WeWork’s collapse has lessons for investors
WeWork was one of the world’s most lauded start-ups in recent years, being valued around $50bn. But just four years since that peak valuation, the company has filed for bankruptcy.
Cloaked in the guise of a tech enterprise, WeWork ultimately revealed itself as an office rental business. Its downfall was the result of internal challenges it created for itself, compounded by external forces beyond its influence, such as the pandemic.
As I recently set out in a YouTube video, WeWork spent huge amounts to acquire a mass of long-term leases in some of the world’s most expensive real estate markets. These commercial properties were then subdivided into smaller spaces for freelancers and others, on a short-term basis.
The flamboyant, charismatic young founder Adam Neumann launched WeWork in 2010. It expanded at a blistering pace and attempted to revolutionise the world of work.
Neumann described WeWork as “the world’s first physical social network,” with office spaces featuring cool, design-led furniture and surroundings and, often, beer on tap. He had hoped to form a global community that believed in “the energy of We” with an aspiration to “elevate the world’s consciousness.”
However, the lofty declarations were overcome by a more mundane reality: it couldn’t afford to pay its bills.
What can we learn as investors?
The collapse of WeWork serves as a stark reminder to investors that amid the hype and allure of disruptive start-ups, it is imperative to scrutinise the fundamentals of a company before diving into investment decisions.
WeWork, once hailed as a unicorn and a symbol of the shared economy revolution, crumbled under the weight of its inflated valuation and shaky business model, offering crucial lessons for investors navigating the volatile landscape of high-growth ventures.
One of the primary takeaways from the WeWork debacle is the danger of succumbing to hype without delving into the core fundamentals of a company.
Investors should not be swayed solely by the hype of visionary leaders or industry buzz. It’s imperative to conduct a rigorous analysis of a company’s financial health, revenue streams, and path to profitability.
WeWork’s collapse underscores the importance of grounding investment decisions in a solid understanding of the business.
The saga also highlights the significance of questioning lofty valuations. WeWork’s valuation skyrocketed to astronomical levels, reaching around $50 billion at its peak.
This valuation, however, was divorced from the economic realities of the company, which struggled with escalating losses and a lack of clear profitability.
Investors must be cautious when faced with valuations that seem detached from a company’s financial performance. A critical examination of key financial metrics, such as revenue growth, profit margins, and cash flow, is essential to avoid falling victim to inflated valuations that can lead to significant investment losses.
The WeWork drama emphasizes the need for investors to assess the sustainability of a company’s business model.
Theirs relied heavily on aggressive expansion and long-term lease commitments, leading to financial instability when market conditions changed.
A thorough evaluation of a company’s strategic approach and its adaptability to evolving market dynamics is crucial. Sustainable growth and a robust business model should be prioritised over rapid but unsustainable expansion.
Investors must also be vigilant in scrutinising corporate governance structures. WeWork’s governance issues, including concerns over Neumann’s influence and the lack of effective oversight, contributed to the company’s downfall.
A transparent and well-structured governance framework is essential for ensuring ethical decision-making and aligning the interests of management with those of shareholders. Investors must always carefully evaluate the governance practices of potential investments to mitigate the risks associated with poor leadership and decision-making.
Plus, the WeWork collapse underscores the importance of diversification in an investment portfolio. Concentrating investments in a single company or sector exposes investors to heightened risks. A diversified portfolio, spread across various sectors, regions and asset classes, provides a buffer against the impact of individual failures.
No-one likes to see a business fail, of course, but there are valuable lessons to be learned for investors from the collapse of this one-time golden start-up. Namely, don’t overlook the fundamentals.
Nigel Green is deVere CEO and Founder
Also published on Medium.
