WeWork’s disastrous attempt at a public offering provides lessons for everyday companies thinking about their business models. The core business issues were potential competition and the risk of long-term commitments to provide short-term rentals. The ethics lesson is also worth exploring.
Two aspects of We’s business model worried potential investors. The most glaring to me was potential competition. The founder of We’s largest investor, Masayoshi Son, said the company is more than just a renter of office space, "something completely new that uses technology to build and network communities." Although technology is present in every business, We was hardly a tech startup. A competitor would not need cutting edge intellectual property to set up business across the street.
In fact, I have been in a WeWork office, and in an independent co-working space. The décor was a little different, but the functionality was pretty much the same. WeWork had a complicated check-in system, while the independent space had a sophisticated yellow tablet on which tenants wrote their name and the time they came in. WeWork also uses facial recognition within its locations to understand how people use the space, which has some advantages. At somewhat higher cost, a local manager can walk through a co-working space and see what people are doing.
Local independent co-working spaces can compete with WeWork, as can other national chains. Office Depot/OfficeMax has set up co-working spaces at nine their stores, and Staples is also testing the idea. The Office Depot store near me in Tigard, Oregon, was larger than needed, so a remodel yielded a smaller retail store and a coworking space. The retail store offers printing, tech support and office supplies, providing a little synergy with the coworking space.
Local independent co-working spaces can compete with WeWork, as can other national chains.
One of WeWork’s strengths that would be hard to challenge is national accounts. If a company needs sales representatives across the country, renting space and then keeping the printers and coffee pots working are hassles for the corporate facilities department. Outsourcing this function to WeWork is a great one-stop solution. Independent coworking companies would not be able to function in this market. Right now only Regus’ Spaces can compete with WeWork in number of locations. However, other industries have used networks of local businesses to offer nation-wide service availability, so some network may develop. Still, this is likely a small part of the market, so independent competition will be significant.
In a recession, WeWork’s revenue will drop as people either give up on coworking space or downsize their usage. Yet WeWork’s payment obligations will remain as they are.
The second major business challenge relates to cyclical demand. WeWork enters into long-term contracts to lease space from building owners. Then WeWork rents that space out in short-term agreements to tenants. In a recession, WeWork’s revenue will drop as people either give up on coworking space or downsize their usage. Yet WeWork’s payment obligations will remain as they are. To survive a recession, the company needs significant reserves. Business cycle risk is not a killer to the business model, but it requires financial resources to survive the inevitable fluctuations of demand. Any coworking provider, large or small, must consider this risk.
Many companies have similar challenges to their business models. Too many executives discount competitors, and too few take the risk of recession seriously enough.
Finally, We (the actual name of the holding company) offers an important lesson regarding ethics. Founder Adam Neumann made deals between himself personally and the corporation he ran, which raised many red flags when the financial disclosure was released. Neumann and We restructured the deals to remove any continuing self-dealing, but potential investors were left with a bad taste in their mouths. That Neumann created those self-serving deals in the first place led the investment community to doubt his trustworthiness. The lesson from this is that your character is judged not only by your current affairs, but also by your past.
