork was able to buy so much space because of the astronomical amount of cash it raised in Silicon Valley. Since its launch in 2010, billions of dollars of venture capital money have poured into the business. Investors turned a blind eye to the vast losses Neumann was making —even as they spiralled to $1.4 billion in the first half of this year. As he opened expensive new sites in London, Hong Kong, Buenos Aires, Milan, the spending got wilder until its current state of burning through $700 million every three months.
His backers were prepared to forgive him in the hope that, once he had built his network across the globe, early losses would reverse spectacularly like at Google or Facebook. Furthermore, they hoped a stock market flotation earmarked for this year would value it at more than $50 billion. Massive returns would come to those providing what they call in the tech industry “patient capital”.
But WeWork quickly became the sickest patient in the Wall Street emergency ward. Bankers testing the market to see how much the world’s investors were willing to pay for its shares found a horrifying answer: not much.
Stock market experts realised this was no Google or Facebook. WeWork had no technology that would change the world. For all the festivals, ping-pong tables and free beer, cynics said, it was essentially just a company that did up offices and rented them out.
Professor Scott Galloway, of New York University’s Stern School of Business, was vicious. He dubbed WeWork “WeWTF” and ridiculed it as a “cult”.Comparing it to a cheap office refurb, he said it had covered the gaping cracks in its business model with budget wall-panelling which would “dissipate at the first whiff of a recession, revealing a family of raccoons or the mummified corpses of drug mules”. Chary investors agreed, declaring the business valued at $47 billion last year was actually worth as little as $15 billion.
Meanwhile, stories abounded of Neumann’s rock-star behaviour. The Wall Street Journal has recounted tales of how he and his friends would smoke weed while flying around the world on private jets. One Gulfstream he was flying in was grounded after crew members found a big chunk of the drug stuffed in a cereal box.
Once, after firing seven per cent of his employees, he reportedly gave a sombre speech at WeWork’s headquarters explaining the need to cut costs, but at the end of his address, a group of staff burst into the room pouring tequilas and making toasts. Then, a member of the hip-hop group Run DMC appeared, hugged Neumann and performed a set to the confused crowd, it was said. Neumann’s spokeswoman would not comment on these stories.
Still, it’s not just Neumann’s behaviour that’s caused problems. Since the float was pulled, some property owners have refused to let out their buildings to the fallen giant. One major London developer says he declined offers to sign up multiple WeWork sites in his buildings because he was concerned about its long-term finances. Property agents say others were taking a similar view. “Given the large financial commitment to fit out the buildings, which is shared between the landlord and WeWork, owners are seriously concerned,” says one.
WeWork’s gaudy interiors do not necessarily suit other tenants, leaving property owners fearing being left with costly white elephants. Others, it should be said, say the fallout has not yet been felt, pointing to WeWork’s high occupancy levels. WeWork says its London sites are more than 90 per cent full. Mike Hussey, boss of property developer Almacantar, praises WeWork for giving modern business people the flexibility and environment they want. “Don’t fall for the negative hype,” he says, adding that the WeWork in his Southbank development is fully occupied.
Moreover, the fate of WeWork has caused huge damage to the billionaire boss of its biggest investor, the Japanese company Softbank, aka the biggest technology investor in the world. It’s famed for buying big stakes in fast-growing tech companies such as Uber and Cambridge microchip designer ARM.
Neumann and Softbank’s owner, Masayoshi Son, became brothers in arms soon after they met in India in 2016. Like Neumann, Son had built his career on making huge, risky bets. As he puts it: “We only live once, so I want to think big.” In 2017, Son ploughed $3.1 billion into WeWork.
Such vast bets can pay off at the beginning of an economic recovery, when valuations of companies are at rock bottom. But Son arrived almost a decade into the bull run of the stock market, spending $85 billion of his $100 billion Vision Fund in the past two years, just as the cycle has begun to turn. Stock market flotations of its companies have either collapsed like WeWork’s, or seen shares immediately plummet like at Uber and Slack Technologies.
So what next for WeWork? Many property experts say it will implode because of a mismatch in the durations of its outgoings and income. Put simply, WeWork invests long term on its leases of up to 20 years (it now has a nosebleed-inducing $47 billion of leases) but relies on income from short-term tenants who can leave quickly.
Others such as Almacantar’s Hussey and giant office developer British Land say its problems are solvable if it stops expanding so fast. WeWork has replaced Neumann with new bosses, and a spokesman says: “Our core business continues to perform well, and executive leadership is now focused on profitability and more strategic expansion… We will enter fewer lease agreements in the quarters to come.”
They even hope to make another attempt at floating the business, but many are sceptical. Word on Wall Street this week is that JP Morgan is trying to rally investors to offer up a hugely risky $5 billion emergency loan, while Softbank is said to be mulling its own rescue plan.
One industry veteran says: “WeWork has flown into a perfect storm. And when you’re in a perfect storm, you’d better be sure you have a decent captain on the bridge, and that all the rivets are tight.”
Soon we’ll see if its new captains sail out alive or scuttle the WeWork ship, ending an extraordinary corporate folly.
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