WeWork: A free lesson for Startups, worth at least $37 bn

WeWork, one of the biggest and fastest growing co-working space providers, has been in the news recently, mostly for wrong reasons. The company, and its CEO, had been in the news for long time. However, the coverage had largely been positive or neutral until recently. The company's CEO Adam Neumann had developed a brand of his own, which looked set to challenge Elon Musk and Steve Jobs.

A few weeks back, WeWork was apparently seeking a valuation of $47 bn for its ucoming IPO. Some of the recent reports suggest that the We Company brought the expectation down to $10 bn. That's a huge 80% notional loss to the investors in WeWork, which includes marquee Venture Capitalists like SoftBank.

So, here the startups are presented with a once- in- a- life- time opportunity of learning a lesson worth $37 bn, for free. Here's the summary of what we can take away based on what we know so far.

• Flamboyance is not equal to performance: This might sound obvious, but this is exactly how Neumann marketed a real-estate leasing company as a tech company. The company's investment in tech for analyzing large amount of customer data was sought to be a huge differentiator against competitors, and was expected to miraculously result in higher revenues over a period of time. A typical WeWork customer is a startup, which is by definition, looking at staying lean and mean; there is no clarity how WeWork expected it to dole out more per seat rather than move to another competitor in co-working space.
• Competition can come in from most unexpected places: WeWork not only invested in long-term leases for procuring space, it also invested in furnishing the space and making it look trendy. In order to turn profitable, WeWork not only has to beat competitor like Regus, another co-working space provider, but also any other player which can offer office space. Pubs in New York started offering their premises as a flexible workplace, during work days office hours, when they have very low footfall, and now the concept is being tried in India as well. One thing to remember is that, they have already invested their money in leasing and furnishing, and don't have to make all their money from letting out space for offices. Thus, they can afford to charge at least 20% lower than a co-working space provider like WeWork.

Restaurants and pubs can provide flexible spaces (pic: The New York Times)

• Using tech in biz doesn't by itself make your biz "scalable": Thought WeWork sought to leverage tech in business, the fundamental product had its limitation on scalability. The space is physical product, unlike a song or a video delivered over internet. A song can be sold to a million customers without much incremental cost because it is not a physical product anymore (unlike in gramophone days). For WeWork, more customers would mean procuring more real-estate. Which in turn translates into higher costs of leasing and furnishing.
• Revenues and Profits matter, but cash flows matter even more: As they say, "sales is vanity, profit is sanity and cash is reality". WeWork may have been able to increase revenues but profitability looked distant. The cash flows have been stretched thanks to rapid expansion, requiring money being pumped into leases and furnishing. The employees at WeWork also meant more fixed costs. A business with high fixed costs and minimal variable costs is always reliant on scalability. Unless it is able to beat the growth versus scalability trap by inventing a model, like franchising model developed by restaurant chains.
• Gravity exists, throwing money at the problem will help you: Vanity can only take you so far, however business needs cash to run. Vendors need to be paid leases and furnishing costs and employees need to be paid salaries. You should know how long you can afford to throw cash at this problem. The moment investors or prospective investors turn jittery, the cash flows will dry up.

Never throw good money after the bad money (pic courtesy: pexels.com)

• You can't ignore basic norms of corporate governance for too long: The leadership style of Neumann and his apparent lack of ethics have been discussed widely. Was he really cut out to run a 'corporation', when WeWork started going beyind a size that is typically associated with a startup? You can afford to run a business in your own style as long as you run it with your own money. When the professional investors come in, they would expect their portfolio companies to be managed in professional way, which is probably the reason, now replacing Neumann with a professional is being discussed.

A startup should thank WeWork for providing these lessons for free, and ensure these are implemented in their business, for medium to long-term success.

#startup #cashflows #businessmodel #scalability #wework #pricing #costs